As filed with the Securities and Exchange Commission on January 15,September 2, 2020
Registration
File No. 333-333-__________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Quanta, Inc.QUANTA, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 7373 | 81-2749032 | ||
(State or
| (Primary Standard Industrial Classification | (I.R.S. Employer Identification No.) |
3606 W. Magnolia Blvd.,
Burbank, CA 91505
(818) 940-1617659-8052
(Address, including zip code, and telephone number, including area code,
of registrant’s principalprinciple executive office)offices)
Eric Rice
Chief Executive Officer
3606 W. Magnolia Blvd.
Burbank, CA 91505
(818) 940-1617
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
W. David Mannheim
Andrew C. Nielsen
Nelson Mullins Riley & Scarborough LLP
GlenLake One
4140 Parklake Avenue, Suite 200
Raleigh, NC 27612
(919) 329-3800
Approximate date of commencement of proposed sale to the public:As soon as practicable after the effective date of this registration statement.Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X]box: [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | |
| Accelerated filer | [ ] | |
| Non-accelerated filer [X] | ||
| Smaller reporting company [X] | ||
| Emerging growth company | [ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [ ]
CALCULATION OF REGISTRATION FEECalculation of Registration Fee
Title of Each Class of Securities to be Registered | Number of Shares of Common Stock to be Registered(1) | Proposed Maximum Offering Price Per Share(2) | Proposed Maximum Aggregate Offering | Amount of Registration Fee(3) | ||||||||||||
| Common stock, par value $0.001 per share, offered by the Reselling Stockholders | 5,000,000 | $ | 0.4500 | $ | 2,250,000 | $ | 292.05 | |||||||||
Title of each Class of Securities To be Registered | Amount to be registered(1) | Proposed maximum Offering price per share (2)(3)(4)(5) | Proposed maximum aggregate Offering price | Amount of registration fee | ||||||||||||
| Common Stock, par value $0.001 per share, to be offered by the Registrant | 7,500,000 | $ | 0.20 | 1,500,000 | $ | 194.70 | ||||||||||
| Total | 7,500,000 | $ | 0.20 | 1,500,000 | $ | 194.70 | ||||||||||
| (1) |
| (2) | Estimated |
| (3) | Offering price has been arbitrarily determined by the Board of | |
| (4) | The offering price has been estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o). |
The Registrant hereby amends this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 as amended, or until the Registration Statementregistration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
Quanta, Inc.PRELIMINARY PROSPECTUS
5,000,000DATED SEPTEMBER 2, 2020
QUANTA, INC.
7,500,000 Shares of Common Stock
3606 W. Magnolia Blvd.
Burbank, CA 91505
(818) 659-8052
www.buyquanta.com
This prospectus relates to the offer and resale ofWe are offering (the “Offering”) up to 5,000,0007,500,000 (the “Maximum Offering”) shares (the “Shares”) of our common stock,Common Stock, par value $0.001 per share (the “Resell Shares”“Common Stock”), by certain on a “best efforts” basis at a fixed offering price of $0.20 per share. The minimum purchase requirement per investor is $1,000 (5,000 shares); however, we can waive the minimum purchase requirement on a case-by-case basis in our stockholders (the “Reselling Stockholders”) pursuant to a sole discretion. See “Securities Purchase Agreement dated November 25, 2019 (the “Purchase Agreement”) and a Registration Rights Agreement dated November 25, 2019 (the “Registration Rights Agreement”). If issued presently, the Resell Shares represent 9.1% of our issued and outstanding shares of common stock as of December 31, 2019. All of the Resell Shares, when sold, shall be sold by the Reselling Stockholders.Being Offered” beginning on page 27.
The Reselling Stockholders may sell all orInvesting in our Common Stock involves a portionhigh degree of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the timerisk. These are speculative securities. You should purchase these securities only if you can afford a complete loss of sale, at varying prices, or at negotiated prices.
We will not receive any proceeds from the saleyour investment. See “Risk Factors” starting on page 3 for a discussion of the shares of our common stock by the Reselling Stockholders. However, we did receive proceeds from our initial sale of the Resell Shares to the Reselling Stockholders pursuant to the Purchase Agreement.
Any broker-dealers or agentscertain risks that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”),you should consider in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the Reselling Stockholders.an investment in our Common Stock.
Our common stock is quotedCommon Stock currently trades on the OTC MarketsMarket’s Pinks under the symbol “QNTA.” On December 31, 2019,“QNTA” and the reported closing price of our common stock on August 25, 2020 was approximately $0.52 per share. Prior to this offering, there has been a very limited market for our securities. While our$0.125. Our common stock is quotedcurrently trades on a sporadic and limited basis. Our Board of Directors used its business judgment in setting the OTC Markets, there has been negligible trading volume. There is no guarantee that an active trading market will develop in our securities.
Neither we nor$0.20 purchase price per share to the Reselling Stockholders have authorized any dealer, salesman or other personCompany as consideration for the stock to give any information or to make any representation other than those contained or incorporated by referencebe issued in this prospectus. You must not rely uponoffering. The purchase price per share bears no relationship to our book value or any informationother measure of our current value or representation not contained or incorporated by reference in this prospectus.worth.
We are an “emerging growth company,” as defined in Section 2(a)expect to commence the sale of the Securities Act, and,Shares as such, have elected to comply with certain reduced public disclosure requirements forsoon as practicable after the Registration Statement of which this prospectus and future filings. This prospectus complies withProspectus is a part (the “Registration Statement”) is declared effective by the requirements that apply to an issuer that is an emerging growth company. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 4.
Neither theUnited States Securities and Exchange Commission nor(the “SEC”). The Offering will terminate on the earlier of (i) 365 days after the Registration Statement is declared effective by the SEC, (ii) the date on which the Maximum Offering is sold, or (iii) when the Company elects to terminate the offering for any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation toreason (in each such case, the contrary is a criminal offense.“Termination Date”).
The dateThere is no minimum offering amount that we must sell before we close. We have made no arrangements to place subscription proceeds in escrow, trust or a similar account, which means that we have the right, subject to applicable securities laws, to begin applying “dollar one” of the proceeds from the Offering towards our business strategy, including, without limitation, research and development expenses, offering expenses, working capital and general corporate purposes and other uses, as more specifically set forth in the “Use of Proceeds to Issuer” section of this prospectus is __________ __, ____S-1. We will hold closings, from time to time until the Termination Date, upon the receipt of investors’ subscriptions and acceptance of such subscriptions by the Company. Subscriptions made by investors pursuant to subscription agreements in this Offering are irrevocable.
| Price to Public | Underwriting Discount and Commissions(1) | Proceeds to the Company(2) | ||||||||||
| Per Share | $ | 0.20 | - | $ | 0.20 | |||||||
| Maximum Offering(3) | $ | 1,500,000 | - | $ | 1,500,000 | |||||||
| (1) | The minimum investment amount for each subscription is 5,000 Shares or $1,000. The Offering may be made, in management’s discretion, directly to investors by the management of the Company on a “best efforts” basis. We do not intend to use commissioned sales agents or underwriters; however, we reserve the right to offer the Shares through broker-dealers who are registered with the Financial Industry Regulatory Authority (“FINRA”). We may be required to retain a broker-dealer or register as an issuer-dealer and/or agent under the blue sky laws of certain states in order to make offers to sell our Shares in those states. There can be no guarantee that we will be approved as an issuer-dealer and/or agent in any or all of the states which we determine require such registration. If we do not engage a broker-dealer or register as an issuer-dealer and/or agent in the foregoing states, we will not offer and sell the Shares in such states. |
| (2) | The amounts shown are before deducting offering costs to us, which include legal, accounting, printing, due diligence, marketing, consulting, selling and other costs incurred in this offering, estimated to be $22,500. No proceeds of the Offering will be provided to other persons, except as set forth herein. |
| (3) | The Shares are being offered pursuant to The Securities Act of 1933. The Company is following the “Form S-1 Registration Statement” format of disclosure under the Securities Act of 1933. We have the option in our sole discretion to accept less than the minimum investment. |
TABLE OF CONTENTS
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
We are offering to sell, and seeking offers to buy, our securities only in jurisdictions where such offers and sales are permitted. Please carefully read the information in this Prospectus and any accompanying Prospectus supplements, which we refer to collectively as the “S-1.” This S-1 contains all of the representations by us concerning this Offering, and no person shall make different or broader statements than those contained herein. You should rely only on the information contained in this prospectus and in any free writing prospectus that we may provide to you in connection with this offering. Neither we nor the underwriter hasS-1. We have not authorized anyone to provide you with any information different from, or in addition to, thatother than the information contained in this prospectus or any such free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We can provide no assurance as to the reliability of any other information that others may give you. Neither we nor the underwriter is making an offer to sell or seeking offers to buy these securities in any jurisdiction where or to any person to whom the offer or sale is not permitted.S-1. The information contained in this prospectusS-1 is accurate only as of its date or as of the respective dates of any documents or other information incorporated herein by reference, regardless of the time of its delivery or of any sale or delivery of our securities. Neither the delivery of this S-1 nor any sale or delivery of our securities shall, under any circumstances, imply that there has been no change in our affairs since the date on the front cover of this prospectus,S-1. This S-1 will be updated and made available for delivery to the information in any free writing prospectusextent required by the federal securities laws.
This Prospectus is part of the Registration Statement that we filed with the SEC using a continuous offering process. Periodically, we may provide youa Prospectus supplement that would add, update or change information contained in connectionthis S-1. Any statement that we make in this S-1 will be modified or superseded by any inconsistent statement made by us in a subsequent Prospectus supplement. The Registration Statement we filed with this offering is accurate only asthe SEC includes exhibits that provide more detailed descriptions of the date of such free writing prospectus. Our business, financial condition, results of operationsmatters discussed in this S-1. You should read this S-1 and prospects may have changed since those dates. Neither we, northe related exhibits filed with the SEC and any of our officers, directors, agents or representatives or the underwriter, makes any representation to you about the legality of an investmentProspectus supplement, together with additional information contained in our common stock. You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financialannual reports, semi-annual reports and other issuesreports and information statements that we will file periodically with the SEC. The Registration Statement and all supplements and reports that we have filed or will file in the future can be read at the SEC website, www.sec.gov.
Unless otherwise indicated, data contained in this S-1 concerning the business of the Company is based on information from various public sources. Although we believe that such data is generally reliable, such information is inherently imprecise, and our estimates and expectations based on this data involve a number of assumptions and limitations. As a result, you should consider before investing in our common stock.are cautioned not to give undue weight to such data, estimates or expectations.
In this S-1, unless the context indicates otherwise, references to the “Company,” “we,” “our,” and “us” refer to the activities of and the assets and liabilities of the business and operations of Quanta, Inc., a Nevada corporation.
PROSPECTUS SUMMARYCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This summary highlights information aboutS-1 includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other than statements of historical facts contained in this offeringS-1 may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this S-1, and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, future acquisitions and the information includedindustry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” section of this S-1. Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus. This summary doesS-1.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not contain allguarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the information that you should consider before investingforward-looking statements contained in our securities. You should carefully read this entire prospectus, especially the sections titledS-1. The matters summarized under “Summary,” “Risk Factors” andFactors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations,” “Description of Business” and elsewhere in this S-1 constitute forward-looking statements and our consolidatedactual results may differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements included herein,contained in this S-1, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this S-1 speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
| (ii) |
This summary highlights selected information contained elsewhere in this S-1. This summary is not complete and does not contain all the information that you should consider before deciding whether to invest in our Common Stock. You should carefully read the entire S-1, including the notes thereto,risks associated with an investment in the Company discussed in the “Risk Factors” section of this S-1, before making an investment decision. ReferencesSome of the statements in this prospectus to “we,S-1 are forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” “us,” “our,” “the company” and the “Company” refer to Quanta, Inc. and, where appropriate, its subsidiaries, unless expressly indicated or the context otherwise requires.above.
Business Overview
We are an applied science company founded in 2016, focusing on enhancingincreasing energy levels in plant matter (including cannabis) to increase performance within the human body. Our proprietary technology uses quantum mechanics to increase bioactivitybio-activity of targeted molecules to enhance the desired effects. We specialize in potentiating rare naturally occurring elements to create impactful and sustainable healing solutions that have potential towe believe will one day be as powerful and predictable as pharmaceutical drugs. We offer our technology as a platform, making it accessible to existing high-quality product makers throughwith existing distribution channels, as well as consumer products. We serve brands in cannabis, anti-aging, healthOur mission is to power as many impactful, high-performing and wellness, stress management, pain management, fitnesswholly organic solutions as possible through product lines and brain performance enhancement. Our CBD pain relief rub is an all-natural CBD topical that consistsa series of 13 natural elements including turmeric, arnicalicensing and polarized cannabidiol (CBD), designed to provide relief from pain, inflammation, and stiffness in muscles and joints.distribution partnerships.
Risk FactorsCompany Information
Our principal executive offices and mailing address is Quanta, Inc., 3606 W. Magnolia Blvd., Burbank, CA 91505, and our telephone number is (818) 659-8052. Our website address is www.buyquanta.com. The information contained therein or accessible thereby shall not be deemed to be incorporated into this Prospectus.
An investment in our securities involves a high degree of risk. You should carefully consider theOur business and our ability to execute our business strategy are subject to a number of risks summarized below. These risks are discussedas more fully described in the section titled “Risk Factors.“Risk Factors” beginning on page 3. These risks include, but are not limited to, the following:among others:
| ● |
| We have incurred operating losses since we began operations and may not be profitable in the future. We will require additional financing to support our on-going operations; |
| ● | The Company’s independent registered public accounting firm, in their report on the Company’s December 31, |
| ● | We will likely incur significant costs and obligations in relation to our on-going and anticipated business operations; |
| ● | We are reliant on key employees in the management of our business and loss of their services could materially adversely affect our business; |
| ● | Our business is heavily regulated which could have a material adverse effect on our results of operations and financial condition; |
| ● | We have identified material weaknesses in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods; |
| ● | Our directors and officers control a large portion of our Common |
| ● | Because our common stock is deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to marketability restrictions; |
| ● | Our stock price may be volatile and you may not be able to sell your shares for more than what you paid; and |
Corporate Information
Our principal executive offices are located at 3606 W. Magnolia Blvd, Burbank, California 91505, and our telephone number is (818) 659-8052.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” An emerging growth company may take advantage of certain reduced disclosure and other requirements that are otherwise generally applicable to public companies. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity. For example, so long as we are an emerging growth company:
We may take advantage of these reduced disclosure and other requirements until the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering, or such earlier time that we are no longer an emerging growth company. For example, if certain events occur before the end of such five-year period, including if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period, we will cease to be an emerging growth company.
As mentioned above, the JOBS Act permits us, as an emerging growth company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected not to opt out of the extended transition period which means that when an accounting standard is issued or revised, and it has different application dates for public or private companies, as an emerging growth company, we can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make it difficult or impossible because of the potential differences in accounting standards used to compare our financial statements with the financial statements of a public company that is not an emerging growth company, or the financial statements of an emerging growth company that has opted out of using the extended transition period.
The Offering
| ● | The other factors described in “Risk Factors.” |
THE OFFERING
| Issuer: | ||
| Number of shares of Common Stock to be Outstanding after the Offering: | 65,447,047 shares of Common Stock if the Maximum Offering is sold. | |
| Price per Share: | $0.20 | |
| Maximum Offering: | 7,500,000 Shares of our Common Stock, at an offering price of $0.20 per Share, for total gross proceeds of $1,500,000. | |
| Minimum Purchase: | $1,000 (5,000 Shares) although we reserve the right to accept subscriptions for lesser amounts | |
| Voting Rights: | Common Stock – one vote per share Series A Preferred Stock – as a class has voting power equal to 51% of the total votes of the Common and Preferred Stock that is outstanding | |
| Use of Proceeds: | If we sell all of the 7,500,000 Shares being offered, our net proceeds (after estimated Offering expenses) will be approximately $1,478,500. We will use these net proceeds for research and development expenses, offering expenses, working capital and general corporate purposes, and such other purposes described in the “Use of Proceeds to Issuer” section of this S-1. | |
| Risk Factors: | Investing in our Common Stock involves a high degree of risk. See “Risk Factors” starting on page 3. | |
| Dividends: | The Company has not declared or paid a cash dividend to stockholders since it was organized and does not intend to pay dividends in the foreseeable future. The Board of Directors presently intends to retain any earnings to finance our operations and does not expect to authorize cash dividends in the foreseeable future. Any payment of cash dividends in the future will depend upon the Company’s earnings, capital requirements and other factors | |
| OTC Markets trading | Our common stock is quoted on the OTC under the symbol “QNTA.” |
An investment in our securitiesCommon Stock involves a high degree of risk. In addition to the other information contained in this prospectus, prospective investorsYou should carefully consider the following risks described below, together with all of the other information included in this S-1, before investing in our securities.making an investment decision. If any of the following risks actually occur, as well as other risks not currently known to us or that we currently consider immaterial,occurs, our business, operating results and financial condition or results of operations could be materially adversely affected. As a result,suffer. In that case, the trading price of our common stockshares of Common Stock could decline and you may lose all or part of your investment in our common stock. The risks discussed below also includeinvestment. See “Cautionary Note Regarding Forward-Looking Statements” above for a discussion of forward-looking statements and our actual results may differ substantially from those discussedthe significance of such statements in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” inthe context of this prospectus. In assessing the risks below, you should also refer to the other information contained in this prospectus, including the financial statements and the related notes, before deciding to purchase any of our securities.S-1.
Risks Related to the Marijuana Industry
Cannabis continues to be a Controlled Substance under the United States Federal Controlled Substances Act and our business may result in federal civil or criminal prosecution.
We are directly engaged in the medical and adult-use cannabis industry in the U.S. where local state law permits such activities however all such activities remain illegal under federal law in the U.S. Investors are cautioned that in the U.S., cannabis is highly regulated at the state level. To our knowledge, there are to date a total of 33 states, and the District of Columbia, Puerto Rico and Guam that have legalized medical cannabis in some form, including California, although not all states have fully implemented their legalization programs. Eleven states and the District of Columbia have legalized cannabis for adult use. Fourteen additional states have legalized high-cannabidiol (“CBD”), low Delta-9-tetrahydrocannabinol (“THC”) oils for a limited class of patients. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a Schedule I controlled substance under the U.S. Controlled Substance Act of 1970 (codified in 21 U.S.C.A. Section 812) (the “Controlled Substances Act”). Under United States federal law, a Schedule I drug is considered to have a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the substance under medical supervision. Federal law prohibits commercial production and sale of all Schedule I controlled substances, and as such, cannabis-related activities, including without limitation, the importation, cultivation, manufacture, distribution, sale and possession of cannabis remain illegal under U.S. federal law. It is also illegal to aid or abet such activities or to conspire or attempt to engage in such activities. Strict compliance with state and local laws with respect to cannabis may neither absolve us of liability under U.S. federal law, nor provide a defense to any federal proceeding brought against us. An investor’s contribution to and involvement in such activities may result in federal civil and/or criminal prosecution, including, but not limited to, forfeiture of his, her or its entire investment, fines and/or imprisonment.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges and penalties, including, but not limited to, disgorgement of profits, cessation of business activities, divestiture, or prison time. This could have a material adverse effect on us, including our reputation and ability to conduct business, the potential listing of our securities on the Canadian Securities Exchange (the “CSE”), our financial position, operating results, profitability or liquidity or the market price of our publicly traded shares. In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation or defense of any such matters or our final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of cannabis laws may be subject to change, which creates uncertainty for our business.
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in, and the operations of, cannabis businesses in the U.S. are subject to inconsistent laws and regulations. The so-called “Cole Memorandum” issued by former Deputy Attorney General James Cole on August 29, 2013 and other Obama-era cannabis policy guidance, discussed below, provided the framework for managing the tension between federal and state cannabis laws. Subsequently, as discussed below, former Attorney General Jeff Sessions rescinded the Cole Memo and related policy guidance. Although no longer in effect, these policies, and the enforcement priorities established within, appear to continue to be followed during the Trump administration and remain critical factors that inform the past and future trend of state-based legalization.
The Cole Memo directed U.S. Attorneys not to prioritize the enforcement of federal cannabis laws against individuals and businesses that comply with state medical or adult-use cannabis regulatory programs, provided certain enumerated enforcement priorities (such as diversion or sale of cannabis to minors) were not implicated. In addition to general prosecutorial guidance issued by the DOJ, FinCEN issued a the FinCEN Memorandum on February 14, 2014 outlining Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memorandum. On the same day the FinCEN Memorandum was published, the DOJ issued complimentary policy guidance directing prosecutors to apply the enforcement priorities of the Cole Memo when determining whether to prosecute individuals or institutions with crimes related to financial transactions involving the proceeds of cannabis-related activities.
On January 4, 2018, the then Attorney General Jeff Sessions rescinded the Cole Memo, the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo and the Cole Banking Memorandum has not affected the status of the FinCEN Memorandum issued by the Department of Treasury, which remains in effect. In addition to his rescission of the Cole Memo, former Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum.” The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.S. Attorney’s Manual (the “USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities and the lack of additional guidance since the resignation of former Attorney General Sessions, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
Such potential proceedings could involve significant restrictions being imposed upon us or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on our business, revenues, operating results and financial condition as well as our reputation and prospects, even if such proceedings were concluded successfully in our favor. In the extreme case, such proceedings could ultimately involve the criminal prosecution of our key executives, the seizure of corporate assets, and consequently, the inability of us to continue its business operations. Strict compliance with state and local laws with respect to cannabis does not absolve us of potential liability under U.S. federal law, nor provide a defense to any federal proceeding which may be brought against us. Any such proceedings brought against us may adversely affect our operations and financial performance.
We may be in violation of anti-money laundering laws and regulations which could impact our ability to obtain banking services, result in the forfeiture or seizure of our assets and could require us to suspend or cease operations.Business
We are subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Since the cultivation, manufacture, distribution and sale of cannabis remains illegal under the Controlled Substances Act, banks and other financial institutions providing services to cannabis-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks or other financial institutions that provide cannabis businesses with financial services such as a checking account or credit card in violation of the Bank Secrecy Act could be criminally prosecuted for willful violations of money laundering statutes, in addition to being subject to other criminal, civil, and regulatory enforcement actions. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of the laws and regulations governing financial institutions in the U.S. The lack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry. The potential lack of a secure place in which to deposit and store cash, the inability to pay creditors through the issuance of checks and the inability to secure traditional forms of operational financing, such as lines of credit, are some of the many challenges presented by the unavailability of traditional banking and financial services. These statutes can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified unlawful activity” such as distributing controlled substances which are illegal under federal law, including cannabis, and for failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the Controlled Substances Act. We may also be exposed to the foregoing risks.
As previously introduced, in February 2014, FinCEN issued the FinCEN Memo providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of the Bank Secrecy Act. It refers to supplementary guidance that former Deputy Attorney General James M. Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Controlled Substances Act. Although the FinCEN Memo remains in effect today, it is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. Overall, the DOJ continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in any state, including in states that have legalized the applicable conduct and the DOJ’s current enforcement priorities could change for any number of reasons. A change in the DOJ’s enforcement priorities could result in the DOJ prosecuting banks and financial institutions for crimes that previously were not prosecuted. If we do not have access to a U.S. banking system, its business and operations could be adversely affected.
Other potential violations of federal law resulting from cannabis-related activities include the Racketeer Influenced Corrupt Organizations Act (“RICO”). RICO is a federal statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the Canadian Securities Administrators), to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise which is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns of racketeering activity to initiate a civil action against the individuals involved. Although RICO suits against the cannabis industry are rare, a few cannabis businesses have been subject to a civil RICO action. Defending such a case has proven extremely costly, and potentially fatal to a business’ operations.
In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends, effect other distributions, and subject us to civil and/or criminal penalties. Furthermore, while there are no current intentions to declare or pay dividends on our Common Stock in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time. We could likewise be required to suspend or cease operations entirely.
We may become subject to federal and state forfeiture laws which could negatively impact our business operations.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture. As an entity that conducts business in the cannabis industry, we are potentially subject to federal and state forfeiture laws (criminal and civil) that permit the government to seize the proceeds of criminal activity. Civil forfeiture laws could provide an alternative for the federal government or any state (or local police force) that wants to discourage residents from conducting transactions with cannabis related businesses but believes criminal liability is too difficult to prove beyond a reasonable doubt. Also, an individual can be required to forfeit property considered to be the proceeds of a crime even if the individual is not convicted of the crime, and the standard of proof in a civil forfeiture matter is lower than the standard in a criminal matter. Depending on the applicable law, whether federal or state, rather than having to establish liability beyond a reasonable doubt, the federal government or the state, as applicable, may be required to prove that the money or property at issue is proceeds of a crime only by either clear and convincing evidence or a mere preponderance of the evidence.
Investors located in states where cannabis remains illegal may be at risk of prosecution under federal and/or state conspiracy, aiding and abetting, and money laundering statutes, and be at further risk of losing their investments or proceeds under forfeiture statutes. Many states remain fully able to take action to prevent the proceeds of cannabis businesses from entering their state. Because state legalization is relatively new, it remains to be seen whether these states would take such action and whether a court would approve it. Our investors and prospective investors should be aware of these potentially relevant federal and state laws in considering whether to invest in us.
We are subject to certain tax risks and treatments that could negatively impact our results of operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses.
The heightened regulatory scrutiny could have a negative impact on our ability to raise capital.
Our business activities rely on newly established and/or developing laws and regulations in multiple jurisdictions, including in Nevada. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect our profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the U.S. Food and Drug Administration, SEC, the DOJ, the Financial Industry Regulatory Authority or other federal, Nevada or other applicable state or non-governmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or non-medical purposes in the U.S. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding our industry may adversely affect our business and operations, including without limitation, the costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, create a public trading market in the U.S. for our securities or to find a suitable acquirer, which could reduce, delay or eliminate any return on investment in the company.
The potential re-classification of cannabis in the United States could create additional regulatory burdens on our operations and negatively affect our results of operations.
If cannabis and/or CBD is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical benefits of cannabis would most likely be improved; however, rescheduling cannabis may materially alter enforcement policies across many federal agencies, primarily the U.S. Food and Drug Administration (the “FDA”). FDA is responsible for ensuring public health and safety through regulation of food, drugs, supplements, and cosmetics, among other products, through its enforcement authority pursuant to the Federal Food Drug and Cosmetic Act (the “FFDCA”). FDA’s responsibilities include regulating the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because cannabis is federally illegal to produce and sell, and because it has no federally recognized medical uses, the FDA has historically deferred enforcement related to cannabis to the U.S. Drug Enforcement Agency (the “DEA”); however, the FDA has enforced the FFDCA with regard to hemp-derived products, especially CBD, sold outside of state-regulated cannabis businesses. If cannabis were to be rescheduled to a federally controlled, yet legal, substance, FDA would likely play a more active regulatory role. Further, in the event that the pharmaceutical industry directly competes with state-regulated cannabis businesses for market share, as could potentially occur with rescheduling, the pharmaceutical industry may urge the DEA, FDA, and others to enforce the FFDCA against businesses that comply with state but not federal law. The potential for multi-agency enforcement post-rescheduling could threaten or have a materially adverse effect on the operations of existing state-legal cannabis businesses, including the company.
There is uncertainty regarding the availability of U.S. federal patent and trademark protection.
As long as cannabis remains illegal under U.S. federal law, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to us. As a result, our intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, we can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, state or local level.
We could experience difficulty enforcing our contracts.
Due to the nature of our business and the fact that our contracts involve cannabis and other activities that are not legal under U.S. federal law and in some jurisdictions, we may face difficulties in enforcing our contracts in federal and certain state courts. The inability to enforce any of our contracts could have a material adverse effect on our business, operating results, financial condition or prospects.
Risks Related to the Business
We will require additional financing to support our on-going operations.
We will require equity and/or debt financing to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions. A number of factors could cause us to incur higher borrowing costs and experience greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook, or credit ratings. There can be no assurance that additional financing will be available to us when needed or on terms which are acceptable. Our inability to raise financing to fund on-going operations, capital expenditures or acquisitions may adversely affect our ability to fund our operations, meet contractual commitments, make future investments or desirable acquisitions, or respond to competitive challenges and may have a material adverse effect upon our business, results of operations, financial condition or prospects.
If additional funds are raised through further issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of Common Stock. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
We may not be ableThere is substantial doubt about our ability to continue to operate as a going concern.concern, which may hinder our ability to obtain future financing.
Since our inception, weWe have incurred significant operating losses and negative cash flows fromyet to establish any history of profitable operations. For the transition period from April 1, 2018 to December 31, 2018,six months ended June 30, 2020, the Company incurred a net loss of $1,613,972$3,225,000 and used cash in operating activities of $1,028,501. For the nine months ended September$1,344,000, and at June 30, 2019,2020, the Company incurredhad a net lossstockholders’ deficit of $2,629,915 and used cash in operating activities of $958,100. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s December 31, 2018 audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.$814,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s December 31, 2019 audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities and future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.
At June 30, 2020, the Company had cash on hand in the amount of $30,000. Subsequent to June 30, 2020, the Company received $250,000 from the issuance of five notes payable. Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders,stockholders, in the case of equity financing.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting.
Maintaining effective internal control over financial reporting that, if not properly remediated, could result in material misstatements in ourand effective disclosure controls and procedures are necessary for us to produce reliable financial statements in future periods.
Management identified material weaknesses instatements. We have evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of December 31, 2018.2019. See “Item 9A – Controls and Procedures” of our Annual Report on Form 10-KT10-K/A for the transition period from April 1, 2018 toyear ended December 31, 20182019 filed with the Securities and Exchange Commission on April 16,9, 2019.
Although we are undertaking steps to address these material weaknesses, the existence of aA material weakness is an indicationdefined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is more than a remote likelihoodreasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected inon a timely basis. The material weaknesses we identified are (i) We do not have written documentation of our internal control policies and procedures, including written policies and procedures to ensure the correct application of accounting and financial reporting with respect to the current or any future period. Remediation effortsrequirements of U.S. GAAP and SEC disclosure requirements; and (ii) The Company did not maintain effective policies to ensure adequate segregation of duties within its accounting processes. Specifically, due to the size of the Company and the smaller nature of department teams, opportunities are stilllimited to segregate duties, resulting in process and have not yet been completed. We cannot assure you that the steps taken will remediate such weakness, nor can we be certaininabilities to soundly manage segregation of whether additional actions will be required or the costs of any such actions.job responsibilities.
In addition, we mayThe Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation plans has commenced and is being overseen by the board. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future identify furtherfuture. Even effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, that we have not discovered to date. Although we are engaged in remediation efforts with respect to the material weaknesses, the existence of one or more material weaknesses could result in errorsmaterial misstatements in our financial statements, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to meet our financial reporting obligations. We have identified weaknesses in our internal controls, and we cannot provide assurances that these weaknesses will be effectively remediated or that additional material weaknesses will not occur in the future.
If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and substantial costsa failure to meet our reporting and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investorsobligations, each of which could lose confidence inhave a material adverse effect on our reported financial information,condition and the markettrading price of our common stockstock.
The recent global coronavirus outbreak could decline significantly, we may be unable to obtain additional financing to operate and expandharm our business and our business and financial condition could be harmed. We cannot assure you that we will be able to remediate these material weaknesses in a timely manner.results of operations.
The adverse public health developments and economic effects of the COVID-19 outbreak in the United States could adversely affect the Company’s operations as a result of quarantines, facility closures and logistics restrictions in connection with the outbreak. More broadly, the outbreak could potentially lead to an economic downturn, which would likely decrease spending, adversely affecting our business, results of operations and financial condition. The Company cannot accurately predict the effect the COVID-19 outbreak will have on the Company.
We may experience difficulties in generating profits.
We may experience difficulties in our development process, such as capacity constraints, quality control problems or other disruptions, which would make it more difficult to generate profits. Our failure to achieve a low-cost structure through economies of scale or improvements in manufacturing processes and design could have a material adverse effect on our business, prospects, results of operations and financial condition.
We will likely incur significant costs and obligations in relation to our on-goingongoing and anticipated business operations.
We expect to incur significant on-goingongoing costs and obligations related to our investment in infrastructure and growth and for regulatory compliance, which could have a material adverse impact on our results of operations, financial condition and cash flows. In addition, future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the company.
We are reliant on key employees in the management of our business and loss of their services could materially adversely affect our business.
Our success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on our business, operating results, financial condition or prospects.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations also may make it more difficult and expensive for us to obtain director and officer liability insurance and we may at times be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Thus, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our business is heavily regulated which could have a material adverse effect on our results of operations and financial condition.
The business and activities of the company are heavily regulated in all jurisdictions where it carries on business. Our operations are subject to various laws, regulations and guidelines by governmental authorities, relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of marijuana and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services. Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all regulatory approvals, where necessary, for the sale of our products. Similarly, we cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of the company.
We will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate our business, the suspension or expulsion from a particular market or jurisdiction or of our key personnel, and the imposition of fines and censures. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the company.
Our industry is subject to intense competition.
There is potential that we will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the company. Increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the company. If we are unable to compete effectively, it could decrease our customer traffic, sales and profit margins, which could adversely affect our business, financial condition, and results of operations.
Because of the early stage of the industry in which we operate, we expect to face additional competition from new entrants. To become and remain competitive, we will require research and development, marketing, sales and support. We may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the company.
We have a limited operating history.
The Company and its subsidiaries have varying and limited operating histories, which can make it difficult for investors to evaluate our operations and prospects and may increase the risks associated with investment into the company.
The results of future clinical research may negatively impact our business.
Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although we believe that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of our Common Stock should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this Prospectus or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for our products with the potential to lead to a material adverse effect on our business, financial condition, results of operations or prospects.
We are reliant on key inputs and changes in their costs could negatively impact our profitability.
The manufacturing business is dependent on a number of key inputs and their related costs including raw materials and supplies related to product development and manufacturing operations. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the company.
We are subject to environmental regulations.
Our operations are subject to environmental regulationregulations in the various jurisdictions in which we operate. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation,regulations, if any, will not adversely affect our operations.
Failure to comply with applicable environmental laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. We may be required to compensate those suffering loss or damage due to our operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
The market for our products is difficult to forecast and our forecasts may not be accurate which could negatively impact our results of operations.
We must rely largely on our own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. A failure in the demand for our products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects of the company.
We are subject to certain risks regarding the management of our growth.
We may be subject to growth-related risks including capacity constraints and pressure on our internal systems and controls. The ability of the company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the company to deal with this growth may have a material adverse effect on our business, financial condition, results of operations or prospects.
We may experience difficulties in maintaining adequate internal controls.
Our officers and directors lack experience in and with the reporting and disclosure obligations of publicly-traded companies. Such lack of experience may impair our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures, which may result in material misstatements to our financial statements and an inability to provide accurate financial information to our stockholders. Effective internal controls are necessary for the company to provide reliable financial reports and to help prevent fraud. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause it to fail to meet its reporting obligations. If the company or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our Consolidated Financial Statements and materially adversely affect the trading price of our Common Stock. In addition, our operations, future earnings and ultimate financial success could suffer irreparable harm due to our officers’ and directors’ lack of experience with publicly-traded companies and their reporting requirements in general.
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We are subject to product liability regarding our products, which could result in costly litigation and settlements.
As a distributor of products designed to be ingested by humans, the company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
A product liability claim or regulatory action against the company could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the company. Although we have secured product liability insurance, and strictly enforce a quality standard within the operations, there can be no assurances that we will be able to maintain our product liability insurance on acceptable terms or with adequate coverage against potential liabilities. This scenario could prevent or inhibit the commercialization of our potential products. To date, there have been no product related issues.
We may have uninsured or uninsurable risk.
We may be subject to liability for risks against which we cannot insure or against which we may elect not to insure due to the high cost of insurance premiums or other factors. The payment of any such liabilities would reduce the funds available for our normal business activities. Payment of liabilities for which the company does not carry insurance may have a material adverse effect on our financial position and operations.
Certain remedies shareholders may seek against our officers and directors may be limited and such officers and directors may be entitled to indemnification by the company.
Our governing documents provide that the liability of our board of directors and officers is eliminated to the fullest extent allowed under the laws of the State of Nevada. Thus, the company and the shareholders of the company may be prevented from recovering damages for alleged errors or omissions made by the members of our board of directors and officers. Our governing documents also provide that the company will, to the fullest extent permitted by law, indemnify members of our board of directors and officers for certain liabilities incurred by them by virtue of their acts on behalf of the company.
Breaches in our security, cyber-attacks or other cyber-risks could expose us to significant liability and cause our business and reputation to suffer.
Our operations involve transmission and processing of our customers’ confidential, proprietary and sensitive information. We have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks as a result of third partythird-party action, employee error or misconduct. Security risks, including, but not limited to, unauthorized use or disclosure of customer data, theft of proprietary information, loss or corruption of customer data and computer hacking attacks or other cyber-attacks, could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities. We are continuously working to improve our information technology systems, together with creating security boundaries around our critical and sensitive assets. We provide advance security awareness training to our employees and contractors that focuses on various aspects of the cyber security world. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures and our products could be harmed, we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities.
Risks related to this Offering and the Ownership of our Common Stock
Our directors and officersFor the foreseeable future, Eric Rice or his affiliates will be able to control a large portionthe selection of our Common Stock.
The officers and directorsall members of the company currently own a significant portion of the issued and outstanding shares of Common Stock. Our shareholders nominate and elect our board of directors, as well as virtually every other matter that requires stockholder approval, which generally haswill severely limit the ability of other stockholders to controlinfluence corporate matters.
As of the acquisition or dispositiondate of our assets,this S-1, Eric Rice and the future issuancehis affiliates owned 18,030,032 shares of our Common Stock (approximately 31.7%) and 100% of our Series A preferred stock. Under our certificate of incorporation, holders of Series A preferred stock have, as a class, voting rights equal to 51% of the total votes of all outstanding common and preferred stock entitled to vote. Because of this dual class structure, Eric Rice, his affiliates, his family members and descendants will, for the foreseeable future, have control over our management and affairs, and will be able to control virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or sales of our company or assets. Moreover, these persons may take actions in their own interests that you or our other securities.stockholders do not view as beneficial. The holders of the outstanding shares of Series A Preferred Stock vote with the holders of the common stock and any outstanding preferred stock without regard to class, except as to those matters on which separate class voting is required by applicable law or our Articles of Incorporation. Accordingly, for any matters with respect to which a majority vote of our Common Stock may be required by law, our directors and officers may(and Mr. Rice, in particular) have the ability to control such matters. Because the directors and officersof this voting control, a substantial portion of such Common Stock, investors may find it difficult or impossible to replace our directors if they disagree with the way our business is being operated.
Because our common stock is deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.
Since our common stock is a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), it will be more difficult for investors to liquidate their investment. The SEC defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The shares of Common Stock are covered by the penny stock rules pursuant to Rule 15g-9 under the Exchange Act, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the securities of the company that are captured by the penny stock rules. Consequently, the penny stock rules may affect the ability of broker-dealers to trade our securities. Management believes that the penny stock rules could discourage investor interest in and limit the marketability of our Common Stock.
Financial Industry Regulatory Authority sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock, which could depress the price of our common stock.
In addition to the “penny stock” rules described above, the U.S. Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer before recommending an investment to a customer. Prior to recommending speculative, low priced securities to non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Pursuant to the interpretation of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend our Common Stock to customers which may limit an investor’s ability to buy and sell our Common Stock, have an adverse effect on the market for our Common Stock, and thereby negatively impact the price of our Common Stock.
Our Common Stock is subject to liquidity risks.
Our Common Stock tradesis quoted on the OTCQBOTC in the United States. The OTCQBOTC is an inter-dealer, over-the-counter market that provides significantly less liquidity than other national or regional exchanges. Securities tradedquoted on the OTCQBOTC are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The SEC’s order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTCQB. Quotes for stocks listed on the OTCQB are not listed in newspapers. Therefore, pricesOTC. Prices for securities tradedquoted solely on the OTCQBOTC may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.
We cannot predict at what prices our Common Stock will trade and there can be no assurance that an active trading market will develop or be sustained. Commencing
Sales of a substantial number of shares of our common stock in January 2019,the public market, or the perception that such sales could occur, could cause our stock price to fall.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the contractual restrictions on resale of such common stock lapse, or after those shares become registered for resale pursuant to an effective registration statement, the trading price of our common stock could decline. The majority of the outstanding shares of our Common Stock began trading onare currently without restriction. Upon the CSE. Because our Common Stock has traded for a very short periodeffectiveness of time on the CSE,any registration statement we have not developedcould elect to file with respect to any meaningful liquidity on this exchange and we cannot guaranty that we will do sooutstanding shares of common stock, any sales of those shares or any perception in the future. There is a significant liquidity risk associated with an investment inmarket that such sales may occur could cause the company.trading price of our common stock to decline.
The shares of our Common Stock we may issue in the future and the options we may issue in the future may have an adverse effect on the market price of our Common Stock and cause dilution to investors.
We may issue shares of Common Stock and warrants to purchase Common Stock pursuant to private offerings and we may issue options to purchase Common Stock to our executive officers pursuant to their employment agreements. The sale, or even the possibility of sale, of shares pursuant to a separate offering or to executive officers could have an adverse effect on the market price of our Common Stock or on our ability to obtain future financing.
Our stock price may be volatile and you may not be able to sell your shares for more than what you paid.
Our stock price may be subject to significant volatility, and you may not be able to sell shares of Common Stock at or above the price you paid for them. The trading price of our Common Stock has been subject to fluctuations in the past and the market price of our Common Stock could continue to fluctuate in the future in response to various factors, including, but not limited to: quarterly variations in operating results; our ability to control costs and improve cash flow; announcements of innovations or new products by us or by our competitors; changes in investor perceptions; and new products or product enhancements by us or our competitors. An investment in our common stock is speculative and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks involved in an investment in us, including the risk of losing their entire investment.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” All statements other than statements of historical facts contained in this prospectus may be forward-looking statements. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “continues,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “would” or “should” or, in each case, their negative or other variations or comparable terminology. They appear in a number of places throughout this prospectus, and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, future acquisitions and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the “Risk Factors” section of this prospectus. Those factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this prospectus. The matters summarized under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus could cause our actual results to differ significantly from those contained in our forward-looking statements. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertakeThere is no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by applicable law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
USE OF PROCEEDSminimum offering.
We willdo not receive anyhave a minimum offering requirement, and we may use the proceeds from the salethis Offering immediately following our acceptance of the common stock offered by the Reselling Stockholders; however, we did receive proceeds from our initial sale of the Resell Shares to the Reselling Stockholders pursuant to the Purchase Agreement. The proceeds from the initial sale of the Resell Shares will be usedcorresponding subscription agreements. We do not have any track record for general corporate and working capital purposes.
DETERMINATION OF OFFERING PRICE
We have not set an offering price for the shares registered hereunder, as the only shares being registered are those sold pursuant to the Purchase Agreement. The Reselling Stockholders may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices.
PRICE RANGE OF THE REGISTRANT’S COMMON EQUITY
Our common stock first became quoted on the OTC Markets under the trading symbol “FSIZ” on January 17, 2018. On August 16, 2018 the company changed its stock symbol to “QNTA.” Our common stock is quoted on the OTC Markets under the symbol “QNTA.” Our stock has been thinly traded on the OTCself-underwritten offerings, and there can be no assurance we will sell the Maximum Offering or any other amount in this Offering. There is no assurance that a liquidwe will raise sufficient capital from this Offering to implement our business plan, potentially resulting in greater operating losses unless we are able to raise the required capital from alternative sources. There is no assurance that alternative capital, if needed, would be available on terms acceptable to us, or at all.
Investors may pay less than the then-prevailing market price for our common stock will ever develop. The tables below reflect inter-dealer prices, without retail mark-up, markdown or commission, andwhich may not necessarily represent actual transactions.
| Fiscal Year Ended December 31, 2018 | High | Low | ||||||
| First Quarter | $ | N/A* | $ | N/A* | ||||
| Second Quarter | $ | 3.00 | $ | 0.75 | ||||
| Third Quarter | $ | 3.00 | $ | 1.05 | ||||
| Fourth Quarter | $ | 2.00 | $ | 1.70 | ||||
| Fiscal Year Ended December 31, 2019 | High | Low | ||||||
| First Quarter | $ | 5.00 | $ | 1.00 | ||||
| Second Quarter | $ | 2.35 | $ | 1.83 | ||||
| Third Quarter | $ | 19.00 | $ | 0.20 | ||||
| Fourth Quarter | $ | 0.58 | $ | 0.20 | ||||
* The first trade of common stock occurred in April 2018.
As of December 31, 2019,reduce the last reported salesmarket price reported on the OTC Markets, Inc. for our common stock.
The common stock was approximately $0.52to be issued to the investors pursuant to this S-1 will be purchased at a fixed price of $0.20 per share and we had approximately 118 holders of record ofshare. If the then-prevailing market price exceeds such amount, investors have a financial incentive to sell our common stock. The number of record holders was determined fromstock quickly to realize the records of our transfer agentprofit equal to the difference between the discounted price and does not include beneficial owners of common stock whosethe market price. If the investors sell the shares, are held in the names of various security brokers, dealers or registered clearing agencies. The transfer agentprice of our common stock is Actioncould decrease.
We have broad discretion in how we use the proceeds of this Offering, and may not use these proceeds effectively, which could affect our results of operations and cause the price of our Common Stock Transfer locatedto decline.
We will have considerable discretion in the application of the net proceeds of this Offering. We intend to use the net proceeds from this Offering to fund our business strategy, including without limitation, new and ongoing research and development expenses, offering expenses, working capital and other general corporate purposes, which may include funding for the hiring of additional personnel. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this Offering. We may use the net proceeds for purposes that do not yield a significant return or any return at 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, UT 84121.all for our stockholders. In addition, pending their use, we may invest the net proceeds from this Offering in a manner that does not produce income or that loses value.
We may terminate this Offering at any time.
We reserve the right to terminate this Offering at any time, regardless of the number of shares of Common Stock sold. In the event that we terminate this Offering at any time prior to the sale of all of the shares of Common Stock offered hereby, whatever amount of capital that we have raised at that time will have already been utilized by the Company and no funds will be returned to subscribers.
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HoldersAs of the date of this S-1, an aggregate of 57,947,047 shares of our Common Stock are issued and outstanding. If you purchase Shares in this Offering, your ownership interest in our Common Stock may be diluted immediately, to the extent of the difference between the price to the public charged for each Share in this Offering and the net tangible book value per share of our Common Stock after this Offering.
Except as otherwise indicted herein, the number of shares of our common stock are entitled to receive dividends as may be declared from time to time by our boardoutstanding after this offering is based on 57,723,500 shares of directors. We have not paid any cash dividends since inception on our common stock issued and do not anticipate paying any inoutstanding as of September 1, 2020, and excludes the foreseeable future. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our board of directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our board of directors may deem relevant.following:
| ● | 3,030,000 shares of common stock issuable upon the exercise of outstanding stock options as of that date having a weighted average exercise price of $0.11 per share; | |
| ● | 11,664,520 shares of common stock issuable upon the conversion of outstanding convertible notes having an exercise price of $0.05 per share to $0.07 per share; and | |
| ● | 3,500,000 shares of vested restricted common stock to be issued; | |
| ● | 3,626,635 shares of subscribed common stock to be issued. |
DILUTIONNet Tangible Book Value
Not applicable. We are not offering
Our net tangible book value as of June 30, 2020 was $(814,000) or $(0.01) per share based on 56,900,978 outstanding shares of Common Stock as of such date. Net tangible book value per share equals the amount of our total tangible assets, less total liabilities, divided by the total number of shares registered under this registration statement for purchase. The shares are being registered on behalfof our Common Stock outstanding, all as of the Reselling Stockholders pursuantdate specified. After giving effect to our sale of the Purchase Agreement.maximum Offering amount of $1,477,500 in securities, after deducting approximately $22,500 in estimated offering expenses payable by us, and assuming no other changes since June 30, 2020, our as-adjusted net tangible book value would be approximately $663,500, or $0.01 per share. At an Offering price of $0.20 per share, this represents an immediate dilution in net tangible book value of $0.19 per share to investors of this Offering, as illustrated in the following table:
| Assumed Public Offering price per share | $ | 0.20 | ||||||
| Net tangible book value per share | $ | (0.01 | ) | |||||
| Change in net tangible book value per share attributable to new investors in this offering | $ | 0.02 | ||||||
| Adjusted net tangible book value per share after this offering | $ | 0.01 | ||||||
| Dilution per share to new investors in the Offering | $ | 0.19 |
The following table illustrates the per share dilution to new investors discussed above, assuming the sale of, respectively, 100%, 75%, 50% and 25% of the Shares offered for sale in this Offering (after deducting our estimated offering expenses of approximately $22,500):
| 100 | % | 75 | % | 50 | % | 25 | % | |||||||||
| Funding Level | $ | 1,477,500 | $ | 1,102,500 | $ | 727,500 | $ | 352,500 | ||||||||
| Offering Price | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | ||||||||
| Pro forma net tangible book value per share of Common Stock before the Offering | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| increase per share attributable to investors in this Offering | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.01 | ||||||||
| Pro forma net tangible book value per share of Common Stock after the Offering | $ | 0.01 | $ | 0.00 | $ | 0.00 | $ | (0.01 | ) | |||||||
| Dilution to investors in the Offering | $ | 0.19 | $ | 0.20 | $ | 0.20 | $ | 0.21 |
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RESELLING STOCKHOLDERSPLAN OF DISTRIBUTION
The Reselling Stockholders may offerPlan of Distribution for Quanta, Inc.’s Public Offering of 7,500,000 Shares of Common Stock
This is a self-underwritten (“best-efforts”) offering. This prospectus is part of a registration statement that permits our officers and directors to sell up to 5,000,000the shares of our common stock, which we previously sold pursuantbeing offered by the Company directly to the Purchase Agreement. Thepublic, with no commission or other remuneration payable to them for any shares they may sell. Presently, we expect that our officers and directors will personally contact existing shareholders, friends, family members and business acquaintances and inform them about the offering. In addition, we may market the offering to institutional investors through our officers and directors. We may also offer our shares of common stock registered for resalethrough brokers, dealers or agents, although we have no current plans or arrangements to do so. The company has been contacted by multiple financial institutions, as well as fielded interest from existing shareholders that give the Reselling Stockholders represent approximately 9.1%Company assurance as to the marketability of its shares to these identified parties. This offering will terminate on the date which is 365 days from the effective date of this prospectus, although we may close the offering on any date prior if the offering is fully subscribed or upon the vote of our issued and outstanding sharesboard of common stock as of December 31, 2019.directors.
We may requireIn offering the Reselling Stockholderssecurities on our behalf, our officers and directors will rely on the safe harbor from broker dealer registration set forth in Rule 3a4-1 under the Exchange Act. The officers and directors will not register as broker-dealers pursuant to suspend the salesSection 15 of the sharesExchange Act, in reliance upon Rule 3a4-1, which sets forth those conditions under which a person associated with an issuer may participate in the offering of the Issuer’s securities and not be deemed to be a broker-dealer. In that regard, we confirm that:
| a. | None of our officers or directors are subject to a statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act; | |
| b. | None of our officers or directors will be compensated in connection with their participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in the common stock; | |
| c. | None of our officers or directors is or will be, at the time of his participation in the offering, an associated person of a broker-dealer; and | |
| d. | Our officers and directors meet the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of the Exchange Act, in that each (A) primarily perform substantial duties for or on our behalf, other than in connection with transactions in securities, and (B) is not a broker or dealer, or has been an associated person of a broker or dealer, within the preceding 12 months, and (C) has not participated in selling and offering securities for any issuer more than once every 12 months other than in reliance on Paragraphs (a)(4)(i) or (a)(4)(iii) of Rule 3a4-1. |
None of our common stock being offered pursuantofficers or directors, control persons or affiliates intend to this prospectus upon the occurrence ofpurchase any event that makes any statementshares in this prospectus or the related registration statement untrue in any material respect or that requires the changing of statements in those documents in order to make statements in those documents not misleading.offering.
Selling Security Holders
No securities are being sold for the account of security holders; all net proceeds of this Offering will go to the Company.
If the Maximum Offering is sold, the maximum gross proceeds from the sale of our Common Stock in this Offering will be $1,500,000. The Reselling Stockholders identifiednet proceeds from the total Maximum Offering are expected to be approximately $1,477,500, after the payment of offering costs (including filing fees, and legal, accounting, printing, due diligence, marketing, selling and other costs incurred in the table belowOffering of the Shares). The estimate of the budget for offering costs is an estimate only and the actual offering costs may differ. We expressly reserve the right to change the anticipated use of proceeds if we, in our discretion, deem such change to be necessary or appropriate. We expect from time to time offerto evaluate the acquisition of businesses, strategic partnership, intellectual property, products and sell under this prospectus any or alltechnologies for which a portion of the sharesnet proceeds may be used, although we currently are not planning or negotiating any such transactions. The following table represents management’s best current estimate of common stock described under the column “Sharesuses of the net proceeds received from the sale of Common Stock Being Offered” in the table below.
Information concerning the Reselling Stockholders may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly. We cannot give an estimate as to the number of shares of common stock that will actually be held by the Reselling Stockholders upon termination of this offering, because the Reselling Stockholders may offer some or all of the common stock under the offering contemplated by this prospectus or acquire additional shares of common stock. The total number of shares that may be sold hereunder will not exceed the number of shares offered hereby. Please read the section entitled “Plan of Distribution” in this prospectus.
The manner in whichOffering over the Reselling Stockholders acquired or will acquire sharescourse of our common stock is discussed below under “The Offering.”
The12 months following table sets forth the name of each Reselling Stockholder, the number of shares of our common stock beneficially owned by such stockholder before this offering, the number of shares to be offered for such stockholder’s account and the number and (if one percent or more) the percentage of the class to be beneficially owned by such stockholder after completion of the offering. The numberOffering, assuming the sale of, shares owned are those beneficially owned, as determined under the rulesrespectively, 100%, 75%, 50% and 25% of Shares of the SEC, and such information is not necessarily indicative of beneficial ownershipCommon Stock offered for any other purpose. Under such rules, beneficial ownership includes any shares of our common stock as to which a person has sole or shared voting power or investment power and any shares of common stock whichsale in this Offering, with the person has the right to acquire within 60 days, through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement, and such shares are deemed to be beneficially owned and outstanding for computing the share ownership and percentagebalance of the person holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other person. Beneficial ownership percentages are calculated based on 54,792,255 shares of our common stock outstanding as of December 31, 2019.
Unless otherwise set forth below, (a) the persons and entities namednet proceeds reflected in the line item titled “Unallocated Proceeds for General Corporate Purposes.” Management expects to use the unallocated proceeds from the sale of Common Stock in this Offering in approximately the same proportions reflected in the following table have sole voting and sole investment power with respect tofor the shares set forth oppositepurposes specified below on a going-forward basis after the Reselling Stockholder’s name, subject to community property laws, where applicable, and (b) no Reselling Stockholder had any position, office or other material relationship within the past three years, with us or with any of our predecessors or affiliates. The number of shares of common stock shown as beneficially owned before the offering is based on information furnished to us or otherwise based on information available to us at the timingfirst 12 months following completion of the filing of the registration statement of which this prospectus forms a part.Offering.
Shares Beneficially the Reselling | Shares of Common Stock | Number of Shares to be Owned by the Reselling Stockholders After the Offering and Percent of Total Issued and Outstanding Shares | |||||||||||||||
| Name of Reselling Stockholder | Beforethe Offering(1) | % of Class(1) | Being Offered | # of Shares(2) | % of Class(2) | ||||||||||||
| Alpha Capital Anstalt | 2,500,000 | 4.6% | 2,500,000 | 0 | 0 | % | |||||||||||
| Trillium Partners LP(3) | 1,500,000 | 2.7% | 1,500,000 | 0 | 0 | % | |||||||||||
| Henry Sargent(3) | 500,000 | 0.9% | 500,000 | 0 | 0 | % | |||||||||||
| Chad Nelson | 500,000 | 0.9% | 500,000 | 0 | 0 | % | |||||||||||
| Percentage of Offering Sold | ||||||||||||||||
| 100% | 75% | 50% | 25% | |||||||||||||
| Cost of Goods | $ | 148,000 | 110,000 | 73,000 | 35,000 | |||||||||||
| Marketing & Distribution | $ | 296,000 | 220,000 | 146,000 | 70,000 | |||||||||||
| Research & Development | $ | 739,000 | 551,000 | 364,000 | 176,000 | |||||||||||
| General & Administrative | $ | 294,500 | 221,500 | 144,500 | 71,500 | |||||||||||
| Unallocated Proceeds for General Corporate Purposes | $ | - | - | - | - | |||||||||||
| TOTAL | $ | 1,477,500 | $ | 1,102,500 | $ | 727,500 | $ | 352,500 | ||||||||
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis expected use of the net proceeds from this Offering represents our intentions based upon our current financial condition, results of operations, business plans and conditions. Our management has significant flexibility and broad discretion in applying the net proceeds received in this Offering. We cannot assure you that our assumptions, expected costs and expenses and estimates will prove to be accurate or that unforeseen events, problems or delays will not occur that would require us to seek additional debt and/or equity funding, which may not be available on favorable terms, or at all. See “Risk Factors” starting on page 3.
The following discussion and analysisCompany intends to use a portion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhereproceeds raised in this prospectus. Our discussion includes forward-looking statements based upon current expectations that involve risksOffering to fund the compensation payable to its executive officers, as described under “Compensation of Directors and uncertainties, such as our plans, objectives, expectations and intentions. Actual results andExecutive Officers” below. In addition, the timingCompany may use a portion of events could differ materiallythe proceeds from those anticipatedthe sale of Common Stock in these forward-looking statements as a resultthis Offering to repay some of a number of factors. See “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this prospectus.
OVERVIEWoutstanding balance under the Company’s outstanding indebtedness.
We believe that if we raise the Maximum Amount in this Offering, that we will have sufficient capital to finance our operations for at least the next 12 months. However, if we do not sell the Maximum Amount or if our operating and development costs are an applied science company focusing on enhancing energy levels in plant matter (including cannabis)higher than expected, we will need to increase performance within the human body. Our proprietary technology uses quantum mechanicsobtain additional financing prior to increase bioactivity of targeted moleculesthat time. Further, we expect that during or after such 12-month period, we will be required to enhance the desired effects. We specialize in potentiating rare, naturally occurring elementsraise additional funds to create impactful and sustainable healing solutionsfinance our operations until such time that have potential to be as powerful and predictable as pharmaceutical drugs. We offer our technology as a platform to product makers through distribution channels as well as consumer products. We serve brands in cannabis, anti-aging, health and wellness, stress management, pain management, fitness and brain performance enhancement. Our CBD pain relief rub is an all-natural CBD topical that consists of 13 natural elements including turmeric, arnica and polarized cannabidiol (CBD), designed to provide relief from pain, inflammation, and stiffness in muscles and joints.we can conduct profitable revenue-generating activities.
Our Company History
The company was founded in Nevada as Freight Solution, Inc. in 2016.
On June 5, 2018, we underwent a change of control. In connection with the change of control, our board of directors and officers was reconstituted through the resignation of Shane Ludington as Chairman, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of the Registrant and the appointment of Mr. Eric Rice as Chairman, Chief Executive Officer and Chief Financial Officer and Mr. Jeffrey Doiron as President and Chief Operations Officer.
On June 6, 2018 we formed a wholly-owned subsidiary, Quanta Acquisition Corp. in the state of California, and executed an Agreement of Merger and Plan of Reorganization, with Bioanomaly, Inc., a California corporation, d/b/a Quanta and Quanta Acquisition Corp., a California corporation and our wholly-owned subsidiary. Pursuant to the terms of the Merger Agreement, Quanta Acquisition Corp. merged with and into Quanta in a statutory reverse triangular merger with Quanta surviving as a wholly-owned subsidiary. Following the merger, we adopted our business plan.
On June 6, 2018, we cancelled 15,000,000 shares of common stock acquired through the change in control transaction. As consideration for the merger, we agreed to issue the shareholders of Quanta an aggregate of 21,908,810 shares of our common stock, par value $0.001 per share. Freight Solution shareholders retained 6,500,000 shares of common stock, which represented 23% of our issued and outstanding stock following the merger.
Simultaneously with the merger, we accepted subscriptions for 6,500,000 shares of common stock in a private placement offering at a purchase price of $0.20 per share for an aggregate offering amount of $1,300,000. We also issued two non-affiliated investors warrants to purchase 3,000,000 shares of our common stock at an exercise price of $0.30 per share expiring in four years.
On July 11, 2018 the State of Nevada approved our name change from Freight Solution, Inc. to Quanta, Inc.
Following the consummation of the merger, Quanta shareholders beneficially owned approximately 63% of our issued and outstanding common stock.
Business ModelQuanta Basics
ThoughQuanta is a cutting-edge technology platform whose patented, proprietary technology harnesses advances in quantum biology to increase the potency of active ingredients. Currently, Quanta supports product formulations in pain management, anti-inflammation, skincare, agriculture, nutritional supplements, and plant-based consumables. Ultimately, Quanta’s mission is to deliver better, more effective ingredients to elevate product efficacy, reduce waste and facilitate healthier, more sustainable consumption.
The established resonance theory behind Quanta’s polarization process has many potential applications. From potentiating bio-ingredients to produce more-effective carbon-trapping plants to transformative anti-aging solutions Quanta’s technology has the opportunity to upend how commercial products are made and the benefits from them. Already we offersee multi-trillion-dollar global industries benefiting from Quanta’s technology.
Our proof of concept, Quanta’s market-leading CBD pain-relief rub (“Muscle Rub”), is only the first in a series of paradigm shift products to emerge from our labs. At the heart of its well-documented effectiveness is our proprietary “polarization” process, which uses electromagnetic force to markedly enhance bioactivity at the molecular level—a polarized active ingredient is more soluble and creates stronger bonds with the body’s receptors. This allows us to enhance ingredients so they work faster and more powerfully without the use of chemical by-products or cellular penetration. Quanta believes this natural solution has nearly limitless applications in the world of plant-based consumer products.
Quanta is involved in ambitious projects that we believe will reshape the next wave of climate science, sustainability, nutrition, and more. Having harnessed the technology of the future, Quanta is dedicated to bringing tomorrow’s health and wellness solutions to the billions in need today.
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Proof of Concept
Creating, producing and selling consumer products was never our primary focus; Quanta’s Muscle Rub was simply a means to an end - proof of concept and a revenue driver in a small portfolioemerging market as our business model took shape. Fundamentally, Quanta can be a licensing concern designed to collaborate with large brands to improve product quality and the profit margins of existing and new products. But the market needed proof and we chose to start in the under-developed category of CBD because of its speed to market.
Understandably, we met the same initial hurdles every start-up encounters. In addition to simply explaining quantum mechanics, we had no track record of success from a business standpoint. The immediate goal was to prove our model was defensible. Hence, we chose CBD as a launch category. This market provided protection from industry titans that may have felt threatened by such a powerful technology while allowing us to drive profits during R&D.
Over the last two years, we have developed and sold products largely to the medical industry, along with some consumer retail. This effort was designed to drive revenue and to prove the concept of our own products,model: that polarizing a single ingredient can produce a demonstrably superior product that consumers find safe and effective (establish consumer appetite).
Discovery Synopsys
Using our product development process and business-to-business and direct-to-consumer sales approaches as a benchmark for future business, we developed the Quanta business modelmodel. Our technology’s unique ability to strengthen ingredients renders them more potent without added chemicals or penetrating cells means Quanta is alsoin a first-of-its-kind position in the market. As the world’s first company focused on co-branding partnershipsQuantum Biology we sit in a strong, but unique position in the market.
Our ability to increase ingredient efficacy by up to 500% means we are in a rare position to truly disrupt many areas of material science.
Quanta’s technology renders products superior to any on the market today. A 30% re-purchase rate (on one SKU alone) illustrates consumer appetite for the product.
Upcoming products and ventures will be designed to achieve or surpass this level of consumer benefit and uptake.
Quanta Business Model in 3 P’s: Potentiation, Partners, and Profits
After two years we believe the best possible model for the long-term success of the company is collaborating with top-qualitybest-in-class partners through joint ventures for new verticals, products, and research. These joint ventures may involve a jointly owned special purpose entity or they may be entirely based on contractual obligations.
Our mission has never been to create the best novel products on the planet. Our mission has always been to revolutionize the way formulations are developed and how products perform. We seek to work with the best product developersmakers in the world to positively impact as many industries as possible.
The unique ability to increase the ingredient and manufacturers throughproduct performance opens the doors for major opportunities. Higher performing ingredients mean less is needed to make a strong impact (increased margins, increase overall efficacy). We proved this with our Muscle Rub, which uses approximately 1/3 the CBD of competing products with demonstrably improved results.
The level of potentiation delivered by Quanta allows our partners the unique ability to provide higher-performing products, lower material costs, more competitive pricing and increased profit margins. In short, our partners will be able to make better performing, more affordable products with a higher repeat purchase. This is true disruption and consumer utopia.
We aim to work with groups that specialize in manufacturing, marketing, selling and distributing existing product lines that utilize ingredients we can potentiate. Partners like this facilitate efficient market delivery of joint innovations.
We believe this strategy provides greater shareholder value, enhances revenue potential, defrays upfront expenses and affords us the ability to raise capital for new projects without massive dilution.
Ultimately, these ventures would result in licensing out our technology to other reputable brands and companies to create co-branded products whereas the term “Powered by Quanta” platform. Our business model is very similar to thebecomes as recognized as “Intel Inside” program. Inside.”
We help top brands in cannabis, anti-aging, health and wellness, stress management, pain management, fitness and brain performance enhancement increase the bio-activitybelieve this type of selected elements within their existing formulas to create new, higher performing product lines. In exchange for access to our technology we collect either monthly fees and/or profit share on new revenue created. With regard to cannabis partnerships, we do not participate in revenue, rather we provide our technology and services forpartnership will afford a flat monthly fee.
We are currently working with brands that use the following elements in their product lines:company Quanta partners with:
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Addressable MarketsSimultaneously these partnerships will allow Quanta:
| ● | Greater brand recognition. | |
| ● | Increased revenue and in turn profitability. | |
| ● | Quicker timeline to more licensing opportunities because of a track record of success. | |
| ● | Brand to become synonymous with improving the performance of ingredients within products. |
Manufacturing Partnerships
ThoughQuanta is currently focused on partnering with large-scale manufacturers and distributors able to produce products that meet the requirements of applicable regulations IE: Good Manufacturing Practices to fulfill orders of our initial focus has been cannabis, Quanta has the unique ability to work within any market that leverages plant matter elements for pain relief, anti-inflammatory and qualityown product line. This type of life products. The Companypartnership is also entering the nutraceutical and phytoceutical industries and has plans to expand into multiple sectors in the coming years.crucial because it will afford:
“Powered By Quanta”
| ● | New product development that meets certification requirements | |
| ● | Much larger production scale | |
| ● | Speed to market | |
| ● | Increased distribution and profitability |
Our “Powered by Quanta” program isWith our licensing capabilities, Quanta technology can render better, more efficacious products that cost less to create but command a licensing platform designedhigher purchase value because of polarized ingredients. This, in turn, allows companies to integrate our technology into existing top qualitydiversify their catalog of products around the globe. Once we alignwhile simultaneously providing them with a brand that meets our criteria of having both great products and large distribution, we build and install one of our remotely operated machines in their facility. Each time the partner makes products they simply place their materials in the chamber and answer 5 simple questions. This information is then sent to one of our scientists who will then input polarization specifications to fit the licensee’s needs. Within the confines of the Quanta polarization machines, our technology uses electric and magnetic frequencies to communicate with and re-train the way electrons and the nucleus interact within targeted atoms. The result of this process is a molecule with higher energy/vibrational levels which helps to create a more impactful chemical reaction in the body. Once their batch is complete, we notify the partner to remove it from the machine. They then place “Powered by Quanta” on their products and collect a premium. 100% of our machines are run remotely on a dedicated fiber optic line for quality control, security and ease of use for our partners. Currently each machine can polarize 7.5 liters of oils every 4.25 hours.
Growth Strategy
Licensing
Our current focus is solidifying licensing/co-branding partnerships with the top companies in the cannabis sector, though we are entering into multiple other markets as well. In the cannabis industry we are focused on working with high quality THC brands. This allows us to offer the public a standardized experience with higher energy and reduced side effects without having to become a licensed cannabis company. Both recreational and medicinal THC brands are starting to realize the importance of market differentiation and a need for a standardized consumer experience. We are offering limited licenses in states which have legalized medicinal and/or recreational marijuana use. We are also looking to work with a small, select group of top CBD brands with large distribution and solid reputations.
CBD Products
Our technology significantly increases the bio-activity of CBD which we believe puts us in a strong position for the future. We will work with top brands, but we will also be offering our own hemp derived CBD products online and in traditional stores. Currently we are preparing to launch our fast-acting and high performing CBD Muscle Rub nationwide.
Marketing And Distribution
We offer a scientific solution that is difficult for the public to understand, which makes education a large part of the marketing plan for Quanta. We plan to launch campaigns to offer free samples of our products in exchange for consumer information to build lists and eCommerce revenues. We have found that the best way to sell Quanta’s products is to have people try them and feel the difference, rather than to confuse them with how the company creates such performance.
We are focused on influencer marketing, traditional and digital media, internet marketing and product placement as a primary means of marketing for Quanta. We believe that high quality content in conjunction with pre-built digital distribution will be the best value for the dollar. We have solidified and are currently solidifying partnerships with very visible influencers and celebrities to help with awareness and digital distribution.
Products And Services
Polarization Technology Licensing
The Company owns proprietary technology that uses frequency training to improve the performance of cannabinoids and other natural elements. For THC products our core technology provides very specific advantages for partner brands such as increased energy and greatly reduced side effects (paranoia, anxiety, laziness and loss of cognitive functions) while standardizing the overall THC consumer experience. And for CBD products we offer increased time to activation and increased duration of performance.
The Company intends to monetize this intellectual property through 1) licensing agreements in conjunction with cannabis brands that adhere to state medical and recreational marijuana laws and 2) establishing business relationships with scientific research organizations to develop biologic applications based upon specific plant research and development methodologies.
The Company owns intellectual property (recipes and process/methods) for use in medical marijuana topicals, edibles, vape, sub-lingual and lozenges. The Company’s proprietary muscle rub is unlike other topicals of which may take up to an hour or more to take effect. Based upon preliminary results, our muscle rub generally takes effect within a period of 1-3 minutes. We believe the rapid acting characteristics of our muscle rub will overcome the major obstacle of penetrating the main stream pain and muscle tension relief market. In addition to the muscle rub, we have other forms of topicals under development that assist with anti-aging, inflammation, sexual performance, testosterone balancing and weight loss.
Objectives
Our current strategy is to seek out new co-branding and licensing opportunities for our intellectual property while constantly looking for new strategic corporate and product acquisitions. We are also focused on developing and acquiring new patents, trade secrets, trademarks and other intellectual property.
Competition
CBD products have emerged as extremely popular items in today’s society. The CBD industry has quickly grown from a few large players to hundreds of startups burgeoning. Quanta stands out in a crowded market with a patented technology that allows for enhanced performance, onset, and duration. Creating a truly unique product in a saturated but popular market.distinguished advantage. More efficacious ingredients.
Employees
As of the date of this prospectus,S-1, Quanta has 821 full time and 112 part time employees. We believe we enjoy good employee relations. None of our employees are members of any labor union, and we are not a party to any collective bargaining agreement.
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Government Regulation
We believe we are in compliance with applicable federal, state and other regulations and that we have compliance programs in place to ensure compliance going forward. There are no regulatory notifications or actions pending.
Item 1A. Risk Factors.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 1B. Unresolved Staff Comments.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 2. Properties
The Company does not own any physical location. Quanta currently leases its corporate headquarters and other offices in Burbank, California which lease expires in August 2023. Because our current offices are insufficientThe Company currently also leases a manufacturing, shipping and research facility which expires in size for current and future operations, the company plans to seek replacement office space around the Los Angeles area at the time of the expiration of the current lease.December 2024.
Item 3. Legal Proceedings
From time to time, we are a party to, or otherwise involved in, legal proceedings arising in the normal and ordinary course of business. As of the date of this prospectus,S-1, we are not aware of any other proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.
Item 4. Mine Safety Disclosures.
There are no current mining activities at the date of this report.
Corporate Information
Our principal executive offices are located at 3606 W. Magnolia Blvd., Burbank, CA 91505, and our telephone number is (818) 659-8052. Our website address is www.buyquanta.com. The information contained therein or accessible thereby shall not be deemed to be incorporated into this S-1.
The Company does not own any physical location. Quanta currently leases its corporate headquarters and other offices in Burbank, California which lease expires in August 2023. The Company currently also leases a manufacturing, shipping and research facility which expires in December 2024. The Company believes that these facilities are adequate for the Company’s operations and intended operations for the foreseeable future.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SummaryThe following discussion and analysis of Key our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this S-1. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in this S-1. Also, please see the notes to our Financial Statements for information about our significant accounting policies.
Results of Operations
Results of Operations for the ninethree months ended SeptemberJune 30, 20192020 compared to the ninethree months ended SeptemberJune 30, 20182019
Revenue–Revenues
Net sales are comprised of wholesale sales to our retail partners and sales through our direct to consumer channel. Net sales in both channels reflect the impact of product returns as well as discounts for certain sales programs or promotions.
For the ninethree months ended SeptemberJune 30, 2020, the Company recognized $318,000 in net sales. For the three months ended June 30, 2019, were $930,862, compared to revenues for the nine months ended September 30, 2018 of $134,183. The Company began full time operationsrecognized $318,000 in August 2018.net sales.
Expenses-
Operating expenses for the ninethree months ended SeptemberJune 30, 2019 were $3,698,165.2020 was $2,313,000. The Company incurred $2,669,586$167,000 in research and development costs, and $1,741,000 in administrative and other costs associated with operations, including legal and professional fees of $228,726. In addition, consulting expense$337,000, and $405,000 of labor and related to share-based compensation was $1,749,810. costs.
Operating expenses for the ninethree months ended SeptemberJune 30, 2018 were $1,020,071.2019 was $2,107,000. The Company incurred $417,734$82,000 in research and development costs, and $1,719,000 in administrative and other costs associated with operations, including legal and professional fees of $95,262. The Company incurred $215,462 in research$90,000, and development$305,000 of labor and related costs.
Other income (expense)Income (Expense) – Other expense for
For the ninethree months ended SeptemberJune 30, 2020, the Company recognized $200,000 of net other income.
For the three months ended June 30, 2019, was $20,187. Other incomethe Company recognized $16,000 of net other expenses.
Net Loss
Net loss for the three months ended SeptemberJune 30, 20182020 was $62,038.
Net loss -$1,866,000. Net loss for the ninethree months ended SeptemberJune 30, 2019 and September 30, 2018 was $3,017,233 and $961,428, respectively.$1,906,000. We recorded no provision for federal income taxes for either period.
Results of Operations for nine month transition periodsix months ended December 31, 2018June 30, 2020 compared to the yearsix months ended March 31, 2018June 30, 2019
Revenue–Revenues for
For the nine-month transition periodsix months ended December 31, 2018 were $225,254, compared to revenues forJune 30, 2020, the yearCompany recognized $675,000 in net sales. For the six months ended March 31, 2018 of $50,829. TheJune 30, 2019, the Company began full time operationsrecognized $538,000 in August 2018.net sales.
Expenses
Operating expenses for the nine-month transition periodsix months ended December 31, 2018 were $1,717,584.June 30, 2020 was $3,685,000. The companyCompany incurred $207,600$245,000 in research and development costs. The Company incurred $1,055,805costs, and $2,653,000 in administrative and other costs associated with operations, including legal and professional fees of $128,289. These costs were not associated with our direct public offering efforts$405,000 and therefor expensed as incurred.$788,000 of labor and related costs.
Operating expenses for the yearsix months ended March 31, 2018 were $685,739.June 30, 2019 was $2,461,000. The companyCompany incurred $208,762$82,000 in research and development costs. The Company incurred $278,195costs, and $1,882,000 in administrative and other costs associated with operations, including legal and professional fees of $31,052. These costs were not associated with our direct public offering efforts$111,000, and therefor expensed as incurred.$504,000 of labor and related costs.
Other Income (Expense)
For the transition periodsix months ended December 31, 2018,June 30, 2020, the companyCompany recognized $41,000 as gain on extinguishment$116,000 of debt and $21,000 as gain on forgiveness of accrued interest.net other expenses.
For the yearsix months ended March 31, 2018,June 30, 2019, the company incurred interest expenseCompany recognized $20,000 of $62,777.net other expenses.
Net Loss
Net loss for the six months ended June 30, 2020 was $3,225,000. Net loss for the six months ended June 30, 2019 was $2,099,000. We recorded no provision for federal income taxes for either period.
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Net LossLiquidity
Net loss for the nine-month transition period ended December 31, 2018 was $1,613,972. Net loss for the year ended March 31, 2018 was $735,687. We recorded no provision for federal income taxes for either period. We recorded $800 in minimum franchise tax for the state of California for the year ended March 31, 2018 which is included in administrative expenses.
Basic and diluted loss per share - Basic and diluted loss per share for the nine-month transition period ended December 31, 2018 was $.05 per share. Basic and diluted number of shares outstanding was 35,100,108. Basic and diluted loss per share for year ended March 31, 2018 was $0.03 per share. Basic and diluted number of shares outstanding was 21,908,810.
Result of Operations for the nine months ended December 31, 2017 (Unaudited)
Operating expenses for the nine months ended December 31, 2017 were $424,594. The company incurred $146,273 in research and development costs. The Company incurred $165,665 in administrative and other costs associated with operations, including legal and professional fees of $23,268. These costs were not associated with our direct public offering efforts and therefor expensed as incurred.
Other Expense
During the nine months ended December 31, 2017, the company incurred interest expense of $21,778
Net Loss – Net loss before provision for incomes taxes for the nine months ended December 31, 2017 was $430,808. We recorded no provision for federal income taxes for either period. We recorded $800 in minimum franchise tax for the state of California for the nine month ended December 31, 2018 which is included in administrative expenses above
Basic and diluted loss per share - Basic and diluted loss per share for the nine month ended December 31, 2017 was $0.02 per share. Basic and diluted number of shares outstanding was 21,908,810
Liquidity and Capital Resources
We have yet to establish any history of profitable operations. As reflected inFor the accompanying financial statements, for the ninesix months ended SeptemberJune 30, 2019,2020, the companyCompany incurred a net loss of $3,017,233$3,255,000 and used cash in operating activities of $958,100,$1,344,000, and at SeptemberJune 30, 2019,2020, the companyCompany had a working capital deficiencystockholders’ deficit of $174,449.$814,000. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. In addition, ourthe Company’s independent registered public accounting firm, included an explanatory paragraph in itstheir report on ourthe Company’s December 31, 2019 audited financial statements, raised substantial doubt about the Company’s ability to continue as of and for the year ended December 31, 2018 with respect to this uncertainty.a going concern. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities and future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern.
At SeptemberJune 30, 2019,2020, the companyCompany had cash on hand in the amount of $34,406.$30,000. Subsequent to SeptemberJune 30, 2019,2020 the companyCompany received $1,000,000 for subscriptions for shares$250,000 from the issuance of common stock to be issued in a private placement, and 250,000 through a convertible note.five notes payable. Management estimates that the current funds on hand will be sufficient to continue operations through the next 6six months. The Company’s ability to continue as a going concern is dependent upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or external financing will provide the additional cash to meet the company’sCompany’s obligations as they become due. No assurance can be given that any future financing if needed, will be available or, if available, that it will be on terms that are satisfactory to the company.Company. Even if the company is able toCompany can obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing.financing
AsResults of September 30, 2019 andOperations for year ended December 31, 2019 compared to the nine months ended December 31, 2018 we owed $120,850 and $80,000 respectively in connection with short term loans from unrelated parties, respectively. The proceeds of which were used for basic working capital purposes.
The following activitiesRevenue
Net sales are comprised of wholesale sales to our retail partners and financial transactions occurred duringsales through our direct to consumer channel. Net sales in both channels reflect the impact of product returns as well as discounts for certain sales programs or promotions.
For the year ended December 31, 2019, the Company recognized $1,268,988 in net sales. For the nine-month transition period endingended December 31, 2018. They were2018, the following:Company recognized $225,254 in net sales. The increase in sales is due to an increase in our customers for a full year of operations in 2019 compared to four months of full operations in the transition period.
| By Geographic Territory: | Year ended December 31, 2019 | Transition period ended December 31, 2018 | ||||||
| California | $ | 766,469 | $ | 156,974 | ||||
| Other states | 477,139 | 68,280 | ||||||
| International | 25,380 | - | ||||||
| $ | 1,268,988 | $ | 225,254 | |||||
| By Sales Channel: | ||||||||
| Direct to consumer | $ | 443,916 | $ | 67,806 | ||||
| Wholesale | 793,284 | 157,448 | ||||||
| License Revenue | 31,788 | - | ||||||
| $ | 1,268,988 | $ | 225,254 | |||||
Recent Accounting PronouncementsExpenses
Operating expenses for the year ended December 31, 2019 were $6,453,091. The Company incurred $351,670 in research and development costs, and $4,799,030 in administrative and other costs associated with operations, including legal and professional fees of $651,764, and $1,302,391 of labor and related costs. These costs were not associated with our direct public offering efforts and therefor expensed as incurred.
Operating expenses for the nine-month transition period ended December 31, 2018 were $1,717,584. The Company incurred $207,600 in research and development costs, and $1,055,805 in administrative and other costs associated with operations, including legal and professional fees of $128,289, and $454,179 of labor and related costs. These costs were not associated with our direct public offering efforts and therefor expensed as incurred.
Other Income (Expense)
For the year ended December 31, 2019, the Company recognized $299,541 of net other expenses, including interest expense of $226,239, private placement costs of $238,395 and $145,565 of extinguishment of derivative liabilities.
For the nine-month transition period ended December 31, 2018, the Company recognized $41,000 as gain on extinguishment of debt and $21,000 as gain on forgiveness of accrued interest.
Net Loss
Net loss for the year ended December 31, 2019 was $5,787,364. Net loss for the nine-months transition period ended December 31, 2018 was $1,613,972. We recorded no provision for federal income taxes for either period. We recorded $800 in minimum franchise tax for the state of California for the year ended December 31, 2019 and nine-month transition period ended December 31, 2018, respectively, which are included in administrative expenses.
Basic and diluted loss per share - Basic and diluted loss per share for the year ended December 31, 2019 was $.14 per share. Basic and diluted number of shares outstanding was 40,528,456 for 2019. Basic and diluted loss per share for the transition period ended December 31, 2018 was $.05 per share. Basic and diluted number of shares outstanding was 35,100,108 for 2018.
In June 2016, the FinancialCritical Accounting Standards Board (“FASB”) issued ASU 2016-13,Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred-loss impairment methodologyPolicies and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. ASU 2016-13 is effective for the company beginning January 1, 2020 and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.Estimates
Other recentOur financial statements are prepared in accordance with accounting pronouncements issued byprinciples generally accepted in the FASB,United States of America, or GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements including its Emerging Issues Task Force,various allowances and reserves for accounts receivable and inventories, the American Instituteestimated lives of Certified Public Accountants,long-lived assets and trademarks and trademark licenses, as well as claims and contingencies arising out of litigation or other transactions that occur in the Securitiesnormal course of business. The following summarizes our most significant accounting and Exchange Commission did not or are not believed by management to have a material impact on the company’s present or future consolidated financial statements.reporting policies and practices:
Sole DirectorThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and Executive Officersassumptions 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 revenues and expenses during the reporting period. Significant accounting estimates include certain assumptions related to, among others, impairment analysis of long-term assets, valuation allowance on deferred income taxes, assumptions used in valuing stock instruments issued for services, assumptions made in valuing derivative liabilities, and the accrual of potential liabilities. Actual results may differ from these estimates.
Revenue Recognition
The Company recognizes revenue when risk of loss transfers to our customers and collection of the receivable is reasonably assured, typically upon delivery of products. The Company historically has offered no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against revenue. The Company follows the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
Stock Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and financing costs. The Company accounts for such grants issued and vesting based on ASC 718, whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using a Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the March 31, 2020, reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
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DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth the name and age of officers and director as of the date hereof. Our executive officers are elected annually by our board of directors. Our executive officers hold their offices until they resign, are removed by the board of directors, or his successor is elected and qualified.
| Name | Position | Age | ||
| Eric Rice | Founder, Chairman, Chief Executive Officer and Chief Financial Officer, Sole Director | |||
| Jeffrey Doiron | President and Chief Operations Officer | |||
| Kirk Westwood | Vice President | 48 | ||
| Blake Gillette | Executive Vice President | 25 |
Eric Rice, Founder, Chairman, Chief Executive Officer, and Chief Financial Officer and Sole Director. PriorEric Rice is a leading American entrepreneur. He started his business career in Chicago in wealth management and high-net-worth financial advising before spending more than a decade building businesses at the nexus of multiple industries including artificial intelligence, machine learning, technology. Along the way, he worked with founders across multiple sectors to launching Quanta in 2016, Mr. Rice wascreate profitable, enduring enterprises, demonstrating a keen eye for the foundernuances of markets and corresponding growth opportunities. In 2013, he cofounded 25 Ventures, a technology venture studio. Beforestudio that he wasdeveloped multiple companies in various areas including wellness, ad tech, and cannabis. He is a sought-after partner for start-ups and established businesses around the CEOglobe. With its world-changing ambitions, Quanta represents the culmination of TrepScore, an artificial intelligence platform for small business data from 2014 to 2016,Eric’s years of insight and the COO of Business Rockstars from 2015 to 2016. Mr. Rice has no further activity orexperience, merging his market acumen with his longstanding interest in any of these operations.the applied sciences. He has built companieslives in numerous verticals including financial services, digital media, artificial intelligence, biotechnology, live gaming and cannabis. Mr. Rice leads Quanta’s operations and overall strategic direction. He holds a Bachelor of Arts Degree in SCS from Indiana University. Mr. Rice’s status as the founder alongBurbank with his extensive experience in marketing ledwife and two children, and still finds time to make it to the conclusion that he is qualified to serve in these capacities.batting cages.
Jeffrey Doiron, President and Chief Operations Officer. Before taking over operations for Quanta, Mr. Doiron founded and grew one of the continent’s most innovative advanced digital agencies. He was the Managing Director and Cofounder of Fuel Industries Inc from 1999 through 2017. He uses his vast experience to connect new and exciting ideas with the right partners and brands. He guides the team to unlock their most creative selves and drive forward the momentum of the company. The Company concluded that Mr. Doiron’s past experiences and training render him qualified to serve in these capacities.
Kirk Westwood, Vice President. An expert with thousands of hours of experience in reading people and in what cultures do around the world to create what looks like good fortune. It was during his 4 years within an Australian Special Forces Unit that Kirk coined the term “The Luck Bubble” to describe the phenomena of Elite Special Forces Operators experiencing extreme moments of good fortune whilst on operations. It is a very real, and trainable dynamic that has now been used repeatedly to help organizations, sports teams and individuals make millions, create winning dynasties, pivot technologies and radically improve corporate cultures.
Blake Gillette, Executive Vice President
Blake Gillette, Executive Vice President. Prior to taking on the role of Executive Vice President at Quanta, Mr. Gillette started his career at Red Bull Energy Drinks, before moving on to the world of entrepreneurship. Having spent the prior 5 years before Quanta in the startup world, ranging from the clothing industry to E-learning platforms, and Artificial Intelligence. He went on to become a partner and co-founder of 25 Ventures, an incubator for early-stage companies looking to scale quickly and improve operating performance. He then joined Quanta in a full-time capacity as it’s Executive Vice President.
Board of Directors
Each director is elected to the board of directors and serves until his or her successor is elected and qualified, unless he or she resigns or is removed earlier. each of our officers is elected by our board of directors to a term of one (1) year and serves until his or her successor is duly elected and qualified, or until he or she is earlier removed from office or resigns.
At the very least, we will reimburse all directors for expenses incurred in attending directors’ meetings provided that we have sufficient resources to pay these expenses. We will consider in applying for officers and directors liability insurance at such time that we have the financial resources to do so.
Currently, Eric Rice is our sole director.
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Committees of the Board of Directors
Concurrent with having sufficient members and resources, our board of directors intends to establish an audit committee and a compensation committee. The audit committee will review the results and scope of the audit and other services provided by the independent auditors and review and evaluate the system of internal controls. The compensation committee will review and recommend compensation arrangements for the officers and employees. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish committees. We believe that we will need a minimum of three independent directors to have effective committee systems.
As of the date hereof, we have not established any board committees.
Family Relationships
No family relationship exists between any director, executive officer, or any person contemplated to become such.
Director Independence
We currently do not have any independent directors serving on our board of directors.
Potential Conflicts
The OTC Markets, on which we have our shares of common stock quoted, does not currently have any director independence requirements.
No member of management will be required by us to work on a full timefull-time basis. Accordingly, certain conflicts of interest may arise between us and our officer(s) and director(s) in that they may have other business interests in the future to which they devote their attention, and they may be expected to continue to do so although management time must also be devoted to our business. As a result, conflicts of interest may arise that can be resolved only through their exercise of such judgment as is consistent with each officer’s understanding of his/her fiduciary duties to us.
Currently we have only one officerdirector, Eric Rice, who is also our Chairman, Chief Executive Officer and one director (both of whom are the same person),Chief Financial Officer, and will seek to add additional officer(s) and/or director(s) as and when the proper personnel are located and terms of employment are mutually negotiated and agreed, and we have sufficient capital resources and cash flow to make such offers.
We cannot provide assurances that our efforts to eliminate the potential impact of conflicts of interest will be effective.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past ten years:
| ● | has had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; |
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; |
| ● | been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or |
| ● | been subject or a party to or any other disclosable event required by Item 401(f) of Regulation S-K. |
Code of Business Conduct and Ethics
Upon incorporation we adopted a written code of ethics applicable to our board of directors, officers and employees in accordance with applicable Federal and states securities laws. Our board of directors shall oversee compliance with the code of ethics as it relates to the company through an officer designated by the board. Employees are required to report known and suspected breaches of our code of ethics to an appropriate supervisor, or in the case of officers and directors, to a senior officer designated by our board of directors. Our code of ethics is designed to deter wrongdoing and to promote:
| ● | honest and ethical conduct; |
| ● | full, fair, accurate, timely and understandable disclosure in reports and documents that we will file with securities regulators and in our other public communications; |
| ● | compliance with applicable laws, rules and regulations, including insider trading compliance; and |
| ● | accountability for adherence to the code and prompt internal reporting of violations of the code, including illegal or unethical behavior regarding accounting or auditing practices. |
A copy of our Code of Business Conduct and Ethics has been filed with the Securities and Exchange Commission as Exhibit 14.1 to our Registration Statement filed on Form S-1 on June 1, 2017.
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COMPENSATION OF DIRECTORS, EXECUTIVE OFFICERS AND DIRECTOR COMPENSATIONKEY EMPLOYEES
Summary Compensation Table
The following table sets forth all of the compensation awarded to, earned by or paid to our named directors, executive officers and key employees for the fiscal year ended December 31, 2019, the transition period ended December 31, 2018 and the fiscal yearsyear ended April 30, 2018 and 2017:2018:
| Name and Principal Position | Period | Base Salary ($) | All Other Compensation ($) | Total ($) | Period | Base Salary ($) | Option Awards ($)(2) | All Other Compensation | Total ($) | |||||||||||||||||||||||
| Eric Rice | Transition Period ended December 31, 2018 | 14,500 | — | 14,500 | Fiscal Year ended December 31, 2019 | 103,044 | — | — | 103,044 | |||||||||||||||||||||||
| Founder, Chairman and Chief | Fiscal Year ended April 30, 2018 | — | — | — | Transition Period ended December 31, 2018 | 14,500 | — | — | 14,500 | |||||||||||||||||||||||
| Executive Officer(1) | Fiscal Year ended April 30, 2017 | — | — | — | ||||||||||||||||||||||||||||
Executive Officer (Principal Executive Officer) (1) | Fiscal Year ended April 30, 2018 | — | — | — | — | |||||||||||||||||||||||||||
| Jeffrey Doiron | Transition Period ended December 31, 2018 | 59,027 | — | 59,027 | Fiscal Year ended December 31, 2019 | 93,732 | 415,672 | — | 509,404 | |||||||||||||||||||||||
| President(1) | Fiscal Year ended April 30, 2018 | — | — | — | Transition Period ended December 31, 2018 | — | — | 59,027 | 59,027 | |||||||||||||||||||||||
| Fiscal Year ended April 30, 2017 | — | — | — | Fiscal Year ended April 30, 2018 | — | — | — | — | ||||||||||||||||||||||||
| Kirk Westwood | Fiscal Year ended December 31, 2019 | 71,803 | 566,826 | 30,293 | 668,922 | |||||||||||||||||||||||||||
| Vice President (1) | Transition Period ended December 31, 2018 | — | — | 87,710 | 87,710 | |||||||||||||||||||||||||||
| Fiscal Year ended April 30, 2018 | — | — | — | — | ||||||||||||||||||||||||||||
| Blake Gillette | Fiscal Year ended December 31, 2019 | - | - | |||||||||||||||||||||||||||||
| Transition Period ended December 31, 2018 | 38,332 | - | - | |||||||||||||||||||||||||||||
| Fiscal Year ended April 30, 2018 | 25,800 | - | - | |||||||||||||||||||||||||||||
(1)Appointed June 6, 2018.
| (1) | Appointed June 6, 2018. |
| (2) | The amounts reported in this column represent the aggregate grant date fair value of option awards computed in accordance with FASB ASC Topic 718 by utilizing the Black-Scholes option-pricing model. |
Employment Agreements
The Company entered into an employment agreementagreements with Mr. Rice, Doiron, Gillette and Westwood on August 29, 2018September 4, 2019 pursuant to which Mr. Rice agreed to serve as our Chief Executive Officer for annual compensation of $120,000, Mr. Doiron agreed to serve as our President for annual compensation of $96,000. The agreement also provides$108,000, Mr. Gillette agreed to serve as Executive Vice President for the issuance$78,000, and Mr. Westwood agreed to serve as our Vice President for annual compensation of 1,000,000 restricted shares pursuant to a vesting schedule. As of December 31, 2019, no shares have been granted or issued. The$78,000. Mr. Rice’s agreement has no seta term of three years and either party can terminate the agreement at any time.time; provided that unless terminated by us for cause or terminated by the employee without good reason, Mr. Rice is entitled to twelve months’ severance. Mr. Doiron’s agreement has a term of three years and either party can terminate the agreement at any time; provided that unless terminated by us for cause or terminated by the employee without good reason, Mr. Doiron is entitled to one monththree months’ severance. Mr. Gillette’s agreement has a term of severance ifthree years and either party can terminate the agreement isat any time; provided that unless terminated by us.us for cause or terminated by the employee without good reason, Mr. Gillette’s is entitled to three months’ severance. Mr. Westwood’s agreement has a term of three years and either party can terminate the agreement at any time; provided that unless terminated by us for cause or terminated by the employee without good reason, Mr. Westwood is entitled to three months’ severance.
Director Compensation
We have no arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.
Pension Table
None.
Retirement Plans
We do not offer any annuity, pension, or retirement benefits to be paid to any of our officers, directors, or employees in the event of retirement. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement, or any other termination of employment with our company, or from a change in the control of our Company.
Compensation Committee
We do not have a separate compensation committee. Instead, our board of directors reviews and approves executive compensation policies and practices, reviews salaries and bonuses for other officers, administers our stock option plans and other benefit plans, if any, and considers other matters that may be brought forth to it.
Risk Management Considerations
We believe our compensation policies and practices for our employees, including our executive officers, do not create risks that are reasonably likely to have a material adverse effect on our Company.
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Outstanding Equity Awards at Fiscal Year-EndSECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
NoneThe following table sets forth the amount of our named executive officers had any outstanding stock or option awardsCommon Stock and Series A Preferred Stock beneficially owned by the listed persons as of the fiscal years ended April 30, 2017July 29, 2020. On that date, there were issued and 2018 and the transition period ended December 31, 2018. We have not issued any awards to its named executive officers. The Company and its board may grant awards as it sees fit to its employees as well as key consultants and other outside professionals.
outstanding Long-Term Incentive Plans and Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance. No individual grants or agreements regarding future payouts under non-stock price-based plans have been made to any executive officer or any director or any employee or consultant since our inception; accordingly, no future payouts under non-stock price-based plans or agreement s have been granted or entered into or exercised by our officer or director or employees or consultants since we were founded.
56,900,978 Grants of Plan-Based Awards Table
None of our named executive officers received any grants of stock, option awards or other plan-based awards during the fiscal years ended April 30, 2017 and 2018 and the transition period ended December 31, 2018. We have no activity with respect to these awards.
Options Exercised and Stock Vested Table
None of our named executive officers exercised any stock options, and no restricted stock units if any, held by our named executive officers vested during the transition period ended December 31, 2018. We have no activity with respect to these awards.
Securities Authorized for Issuance under Equity Compensation Plans
To date we have not authorized the issuance of any shares of common stock under equity compensation plans.and 2,500,000 shares of our Series A preferred stock outstanding. Unless otherwise noted, to our knowledge, these persons have sole investment and voting power over the shares listed. As of July 29, 2020, no security holders (other than directors or executive officers) beneficially owned more than 10% of any class of our voting securities.
| Title of Class | Name and Address of beneficial owner (1) | Amount and Nature of Beneficial Ownership | Amount and Nature of beneficial ownership acquirable(2) | Percentage of Class Owned (3) | ||||||||||
| Common Stock | Eric Rice | 18,030,032 | 31.7 | % | ||||||||||
| Common Stock | Jeffrey Doiron | 93,047 | 675,000 | 0.16 | % | |||||||||
| Common Stock | Kirk Westwood | 36,628 | 1,145,833 | 0.06 | % | |||||||||
| Common Stock | Blake Gillette | 2,076,374 | - | 3.6 | % | |||||||||
| Common Stock | All directors and executive officers as a group (4) | 18,159,707 | 1,820,833 | 35.9 | % | |||||||||
| Series A Preferred Stock | Eric Rice | 2,500,000 | 0 | 100 | % | |||||||||
| (1) | The address for all officers, directors and beneficial owners is c/o Quanta, Inc., 3606 W Magnolia Blvd, Burbank, CA 91505. |
| (2) | This column reflects securities that a person has the right to acquire within 60 days. On December 19, 2019, Jeffrey Doiron and Kirk Westwood were granted options to acquire the company’s common stock. One option was for 1,100,000 shares at an exercise price of $0.23 per share; 550,000 vested immediately and the remaining 550,000 vest ratably over the 24-month period after the date of the grant. One option was for 1,500,000 shares at an exercise price of $0.10 per share; 1,000,000 vested immediately and the remaining 500,000 vest ratably over a 12-month period beginning 12 months after the date of the grant. On May 22, 2020, each of these options was amended to reduce the exercise price to $0.10 per share. |
| (3) | Based on number of issued and outstanding shares of common and Series A preferred stock outstanding as of set forth above. |
| (4) | Eric Rice, our Chairman and Chief Executive Officer, owns 18,030,032 shares 31.7% of our common stock and 2,500,000 shares (100%) of our Series A preferred stock. |
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INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain Relationships and Related Transactions
WeExcept as set forth below, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of those persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last two fiscal years, including the transition period ended December 31, 2018.
On April 14, 2020, we issued to Eric Rice, our Chairman, Chief Executive Officer and Chief Financial Officer, 2,500,000 shares of a newly created class of preferred stock, Series A Preferred Stock, in a private placement transaction in satisfaction of certain accrued but unpaid compensation in the amount of $120,000 then owed to Mr. Rice.
Review, Approval and Ratification of Related Party Transactions
Our board of directors is responsible to approve all related party transactions. Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions with our executive officers, directors and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our board of directors, or an appropriate committee thereof.
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the company or any other individual having a relationship which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Currently, Eric Rice is our sole director. According to the NASDAQ definition, Mr. Eric Rice is not an independent director because he currently holds the title of an officer in the company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDSECURITIES BEING OFFERED
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us regarding beneficial ownershipis a summary of the rights of our common stockCommon Stock as provided in our Certificate of December 31, 2019 by:
Beneficial ownership is determined accordingIncorporation, and bylaws. For more detailed information, please see our Certificate of Incorporation and bylaws which have been filed (or incorporated by reference) as exhibits to the rulesRegistration Statement of the SEC, which generally provide thatthis Prospectus is a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days. Common stock issuable upon exercise of options or warrants currently exercisable or exercisable within 60 days are deemed outstanding solely for purposes of calculating the percentage of class and percentage of total voting power of the beneficial owner thereof.
Unless otherwise indicated, we believe that each person named in the table below has sole voting and investment power with respect to all shares of our common stock beneficially owned by him or her.
| Name And Address(1) | Beneficially Owned | Percentage Owned(2) | ||||||
| Eric Rice, Chairman, Chief Executive Officer | 17,925,390 | 32.7 | % | |||||
| Jeffrey Doiron, President | - | - | % | |||||
| All directors and officers as a group (2 persons) | 17,925,390 | 32.7 | % | |||||
| Other 5% Holders | ||||||||
| Brothers Pascarella LLC | 4,000,000 | 7.3 | % | |||||
(1)The address for all officers, directors and beneficial owners is 3606 W Magnolia Blvd, Burbank, CA 91505.
(2)Based on 54,792,255 shares of common stock outstanding as of December 31, 2019.
DESCRIPTION OF CAPITAL STOCKpart.
We were incorporated underThis Prospectus relates to the lawsoffer and sale of the State of Nevada on April 28, 2016. We are authorizedup to issue 100,000,000 shares of common stock, par value $0.001 per share and 25,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2019, 54,792,255 shares7,500,000 Shares of our common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, an aggregate of 12,000,000 shares of common stock are reserved for issuance upon the exercise of outstanding options and the conversion of convertible notes will result in the issuance of additional shares of common stock.
Preferred Stock
Our articles of incorporation authorize the issuance of 25,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors. No shares of preferred stock have been designated, issued or were outstanding as of the date of this prospectus. Accordingly, our board of directors is empowered, without stockholder approval, to issue up to 25,000,000 shares of preferred stock with voting, liquidation, conversion, or other rights that could adversely affect the rights of the holders of the common stock. Although we have not issued any shares of preferred stock, there can be no assurance that we will not do so in the future.
Among other rights, our board of directors may determine, without further vote or action by our stockholders:
If issued, our preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred stock or any rights to purchase preferred shares may have the effect of making it more difficult for a third party to acquire control of us. This may delay, defer or prevent a change of control in our Company or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock.
Common StockStock.
Our articles of incorporation authorize the issuance of 100,000,000 shares of Common Stock. The holders of our Common Stock:
| ● | have equal ratable rights to dividends from funds legally available for payment of dividends when, as and if declared by the board of directors; |
| ● | are entitled to share ratably in all of the assets available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of our affairs; |
| ● | do not have preemptive, subscription or conversion rights, or redemption or access to any sinking fund; and |
| ● | are entitled to one non-cumulative vote per share on all matters submitted to stockholders for a vote at any meeting of stockholders |
Authorized but Unissued Capital Stock
Nevada law does not require stockholder approval for the issuance of authorized shares. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved common stock (or preferred stock) may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our board by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of our common stock at prices higher than prevailing market prices.
Shareholder Matters
As an issuer of “penny stock” the protection provided by the federal securities laws relating to forward looking statements does not apply to us if our shares are considered to be penny stocks (which they currently are and probably will be for the foreseeable future). Although the federal securities lawlaws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any claim that the material provided by us, including this prospectus,S-1, contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
As a Nevada corporation, we are subject to the Nevada Revised Statutes (“NRS” or “Nevada law”). Certain provisions of Nevada law described below create rights that might be deemed material to our shareholders. Other provisions might delay or make more difficult acquisitions of our stock or changes in our control or might also have the effect of preventing changes in our management or might make it more difficult to accomplish transactions that some of our shareholders may believe to be in their best interests.
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Series A Preferred Stock
On April 14, 2020, the Company filed a Certificate of Designation for the Company’s Series A Preferred Stock with the Secretary of State of Nevada designating 2,500,000 shares of its authorized preferred stock as Series A Preferred Stock, par value of $0.001 per share. The Series A Preferred Stock is not entitled to receive any dividends or liquidation preference and are not convertible into shares of the Company’s common stock. The holders of the Series A Preferred Stock, in the aggregate, have voting power equal to 51% of the total votes of all of the outstanding common and preferred stock of the Company entitled to vote. Accordingly, each share of Series A Preferred Stock shall have voting rights equal to one and one-tenth (1.1) times a fraction, the numerator of which is the shares of outstanding common stock and undesignated preferred stock of the Company and the denominator of which is number of shares of outstanding Series A Preferred Stock. With respect to all matters upon which stockholders are entitled to vote or give consent, the holders of the outstanding shares of Series A Preferred Stock shall vote with the holders of the common stock and any outstanding preferred stock without regard to class, except as to those matters on which separate class voting is required by applicable law or the Company’s Articles of Incorporation. Our Chairman, Chief Executive Officer and Chief Financial Officer, Eric Rice, was issued all 2,500,000 shares of the Series A Preferred Stock, giving him effective voting control over the Company’s affairs.
Convertible Notes
On NovemberFebruary 25, 2019,2020, we issued a 10% convertible promissory note in the principal amountbalance of $30,000.$153,000. The convertible note bears interest at a rate of 10% per annum and matures on MayFebruary 25, 2021. The holder may, at its option, convert the convertible note into shares of our common stock at a per share conversion price equal to 61% of the lowest trading price for our common stock during the 15 trading days preceding the conversion date.
On March 31, 2020, we issued a convertible note in the principal balance of $357,000. The convertible note bears interest at a rate of 10% and matures on December 31, 2020. The holder may, at its option, convert the convertible note into shares of our common stock at a per share conversion price equal to 50% of the lowest closing bid price for our common stock during the preceding 20 trading days.$0.05 per share.
On October 29, 2019,April 27, 2020, we received $253,800 in proceeds from the issuance ofissued a convertible note in the principal balance of $282,000.$341,000. The convertible note bears interest at a rate of 12%10% and matures on April 29,December 31, 2020. The holder may, at its option, convert the convertible note into shares of our common stock at a per share conversion price equal to the lesser of (i) 60% of the lowest trading price for our common stock during the 25 trading days preceding the date of the convertible note or (ii) 60% of the lowest trading price for our common stock during the 25 trading days preceding the date of conversion.$0.05 per share. In connection with the note, weissuance of the Convertible Notes, the Company issued an aggregate of 705,000 returnable shares of ourthe Company’s common stock to the holder of the convertible note, which must be returned to our treasury if the convertible note is repaid or satisfied. In addition, as a commitment fee, we also issued 141,000 shares of our common stock to the holder of the convertible note.fee.
Selected Provisions of the Nevada Revised Statutes
Directors’ Duties. Section 78.138 of the Nevada law allows our directors and officers, in exercising their powers to further our interests, to consider the interests of our employees, suppliers, creditors and shippers. They can also consider the economy of the state and the nation, the interests of the community and of society and our long-term and short-term interests and shareholders, including the possibility that these interests may be best served by our continued independence. Our directors may resist a change or potential change in control if they, by a majority vote of a quorum, determine that the change or potential change is opposed to or not in our best interest. Our board of directors may consider these interests or have reasonable grounds to believe that, within a reasonable time, any debt which might be created as a result of the change in control would cause our assets to be less than our liabilities, render us insolvent, or cause us to file for bankruptcy protection
Dissenters’ Rights. Among the rights granted under Nevada law which might be considered material is the right for shareholders to dissent from certain corporate actions and obtain payment for their shares (see NRS 92A.380-390). This right is subject to exceptions, summarized below, and arises in the event of mergers or plans of exchange. This right normally applies if shareholder approval of the corporate action is required either by Nevada law or by the terms of the articles of incorporation.
A shareholder does not have the right to dissent with respect to any plan of merger or exchange, if the shares held by the shareholder are part of a class of shares which are:
| ● | listed on a national securities exchange, |
| ● | included in the national market system by the Financial Industry Regulatory Authority (“FINRA”), or |
| ● | held of record by not less than 2,000 holders. |
This exception notwithstanding, a shareholder will still have a right of dissent if it is provided for in the articles of incorporation or if the shareholders are required under the plan of merger or exchange to accept anything but cash or owner’s interests, or a combination of the two, in the surviving or acquiring entity, or in any other entity falling in any of the three categories described above in this paragraph.
Inspection Rights. Nevada law also specifies that shareholders are to have the right to inspect company records (see NRS 78.105). This right extends to any person who has been a shareholder of record for at least six months immediately preceding his demand. It also extends to any person holding, or authorized in writing by the holders of, at least 5% of outstanding shares. Shareholders having this right are to be granted inspection rights upon five days’ written notice. The records covered by this right include official copies of:
| ● | the articles of incorporation, and all amendments thereto, |
| ● | bylaws and all amendments thereto; and |
| ● | a stock ledger or a duplicate stock ledger, revised annually, containing the names, alphabetically arranged, of all persons who are stockholders of the corporation, showing their places of residence, if known, and the number of shares held by them, respectively. |
In lieu of the stock ledger or duplicate stock ledger, Nevada law provides that the corporation may keep a statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the present and complete post office address, including street and number, if any, where the stock ledger or duplicate stock ledger specified in this section is kept.
Control Share Acquisitions. Sections 78.378 to 78.3793 of Nevada law contain provisions that may prevent any person acquiring a controlling interest in a Nevada-registered company from exercising voting rights. To the extent that these rights support the voting power of minority shareholders, these rights may also be deemed material. These provisions will be applicable to us as soon as we have 200 shareholders of record with at least 100 of these having addresses in Nevada as reflected on our stock ledger. While we do not yet have the required number of shareholders in Nevada or elsewhere, it is possible that at some future point we will reach these numbers and, accordingly, these provisions will become applicable. We do not intend to notify shareholders when we have reached the number of shareholders specified under these provisions of Nevada law. Shareholders can learn this information pursuant to the inspection rights described above and can see the approximate number of our shareholders by checking under Item 5 of our most recent annual report on Form 10-K. You can view these and our other filings at www.sec.gov in the “EDGAR” database.
Under NRS Sections 78.378 to 78.3793, an acquiring person who acquires a controlling interest in company shares may not exercise voting rights on any of these shares unless these voting rights are granted by a majority vote of our disinterested shareholders at a special shareholders’ meeting held upon the request and at the expense of the acquiring person. If the acquiring person’s shares are accorded full voting rights and the acquiring person acquires control shares with a majority or more of all the voting power, any shareholder, other than the acquiring person, who does not vote for authorizing voting rights for the control shares, is entitled to demand payment for the fair value of their shares, and we must comply with the demand. An “acquiring person” means any person who, individually or acting with others, acquires or offers to acquire, directly or indirectly, a controlling interest in our shares. “Controlling interest” means the ownership of our outstanding voting shares sufficient to enable the acquiring person, individually or acting with others, directly or indirectly, to exercise one-fifth or more but less than one-third, one-third or more but less than a majority, or a majority or more of the voting power of our shares in the election of our directors. Voting rights must be given by a majority of our disinterested shareholders as each threshold is reached or exceeded. “Control shares” means the company’s outstanding voting shares that an acquiring person acquires or offers to acquire in an acquisition or within 90 days immediately preceding the date when the acquiring person becomes an acquiring person.
These Nevada statutes do not apply if a company’s articles of incorporation or bylaws in effect on the tenth day following the acquisition of a controlling interest by an acquiring person provide that these provisions do not apply.
According to NRS 78.378, the provisions referred to above will not restrict our directors from taking action to protect the interests of our company and its shareholders, including without limitation, adopting or executing plans, arrangements or instruments that deny rights, privileges, power or authority to a holder of a specified number of shares or percentage of share ownership or voting power. Likewise, these provisions do not prevent directors or shareholders from including stricter requirements in our articles of incorporation or bylaws relating to the acquisition of a controlling interest in the company.
Our articles of incorporation and bylaws do not exclude us from the restrictions imposed by NRS 78.378 to 78.3793, nor do they impose any more stringent requirements.
Certain Business Combinations. Sections 78.411 to 78.444 of the Nevada law may restrict our ability to engage in a wide variety of transactions with an “interested shareholder.” As was discussed above in connection with NRS 78.378 to 78.3793, these provisions could be considered material to our shareholders, particularly to minority shareholders. They might also have the effect of delaying or making more difficult acquisitions of our stock or changes in our control. These sections of NRS are applicable to any Nevada company with 200 or more stockholders of record and that has a class of securities registered under Section 12 of the 1934 Securities Exchange Act, unless the company’s articles of incorporation provide otherwise.
These provisions of Nevada law prohibit us from engaging in any “combination” with an interested stockholder for three years after the interested stockholder acquired the shares that cause him/her to become an interested shareholder, unless he had prior approval of our board of directors. The term “combination” is described in NRS 78.416 and includes, among other things, mergers, sales or purchases of assets, and issuances or reclassifications of securities. If the combination did not have prior approval, the interested shareholder may proceed after the three-year period only if the shareholder receives approval from a majority of our disinterested shares or the offer meets the requirements for fairness that are specified in NRS 78.441-42. For the above provisions, a “resident domestic corporation” means a Nevada corporation that has 200 or more shareholders. An “interested stockholder” is defined in NSR 78.423 as someone who is either:
| ● | the beneficial owner, directly or indirectly, of 10% or more of the voting power of our outstanding voting shares; or |
| ● | our affiliate or associate and who within three years immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our outstanding shares at that time. |
Amendments to Bylaws
Our articles of incorporation provide that the power to adopt, alter, amend, or repeal our bylaws is vested exclusively with the board of directors. In exercising this discretion, our board of directors could conceivably alter our bylaws in ways that would affect the rights of our shareholders and the ability of any shareholder or group to effect a change in our control; however, the board would not have the right to do so in a way that would violate law or the applicable terms of our articles of incorporation.
Transfer Agent
The transfer agent for our common stock is Action Stock Transfer Corporation, 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, Utah 84121. Its telephone number is (801) 274-1088.
SHARES ELIGIBLE FOR FUTURE SALEEXPERTS
Our shares of common stock are thinly traded. Only a small percentage ofWeinberg & Company, P.A., independent registered public accounting firm, has audited our common stock is available to be traded and is held by a small number of holders and the price, if traded, may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The sales of a substantial amount of common stock in the public market in the future, or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.
As ofconsolidated financial statements at December 31, 2019 54,792,255 shares of our common stock were issued and outstanding2018, and no shares of preferred stock were issued and outstanding. In addition, an aggregate of 12,000,000 shares of common stock are reserved for issuance upon the exercise of outstanding options and the conversion of convertible notes will result in the issuance of additional shares of common stock.
All of the shares of our common stock sold under this prospectus will be freely tradable without restriction or further registration under the Securities Act, unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate or held by our current stockholders, or issued by us in connection with the conversion or exercise of the preferred stock, warrants and options described above, may not be resold except pursuant to an effective registration statement or an exemption from registration, including the exemption under Rule 144 of the Securities Act described below. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the current public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144 as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
Such sales by affiliates under Rule 144 are also subject to restrictions relating to the manner of sale, notice requirements and the availability of current public information about us, and to the holding period requirements set forth above if the shares are restricted securities.
Rule 701
Rule 701 of the Securities Act, as currently in effect, permits each of our employees, officers, directors, and consultants, to the extent such persons are not “affiliates” as that term is defined in Rule 144, who purchased or received our shares pursuant to a written compensatory plan or contract, to resell such shares in reliance upon Rule 144, but without compliance with the specific requirements regarding the availability of public information or holding periods thereunder. Rule 701 provides that affiliates who purchased or received shares pursuant to a written compensatory plan or contract are eligible to resell their Rule 701 shares under Rule 144 without complying with the holding period requirement of Rule 144.
On November 25, 2019, we entered into the Purchase Agreement and Registration Rights Agreement pursuant to which we sold 5,000,000 shares of our common stock to the Reselling Stockholders.
The Reselling Stockholders may sell all or a portion of the shares being offered pursuant to this prospectus at fixed prices and prevailing market prices at the time of sale, at varying prices, or at negotiated prices.
We will not receive any proceeds from the sale of the shares of our common stock by the Reselling Stockholders; however, we did receive proceeds from our initial sale of the Resell Shares to the Reselling Stockholders pursuant to the Purchase Agreement.
The Reselling Stockholders and any of their pledgees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTC Markets or any other stock exchange, market or trading facility on which the shares of our common stock are traded or in private transactions. These sales may be at fixed prices and prevailing market prices at the time of sale, at varying prices or at negotiated prices. The Reselling Stockholders may use any one or more of the following methods when selling shares:
Broker-dealers engaged by the Reselling Stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Reselling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
The Reselling Stockholders may be consideredunderwriters within the meaning of the Securities Act and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Pursuant to a requirement by FINRA, the maximum commission or discount to be received by any FINRA member or independent broker-dealer may not be greater than 8% of the gross proceeds received by us for the sale of any securities being registered pursuant to Rule 415 promulgated under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the Reselling Stockholders. The Reselling Stockholders may agree to indemnify any agent, dealer, or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act of 1933.
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares covered by this prospectus. We have agreed to indemnify the Reselling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933. We will not receive any proceeds from the resale of any of the shares of our common stock by the Reselling Stockholders.
The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Reselling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Reselling Stockholders or any other person. We will make copies of this prospectus available to the Reselling Stockholders.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Sections 78.7502 and 78.751 of the Nevada Revised Statutes authorize a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit indemnification, including reimbursement of expenses incurred, under certain circumstances for liabilities arising under the Securities Act. In addition, our bylaws provide that we have the authority to indemnify our directors and officers and may indemnify our employees and agents (other than officers and directors) against liabilities to the fullest extent permitted by Nevada law. We are also empowered under our bylaws to purchase insurance on behalf of any person whom we are required or permitted to indemnify.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
The validity of the securities offered hereby will be passed upon for us by Nelson Mullins Riley & Scarborough LLP, Raleigh, North Carolina.
The consolidated financial statements of Quanta, Inc. as ofyear ended December 31, 20182019, and March 31, 2018, and for the nine-month transition period ended December 31, 2018, andas set forth in their report thereon (which contains an explanatory paragraph describing conditions that raise substantial doubt about the year ended March 31, 2018,Company’s ability to continue as a going concern) appearing elsewhere herein. We have included our financial statements in this prospectus have been so includedand elsewhere in the registration statement in reliance on the report of Weinberg & Company, P.A., an independent registered public accounting firm, appearing elsewhere herein, upon theP.A’s report, given on their authority of said firm as experts in auditingaccounting and accounting.auditing.
LEGAL MATTERS
Matheau J. W. Stout, Esq. of Stout Law Group, P.A., of Baltimore, Maryland, will issue to Quanta, Inc. its opinion regarding the legality of the common stock being offered hereby. Stout Law Group, P.A. has consented to the references in this prospectus to its opinion.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Exchange Act and, in accordance therewith, file annual, quarterly and special reports, proxy statements and other information with the SEC. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system, or EDGAR, via electronic means, including the SEC’s home page on the Internet (www.sec.gov). At some point in the near future we intend to make our reports, amendments thereto, and other information available, free of charge, on our website. At this time, we do not provide a link on its website to such filings, and there is no estimate for when such a link on our website will be available.
We also have filed with the SEC a registration statementRegistration Statement on Form S-1 under the Securities Act, of which this Prospectus is a part, with respect to the securities beingshares of Common Stock offered hereby. This prospectus, which constitutes a part of the registration statement,Prospectus does not contain all of the information set forth in the registration statementRegistration Statement or the exhibits and schedules filed with the registration statement.therewith. For further information about us and the securitiesCommon Stock offered hereby, we refer you to the registration statementRegistration Statement and the exhibits and schedules filed with the registration statement.therewith. Statements contained in this prospectusS-1 regarding the contents of any contract or any other document that is filed as an exhibit to the registration statementRegistration Statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.Registration Statement. The Registration Statement and all exhibits thereto also may be found on the EDGAR system at the SEC’s website.
INDEX TO FINANCIAL STATEMENTS
Contents:
Interim Financial Statements
Annual Financial Statements
| F-1 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
| June 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 30 | $ | 433 | ||||
| Accounts receivable | 18 | 28 | ||||||
| Inventories | 161 | 123 | ||||||
| Prepaid expenses | - | 7 | ||||||
| Total current assets | 209 | 591 | ||||||
| Equipment, net | 287 | 313 | ||||||
| Operating lease right-of-use asset, net | 680 | 333 | ||||||
| Deposits | 34 | 34 | ||||||
| Total assets | $ | 1,210 | $ | 1,271 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 141 | $ | 74 | ||||
| Notes payable | 182 | 56 | ||||||
| Convertible note payable (net of discount of $479 and $255, respectively) | 157 | 57 | ||||||
| Deferred revenue, license agreement | 33 | 33 | ||||||
| Operating lease liabilities, short-term | 167 | 86 | ||||||
| Derivative liabilities | 293 | 400 | ||||||
| Total current liabilities | 973 | 706 | ||||||
| Long term liabilities | ||||||||
| Deferred revenue, licenses agreement, long-term | 17 | 34 | ||||||
| Notes payable, long term | 509 | |||||||
| Operating lease liabilities, long-term | 525 | 252 | ||||||
| Total liabilities | 2,024 | 992 | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $0.001 par value; 25,000,000 shares authorized; 2,500,000 issued and outstanding | 2 | - | ||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 56,900,978 and 49,087,255 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | 57 | 49 | ||||||
| Shares to be issued (3,626,763 and 7,318,519 as of June 30, 2020 and December 31, 2019, respectively) | 3,116 | 2,848 | ||||||
| Additional paid-in capital | 7,474 | 5,620 | ||||||
| Accumulated deficit | (11,463 | ) | (8,238 | ) | ||||
| Total stockholders’ equity (deficit) | (814 | ) | 279 | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 1,210 | $ | 1,271 | ||||
See notes to condensed consolidated financial statements
| F-2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share amounts)
(Unaudited)
| Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Sales, net | $ | 307 | $ | 309 | $ | 658 | $ | 533 | ||||||||
| Distributor license fees | 11 | 9 | 17 | 15 | ||||||||||||
| Total revenue | 318 | 318 | 675 | 548 | ||||||||||||
| Cost of goods sold | 71 | 101 | 99 | 160 | ||||||||||||
| Gross profit | 247 | 217 | 576 | 388 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Compensation and benefits | 405 | 306 | 787 | 493 | ||||||||||||
| Selling, general, and administrative | 1,741 | 1,719 | 2,653 | 1,882 | ||||||||||||
| Research and development | 167 | 82 | 245 | 82 | ||||||||||||
| Total operating expenses | 2,313 | 2,107 | 3,685 | 2,457 | ||||||||||||
| Loss from operations | (2,066 | ) | (1,890 | ) | (3,109 | ) | (2,069 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of derivative liability | 148 | - | 283 | - | ||||||||||||
| Gain on extinguishment of derivative liability | 286 | - | 286 | - | ||||||||||||
| Private placement costs | (17 | ) | (279 | ) | ||||||||||||
| Interest expense | (217 | ) | (16 | ) | (406 | ) | (20 | ) | ||||||||
| Other income (expense), net | 200 | (16 | ) | (116 | ) | (20 | ) | |||||||||
| Net loss | $ | (1,866 | ) | $ | (1,906 | ) | $ | (3,225 | ) | $ | (2,089 | ) | ||||
| Net loss per share, basic and diluted | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.05 | ) | ||||
| Weighted average common shares outstanding – basic and diluted | 58,728,752 | 39,223,665 | 57,512,526 | 39,211,943 | ||||||||||||
See notes to condensed consolidated financial statements
| F-3 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(amounts in thousands, except share amounts)
(Unaudited)
| Three months ended June 30, 2020 (Unaudited) | ||||||||||||||||||||||||||||||||
| Series A Preferred stock, par value $0.001 | Common stock, par value $0.001 | Additional Paid-in | Shares to be | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | issued | deficit | Deficit | |||||||||||||||||||||||||
| Balance, March 31, 2020 | - | $ | - | 54,198,366 | $ | 55 | $ | 6,224 | $ | 2,774 | $ | (9,597 | ) | $ | (544 | ) | ||||||||||||||||
| Issuance of shares | 18,519 | - | 5 | (5 | ) | - | ||||||||||||||||||||||||||
| Shares issued for cash | - | - | 277,778 | - | 75 | - | - | 75 | ||||||||||||||||||||||||
| Fair value of vested options | - | - | - | - | 102 | - | - | 102 | ||||||||||||||||||||||||
| Fair value of shares for services | - | - | 1,250,117 | 1 | 186 | 336 | - | 523 | ||||||||||||||||||||||||
| Fair value of shares issued to employees and officer | - | - | 451,198 | - | 51 | - | - | 51 | ||||||||||||||||||||||||
| Fair value of preferred shares issued to officer | 2,500,000 | 2 | - | - | 463 | - | - | 465 | ||||||||||||||||||||||||
| Beneficial conversion feature of issued convertible notes | - | - | - | 291 | - | - | 291 | |||||||||||||||||||||||||
| Fair value of shares issued for loan fees | - | - | 705,000 | 1 | 77 | 11 | - | 89 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (1,866 | ) | (1,866 | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 (Unaudited) | 2,500,000 | $ | 2 | 56,900,978 | $ | 57 | $ | 7,474 | $ | 3,116 | $ | (11,463 | ) | $ | (814 | ) | ||||||||||||||||
| Six months ended June 30, 2020 (Unaudited) | ||||||||||||||||||||||||||||||||
| Series A Preferred stock, par value $0.001 | Common stock, par value $0.001 | Additional Paid-in | Shares to be | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | issued | deficit | Deficit | |||||||||||||||||||||||||
| Balance, December 31, 2019 | - | $ | - | 49,087,255 | $ | 49 | $ | 5,620 | $ | 2,848 | $ | (8,238 | ) | $ | 279 | |||||||||||||||||
| Issuance of shares | 5,018,519 | 5 | 500 | (505 | ) | - | ||||||||||||||||||||||||||
| Shares issued for cash | - | - | 388,889 | 1 | 104 | - | - | 105 | ||||||||||||||||||||||||
| Fair value of vested options | - | - | - | - | 182 | - | - | 182 | ||||||||||||||||||||||||
| Fair value of shares issued for services | - | - | 1,250,117 | 1 | 186 | 762 | - | 949 | ||||||||||||||||||||||||
| Fair value of shares issued to employees and officer | - | - | 451,198 | - | 51 | - | - | 51 | ||||||||||||||||||||||||
| Fair value of preferred shares issued to officer | 2,500,000 | 2 | - | - | 463 | - | - | 465 | ||||||||||||||||||||||||
| Beneficial conversion feature of issued convertible notes | - | - | - | - | 291 | - | - | 291 | ||||||||||||||||||||||||
| Fair value of shares issued for loan fees | - | - | 705,000 | 1 | 77 | 11 | - | 89 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (3,225 | ) | (3,225 | ) | ||||||||||||||||||||||
| Balance, June 30, 2020 (Unaudited) | 2,500,000 | $ | 2 | 56,900,978 | $ | 57 | $ | 7,474 | $ | 3,116 | $ | (11,463 | ) | $ | (814 | ) | ||||||||||||||||
| F-4 |
| Three months ended June 30, 2019 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, March 31, 2019 | 39,200,090 | $ | 39 | $ | 2,360 | $ | 479 | $ | (2,633 | ) | $ | 245 | ||||||||||||
| Shares to be issued | - | - | - | 452 | - | 452 | ||||||||||||||||||
| Fair value of shares for services | 32,505 | 1 | 16 | 1,372 | - | 1,389 | ||||||||||||||||||
| Fair value of shares issued for cashless exercise of warrants | 2,590,910 | 2 | (2 | ) | - | - | - | |||||||||||||||||
| Net loss | - | - | - | (1,906 | ) | (1,906 | ) | |||||||||||||||||
| Balance, June 30, 2019 (Unaudited) | 41,823,505 | $ | 42 | $ | 2,374 | $ | 2,303 | $ | (4,539 | ) | $ | 180 | ||||||||||||
| Six months ended June 30, 2019 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, December 31, 2018 | 39,200,090 | $ | 39 | $ | 2,362 | $ | 306 | $ | (2,450 | ) | $ | 255 | ||||||||||||
| Shares to be issued | - | - | - | 625 | - | 625 | ||||||||||||||||||
| Shares for services | 32,505 | 1 | 16 | 1,372 | - | 1,389 | ||||||||||||||||||
| Shares issued for cashless exercise of warrants | 2,590,910 | 2 | (2 | ) | - | - | - | |||||||||||||||||
| Net loss | - | - | - | - | (2,089 | ) | (2,089 | ) | ||||||||||||||||
| Balance, June 30, 2019 (Unaudited) | 41,823,505 | $ | 42 | $ | 2,374 | $ | 2,303 | $ | (4,539 | ) | $ | 180 | ||||||||||||
See notes to condensed consolidated financial statements
| F-5 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
| Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,225 | ) | $ | (2,089 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 106 | 72 | ||||||
| Fair value of vested options | 182 | - | ||||||
| Fair value of shares issued for services | 949 | 1,389 | ||||||
| Fair value of common shares issued to employees and officer | 51 | - | ||||||
| Fair value of preferred shares issued to officer | 465 | - | ||||||
| Change in fair value of derivative | (283 | ) | - | |||||
| Gain on extinguishment of derivative liability | (286 | ) | - | |||||
| Private placement costs | 279 | - | ||||||
| Amortization of convertible note discount | 380 | - | ||||||
| Amortization of right-of-use asset | 85 | 39 | ||||||
| Interest accrual | - | 20 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 10 | (22 | ) | |||||
| Inventories | (38 | ) | - | |||||
| Prepaid Expenses | 7 | - | ||||||
| Accounts payable and accrued liabilities | 69 | 16 | ||||||
| Deferred revenue | (17 | ) | 85 | |||||
| Operating lease liabilities | (78 | ) | (28 | ) | ||||
| Net cash used in operating activities | (1,344 | ) | (518 | ) | ||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | (80 | ) | (85 | ) | ||||
| Net cash used in investment activities | (80 | ) | (85 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from shares to be issued | - | 625 | ||||||
| Proceeds from shares issued for cash | 105 | - | ||||||
| Proceeds from convertibles notes payable | 563 | - | ||||||
| Proceeds from notes payable | 679 | 13 | ||||||
| Principal payments of convertible notes | (282 | ) | - | |||||
| Principal payments of notes payable | (44 | ) | (42 | ) | ||||
| Costs of recapitalization | - | - | ||||||
| Net cash provided by financing activities | 1,021 | 596 | ||||||
| Increase (decrease) in cash | (403 | ) | (7 | ) | ||||
| Cash and cash equivalents, beginning of period | 433 | 36 | ||||||
| Cash and cash equivalents, end of period | $ | 30 | $ | 29 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for taxes | - | - | ||||||
| Cash paid for Interest | 17 | - | ||||||
| Non-cash investing and financing activities | ||||||||
| Recognition of right-of-use asset and liability | $ | 432 | $ | 410 | ||||
| Original issuance discount | 43 | - | ||||||
| Issue convertible notes payable for fees | 30 | - | ||||||
| Recognition of beneficial conversion feature | 291 | - | ||||||
| Shares issued for fee discount | 88 | - | ||||||
| Derivative allocated to discount | 183 | - | ||||||
| Issuance of shares to be issued | 505 | - | ||||||
| Fair value of shares for loan fee | 76 | - | ||||||
| Fair value shares to be issued for loan fee | 11 | - | ||||||
See notes to condensed consolidated financial statements
| F-6 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SI X MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)
(Amounts in thousands, except share and per share amounts)
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quanta, Inc. (the “Company”) is an applied science company focused on increasing energy levels in plant matter to increase performance within the human body. The Company’s operations are based in Burbank, California. On April 28, 2016, the Company was incorporated as Freight Solution, Inc. in the State of Nevada. Effective June 6, 2018, the Company (then known as Bioanomaly Inc.) was acquired by Freight Solution in a transaction accounted for as a reverse merger transaction. On July 11, 2018, the Company changed its name to Quanta, Inc.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the six months ended June 30, 2020, the Company incurred a net loss of $3,225 and used cash in operating activities of $1,344, and at June 30, 2020, the Company had a stockholders’ deficit of $814. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in their report on the Company’s December 31, 2019 audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At June 30, 2020, the Company had cash on hand in the amount of $30. Subsequent to June 30, 2020, the Company received $250 from the issuance of five notes payable. Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing
Basis of presentation and principles of Consolidation
The accompanying unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2020 and 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020. The Condensed Consolidated Balance Sheet information as of December 31, 2019 was derived from the Company’s audited Consolidated Financial Statements as of and for year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K/A filed with the SEC on April 10, 2020. These financial statements should be read in conjunction with that report.
The consolidated financial statements include the accounts of Quanta Inc, and its wholly-owned subsidiary, Bioanomaly, Inc. Intercompany transactions have been eliminated in consolidation.
| F-7 |
COVID-19
The global outbreak of COVID-19 has negatively affected the U.S. and global economies and has negatively impacted businesses, workforces, customers, and created significant volatility of financial markets. It has also disrupted the normal operations of many businesses, including ours. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration and severity of the outbreak, the length of restrictions and business closures, and the impact on capital and financial markets, all of which are highly uncertain and cannot be predicted. This outbreak could decrease spending, adversely affect demand for our products and harm our business and results of operations. In the quarter ended June 30, 2020, we believe the COVID-19 pandemic did impact our operating results as shipments to customers in the second quarter were down 13% from the first quarter of the year. However, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. While it is not possible at this time to estimate the full impact that COVID-19 will have on our business, restrictions resulting from COVID-19 on general economic conditions could, among other things, impair our ability to raise capital when needed. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates include certain assumptions related to, among others, allowance for doubtful accounts receivable, impairment analysis of long-term assets, valuation allowance on deferred income taxes, assumptions used in valuing stock instruments issued for services, assumptions made in valuing derivative liabilities, and the accrual of potential liabilities. Actual results may differ from these estimates.
Revenue
The Company follows the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
Product Sales—Revenue from sales of the Company’s CBD products is recognized at the point in time when the Company’s performance obligations with the applicable customers have been satisfied. Revenue is recorded at the transaction price, which is the amount of consideration the Company expects to receive in exchange for transferring products to a customer. Generally, the Company’s performance obligations are transferred to the customer at a point in time, typically upon delivery of products. The Company historically has offered no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against revenue. The Company sells its products (i) directly to customers (“DTC”) through online orders from our websites, and DTC sales at conventions and events; and (ii) through wholesalers, including physicians, pharmacies, fitness studios, grocery stores, and other organizations.
License revenue— Revenue from symbolic IP is recognized over the access period to the Company’s IP (see Note 2).
Cost of goods sold includes direct costs and fees related to the sale of our products.
Leases
Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company determines if an arrangement contains a lease at the inception of the contract. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or liability (see Note 5).
| F-8 |
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the June 31, 2020, reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period
Stock Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using a Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.
Advertising costs
Advertising costs are expensed as incurred. During the six months ended June 30, 2020 and 2019, advertising costs totaled $42 and $25, respectively.
Research and Development Costs
Costs incurred for research and development are expensed as incurred. During the six months ended June 30, 2020 and 2019, research and development costs totaled $245 and $167, respectively and include salaries, benefits, and overhead costs of personnel conducting research and development of the Company’s products.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. At June 30, 2020, shares used in the calculation of basic net loss per common share include 3,500,000 of vested but unissued shares underlying awards of restricted common stock. Diluted earnings per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is anti-dilutive.
For the six months ended June 30, 2020, the dilutive impact of stock options exercisable into 3,030,000 shares of common stock, convertible notes convertible into 11,664,520 shares of common stock, and 4,500,000 shares of unvested restricted common stock have been excluded from calculation of weighted average shares because their impact on the loss per share is anti-dilutive.
| F-9 |
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The Company is required to use observable market data if such data is available without undue cost and effort.
The Company believes the carrying amount reported in the balance sheet for cash, accounts receivable, accounts payable and accrued liabilities, and notes payable, approximate their fair values because of the short-term nature of these financial instruments
As of June 30, 2020, the Company’s balance sheet includes Level 2 liabilities comprised of the fair value of embedded derivative liabilities of $293 (see Note 8).
Concentrations of risks
For the six months ended June 30, 2020 and 2019, one customer accounted for 21% or more of revenue. No other customer accounted for 10% or more of revenue. As of June 30, 2020, one customer accounted for 18% of accounts receivable, one accounted for 14% of accounts receivable, and another accounted for 11% of account receivable. No other customer accounted for 10% or more of accounts receivable. As of December 31, 2019, two customers accounted for 19% and 12% of accounts receivable, respectively. No other customer accounted for 10% or more of accounts receivable.
As of June 30, 2020, three vendors accounted for 36% and 40% and 23% of accounts payable, respectively, and no other vendor accounted for 10% or more of accounts payable. As of June 30, 2020 no vendor accounted for 10% or more of accounts payable.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits that are insured by the Federal Deposit Insurance Corporation, or FDIC. At times, deposits held may exceed the amount of insurance provided by the FDIC. The Company has not experienced any losses in its cash and believes it is not exposed to any significant credit risk.
Segments
The Company operates in one segment for the development and distribution of our CBD products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
| F-10 |
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 2 – LICENSE AGREEMENT
Effective January 22, 2019, the Company entered into an agreement with a wholesaler for the exclusive rights to distribute the Company’s products in the state of Colorado for three years. In consideration, the Company received an up-front payment of $100. The Company determined that the exclusive distribution agreement was a distinct agreement for the license of symbolic IP and thus should be recognized on a straight-line basis over the three-year life of the agreement. For the three and six months ended June 30, 2020 the Company recognized revenue related to this agreement in the amount of $11 and $17, respectively. For the three and six months ended June 30, 2019 the Company recognized revenue related to this agreement in the amount of $9 and $15, respectively.
NOTE 3 – INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, and consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Raw materials and packaging | $ | 122 | $ | 103 | ||||
| Finished goods | 39 | 20 | ||||||
| $ | 161 | $ | 123 | |||||
NOTE 4 - EQUIPMENT
Equipment, stated at cost, less accumulated depreciation consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Machinery-technology equipment | $ | 705 | $ | 607 | ||||
| Machinery-technology equipment under construction | 12 | 30 | ||||||
| 717 | 637 | |||||||
| Less accumulated depreciation | (430 | ) | (324 | ) | ||||
| $ | 287 | $ | 313 | |||||
Depreciation expense for the three and six months ended June 30, 2020 was $55 and $106, respectively. Depreciation expense for the three and six months ended June 30, 2019 was $29 and $52, respectively. As of June 30, 2020, the equipment under construction is approximately 70% complete, and is expected to be completed and placed into service during the year ended December 31, 2020.
NOTE 5 - OPERATING LEASES
At December 31, 2019, the Company had one operating lease for its headquarters office space in Burbank, California that expires on July 31, 2023.
In February 2020, the Company took possession of a second leased facility consisting of office, research, and production space also located in Burbank, California. The lease commenced on January 1, 2020, and has a term for 5 years, with annual fixed rental payments ranging from $90 to $101. The aggregate total fixed rent is approximately $478 and resulted in the recognition of an operating lease right-of-use (“ROU”) asset and of corresponding lease liability of approximately $432 each. The Company also paid a security deposit of $16. At June 30, 2020, the Company did not have any other leases.
| F-11 |
ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Generally the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
Six months ended June 30, 2020 | ||||
| (in thousands) | ||||
| Lease Cost | ||||
| Operating lease cost (included in selling, general, and administrative expense in the Company’s statement of operations) | $ | 99 | ||
| Other Information | ||||
| Cash paid for amounts included in the measurement of lease liabilities for 2020 | $ | 69 | ||
| Weighted average remaining lease term – operating leases (in years) | 3.5 | |||
| Average discount rate – operating leases | 4 | % | ||
The supplemental balance sheet information related to leases for the period is as follows:
| At June 30, 2020 | ||||
| Operating leases | ||||
| Long-term right-of-use assets | $ | 680 | ||
| Short-term operating lease liabilities | $ | 167 | ||
| Long-term operating lease liabilities | 525 | |||
| Total operating lease liabilities | $ | 692 | ||
Maturities of the Company’s lease liabilities are as follows:
| Year Ending | Operating Leases | |||
| 2020 | $ | 150 | ||
| 2021 | 186 | |||
| 2022 | 202 | |||
| 2023 | 172 | |||
| 2024 | 103 | |||
| Total lease payments | 813 | |||
| Less: Imputed interest/present value discount | (121 | ) | ||
| Present value of lease liabilities | 692 | |||
| Less current portion | (167 | ) | ||
| Operating lease liabilities, long-term | $ | 525 | ||
Lease expenses were $50 and $99 during the three and six months ended June 30, 2020, respectively. Lease expenses were $28 and $61 during the three and six months ended June 30, 2019, respectively.
NOTE 6 – NOTES PAYABLE
June 30, 2020 | December 31, 2019 | |||||||
| Secured | ||||||||
| (a) Notes payable secured by equipment | $ | 357 | $ | - | ||||
| (b) Note payable secured by assets | 50 | 56 | ||||||
| Unsecured | ||||||||
| (c) Note payable-Payroll Protection Loan | 134 | - | ||||||
| (d) Note payable- Economic Injury Disaster Loan | 150 | - | ||||||
| Total notes payable outstanding | 691 | 56 | ||||||
| Current portion | 182 | - | ||||||
| Long-term portion | $ | 509 | $ | 56 | ||||
| F-12 |
| (a) | In April 2020 and May 2020, the Company entered into two financing agreements aggregating $395. The notes bear interest at 10.9% per annum, are secured by the Company’s equipment, requires monthly payments of principal and interest of $21, and mature in April 2022 and May 2022. During the six months ended | |
| (b) | Note payable, interest at 8.3% per annum, secured by all the assets of the Company. The note was due January 13, 2019 and | |
| (c) | On May 7, 2020, the Company was granted a loan (the “PPP loan”) from Bank of America in the aggregate amount of $134, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated May 4, 2020, matures on May 4, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing on November 2020, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The loan term may be extended to April 20, 2025, if mutually agreed to by the Company and lender. We applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of June 30, 2020. | |
| (d) | On June 5, 2020, the Company received a $150 loan (the “EID Loan”) from the SBA under the SBA’s Economic Injury Disaster Loan program. The EID Loan has a thirty year term and bears interest at a rate of 3.75% per annum. Monthly principal and interest payments of $0.7 per month are deferred for twelve months, and commence in June 2021. The EID Loan may be prepaid at any time prior to maturity with no prepayment penalties. The proceeds from the EID Loan must be used for working capital. The Loan contains customary events of default and other provisions customary for a loan of this type. The Company was in compliance with the terms of the EID loan as of June 30, 2020. |
NOTE 7 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
June 30, 2020 | December 31, 2019 | |||||||
| Unsecured | ||||||||
| (a) Convertible notes with adjustable conversion prices | 183 | 282 | ||||||
| (b) Convertible notes with fixed conversion prices | 453 | - | ||||||
| Total convertible notes principal outstanding | 636 | 282 | ||||||
| Debt discount | (479 | ) | (225 | ) | ||||
| Convertible notes, net of discount | $ | 157 | $ | 57 | ||||
| Current portion | 157 | 57 | ||||||
| Long-term portion | $ | - | $ | - | ||||
| F-13 |
| (a) | At December 31, 2019, there were $282 of convertible notes with adjustable conversion prices outstanding. During the six months ended June 30, 2020, the Company issued one unsecured convertible promissory note for $153, bearing interest at 22% per annum, and maturing in February 2021. Also during the six months ended June 30, 2020, the Company also issued two unsecured convertible notes payable for $30, bearing interest at 10% per annum, and maturing on December 31, 2020, that were issued as loan commitment fees for notes payable. At the option of the holder, the noted are convertible into shares of the Company’s common stock at a price per share discount of 39% to 50% of the average market price of the Company’s common stock, as defined. As a result, the Company determined that the conversion options of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the convertible note, the initial fair value of the embedded conversion features totaled $462, of which $183 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $279 was recorded as private placement costs. During the six months ended June 30, 2020, one convertible note payable for $282 was paid off. At June 30, 2020, the balance of the convertible notes with adjustable conversion prices was $183. | |
| (b) | At December 31, 2019, the Company had no convertible notes outstanding with fixed conversion prices. During the six months ended June 30, 2020, the Company issued six convertible notes with fixed conversion prices aggregating $453. The notes are unsecured, bear interest at 10% per annum, and mature through February 28, 2021. The notes are convertible into shares of the Company’s common stock at a fixed conversion price of $0.05 per share. The Company recorded debt discounts of $451 to account for loan fees, beneficial conversion features, and original issue discounts. The debt discounts are amortized over the life of the notes or are amortized in full upon the conversion of the corresponding notes to common stock. |
At December 31, 2019, the balance of unamortized discount on convertible notes was $225. During the six months ended June 30, 2020, debt discount of $634 was recorded, and debt discount amortization of $380 was recorded. At June 30, 2020, the balance of the unamortized discount was $479.
Note 8 – DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2020, the Company had convertible notes outstanding that are convertible into shares of common stock of the Company at the option of the holder at price per share discounts of 39% to 50% of the Company’s common stock market price, as defined in the note agreements. As the ultimate determination of shares to be issued upon conversion of these notes could exceed the current number of available authorized shares, the Company determined that the conversion features of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities. Accordingly, the conversion features of the notes were separated from the host contracts (i.e. the notes) and characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At December 31, 2019, the balance of the derivative liabilities was $400. During the six months ended June 30, 2020, the Company recorded additions of $462 related to the conversion features of notes issued during the period (see Note 7), recorded a gain on extinguishment of $286 upon pay-off of a related convertible note payable, and a decrease in fair value of derivatives of $283. At June 30, 2020, the balance of the derivative liabilities was $293.
The derivative liabilities were valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
June 30, 2020 | December 31, 2019 | |||||||
| Conversion feature: | ||||||||
| Risk-free interest rate | 0.17 | % | 1.8 | % | ||||
| Expected volatility | 264 | % | 222 | % | ||||
| Expected life (in years) | 1 year | 1 year | ||||||
| Expected dividend yield | - | - | ||||||
| Fair Value: | - | - | ||||||
| Conversion feature | $ | 293 | $ | 400 | ||||
| F-14 |
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical volatility of the Company’s stock. The expected life of the conversion feature of the notes was based on the remaining terms of the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
NOTE 9 – STOCKHOLDERS’ EQUITY
Series A Preferred Stock
On April 14, 2020, the Company filed a Certificate of Designation for the Company’s Series A Preferred Stock with the Secretary of State of Nevada designating 2,500,000 shares of its authorized preferred stock as Series A Preferred Stock, par value of $0.001 per share. The Series A Preferred Stock is not entitled to receive any dividends or liquidation preference and are not convertible into shares of the Company’s common stock. The holders of the Series A Preferred Stock, in the aggregate, have voting power equal to 51% of the total votes of all of the outstanding common and preferred stock of the Company entitled to vote. Accordingly, each share of Series A Preferred Stock shall have voting rights equal to one and one-tenth (1.1) times a fraction, the numerator of which is the shares of outstanding common stock and undesignated preferred stock of the Company and the denominator of which is number of shares of outstanding Series A Preferred Stock. With respect to all matters upon which stockholders are entitled to vote or give consent, the holders of the outstanding shares of Series A Preferred Stock shall vote with the holders of the common stock and any outstanding preferred stock without regard to class, except as to those matters on which separate class voting is required by applicable law or the Company’s Articles of Incorporation.
Common Stock
During the six months ended June 30, 2020, the Company issued 388,889 shares of common stock in a private placement of shares at a price of $0.27 per share for total proceeds of $105.
During the six months ended June 30, 2019, the Company received $625 for subscriptions to purchase 1,250,750 shares of common stock in a private placement of shares at a price of $0.50 per share.
NOTE 10 – STOCK BASED COMPENSATION
Preferred stock
On April 14, 2020, The Company issued 2,500,000 shares of a newly created class of preferred stock, Series A Preferred Stock to the Company’s Chief Executive Officer in a private placement transaction. The fair value of the Series A Preferred shares was determined to be $465 and was recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020. The Company determined the fair value of the Series A Preferred shares by obtaining an independent valuation of the fair value of the Company’s Series A Preferred shares.
Common stock
During the six months ended June 30, 2020, the Company issued 451,198 shares of common stock to employees and officers of the Company. The fair value of the shares was determined to be $51 based on the closing price of the Company’s common stock on the dates shares were granted, and recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020.
During the six months ended June 30, 2020, the Company issued 1,250,117 shares of common stock to consultants and convertible note holders for services. The fair value of the shares was determined to be $187 based on the closing price of the Company’s common stock on the dates shares were granted, and recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020.
During the six months ended June 30, 2020, the Company issued 705,000 shares of common stock to convertible note holders for loan fees. The fair value of the shares was determined to be $89 based on the closing price of the Company’s common stock on the dates shares were granted, and was recorded as debt discount to be amortized over the term of the related convertible notes payable. During the six months ended June 30, 2020, amortization of $53 was recoded.
| F-15 |
Restricted common stock
On May 20, 2019, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to a consultant for services. 1,000,000 shares vested immediately, and the balance of 7,000,000 shares will vest 625,000 shares per quarter over 2.8 years. In the event the consultants service with the Company terminates, any or all of the shares of common stock held by such recipient that have not vested as of the date of termination are forfeited to the Company in accordance with such restricted grant agreement.
The total fair value of the 8,000,000 shares was determined to be $4,000 based on the price per shares of a contemporaneous private placement of the Company’s common stock on the date granted. The Company accounts for the share awards using a graded vesting attribution method over the requisite service period, as if each tranche were a separate award. During the six months ended June 30, 2020, total share-based expense recognized related to vested restricted shares totaled $762. At June 30, 2020, there was $1,104 of unvested compensation related to these awards that will be amortized over a remaining vesting period of 1.7 years.
The following table summarizes restricted common stock activity for the six months ended June 30, 2020:
| Number of shares | Fair value of shares (in thousands) | |||||||
| Non-vested shares, December 31, 2019 | 5,750,000 | $ | 1,682 | |||||
| Granted | - | - | ||||||
| Vested | (1,250,000 | ) | (426 | ) | ||||
| Forfeited | - | - | ||||||
| Non-vested shares, June 30, 2020 | 4,500,000 | $ | 1,103 | |||||
As of June 30, 2020, no shares have been issued and 3,500,000 vested shares are included in shares to be issued on the accompanying financial statements
Stock Options
During the year ended December 31, 2019, the Company issued options exercisable into 3,290,000 shares of common stock. The options initially had an exercise price of $0.23 per share, and this was amended in May 2020 to $0.10 per share. The Company used the Black-Scholes-Merton option pricing model to estimate the fair value of the modified option grants immediately before and immediately after the modification and determined the change in fair value related to the modification was de minimis.
In April 2020, the Company issued options exercisable into 300,000 shares of common stock which vested immediately. The options have an exercise price of $0.14 per share, and expire in ten years. Total fair value of these options at grant date was approximately $30, which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price $0.14 per share, expected term ranging from five years, volatility 236%, dividend rate of 0% and risk-free interest rate of 0.17%.
During the six months ended June 30, 2020, the Company recognized $182 of compensation expense relating to vested stock options. As of June 30, 2020, the amount of unvested compensation related to stock options was approximately $409 which will be recorded as an expense in future periods as the options vest.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
| F-16 |
A summary of stock option activity during the three months ended June 30, 2020:
| Number of options | Weighted Average Exercise Price | Contractual Life in Years | ||||||||||
| Options Outstanding as of December 31, 2019 | 3,230,000 | $ | 0.10 | 6.0 | ||||||||
| Granted | 300,000 | 0.14 | 10.0 | |||||||||
| Exercised | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Options Outstanding as of June 30, 2020 | 3,530,000 | 0.11 | 6.5 | |||||||||
| Options Exercisable as of June 30, 2020 | 2,233,045 | $ | 0.10 | 5.5 | ||||||||
At June 30, 2020, the options outstanding had an intrinsic value of approximately $97.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Company has an agreement with an individual in consideration of the Company’s exclusive use of patented technology developed by the individual. Pursuant to the agreement, as amended, the Company shall pay a royalty of 25% of all the net income from the sale of licensed products, as defined with a minimum royalty of $35 per month payable in cash or common stock of the Company. In addition, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to the individual (see Note 10). During the three and six months ended June 30, 2020, the Company paid $171 and $212 to the individual.
NOTE 12 – SUBSEQUENT EVENTS
In July 2020, the Company issued 500,000 shares of common stock with a fair value of approximately $69 to a consultant for services.
In July 2020, the Company issued five notes payable for aggregate proceeds of $250,000. In connection with these transactions, the Company issued 258,332 shares of common stock with a fair value of $44 as loan fees.
In July 2020, the Company issued 72,522 shares of common stock with a fair value of $10 to two note payable holders for fees.
| F-17 |
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of
Quanta, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Quanta, Inc. and Subsidiary (the “Company”) as of December 31, 20182019 and March 31, 2018, the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the nine monthyear ended December 31, 2019 and the nine-month transition period ended December 31, 2018 and the year ended March 31, 2018, and the related notes (collectively referred to as the “consolidated financial“financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and March 31, 2018, and the results of its operations and its cash flows for the nine monthyear ended December 31, 2019, and for the nine-month transition period ended December 31, 2018 and year ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended December 31, 2018,2019, the Company incurred a net loss and utilized cash in operations, and at December 31, 2018,2019, had a working capital deficiency. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
/s/ Weinberg & Company, P.A.
Los Angeles, California
April 16, 2019
| /s/ Weinberg & Company, P.A. | |
| Los Angeles, California | |
| April 3, 2020 |
| F-18 |
CONSOLIDATED BALANCE SHEETS
| December 31, 2018 | March 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 35,820 | $ | 45,833 | ||||
| Accounts receivable | 19,561 | - | ||||||
| Total current assets | 55,381 | 45,833 | ||||||
| Equipment, net | 372,880 | 284,755 | ||||||
| Security deposit | 16,770 | - | ||||||
| Total assets | $ | 445,031 | $ | 330,588 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 9,617 | $ | 21,000 | ||||
| Notes payable | 180,000 | 80,000 | ||||||
| Convertible notes payable | - | 1,056,000 | ||||||
| Total current liabilities | 189,617 | 1,157,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $0.001 par value; 25,000,000 shares authorized; none issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 39,200,090 and 21,908,810 shares issued and outstanding as of December 31, 2018 and March 31, 2018, respectively | 39,200 | 21,909 | ||||||
| Shares to be issued (612,000 shares) | 306,000 | - | ||||||
| Additional paid-in capital | 2,360,598 | (11,909 | ) | |||||
| Accumulated deficit | (2,450,384 | ) | (836,412 | ) | ||||
| Total stockholders’ equity (deficit) | 255,414 | (826,412 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 445,031 | $ | 330,588 | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 433,143 | $ | 35,820 | ||||
| Accounts receivable | 28,260 | 19,561 | ||||||
| Inventories | 122,519 | - | ||||||
| Prepaid expenses | 7,500 | - | ||||||
| Total current assets | 591,422 | 55,381 | ||||||
| Equipment, net | 313,478 | 372,880 | ||||||
| Operating lease right-of-use asset | 332,980 | - | ||||||
| Security deposits | 33,652 | 16,770 | ||||||
| Total assets | $ | 1,271,532 | $ | 445,031 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 73,598 | $ | 9,617 | ||||
| Notes payable ($55,850 in default at December 31, 2019) | 55,850 | 180,000 | ||||||
| Deferred revenue, license agreement | 32,742 | - | ||||||
| Operating lease liabilities | 85,662 | - | ||||||
| Convertible note payable (net of discount of $224,660) | 57,340 | - | ||||||
| Derivative liabilities | 400,139 | - | ||||||
| Total current liabilities | 705,331 | 189,617 | ||||||
| Long term liabilities | ||||||||
| Deferred revenue, licenses agreement, long-term | 35,470 | - | ||||||
| Operating lease liabilities, long-term | 251,791 | - | ||||||
| Total liabilities | 992,592 | |||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 25,000,000 shares authorized; none issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 49,087,255 and 39,200,090 shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 49,087 | 39,200 | ||||||
| Shares to be issued (7,318,519 and 612,000 shares to be issued as of December 31, 2019 and December 31, 2018, respectively) | 2,847,868 | 306,000 | ||||||
| Additional paid-in capital | 5,619,733 | 2,360,598 | ||||||
| Accumulated deficit | (8,237,748 | ) | (2,450,384 | ) | ||||
| Total stockholders’ equity | 278,940 | 255,414 | ||||||
| Total liabilities and stockholders’ equity | $ | 1,271,532 | $ | 445,031 | ||||
See notes to consolidated financial statements
| F-19 |
CONSOLIDATED STATEMENTS OF OPERATIONS
| Nine months ended December 31, 2018 | Nine months ended December 31, 2017 | Year ended March 31, 2018 | ||||||||||
| (Unaudited) | ||||||||||||
| Sales, net | $ | 225,254 | $ | 15,564 | $ | 50,829 | ||||||
| Cost of goods sold | 183,681 | - | 38,000 | |||||||||
| Gross profit | 41,573 | 15,564 | 12,829 | |||||||||
| Operating expenses: | ||||||||||||
| Contractors and employees | 454,179 | 112,656 | 198,782 | |||||||||
| Research and development | 207,600 | 146,273 | 208,762 | |||||||||
| Selling, general, and administrative | 1,055,805 | 165,665 | 278,195 | |||||||||
| Total operating expenses | 1,717,584 | 424,594 | 685,739 | |||||||||
| Loss from operations | (1,676,011 | ) | (409,030 | ) | (672,910 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest expense | - | (21,778 | ) | (62,778 | ) | |||||||
| Interest income | 39 | - | 1 | |||||||||
| Gain on forgiveness of accrued interest | 21,000 | - | - | |||||||||
| Gain on extinguishment of debt | 41,000 | - | - | |||||||||
| Other income and expense, net | 62,039 | (21,778 | ) | (62,777 | ) | |||||||
| Net loss | $ | (1,613,972 | ) | $ | (430,808 | ) | $ | (735,687 | ) | |||
| Net loss per share, basic and diluted | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||
| Weighted average common shares outstanding – basic and diluted | 35,100,108 | 21,908,810 | 21,908,810 | |||||||||
| Year ended December 31, 2019 | Nine months ended December 31, 2018 | |||||||
| Sale of products, net | $ | 1,237,200 | $ | 225,254 | ||||
| License revenue | 31,788 | - | ||||||
| Total revenue | 1,268,988 | 225,254 | ||||||
| Cost of goods sold | 303,720 | 183,681 | ||||||
| Gross profit | 965,268 | 41,573 | ||||||
| Operating expenses: | ||||||||
| Labor and related | 1,302,391 | 454,179 | ||||||
| Research and development | 351,670 | 207,600 | ||||||
| Selling, general, and administrative | 4,799,030 | 1,055,805 | ||||||
| Total operating expenses | 6,453,091 | 1,717,584 | ||||||
| Loss from operations | (5,487,823 | ) | (1,676,011 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (226,239 | ) | - | |||||
| Interest income | 37 | 39 | ||||||
| Extinguishment of derivative liabilities | 145,565 | - | ||||||
| Change in fair value of derivative liabilities | 19,491 | - | ||||||
| Private placement costs | (238,395 | ) | - | |||||
| Gain on forgiveness of accrued interest | - | 21,000 | ||||||
| Gain on extinguishment of debt | - | 41,000 | ||||||
| Other income and expense, net | (299,541 | ) | 62,039 | |||||
| Net loss | $ | (5,787,364 | ) | $ | (1,613,972 | ) | ||
| Net loss per share, basic and diluted | $ | (0.14 | ) | $ | (0.05 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 42,808,603 | 35,100,108 | ||||||
See notes to consolidated financial statements.
| F-20 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, March 31, 2017 | 21,908,810 | $ | 21,909 | $ | (11,909 | ) | $ | - | $ | (100,725 | ) | $ | (90,725 | ) | ||||||||||
| Net loss for the year ended March 31, 2018 | - | - | - | (735,687 | ) | (735,687 | ) | |||||||||||||||||
| Balance, March 31, 2018 | 21,908,810 | 21,909 | (11,909 | ) | - | (836,412 | ) | (826,412 | ) | |||||||||||||||
| Shares issued for recapitalization | 6,500,000 | 6,500 | (6,500 | ) | - | - | - | |||||||||||||||||
| Costs of recapitalization | - | - | (495,760 | ) | - | - | (495,760 | ) | ||||||||||||||||
| Shares issued for cash | 6,500,090 | 6,500 | 1,293,518 | - | - | 1,300,018 | ||||||||||||||||||
| Fair value of shares issued for settlement of convertible notes payable | 3,771,040 | 3,771 | 1,011,229 | - | - | 1,015,000 | ||||||||||||||||||
| Fair value of shares issued for services | 520,150 | 520 | 193,510 | - | - | 194,030 | ||||||||||||||||||
| Fair value of warrants issued for services | - | - | 376,510 | - | - | 376,510 | ||||||||||||||||||
| Shares to be issued | - | - | - | 306,000 | - | 306,000 | ||||||||||||||||||
| Net loss for the nine months ended December 31, 2018 | - | - | - | - | (1,613,972 | ) | (1,613,972 | ) | ||||||||||||||||
| Balance, December 31, 2018 | 39,200,090 | $ | 39,200 | $ | 2,360,598 | $ | 306,000 | $ | (2,450,384 | ) | $ | 255,414 | ||||||||||||
FOR THE YEAR ENDED DECEMBER 31, 2019
AND THE NINE MONTHS ENDED DECEMBER 31, 2018
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, March 31, 2018 | 21,908,810 | $ | 21,909 | $ | (11,909 | ) | $ | - | $ | (836,412 | ) | $ | (826,412 | ) | ||||||||||
| Shares issued for recapitalization | 6,500,000 | 6,500 | (6,500 | ) | - | - | - | |||||||||||||||||
| Costs of recapitalization | - | - | (495,760 | ) | - | - | (495,760 | ) | ||||||||||||||||
| Shares issued for cash | 6,500,090 | 6,500 | 1,293,518 | - | - | 1,300,018 | ||||||||||||||||||
| Fair value of shares issued for settlement of convertible notes payable | 3,771,040 | 3,771 | 1,011,229 | - | - | 1,015,000 | ||||||||||||||||||
| Fair value of shares issued for services | 520,150 | 520 | 193,510 | - | - | 194,030 | ||||||||||||||||||
| Fair value of warrants issued for services | - | - | 376,510 | - | - | 376,510 | ||||||||||||||||||
| Cash received for shares to be issued | - | - | - | 306,000 | - | 306,000 | ||||||||||||||||||
| Net loss for the nine months ended December 31, 2018 | - | - | - | - | (1,613,972 | ) | (1,613,972 | ) | ||||||||||||||||
| Balance, December 31, 2018 | 39,200,090 | 39,200 | 2,360,598 | 306,000 | (2,450,384 | ) | 255,414 | |||||||||||||||||
| Issuance of shares | 612,000 | 612 | 305,388 | (306,000 | ) | - | - | |||||||||||||||||
| Shares issued for cash | 6,330,750 | 6,331 | 2,084,044 | - | - | 2,090,375 | ||||||||||||||||||
| Cash received for shares to be issued | - | - | - | 530,000 | - | 530,000 | ||||||||||||||||||
| Shares issued for cashless exercise of warrants | 2,590,910 | 2,590 | (2,590 | ) | - | - | - | |||||||||||||||||
| Fair value of shares for services | 212,505 | 213 | 106,040 | 2,317,868 | - | 2,424,121 | ||||||||||||||||||
| Fair value of vested options | - | - | 711,404 | - | - | 711,404 | ||||||||||||||||||
| Fair value of shares issued for loan fee | 141,000 | 141 | 54,849 | - | - | 54,990 | ||||||||||||||||||
| Net loss | - | - | - | - | (5,787,364 | ) | (5,787,364 | ) | ||||||||||||||||
| Balance, December 31, 2019 | 49,087,255 | $ | 49,087 | $ | 5,619,733 | $ | 2,847,868 | $ | (8,237,748 | ) | $ | 278,940 | ||||||||||||
See accompanying notes to financial statements
| F-21 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 2018 | Nine Months Ended December 31, 2017 | Year Ended March 31, 2018 | ||||||||||
| (Unaudited) | ||||||||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | (1,613,972 | ) | (430,808 | ) | (735,687 | ) | ||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation | 86,875 | 33,785 | 62,745 | |||||||||
| Fair value of shares issued for services | 194,030 | - | - | |||||||||
| Fair value of warrants issued for services | 376,510 | - | - | |||||||||
| Gain on forgiveness of accrued interest | (21,000 | ) | - | - | ||||||||
| Gain on extinguishment of debt | (41,000 | ) | - | - | ||||||||
| Accretion expense | - | - | 41,000 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts Receivable | (19,561 | ) | - | - | ||||||||
| Accounts payable and accrued liabilities | 9,617 | 21,000 | 21,000 | |||||||||
| Net cash used in operating activities | (1,028,501 | ) | (376,023 | ) | (610,942 | ) | ||||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of equipment | (175,000 | ) | (172,500 | ) | (172,500 | ) | ||||||
| Payments for security deposit | (16,770 | ) | - | - | ||||||||
| Net cash used in investment activities | (191,770 | ) | (172,500 | ) | (172,500 | ) | ||||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from shares issued for cash | 1,300,018 | - | - | |||||||||
| Proceeds from convertibles notes payable | - | 494,000 | 1,015,000 | |||||||||
| Proceeds from notes payable | 100,000 | 80,000 | 80,000 | |||||||||
| Principal payments of notes payable | - | (70,000 | ) | (420,000 | ) | |||||||
| Proceeds from shares to be issued | 306,000 | - | - | |||||||||
| Costs of recapitalization | (495,760 | ) | - | - | ||||||||
| Net cash provided by financing activities | 1,210,258 | 504,000 | 675,000 | |||||||||
| Decrease in cash | (10,013 | ) | (44,523 | ) | (108,442 | ) | ||||||
| Cash and cash equivalents, beginning of period | 45,833 | 68,021 | 154,275 | |||||||||
| Cash and cash equivalents, end of period | 35,820 | 23,498 | 45,833 | |||||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||
| Cash paid for taxes | 1,600 | - | 3,200 | |||||||||
| Cash paid for Interest | - | 810 | 810 | |||||||||
| Non-cash investing and financing activities | ||||||||||||
| Fair value of shares issued for settlement of convertible notes payable | 1,015,000 | - | - | |||||||||
| Year Ended December 31, 2019 | Nine Months Ended December 31, 2018 | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (5,787,364 | ) | $ | (1,613,972 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 173,902 | 86,875 | ||||||
| Fair value of shares issued for services | 2,424,121 | 194,030 | ||||||
| Fair value of vested options | 711,404 | - | ||||||
| Fair value of warrants issued for services | - | 376,510 | ||||||
| Extinguishment of derivative liabilities | (145,565 | ) | - | |||||
| Change in fair value of derivatives | (19,491 | ) | - | |||||
| Private placement costs | 238,395 | - | ||||||
| Amortization of convertible note discount | 185,330 | - | ||||||
| Gain on forgiveness of accrued interest | - | (21,000 | ) | |||||
| Gain on extinguishment of debt | - | (41,000 | ) | |||||
| Amortization of operating lease right-of-use asset | 87,132 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (8,699 | ) | (19,561 | ) | ||||
| Inventories | (122,519 | ) | - | |||||
| Prepaid expenses | (7,500 | ) | - | |||||
| Accounts payable and accrued liabilities | 63,981 | 9,617 | ||||||
| Deferred revenue, license agreement | 68,212 | - | ||||||
| Operating lease liabilities | (82,659 | ) | - | |||||
| Net cash used in operating activities | (2,221,320 | ) | (1,028,501 | ) | ||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | (114,500 | ) | (175,000 | ) | ||||
| Payment of security deposit | (16,882 | ) | (16,770 | ) | ||||
| Net cash used in investment activities | (131,382 | ) | (191,770 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from shares issued for cash | 2,090,375 | 1,300,018 | ||||||
| Proceeds from shares to be issued | 530,000 | 306,000 | ||||||
| Proceeds from convertibles notes payable | 326,800 | - | ||||||
| Proceeds from notes payable | - | 100,000 | ||||||
| Principal payments of notes payable | (124,150 | ) | - | |||||
| Principal payment of convertible note payable | (73,000 | ) | ||||||
| Costs of recapitalization | - | (495,760 | ) | |||||
| Net cash provided by financing activities | 2,750,025 | 1,210,258 | ||||||
| Decrease in cash | 397,323 | (10,013 | ) | |||||
| Cash and cash equivalents, beginning of period | 35,820 | 45,833 | ||||||
| Cash and cash equivalents, end of period | $ | 433,143 | $ | 35,820 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for taxes | $ | 800 | $ | 1,600 | ||||
| Cash paid for Interest | 15,080 | - | ||||||
| Non-cash investing and financing activities | ||||||||
| Derivative liabilities allocated to convertible note discount | $ | 326,800 | $ | - | ||||
| Original issue discount | 28,200 | - | ||||||
| Fair value of shares issued for loan fee | 54,990 | - | ||||||
| Shares issued for cashless exercise of warrant | 2,590 | - | ||||||
| Fair value of shares issued for settlement of convertible notes payable | - | 1,015,000 | ||||||
See notes to consolidated financial statements
| F-22 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2019 AND
THE NINE MONTHS ENDED DECEMBER 31, 2018
AND THE YEAR ENDED MARCH 31, 2018
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quanta, Inc (“the Company”) was incorporated as Freight Solution, Inc. (“Freight Solution”) on April 28, 2016 in the State of Nevada.
Effective June 6, 2018, Freights Solution and Bioanomaly Inc. (“Bioanomaly”) entered inwas acquired by Freight Solution pursuant to a merger agreement. Pursuant to the merger agreement allin which the shareholders of Bioanomaly exchanged all of theirthe outstanding shares of Bioanomaly for an aggregate of 21,908,810 newly issued shares of Freight Solution’s common stock. Freight Solution shareholders retained 6,500,000 shares of common stock, which representsrepresented 23% of the issued and outstanding stock following the merger. Immediately following the merger, the Board of Directors consisted of three members appointed by Bioanomaly and all former members of Freight Solution’s Board and former officers resigned.
The merger agreement contains customary representation and warranties of Freight Solution and, as applicable, Bioanomalyacquisition was accounted for like transactions. As a result of the merger, a change in control occurred. The merger will be treated as a reverse merger and recapitalization for financial reporting purposestransaction. In connection with Bioanomaly deemed to be the accounting acquirer and Freight Solution deemed to be the legal acquirer. The historical financial statementsclosing of Freight Solution before the merger, have beenFreight Solution’s management was replaced with the historical financial statements of Bioanomaly before the merger in all future filings with the Securities and Exchange Commission (the “SEC”).
The Company incurred $495,760 of finders, legal, and advisory fees related to the merger. As the merger is considered a capital transaction in substance, these costs were charged directly to additional paid-in capital as a cost of the merger.
by Bioanomaly’s management. On July 11, 2018, the Company changed its name to Quanta, Inc. The Company is an applied science businesscompany focused on increasing energy levels ofin plant matter and increasingto increase performance within the human body. The Company’s operations are based in Burbank, California.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine monthsyear ended December 31, 2018,2019, the Company incurred a net loss of $1,613,972$5,787,364 and used cash in operating activities of $1,028,501,$2,221,320, and at December 31, 2018,2019, the Company had a had a working capital deficiency of $134,236.$113,909. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2018,2019, the Company had cash on hand in the amount of $35,820.$433,143. Subsequent to the December 31, 20182019 the Company received $230,365$153,000 from the issuance of a convertible note payable and $30,000 for subscriptions forto purchase shares of common stock to be issued in a private placement.stock. Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stock holders,stockholders, in the case of equity financing
Basis of presentation and change in fiscal yearprinciples of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting standards generally accepted in the United States of America, America.
In December 2018, the Board of Directors of the Company approved a change in the Company’sits fiscal year end from March 31 to December 31. The Company’s fiscal year now begins on January 1 and ends on December 31 of each year, starting on January 1, 2019. The required transition period ofcovering the nine-month period from April 1, 2018 to December 31, 2018 is included in the accompany consolidated financial statements. For comparative purposes, the unaudited consolidated statements of operations and consolidated statements of cash flows for the nine months ended December 31, 2017 are also presented.
The accompanying unaudited consolidated statements of operations and consolidated statements of cash flows for the nine months ended December 31, 2017 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended December 31, 2017 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending March 31, 2018. These financial statements should be read in conjunction with the financial statements of the Company for the year ended March 31, 2018 and notes thereto contained within this Form 10-KT.
Principles of Consolidation
The consolidated financial statements include the accounts of Quanta Inc, and its wholly-owned subsidiary, Bioanomaly, Inc. IntercompanyAll intercompany balances and transactions have been eliminated in consolidation.
| F-23 |
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 revenues and expenses during the reporting period. Significant accounting estimates include certain assumptions related to, among others, allowance for doubtful accounts receivable, impairment analysis of long-term assets, valuation allowance on deferred income taxes, assumptions used in valuing stock instruments issued for services, assumptions made in valuing derivative liabilities, and the accrual of potential liabilities. Actual results may differ from these estimates.
Cash and Cash EquivalentsAccounts Receivable
TheAccounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts if deemed necessary, and payments are generally due within thirty to forty-five days of invoicing. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2019 and December 31, 2018, the Company considers all highly liquid temporary cash investments withdid not record any allowance for uncollectible accounts.
Inventories
Inventories are stated at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an original maturity of three monthsunderstated or less to be cash equivalents.overstated provision required for excess and obsolete inventory. At December 31, 2019 and 2018, the Company had no reserve for inventory obsolescence.
Equipment
Equipment is stated at cost less accumulated depreciation and amortization.depreciation. Depreciation is provided over the estimated useful lives of the equipment, which is three years, using the straight-line method. Expenditures for major additions and improvements are capitalized and minor replacements,repairs and maintenance and repairs are charged to expense as incurred. When equipment is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes.
Equipment under construction includes equipment which is not ready for its intended use. No depreciation is applied to equipment under construction. Once construction is complete and the equipment is ready for its intended use and placed into service, the equipment will begin to be depreciated.
Management assesses the carrying value of equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the nine monthsyear ended December 31, 20182019 and for the yearnine-months period ended MarchDecember 31, 2018, the Company determined there were no indicators of impairment of its property and equipment.
Revenue
Prior to April 1, 2018, theThe Company recognized its revenue in accordance with Accounting Standards Codification (ASC) 605Revenue Recognition, upon the delivery of its services or products when: (1) delivery had occurred or services rendered; (2) persuasive evidence of an arrangement existed; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable was probable
Effective April 1, 2018, the Company adoptedfollows the guidance of Accounting Standards Codification (“ASC”) 606,Revenue from Contracts.Contracts with Customers. The implementation of ASC 606 did not have a material impact on the Company’s consolidated financial statements. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company’s revenue consists of revenueProduct Sales—Revenue from sales of itsthe Company’s CBD products.products is recognized at the point in time when the Company’s performance obligations with the applicable customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of ASC Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue at the point in time when the entity satisfies a performance obligation.
| F-24 |
Revenue is recorded at the transaction price, which is the amount of consideration the Company expects to receive in exchange for transferring products to a customer. Generally, the Company’s performance obligations are transferred to the customer at a point in time, typically upon delivery of products. The Company offershistorically has offered no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally,
The Company sells its products (i) directly to date,customers (“DTC”) through online orders from our websites, and DTC sales at conventions and events; and (ii) through wholesalers, including physicians, pharmacies, fitness studios, grocery stores, and other organizations.
License revenue— Revenue from symbolic IP is recognized over the Company has not incurred incremental costs in obtaining a client contract.access period to the Company’s IP (see Note 2).
Cost of revenuegoods sold includes direct costs and fees related to the sale of our products.
Disaggregated Revenue
The composition of the Company’s net revenues recognized during the year ended December 31, 2019 and the nine-month period ended December 31, 2018, disaggregated by source and nature, are as follows:
| Year ended December 31, 2019 | Nine-months ended December 31, 2018 | |||||||
| By Sales Channel: | ||||||||
| Direct to consumer | $ | 443,916 | $ | 67,806 | ||||
| Wholesale | 793,284 | 157,448 | ||||||
| License Revenue | 31,788 | - | ||||||
| $ | 1,268,988 | $ | 225,254 | |||||
| By Geographic Territory: | ||||||||
| California | $ | 766,469 | $ | 156,974 | ||||
| Other states | 477,139 | 68,280 | ||||||
| International | 25,380 | - | ||||||
| $ | 1,268,988 | $ | 225,254 | |||||
Accounts ReceivableLeases
Accounts receivablePrior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standard in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets and lease liabilities of $420,112 and did not result in a cumulative-effect adjustment to accumulated deficit (see Note 5).
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at the invoiced amount less an allowance for any uncollectible accounts if deemed necessary, do not bear interest,its fair value and payments are generally due within thirty to forty-five days of invoicing. The carrying value of accounts receivable approximates their fair value. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustmentsis then re-valued at each reporting date, with changes in the allowance when it is considered necessary. Account balances are charged off againstfair value reported in the allowance after all meansstatements of collection have been exhaustedoperations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the potential for recovery is considered remote. At December 31, 2018 and March 31, 2018,2019, reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the Company did not record any allowance for uncollectible accounts.end of each reporting period
Income taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for 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. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
Stock Compensation
The Company periodically issues stock options, warrants, shares of common stock, and warrantsrestricted stock unit awards, as share-based compensation to employees and non-employees in non-capital raising transactions, and for services and for financing costs.non-employees. The Company accounts for stock option and warrant grants issued and vestingits share-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation (Topic 718). Stock-based compensation cost is measured at the grant date, based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas theestimated fair value of the award, and is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vestingrequisite service period. The
In periods through December 31, 2018, the Company accountsaccounted for stock option and warrant grantsshare-based compensation issued and vesting to non-employees and consultants in accordance with the authoritative guidanceprovisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the FASB whereas thefair value of whichever is more reliably measurable: (a) the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached,goods or b) at the date at which the necessary performance to earnservices received; or (b) the equity instruments is complete. Options granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
issued. The final fair value of the Company’s stock optionshare-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and warrant grantsthe percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On January 1, 2019, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are estimated usingmeasured by estimating the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected lifefair value of the stock options or warrants,equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements.
Advertising costs
Advertising costs are expensed as incurred. During the year ended December 31, 2019 and future dividends. Compensation expense is recorded based upon the value derived fromnine-month period ended December 31, 2018, advertising costs totaled $103,401 and $27,529, respectively.
Research and Development Costs
Costs incurred for research and development are expensed as incurred. During the Black-Scholes-Merton Option Pricing model,year ended December 31, 2019 and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.nine-month period ended December 31, 2018, research and development costs totaled $351,670 and 207,600, respectively and include salaries, benefits, and overhead costs of personnel conducting research and development of the Company’s products.
Net Loss per Share
Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Shares used in the calculation of basic net loss per common share include vested but unissued shares underlying awards of restricted common stock. Diluted loss per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the Company. In computing diluted loss per share, the treasury stock method assumes that outstanding warrants and convertible notes are exercised and the proceeds are used to purchase common stock at the average market price during the period. Warrants and convertible notes may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.
| F-25 |
At
For the year ended December 31, 20182019, the dilutive impact of stock options exercisable into 3,290,000 shares of common stock, 8,000,000 shares of restricted stock to be issued, and March 31, 2018, there were 3,000,000 and 3,771,000, respectively,convertible notes payable that can convert into 889,469 shares of potentially dilutive shares outstanding thatcommon stock have been excluded from calculation of weighted average shares as effect would have beenbecause their impact on the loss per share is anti-dilutive.
Advertising costs
Advertising costs are expensed as incurred. During For the nine-month periodyear ended December 31, 2018 and year ended March 31, 2018, advertising costs totaled $27,529 and $21,628, respectively.2019, the dilutive impact of stock warrants exercisable into 3,000,000 shares of common stock have been excluded because their impact on the loss per share is anti-dilutive.
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
The Company believes the carrying amount reported in the balance sheet for cash, and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and notes payable, approximate their fair values because of the short-term nature of these financial instruments
As of December 31, 2019, the Company’s balance sheet includes Level 2 liabilities comprised of the fair value of embedded derivative liabilities of $400,139 (see Note 8).
Concentrations of risks
For the nine monthsyear ended December 31, 20182019 and yearthe nine-month period ended MarchDecember 31, 2018, no customer accounted for 10% or more of revenue orrevenue. As of December 31, 2019, two customers accounted for 19% and 12% of accounts receivable, at period-end.
For the nine months endedrespectively, and no other customer accounted for 10% or more of accounts receivable. As of December 31, 2018, and year ended March 31, 2018,no customer accounted for more than 10% of accounts receivable.
| F-26 |
Additionally, for the same periods, no vendor accounted for 10% or more of the Company’s cost of revenues,goods sold, or accounts payable at period-end.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At December 31, 2018, the Company did not have cash deposits that exceededare insured by the federally insured limitFederal Deposit Insurance Corporation, or FDIC. At times, deposits held may exceed the amount of $250,000.insurance provided by the FDIC. The Company believes that no significant concentration of credit risk exists with respect tohas not experienced any losses in its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Research and Development Costs
Costs incurred for research and development are expensed as incurred. The salaries, benefits, and overhead costs of personnel conducting research and development of the Company’s products comprise research and development expenses. Purchased materials that dobelieves it is not have an alternative future use are also expensed.exposed to any significant credit risk.
Segments
The Company operates in one segment for the development and distribution of our CBD products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Recent Accounting Pronouncements
In FebruaryJune 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,Leases,Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today��s “incurred loss” approach with an “expected loss” model, under which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842companies will requirerecognize allowances based on expected rather than incurred losses. Entities will apply the recognition ofstandard’s provisions as a right-of-use asset and a corresponding lease liability, initially measured at the present valuecumulative-effect adjustment to retained earnings as of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating sectionbeginning of the statement of cash flows. For finance leases, interest onfirst reporting period in which the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. Topic 842guidance is effective. The standard is effective for annualinterim and interimannual reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require restatement of prior periods.2022. The Company is in the process of evaluatingcurrently assessing the impact of Topic 842adopting this standard on the Company’s financial statements and disclosures, though the adoption is expected to result in an increase in the assets and liabilities reflected on the Company’s balance sheets.
In June 2018, the FASB issued ASU 2018-07,“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that the ASU will have on our financial position, results of operations, andrelated disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 2 – LICENSE AGREEMENT
Effective January 22, 2019, the Company entered into an agreement with a wholesaler for the exclusive rights to distribute the Company’s products in the state of Colorado for three years. In consideration, the Company received an up-front payment of $100,000. The Company determined that the exclusive distribution agreement was a distinct agreement for the license of symbolic IP and thus should be recognized on a straight-line basis over the three-year life of the agreement. For the year ended December 31, 2019, the Company recognized revenue related to this agreement of $31,788. For the nine month period ended December 31, 2018, no distribution fee revenue was recorded.
| F-27 |
NOTE 23 – INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, and consisted of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Raw materials and packaging | $ | 102,428 | $ | - | ||||
| Finished goods | 20,091 | - | ||||||
| $ | 122,519 | $ | - | |||||
NOTE 4 - EQUIPMENT
Equipment, stated at cost, less accumulated depreciation consisted of the following:
| December 31, 2018 | March 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||
| Machinery-technology equipment | $ | 347,500 | $ | 347,500 | $ | 607,000 | $ | 347,500 | ||||||||
| Machinery-technology equipment under construction | 175,000 | - | 30,000 | 175,000 | ||||||||||||
| 522,500 | 347,500 | 637,000 | 522,500 | |||||||||||||
| Less accumulated depreciation | (149,620 | ) | (62,745 | ) | (323,522 | ) | (149,620 | ) | ||||||||
| $ | 372,880 | $ | 284,755 | $ | 313,478 | $ | 372,880 | |||||||||
Depreciation expense for the nine monthsyear ended December 31, 2019 and transition period ended December 31, 2018 was $173,903 and year ended March 31, 2018 was $86,875 and $62,745,$185,835, respectively. As of December 31, 2018,2019, the equipment under construction is approximately 50%33% complete, and is expected to be completed and placed into service during the year ended December 31, 2019.2020.
NOTE 35 - OPERATING LEASE
The Company leases its headquarters office space in Burbank, California under an operating lease that expires on July 31, 2023. At December 31, 2019, the Company did not have any other leases.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use asset and a lease liability for certain leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019, resulted in the recognition of operating lease right-of-use assets of $420,112 and corresponding lease liabilities of approximately the same amount. There was no cumulative-effect adjustment to accumulated deficit. As of December 31, 2019, the unamortized right of use asset was $332,980 and total lease liabilities were $337,453, of which $85,662 was current.
| F-28 |
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
Year ended December 31, 2019 | ||||
| Lease Cost | ||||
| Operating lease cost (included in selling, general, and administrative expense in the Company’s statement of operations) | $ | 107,588 | ||
| Other Information | ||||
| Cash paid for amounts included in the measurement of lease liabilities for 2019 | $ | 98,375 | ||
| Weighted average remaining lease term – operating leases (in years) | 3.5 | |||
| Average discount rate – operating leases | 4 | % | ||
The supplemental balance sheet information related to leases for the period is as follows:
| At December 31, 2019 | ||||
| Operating leases | ||||
| Long-term right-of-use assets | $ | 332,980 | ||
| Short-term operating lease liabilities | $ | 85,662 | ||
| Long-term operating lease liabilities | 251,791 | |||
| Total operating lease liabilities | $ | 337,453 | ||
Maturities of the Company’s lease liabilities are as follows:
| Year Ending | Operating Leases | |||
| 2020 | $ | 97,625 | ||
| 2021 | 102,506 | |||
| 2022 | 107,632 | |||
| 2023 | 55,126 | |||
| Total lease payments | 362,889 | |||
| Less: Imputed interest/present value discount | (25,436 | ) | ||
| Present value of lease liabilities | 337,453 | |||
| Less current portion | (85,662 | ) | ||
| Operating lease liabilities, long-term | $ | 251,791 | ||
Lease expense were $107,588 and $42,040 during the year ended December 31, 2019 and the nine-month period ended December 31, 2018, respectively.
Subsequent to December 31, 2019, the Company commenced leasing a second facility in addition to its headquarters facility described above (See Note 13).
NOTE 6 – NOTES PAYABLE
| As of | As of | |||||||
| December 31, 2018 | March 31, 2018 | |||||||
| Note payable, due January 13, 2019, interest at 8.3% per annum, secured by all the assets of the Company. The Company did not pay the note when due and is currently working with the note holder to extend the due date. | $ | 80,000 | $ | 80,000 | ||||
| Note payable, unsecured, due January 6, 2019, interest at 10% per year. The Company did not pay the note when due and is currently working with the note holder to extend the due date. | 100,000 | - | ||||||
| Total notes payable (all current portion) | $ | 180,000 | $ | 80,000 | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| Note payable, in default, due January 13, 2019, interest at 8.3% per annum, secured by all the assets of the Company. As of the date of the financial statements, the note has not been fully paid, and the Company is in negotiations with the lender to cure this default. | $ | 55,850 | $ | 80,000 | ||||
| Note payable, unsecured, due January 6, 2019, interest at 10% per year. The note was paid off in 2019. | - | 100,000 | ||||||
| Total notes payable (all current portion) | $ | 55,850 | $ | 180,000 | ||||
| F-29 |
NOTE 47 – CONVERTIBLE NOTES PAYABLE
During the year ended MarchAt December 31, 2018, there was no balance of convertible notes payable. During 2019, the Company issued ninetwo convertible promissory notes payable for an aggregatethe principal sum of $1,015,000. Each$355,000, of which $326,800 was received as proceeds, and $28,200 was recorded as original issue discount (OID). During 2019, one convertible note payablefor $73,000 was repaid. At December 31, 2019, one convertible note for $282,000 was outstanding. The outstanding note is unsecured, accruesbears interest at 5% compounded annually,12%, and matures 24 months fromis due April 29, 2020.
At the date issued. The conversion price for each note is to be atoption of the lowerholders, the notes issued in 2019 are convertible into shares of (i) a 20% discount to the pricing of shares in a financing or (ii)Company’s common stock at a price per share implied by the valuation cap determined for each note. The Company reviewed the guidancediscount of ASC 480-10-25-14, which requires liability accounting for a financial instrument that embodies an unconditional obligation39% to transfer a variable number of equity shares if the monetary value40% of the obligation at inception is based solely or predominantly on anyaverage market price of the following: (a)Company’s common stock, as defined. As a fixed monetary amount known at inception, (b) variations in something other thanresult, the Company determined that the conversion option of the convertible notes were not considered indexed to the Company’s own stock and characterized the fair value of the issuer’s equity shares or (c) variations inverselyconversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the convertible notes in October 2019, the initial fair value of the embedded conversion features totaled $565,195 (see Note 8), of which $326,800 was recorded as debt discount offsetting the face amount of the convertible notes, and the remainder of $238,395 was recorded as private placement costs.
At December 31, 2018, there was no balance of discount on convertible notes payable. During 2019, note discount of $355,000 was recorded, made up of $28,200 OID and $326,800 of discount related to changes inderivative liabilities. In addition, $54,990 of loan costs recorded on one convertible note (see below) are included with the discount. The discount and loan costs are amortized over the term of the related note payable. During 2019, total debt discount and loan costs amortization was $185,330, and at December 31, 2019, the unamortized debt discount and loan fee totaled $224,660.
In connection with the issuance of one convertible note with the principal balance of $282,000, the Company issued as a commitment fee 141,000 shares of its common stock (the “Non-Returnable Shares”) as well as 705,000 shares of its common stock (the “Returnable Shares”). The Company recorded the fair value of the issuer’s equity shares.
Upon issuance,Non-Returnable fees of $54,990 as a loan cost. The Returnable Shares are an own-share lending arrangement issued in contemplation of a debt offering and such shares will be returned to the Company anticipated thatif no event of default has occurred prior to April 29, 2020, the convertible notes will be predominately paid off by the issuancematurity date of the Company’s equity shares. Accordingly, the Company determined that the Company’s obligation associated with the convertible notes payable are monetary amounts fixed at inception to be settled by a variable number of equity shares for the convertible notes. The Company determined thatnote. At issuance, the fair value of the convertible notesshare lending arrangement was $1,181,250 which reflectsdetermined to be immaterial. In accordance with ASC 470-20, the 20% discount toshares are not deemed issued until it becomes more likely than not that they will not be returned and at such point the conversion price. The convertible notes were being accreted to thisshares should be measured at fair value overand such value recognized as a financing cost. At December 31, 2019, management determined that it is probable that the respective two year terms ofCompany will pay the notes. At March 31, 2018, accretion of $41,000 was recordednote in full when due, and meet all other conditions in the balance ofnote agreement. Accordingly, management feels that it is more likely than not that the convertible notes was $1,056,000.
On May 17, 2018,returnable shares will be returned to the Company and therefore the 705,000 Returnable Shares have not been recorded as being issued as of December 31, 2019, nor are they included in basic net loss per share or as potentially dilutive shares in calculating the diluted net loss per share.
NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS
During 2019, the Company had convertible note holders enteredpromissory notes outstanding that are convertible into a conversion and settlement agreement whereby each note holder agreed to settle the outstanding principal of their note in exchange for shares of common stock of the Company. The amountCompany at the option of the holder at price per share discounts ranging from 39% to 40% of the Company’s common stock market price, as defined in the note agreements. As the ultimate determination of shares to be issued was agreed upon separately by each shareholder andconversion of these notes could exceed the Company. The convertible notes payable principal totaled $1,015,000 and were converted into a totalcurrent number of 3,771,040available authorized shares, of common stock, atthe Company determined that the conversion prices ranging from $0.30 per share to $1.04 per share. On May 17, 2018,features of the convertible notes were not considered indexed to the Company’s own stock and accreted balance totaled $1,056,000, andcharacterized the shares issued were measured at their fair value of $1,015,000. the conversion features as derivative liabilities. Accordingly, the conversion features of the notes were separated from the host contracts (i.e. the notes) and characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At December 31, 2018, there was no balance of derivative liabilities. During the year ended December 31, 2019, the Company recorded additions of $565,195 related to the conversion features of notes issued during the period (see Note 7), and a decrease in fair value of derivatives of ($19,491). In addition, the Company recorded a decrease in derivative liability of ($145,565) related to derivative liabilities that were extinguished when the related convertible note payable was paid off (see Note 7). At December 31, 2019, the balance of the derivative liabilities was $400,139.
The differencederivative liabilities were valued at the following dates using a probability weighted Black-Scholes-Merton model with the following assumptions:
December 31, 2019 | October 2019 (dates of inception) | |||||||
| Conversion feature: | ||||||||
| Risk-free interest rate | 1.77 | % | 1.75 | % | ||||
| Expected volatility | 222 | % | 223 | % | ||||
| Expected life (in years) | 1 year | 1 year | ||||||
| Expected dividend yield | - | - | ||||||
| Fair Value: | ||||||||
| Conversion feature | $ | 400,139 | $ | 565,195 | ||||
| F-30 |
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on the historical volatility of $41,000the Company’s stock. The expected life of the conversion feature of the notes was recorded as gainbased on settlementthe remaining terms of debt.the related notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
NOTE 59 – INCOME TAXES
OnThe Company had no income tax expense for the year ended December 22, 2017,31, 2019 and the Tax Reform Act was signed into law which significantly changed U.S. tax law by, among other things, loweringnine-month period ended December 31, 2018. The following is a reconciliation of the corporatestatutory federal income tax rate from 35% to 21%,the Company’s effective January 1, 2018; allowingtax rate:
| Year ended December 31, 2019 | Nine-months ended December 31, 2018 | |||||||
| Federal tax at statutory rate | 21.0 | % | 21.0 | % | ||||
| State tax, net of federal benefit | 7.0 | 7.0 | ||||||
| Change in valuation allowance | (28.0 | ) | (28.0 | ) | ||||
| Effective income tax rate | 0.0 | % | 0.0 | % | ||||
Deferred tax assets and liabilities consist of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Deferred tax assets: | ||||||||
| Stock-based compensation | $ | 1,039,000 | $ | 160,000 | ||||
| Operating lease liability | 94,000 | - | ||||||
| Derivative expenses | 67,000 | - | ||||||
| Net operating loss carryforwards | 1,132,000 | 425,000 | ||||||
| Gross deferred tax assets | 2,332,000 | 585,000 | ||||||
| Less: valuation allowance | (2,103,000 | ) | (540,000 | ) | ||||
| Total deferred tax assets | 229,000 | 45,000 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | 90,000 | 45,000 | ||||||
| Derivative gain | 46,000 | - | ||||||
| Operating lease right-of-use asset | 93,000 | - | ||||||
| Total deferred tax liabilities | 229,000 | 45,000 | ||||||
| Net deferred tax asset (liability) | $ | - | $ | - | ||||
| F-31 |
The provisions of ASC Topic 740, Accounting for Income Taxes, require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. For the accelerationyear ended December 31, 2019 and the nine-month period ended December 31, 2018, based on all available objective evidence, including the existence of expensing for certain business assets; requiring companies to paycumulative losses, the Company determined that it was more likely than not that the net deferred tax assets were not fully realizable. Accordingly, the Company established a one-time transitionfull valuation allowance against its net deferred tax on certain un-remitted earnings of foreign subsidiaries; and eliminating U.S. federal income tax on dividends from foreign subsidiaries.assets. The Company has nointends to maintain a full valuation allowance on net deferred tax provision for anyassets until sufficient positive evidence exists to support reversal of the valuation allowance. During the year ended December 31, 2019 and the nine-month period presented due to its history of operating losses. As ofended December 31, 2018, the valuation allowance increased by $1.5 million and $0.5 million, respectively.
At December 31, 2019 and 2018, the Company had deferred tax assets of approximately $498,000, resulting from certain temporary differencesavailable Federal and state net operating loss carryforwards (“NOL”) carry-forwards of approximately $2,370,000, which are availables) to offsetreduce future taxable income. Future tax benefits whichFor Federal purposes the amounts available were approximately $4.3 million and $1.6 million, respectively. For state purposes approximately $3.1 million and $1.1 was available at December 31, 2019 and 2018, respectively. The Federal carryforwards expire on various dates through 2039 and the state carryforwards expire through 2036. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may arisebe limited as a result of these losses have not been recognizedchanges in these financial statements, as management has determined that their realization is not likelystock ownership. NOLs incurred subsequent to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards. Due to thelatest change in control ofare not subject to the Company (see Note 1), there are significant limitations on the use of the NOLs in future periods.limitation.
The income tax provision consists of the following for the nine months ended December 31, 2018 and the year ended March 31, 2018:
Components of deferred tax assets as of December 31, 2018 and March 31, 2018 are as follows:
| December 31, 2018 | March 31, 2018 | |||||||
| Net deferred tax assets – non-current: | ||||||||
| NOL carry-forwards | $ | 378,000 | $ | 162,000 | ||||
| Share-based compensation | 120,000 | - | ||||||
| Less valuation allowance | (498,000 | ) | (162,000 | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | - | $ | - | ||||
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
For the nine months ended December 31, 2018 | For the year March 31, 2018 | |||||||
| Federal statutory income tax rate | 21.0 | % | 30.0 | % | ||||
| Change in valuation allowance | (21.0 | ) | (30.0 | ) | ||||
| Effective income tax rate | 0.0 | % | 0.0 | % | ||||
The Company’s operations are based in California and it is subject to Federal and California state income tax. Tax years after 20142015 are open to examination by United States and state tax authorities.
The Company adopted accounting rulesthe provisions of ASC 740, which address the determination ofrequires companies to determine whether tax benefits claimed or expected to be claimed onit is “more likely than not” that a tax return shouldposition will be sustained upon examination by the appropriate taxing authorities before any tax benefit can be recorded in the financial statements. Under these rules, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, basedASC 740 also provides guidance on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. These accounting rules also provide guidance on de-recognition,recognition, measurement, classification and interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.related to uncertain tax positions. As of December 31, 20182019 and MarchDecember 31, 2018, no liability for unrecognized tax benefits was required to be recorded.recorded or disclosed.
NOTE 610 – STOCKHOLDERS’ EQUITY (DEFICIT)
The Company’s authorized capital consists of 125,000,000 shares, of which 100,000,000 shares are designated as shares of common stock, par value $0.001 per share, and 25,000,000 shares are designated as shares of preferred stock, par value $0.001 per share. No shares of preferred stock are currently outstanding. Shares of preferred stock may be issued in one or more series, each series to be appropriately designated by a distinguishing letter or title, prior to the issuance of any shares thereof. The voting powers, designations, preferences, limitations, restrictions, relative, participating, options and other rights, and the qualifications, limitations, or restrictions thereof, of the preferred stock are to be determined by the Board of Directors before the issuance of any shares of preferred stock in such series.
During the nine months ended December 31, 2018, the Company and convertible note holders entered into conversion and settlement agreements whereby $1,015,000 of convertible notes were converted into a total of 3,771,040 shares of common stock, at conversion prices ranging from $0.30 per share to $1.04 per share.
On June 6, 2018, the Company sold a total of 6,500,090 shares of common stock in private placements at $0.20 per share, for aggregate gross proceeds of $1,300,018.
During the nine months ended December 31, 2018, the Company issued 520,150 shares of common stock to two individuals for services. The shares were valued based on contemporaneous sales of the Company’s common stock at prices ranging from $0.20 to $0.50 per share for total fair value of $194,030. During the nine months ended December 31, 2018, the Company recognized compensation costs of $194,030 related to these shares, which is included in selling, general, and administrative expense on the accompanying consolidated statement of operations. There were no shares of common stock issued for services during the year ended March 31, 2018.
During the nine months ended December 31, 2018, the Company received $306,000 for subscriptions to purchase 612,000 shares of its common stock in a private placement at a price of $0.50 per share. Subsequent to December 31, 2018 the Company received an additional $230,365 in subscriptions for an additional 467,730 shares of common stock to be issued. As of December 31, 2018, and through the date of the financial statements, the shares had not been issued. The private placement offering is expected to terminate upon the sale of 3,000,000 shares of common stock and the Company is obligated to issue the shares once the private placement offering is completed.
NOTE 7 – WARRANTS
On June 6, 2018, the Company issued warrants to purchase 3,000,000 shares of its common stock to two consultants for services with a total fair value of $376,510 determined using the Black-Scholes-Merton Option Pricing model. The options are exercisable at $0.30 per share, were vested immediately, and expire in June 2022. During the nine months ended December 31, 2018, the Company recognized compensation costs of $376,510 related to these warrants which is included in selling, general, and administrative expense on the accompanying consolidated statement of operations. There were no warrants issued during the year ended March 31, 2018.
The Black-Scholes-Merton inputs used were as follows: risk free interest rate of 1.7%, expected volatility of 100%, expected term of 4.0 years, and expected dividend rate of 0%. The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility is based on other companies that with similar operations and size. The expected life of the warrants was based on the remaining terms of the warrants. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
There were no warrants outstanding at March 31, 2018. The table below summarizes the Company’s warrant activities for the nine months ended December 31, 2018:
Number of warrants | Weighted Average Exercise Price | Contractual Life in Years | ||||||||||
| Warrants Outstanding and Exercisable as of March 31, 2018 | - | $ | - | - | ||||||||
| Granted | 3,000,000 | $ | 0.30 | 4.00 | ||||||||
| Exercised | - | $ | - | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Warrants Outstanding and Exercisable as of December 31, 2018 | 3,000,000 | $ | 0.30 | 4.00 | ||||||||
The following table summarizes information concerning the Company’s stock warrants as of December 31, 2018:
| WarrantsOutstanding | WarrantsExercisable | |||||||||||||||||||||||
| Exercise Prices | Number Outstanding | Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | ||||||||||||||||||
| $0.30 | 3,000,000 | 4.00 | $ | 0.30 | 3,000,000 | 4.00 | $ | 0.30 | ||||||||||||||||
At December 31, 2018, intrinsic value of the warrants was approximately $600,000. There were no warrants outstanding at March 31, 2018.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company has a profit sharing agreement with an individual in consideration of the Company’s exclusive use of patented technology developed by the individual. Pursuant to the agreement, profits (as defined) from the Company’s operations will be allocated 50% to the Company and 50% to the individual. For the nine months ended December 31, 2018 and the year ended March 31, 2018, the Company incurred net losses and therefore no allocation of profit is due.
On June 6, 2018, the Company entered into a noncancelable operating lease for its headquarters office requiring payments of $8,385 per month, with lease payments increasing 5% each year, and ending on July 31, 2023. As of December 31, 2018, the Company’s future minimum rental payments for its headquarters office are as follows:
| Year ending December 31: | ||||
| 2019 | $ | 102,716 | ||
| 2020 | 108,292 | |||
| 2021 | 113,707 | |||
| 2022 | 119,392 | |||
| 2023 | 61,152 | |||
| Total | $ | 505,259 | ||
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2019 | December 31, 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 34,406 | $ | 35,820 | ||||
| Accounts receivable | 56,652 | 19,561 | ||||||
| Total current assets | 91,058 | 55,381 | ||||||
| Equipment, net | 335,028 | 372,880 | ||||||
| Operating lease right-of-use asset, net | 327,977 | - | ||||||
| Security deposit | 16,770 | 16,770 | ||||||
| Total assets | $ | 770,833 | $ | 445,031 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 38,843 | $ | 9,617 | ||||
| Notes payable ($120,850 in default at September 30, 2019) | 120,850 | 180,000 | ||||||
| Deferred revenue, distribution agreement current portion | 34,104 | - | ||||||
| Operating lease liabilities, current portion | 71,710 | - | ||||||
| Total current liabilities | 265,507 | 189,617 | ||||||
| Long term liabilities | ||||||||
| Deferred revenue, distribution agreement long-term portion | 42,634 | - | ||||||
| Operating lease liabilities, long-term portion | 258,113 | - | ||||||
| Total liabilities | 566,254 | 189,617 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 25,000,000 shares authorized; none issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 44,646,255 and 39,200,090 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 44,646 | 39,200 | ||||||
| Shares to be issued (1,824,940 and 612,000 shares to be issued as of September 30, 2019 and December 31, 2018, respectively) | 1,849,780 | 306,000 | ||||||
| Additional paid-in capital | 3,777,770 | 2,360,598 | ||||||
| Accumulated deficit | (5,467,617 | ) | (2,450,384 | ) | ||||
| Total stockholders’ equity | 204,579 | 255,414 | ||||||
| Total liabilities and stockholders’ equity | $ | 770,833 | $ | 445,031 | ||||
See notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Sales, net | $ | 384,420 | $ | 74,253 | $ | 913,810 | $ | 134,183 | ||||||||
| Distributor license fees | 8,526 | - | 17,052 | - | ||||||||||||
| Total revenue | 392,946 | 74,253 | 930,862 | 134,183 | ||||||||||||
| Cost of goods sold | 73,702 | 91,392 | 229,744 | 137,578 | ||||||||||||
| Gross profit (loss) | 319,244 | (17,139 | ) | 701,118 | (3,395 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Employees compensation and contractors | 338,317 | 168,885 | 831,773 | 386,876 | ||||||||||||
| Selling, general, and administrative | 783,901 | 192,288 | 2,669,586 | 417,734 | ||||||||||||
| Research and development | 115,047 | 58,833 | 196,805 | 215,461 | ||||||||||||
| Total operating expenses | 1,237,265 | 420,006 | 3,698,164 | 1,020,071 | ||||||||||||
| Loss from operations | (918,021 | ) | (437,145 | ) | (2,997,046 | ) | (1,023,466 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest Income | - | 21,023 | - | 38 | ||||||||||||
| Gain on extinguishment of debt | - | - | - | 62,000 | ||||||||||||
| Interest expense | (9,939 | ) | - | (20,187 | ) | - | ||||||||||
| Other income (expense), net | (9,939 | ) | 21,023 | (20,187 | ) | 62,038 | ||||||||||
| Net loss | $ | (927,960 | ) | $ | (416,122 | ) | $ | (3,017,233 | ) | (961,428 | ) | |||||
| Net loss per share, basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.08 | ) | $ | (0.04 | ) | ||||
| Weighted average common shares outstanding – basic and diluted | 41,823,505 | 26,439,818 | 40,092,030 | 24,174,314 | ||||||||||||
See notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| Three months ended September 30, 2019 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, June 30, 2019 | 41,823,505 | $ | 41,823 | $ | 2,374,228 | $ | 2,303,797 | $ | (4,539,657 | ) | $ | 180,191 | ||||||||||||
| Shares issued for cash | 2,642,750 | 2,643 | 936,343 | (454,017 | ) | - | 484,969 | |||||||||||||||||
| Fair value of shares for services | 180,000 | 180 | 467,199 | - | - | 467,379 | ||||||||||||||||||
| Net loss | - | - | - | - | (927,960 | ) | (927,960 | ) | ||||||||||||||||
| Balance, September 30, 2019 (Unaudited) | 44,646,255 | $ | 44,646 | $ | 3,777,770 | $ | 1,849,780 | $ | (5,467,617 | ) | $ | 204,579 | ||||||||||||
| Nine months ended September 30, 2019 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, December 31, 2018 | 39,200,090 | $ | 39,200 | $ | 2,360,598 | $ | 306,000 | $ | (2,450,384 | ) | $ | 255,414 | ||||||||||||
| Shares issued for cash | 2,642,750 | 2,643 | 1,313,722 | (206,030 | ) | - | 1,110,335 | |||||||||||||||||
| Shares for services | 212,505 | 213 | 106,040 | 1,749,810 | - | 1,856,063 | ||||||||||||||||||
| Shares issued for cashless exercise of warrants | 2,590,910 | 2,590 | (2,590 | ) | - | - | - | |||||||||||||||||
| Net loss | - | - | - | - | (3,017,233 | ) | (3,017,233 | ) | ||||||||||||||||
| Balance, September 30, 2019 (Unaudited) | 44,646,255 | $ | 44,646 | $ | 3,777,770 | $ | 1,849,780 | $ | (5,467,617 | ) | $ | 204,579 | ||||||||||||
QUANTA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
(Unaudited)
| Three months ended September 30, 2018 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, June 30, 2018 | 38,900,090 | $ | 38,900 | $ | 2,210,898 | $ | - | $ | (1,126,627 | ) | $ | 1,123,171 | ||||||||||||
| Shares to be issued | 85,000 | 85,000 | ||||||||||||||||||||||
| Net loss | - | - | - | (416,122 | ) | (416,122 | ) | |||||||||||||||||
| Balance, September 30, 2018 (Unaudited) | 38,900,090 | $ | 38,900 | $ | 2,210,898 | $ | 85,000 | $ | (1,542,749 | ) | $ | 792,049 | ||||||||||||
| Nine months ended September 30, 2018 (Unaudited) | ||||||||||||||||||||||||
| Common Stock, par value $0.001 | Additional | |||||||||||||||||||||||
| Number of shares | Amount | paid-in capital | Shares to be issued | Accumulated deficit | Total | |||||||||||||||||||
| Balance, December 31, 2017 | 21,908,810 | $ | 21,909 | $ | (11,909 | ) | $ | - | $ | (581,321 | ) | $ | (571,321 | ) | ||||||||||
| Shares issued for recapitalization | 6,500,000 | 6,500 | (6,500 | ) | - | |||||||||||||||||||
| Costs of recapitalization | (495,760 | ) | (495,760 | ) | ||||||||||||||||||||
| Shares issued for cash | 6,500,090 | 6,500 | 1,293,518 | 1,300,018 | ||||||||||||||||||||
| Fair value of shares issued for notes payable | 3,771,040 | 3,771 | 1,011,229 | 1,015,000 | ||||||||||||||||||||
| Shares to be issued | 85,000 | 85,000 | ||||||||||||||||||||||
| Fair value of shares issued for services | 220,150 | 220 | 43,810 | 44,030 | ||||||||||||||||||||
| Fair value of warrants issued for services | 376,510 | 376,510 | ||||||||||||||||||||||
| Net loss | - | - | - | (961,428 | ) | (961,428 | ) | |||||||||||||||||
| Balance, September 30, 2018 (Unaudited) | 38,900,090 | $ | 38,900 | $ | 2,210,898 | $ | 85,000 | $ | (1,542,749 | ) | $ | 792,049 | ||||||||||||
See notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,017,233 | ) | $ | (961,428 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 122,352 | 28,960 | ||||||
| Fair value of shares for services | 1,856,063 | 44,030 | ||||||
| Fair value of warrants issued for services | - | 376,510 | ||||||
| Gain on extinguishment of debt | - | (62,000 | ) | |||||
| Amortization of right-of-use asset | 57,553 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (37,091 | ) | - | |||||
| Accounts payable and accrued liabilities | 29,226 | 49,252 | ||||||
| Deferred revenue | 76,738 | - | ||||||
| Operating lease liabilities | (55,707 | ) | - | |||||
| Net cash used in operating activities | (968,099 | ) | (524,676 | ) | ||||
| CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
| Security Deposit | - | (16,770 | ) | |||||
| Purchase of equipment | (84,500 | ) | (175,000 | ) | ||||
| Net cash used in investment activities | (84,500 | ) | (191,770 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from shares to be issued | - | 85,000 | ||||||
| Proceeds from shares issued for cash | 1,110,335 | 1,300,018 | ||||||
| Proceeds from convertibles notes payable | - | 176,000 | ||||||
| Proceeds from notes payable | - | 85,000 | ||||||
| Principal payments of notes payable | (59,150 | ) | (380,000 | ) | ||||
| Costs of recapitalization | - | (495,760 | ) | |||||
| Net cash provided by financing activities | 1,051,185 | 770,258 | ||||||
| Increase (decrease) in cash | (1,414 | ) | 53,812 | |||||
| Cash and cash equivalents, beginning of period | 35,820 | 23,467 | ||||||
| Cash and cash equivalents, end of period | $ | 34,406 | $ | 77,279 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for taxes | - | 3,200 | ||||||
| Cash paid for Interest | - | - | ||||||
| Non-cash investing and financing activities | ||||||||
| Fair value of shares issued for settlement of convertible notes payable | $ | - | $ | 1,015,000 | ||||
| Initial recognition of operating lease right-of-use asset and operating lease liabilities | $ | 409,620 | $ | - | ||||
See notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018 (UNAUDITED)
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quanta, Inc (formerly “Bioanomaly”, the “Company”), a California corporation, was incorporated on December 27, 2016 and commenced operations in 2017. The Company is an applied science business focused on increasing energy levels of plant matter and increasing performance within the human body.
On June 6, 2018, Bioanomaly completed a merger with Freight Solution, Inc (“Freight Solution”), a Nevada corporation. Pursuant to the merger agreement, all the shareholders of Bioanomaly exchanged all of their shares of Bioanomaly for an aggregate of 21,908,810 newly issued shares of Freight Solution’s common stock. After the merger was completed, the Bioanomaly shareholders owned approximately 77% of the outstanding shares of common stock of Freight Solution and the original shareholders of Freight Solution owned approximately 23% of the outstanding shares of common stock of Freight Solution. The transaction was accounted for as a reverse merger (recapitalization) with Bioanomaly deemed to be the accounting acquirer and Freight Solution deemed to be the legal acquirer. Upon the closing, Bioanomaly changed its name to Quanta, Inc.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine months ended September 30, 2019, the Company incurred a net loss of $3,017,233 and used cash in operating activities of $968,099, and at September 30, 2019, the Company had a working capital deficiency of $174,449. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2018 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At September 30, 2019, the Company had cash on hand in the amount of $34,406. Subsequent to the September 30, 2019 the Company received $1,000,000 for subscriptions for shares of common stock to be issued in a private placement and $254,000 proceeds from the issuance of a convertible note. Management estimates that the current funds on hand will be sufficient to continue operations through the next six months. The Company’s ability to continue as a going concern is dependent upon improving its profitability and the continuing financial support from its shareholders. Management believes the existing shareholders or external financing will provide the additional cash to meet the Company’s obligations as they become due. No assurance can be given that any future financing, if needed, will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, if needed, it may contain undue restrictions on its operations, in the case of debt financing, or cause substantial dilution for its stockholders, in the case of equity financing
Basis of presentation
The accompanying unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019. The Condensed Consolidated Balance Sheet information as of December 31, 2018 was derived from the Company’s audited Consolidated Financial Statements as of and for the nine-month period ended December 31, 2018, included in the Company’s Annual Report on Form 10-KT filed with the SEC on April 16, 2019. These financial statements should be read in conjunction with that report.
The consolidated financial statements include the accounts of Quanta Inc, and its wholly-owned subsidiary, Bioanomaly, Inc. Intercompany transactions have been eliminated in consolidation.
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 revenues and expenses during the reporting period. Significant accounting estimates include certain assumptions related to, among others, reserve for uncollectible accounts receivable, impairment analysis of long-term assets, valuation of deferred tax assets, assumptions used in valuing stock instruments issued for services, and the accrual of potential liabilities. Actual results may differ from these estimates.
Revenue
The Company follows the guidance of Accounting Standards Codification (ASC) 606,Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
The Company’s revenue primarily consists of revenue from sales of its CBD products. Generally, the Company’s performance obligations are transferred to the customer at a point in time, typically upon delivery of products. The Company offers no discounts, rebates, rights of return, or other allowances to clients which would result in the establishment of reserves against service revenue. Additionally, to date, the Company has not incurred incremental costs in obtaining a client contract. Cost of revenue includes direct costs and fees related to the sale of our products.
The Company also recognizes revenue from an exclusive distribution agreement. The Company’s revenue from the exclusive distribution agreement is considered revenue from a symbolic intellectual property (IP) and is recognized over the term of the agreement.
Leases
Prior to January 1, 2019, the Company accounted for leases under ASC 840,Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842,Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The implementation of ASC 842 did not have a material impact on the Company’s consolidated financial statements and did not have a significant impact on our liquidity or on our compliance with our financial covenants associated with our loans. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of $409,620 and lease liabilities for operating leases of $409,620, and a zero cumulative-effect adjustment to accumulated deficit. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”) and elected to not separate lease components and non-lease components for its long-term leases. Lease expense is recognized on a straight-line basis over the lease term (see Note 3).
Stock-Based Compensation
The Company issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.
In periods through December 31, 2018, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On January 1, 2019, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements for the three months and nine months ended September 30, 2019 or the previously reported financial statements.
Net Loss per Share
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted earnings per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive.
At September 30, 2019, the dilutive impact 6,375,000 unvested restricted shares of the Company’s common stock have been excluded because their impact on the loss per share is anti-dilutive. At September 30, 2018, the dilutive impact of notes payable convertible into 3,771,000 shares of the Company’s common stock have been excluded because their impact on the loss per share is anti-dilutive.
Fair Value of Financial Instruments
The Company follows the authoritative guidance issued by the FASB for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The Company is required to use of observable market data if such data is available without undue cost and effort.
The Company believes the carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and notes payable, approximate their fair values because of the short-term nature of these financial instruments
Concentrations of risks
For the three and nine months ended September 30, 2019 and September 30, 2018, no customer accounted for 10% or more of revenue or accounts receivable at period-end.
For the three and nine months ended September 30, 2019 and September 30, 2018, no vendor accounted for 10% or more of the Company’s cost of revenues, or accounts payable at period-end.
The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits, which may from time to time exceed the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to its cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.
Segments
The Company operates in one segment for the development and distribution of our CBD products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. ASU 2016-13 is effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
NOTE 2 - DISTRIBUTION AGREEMENT
Effective January 22, 2019, the Company entered into an agreement with Della Strada Wholesale for the exclusive rights to distribute the Company’s products in the state of Colorado for three years. In consideration, the Company received an up-front payment of $100,000. The Company determined that the exclusive distribution agreement was a distinct agreement for the license of symbolic IP and thus should be recognized on a straight-line basis over the three-year life of the agreement. For the three and nine months ended September 30, 2019, the Company recognized revenue related to this agreement of $8,526 and $17,052, respectively. For the three and nine months ended September 30, 2018, no distribution fee revenue was recorded.
NOTE 3 - OPERATING LEASE
In June 2018, the Company entered into a noncancelable operating lease for its headquarters office requiring payments of $7,936 per month, payments increasing 5% each year, and ending on July 31, 2023. At September 30, 2019, the remaining lease term was 4.25 years. The Company does not have any other leases.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
ASC Topic 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including measurement of lease payments. The Company reviewed the reassessment and re-measurement requirements and concluded that a reduction in lease payments effective August 1, 2019, required reassessment by the Company. As a result, the Company remeasured the lease liability to reflect the change in lease payments, which resulted in a reduction in the operating lease liability and a corresponding adjustment to the operating lease right-of-use asset of approximately $38,000 in the nine months ended September 30, 2019.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
Nine months ended September 30, 2019 | ||||
| Lease Cost | ||||
| Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) | $ | 81,252 | ||
| Other Information | ||||
| Cash paid for amounts included in the measurement of lease liabilities for 2019 | $ | 50,310 | ||
| Weighted average remaining lease term – operating leases (in years) | 4.25 | |||
| Average discount rate – operating leases | 8.3 | % | ||
The supplemental balance sheet information related to leases for the period is as follows:
| At September 30, 2019 | ||||
| Operating leases | ||||
| Long-term right-of-use assets | $ | 327,977 | ||
| Short-term operating lease liabilities | $ | 71,710 | ||
| Long-term operating lease liabilities | 258,113 | |||
| Total operating lease liabilities | $ | 329,823 | ||
Maturities of the Company’s lease liabilities are as follows:
| Year Ending | Operating Leases | |||
| 2019 (remaining 3 months) | $ | 23,811 | ||
| 2020 | 89,291 | |||
| 2021 | 102,090 | |||
| 2022 | 107,194 | |||
| 2023 | 64,316 | |||
| Total lease payments | 386,703 | |||
| Less: Imputed interest/present value discount | (56,880 | ) | ||
| Present value of lease liabilities | $ | 329,823 | ||
Lease expenses were $81,252 and $34,285 during the nine months ended September 30, 2019 and 2018, respectively.
NOTE 4 – STOCKHOLDERS’ EQUITY
Common stock issued for cash
In SeptemberDuring the year ended December 31, 2019 and the nine-month period ended December 31, 2018, the Company completed a private placementplacements of shares at a price ofprices ranging from $.10 to $0.50 per share. A total of $1,416,335$2,926,375 was received, including $1,110,335 received$2,090,375 in 2019 for shares issued in 2019, $530,000 in 2019 for shares subscribed, and $306,000 received in 2018. 2018 for shares issued in 2019.
The Company agreed to issue a total 2,842,69012,011,269 shares in the private placements, of which 2,642,7506,942,750 shares were issued through September 30,December 31, 2019, and 199,9405,068,519 shares are included in shares to be issued.issued on the accompanying financial statements.
NOTE 11 – SHARE-BASED PAYMENTS
CommonRestricted common stock to be issued to consultant with vesting terms
On May 20, 2019, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to a consultant for services (see Note 6)12). 1,000,000 shares vested immediately, and the balance of 7,000,000 shares will vest 625,000 shares per quarter over 2.8 years. In the event the consultants service with the Company terminates, any or all of the shares of common stock held by such recipient that have not vested as of the date of termination are forfeited to the Company in accordance with such restricted grant agreement.
The total fair value of the 8,000,000 shares was determined to be $4,000,000 based on the price per shares of a contemporaneous private placement of the Company’s common stock on the date granted. The Company accounts for the share awards using a graded vesting attribution method over the requisite service period, as if each tranche were a separate award. During the nine monthsyear ended September 30,December 31, 2019, total share-based expense recognized related to vested restricted shares totaled $1,749,810.$2,317,868. At September 30,December 31, 2019, there was $2,250,190$1,628,132 of unvested compensation related to these awards that will be amortized over a remaining vesting period of 2.72.3 years.
| F-32 |
The following table summarizes restricted common stock activity for the nine monthsyear ended September 30,December 31, 2019:
| Number of shares | Fair value of shares | Number of shares | Fair value of shares | |||||||||||||
| Non-vested shares, January 1, 2019 | - | $ | - | - | $ | - | ||||||||||
| Granted | 8,000,000 | 4,000,000 | 8,000,000 | 4,000,000 | ||||||||||||
| Vested | (1,625,000 | ) | (1,749,810 | ) | (2,250,000 | ) | (2,317,868 | ) | ||||||||
| Forfeited | - | - | - | - | ||||||||||||
| Non-vested shares, September 30, 2019 | 6,375,000 | $ | 2,250,190 | |||||||||||||
| Non-vested shares, December 31, 2019 | 5,750,000 | $ | 1,682,132 | |||||||||||||
As of December 31, 2019, no shares have been issued and 2,250,000 vested shares are included in shares to be issued on the accompanying financial statements
Common stock issued for services
During the nine month periodyear ended September 30,December 31, 2019, the Company issued 212,505 shares of common stock to a consultant for services.services rendered. The shares were valued at $106,253 based on a the price per share of a contemporaneous private placement of the Company’s common stock on the date granted.granted and included in selling, general, and administrative expense on the accompanying financial statements.
NOTE 5 – WARRANTSStock Options
During the year ended December 31, 2019, the Company issued options exercisable into 3,290,000 shares of common stock. 1,800,000 options vested immediately, and the balance of 1,490,000 options vest over various periods up to four years. The options have an exercise price of $0.23 per share, and expire in ten years. Total fair value of these options at grant date was approximately $1,179,000, which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price ranging from $0.23 to $0.38 per share, expected term ranging from five to seven years, volatility ranging from 213% to 218%, dividend rate of 0% and risk-free interest rate of 1.77%. During the year ended December 31, 2019, the Company recognized $711,404 of compensation expense relating to vested stock options. As of December 31, 2019, the amount of unvested compensation related to stock options was approximately $468,000 which will be recorded as an expense in future periods as the options vest.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
A summary of stock option activity during the year ended December 31, 2019 and the nine-month period ended December 31, 2018 is as follows:
| Number of warrants | Weighted Average Exercise Price | Contractual Life in Years | |||||||||||
| Options Outstanding and Exercisable as of March 31, 2018 | - | $ | - | - | |||||||||
| Granted | - | $ | - | - | |||||||||
| Exercised | - | - | - | ||||||||||
| Expired | - | - | - | ||||||||||
| Options Outstanding and Exercisable as of December 31, 2018 | - | $ | - | - | |||||||||
| Granted | 3,290,000 | 0.23 | 6.0 | ||||||||||
| Exercised | - | - | - | ||||||||||
| Expired | - | - | - | ||||||||||
| Options Outstanding as of December 31, 2019 | 3,290,000 | 0.23 | 6.0 | ||||||||||
| Options Exercisable as of December 31, 2019 | 1,800,000 | $ | 0.23 | 5.8 | |||||||||
| F-33 |
At December 31, 2019, the aggregate intrinsic value of the stock options was $322,749.
Stock Warrants
In 2018, the Company issued warrants exercisable into 3,000,000 shares of common stock. The warrants were fully vested when issued, have an exercise price of $0.30 per share, and expire in 2022. Total fair value of these warrants at grant date was approximately $377,000, which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price of $0.20 per share, expected term of four years, volatility of 170%, dividend rate of 0% and risk-free interest rate of 1.76%. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future. During the nine monthyear ended September 30,December 31, 2019, there was a cashless exercise of all of the 3,000,000 warrants.
A summary of warrant activity during the nine monthsyear ended September 30,December 31, 2019 and the nine-month period ended December 31, 2018 is presented below:as follows:
| Number of warrants | Weighted Average Exercise Price | Contractual Life in Years | Number of warrants | Weighted Average Exercise Price | Contractual Life in Years | ||||||||||||||||||||
| Warrants Outstanding and Exercisable as of March 31, 2018 | - | $ | - | - | |||||||||||||||||||||
| Granted | 3,000,000 | $ | 0.30 | 4.00 | |||||||||||||||||||||
| Exercised | - | - | - | ||||||||||||||||||||||
| Expired | - | - | - | ||||||||||||||||||||||
| Warrants Outstanding and Exercisable as of December 31, 2018 | 3,000,000 | $ | 0.30 | 4.00 | 3,000,000 | $ | 0.30 | 4.00 | |||||||||||||||||
| Granted | - | $ | - | - | - | - | - | ||||||||||||||||||
| Exercised | (3,000,000 | ) | $ | 0.30 | - | (3,000,000 | ) | $ | 0.30 | - | |||||||||||||||
| Expired | - | $ | - | - | - | - | - | ||||||||||||||||||
| Warrants Outstanding and Exercisable as of September 30, 2019 | - | $ | - | - | |||||||||||||||||||||
| Warrants Outstanding and Exercisable as of December 31, 2019 | - | $ | - | - | |||||||||||||||||||||
NOTE 612 – COMMITMENTS AND CONTINGENCIES
The Company has an agreement with an individual in consideration of the Company’s exclusive use of patented technology developed by the individual. Pursuant to the agreement, as amended, the Company shall pay a royalty of 25% of all the net income from the sale of licensed products, as defined with a minimum royalty of $35,000 per month payable in cash or common stock of the Company. In addition, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to the individual (see Note 4)11). During the nine monthsyear ended September 30,December 31, 2019, the Company paid $194,800$343,300 to the individual.
NOTE 713 – SUBSEQUENT EVENTS
Subsequent to September 30, 2019, the Company issued 9,300,000 shares of its common stock for total proceeds of $1,575,000.
In October 2019,February 2020, the Company issued one unsecured convertible promissory note aggregating $282,000,for $153,000, bearing interest at 12%22% per annum, and maturing April 29,2020.in August 2020. The note is convertible at a 40%39% discount to the price of the Company’s common stock, as defined.
In connectionFebruary 2020, the Company received $30,000 for subscriptions for shares of common stock to be issued in a private placement.
On December 19, 2019, the Company entered into a non-cancelable real property lease agreement for approximately 3096 square feet of office, research, and production space in Burbank, California. The Company took possession of the space in February 2020. The lease term is for 60 months with an option to extend the term for an additional five years thereafter. The lease has with the annual fixed rental payments escalating from $7,500 to $8,441 during the original term. The aggregate total fixed rent is approximately $478,000 and will result in the recognition of an operating lease right-of-use asset of approximately $430,000 and corresponding lease liabilities of approximately the same amount. The Company also paid a security deposit of $16,883.
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, have adversely affected workforces, customers, economies, and financial markets globally, likely leading to an economic downturn. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this note,time.
In March 2020, the Company issued 846,000approximately 241,000 shares of itscommon stock with a fair value of approximately $28,000 to employees for services.
| F-34 |
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The Registrant estimates that expenses in connection with the distribution described in this Registration Statement will be as shown below. All expenses incurred with respect to the distribution will be paid by the Company.
| Expense | ||||
| Legal fees and expenses: | $ | 15,000 | ||
| Accounting fees and expenses: | $ | 7,500 | ||
| Total: | $ | 22,500 | ||
Item 14. Indemnification of Directors and Officers
See the Bylaws of the Company as shown on Exhibit 3.2 herein.
Agreements
We intend to modify the compensation agreements with selected officers and directors, pursuant to which we will agree, to the maximum extent permitted by law, to defend, indemnify and hold harmless the officers and directors against any costs, losses, claims, suits, proceedings, damages or liabilities to which our officers and directors become subject to which arise out of or are based upon or relate to our officers and directors engagement by the Company.
Recent Sales of Unregistered Securities
During the year ended December 31, 2019, we have issued the following securities, which were not registered under the Securities Act, some ofwhich were not previously disclosed in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Common stock issued for cash
During the year ended December 31, 2019 and the nine-month period ended December 31, 2018, the Company completed private placements of shares at prices ranging from $.10 to $0.50 per share. A total of $2,926,375 was received, including $2,090,375 in 2019 for shares issued in 2019, $530,000 in 2019 for shares subscribed, and $306,000 in 2018 for shares issued in 2019.
The Company agreed to issue a total 12,011,269 shares in the private placements, of which 6,942,750 shares were issued through December 31, 2019, and 5,068,519 shares are included in shares to be issued on the accompanying financial statements.
| II-1 |
On May 20, 2019, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to a consultant for services (see Note 12). 1,000,000 shares vested immediately, and the balance of 7,000,000 shares will vest 625,000 shares per quarter over 2.8 years. In the event the consultants service with the Company terminates, any or all of the shares of common stock held by such recipient that have not vested as of the date of termination are forfeited to the Company in accordance with such restricted grant agreement.
The total fair value of the 8,000,000 shares was determined to be $4,000,000 based on the price per shares of a contemporaneous private placement of the Company’s common stock on the date granted. The Company accounts for the share awards using a graded vesting attribution method over the requisite service period, as if each tranche were a separate award. During the year ended December 31, 2019, total share-based expense recognized related to vested restricted shares totaled $2,317,868. At December 31, 2019, there was $1,628,132 of unvested compensation related to these awards that will be amortized over a remaining vesting period of 2.3 years.
During the six months ended June 30, 2020, the Company issued 388,889 shares of common stock in a private placement of shares at a price of $0.27 per share for total proceeds of $105.
During the six months ended June 30, 2019, the Company received $625 for subscriptions to purchase 1,250,750 shares of common stock in a private placement of shares at a price of $0.50 per share.
Stock Issued for Services/Compensation:
Common Stock:
During the year ended December 31, 2019, the Company issued 212,505 shares of common stock to a consultant for services rendered. The shares were valued at $106,253 based on the price per share of a contemporaneous private placement of the Company’s common stock on the date granted and included in selling, general, and administrative expense on the accompanying financial statements.
During the six months ended June 30, 2020, the Company issued 451,198 shares of common stock to employees and officers of the Company. The fair value of the shares was determined to be $51 based on the closing price of the Company’s common stock on the dates shares were granted, and recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020.
During the six months ended June 30, 2020, the Company issued 1,250,117 shares of common stock to consultants and convertible note holderholders for services. The fair value of the shares was determined to be $187 based on the closing price of the Company’s common stock on the dates shares were granted, and recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020.
During the six months ended June 30, 2020, the Company issued 705,000 shares of common stock to convertible note holders for loan fees. The fair value of the shares was determined to be $89 based on the closing price of the Company’s common stock on the dates shares were granted, and was recorded as debt discount to be amortized over the term of the related convertible notes payable. During the six months ended June 30, 2020, amortization of $53 was recoded.
Preferred Stock:
On April 14, 2020, The Company issued 2,500,000 shares of a commitment fee.newly created class of preferred stock, Series A Preferred Stock to the Company’s Chief Executive Officer in a private placement transaction. The fair value of the Series A Preferred shares was determined to be $465 and was recorded as stock compensation in selling, general and administrative expense during the six months ended June 30, 2020. The Company determined the fair value of the Series A Preferred shares by obtaining an independent valuation of the fair value of the Company’s Series A Preferred shares.
Quanta, Inc.On May 20, 2019, the Company agreed to issue 8,000,000 shares of the Company’s common stock with vesting terms to a consultant for services. 1,000,000 shares vested immediately, and the balance of 7,000,000 shares will vest 625,000 shares per quarter over 2.8 years. In the event the consultants service with the Company terminates, any or all of the shares of common stock held by such recipient that have not vested as of the date of termination are forfeited to the Company in accordance with such restricted grant agreement.
5,000,000 SharesThe total fair value of Common Stockthe 8,000,000 shares was determined to be $4,000 based on the price per shares of a contemporaneous private placement of the Company’s common stock on the date granted. The Company accounts for the share awards using a graded vesting attribution method over the requisite service period, as if each tranche were a separate award. During the six months ended June 30, 2020, total share-based expense recognized related to vested restricted shares totaled $762. At June 30, 2020, there was $1,104 of unvested compensation related to these awards that will be amortized over a remaining vesting period of 1.7 years.
The issuances of the above securities were made in reliance upon exemptions from registration available under Section 4(a)(2) and Rule 144 of the Securities Act, among others, as transactions not involving a public offering. This exemption was claimed on the basis that these transactions did not involve any public offering and the purchasers in each offering were accredited or sophisticated and had sufficient access to the kind of information registration would provide. In each case, appropriate investment representations were obtained and certificates representing the securities were issued with restrictive legends.
Prospectus
__________, 2019
| II-2 |
PART IIIII – EXHIBITS
INFORMATION NOT REQUIRED IN PROSPECTUSEXHIBIT INDEX
Item 13.Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses paid or payable by us in connection with the issuance and distribution of the securities being registered. All amounts shown are estimates, except for the SEC registration fee and the FINRA filing fee.
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* To be provided by amendment.
Item 14.Indemnification of Directors and Officers
Under our bylaws, every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that he is or was our director or officer, or is or was serving at our request as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all expenses, liability, and loss (including attorneys’ fees judgments, fines, and amounts paid or to be paid in settlement) reasonably incurred or suffered by him or her in connection therewith. Such right of indemnification shall be a contract right, which may be enforced in any manner desired by such person. The expenses of officers and directors incurred in defending a civil or criminal action, suit, or proceeding must be paid by us as they are incurred and in advance of the final disposition of the action, suit, or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by us. Such right of indemnification shall not be exclusive of any other right which such directors, officers, or representatives may have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw, agreement, vote of shareholders, provision of law, or otherwise.
Without limiting the application of the foregoing, our board of directors may adopt bylaws from time to time with respect to indemnification, to provide at all times the fullest indemnification permitted by the laws of the State of Nevada, and may cause us to purchase and maintain insurance on behalf of any person who is or was our director or officer, or is or was serving at our request as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not we would have the power to indemnify such person. The indemnification provided shall continue as to a person who has ceased to be a director, officer, employee, or agent, and shall inure to the benefit of the heirs, executors and administrators of such person.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
We have not entered into any agreements with our directors and executive officers that require us to indemnify these persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that the person is or was our director or officer or any of our affiliated enterprises. We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act, or otherwise.
Item 15.Recent Sales of Unregistered Securities
The following information represents securities sold by the company since the June 6, 2018 merger and reorganization, which were not registered under the Securities Act. Included are sales of reacquired securities, as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities.
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Item 16.Exhibits and Financial Statement Schedules
(a) Exhibits
The following documents are filed (or incorporated by reference) as exhibits to this registration statement.Registration Statement on Form S-1.
| III-1 |
* Filed herewith.
| III-2 |
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: | ||
| To include any prospectus required by Section 10(a) (3) of | |||
| ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; | ||
| iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. | ||
| (2) | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; | ||
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | ||
# Denotes a management contract or compensatory plan or arrangement.
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
All schedules have been omitted because the information required to be set forth in the schedules is either not applicable or is shown in the financial statements or notes thereto.
| (4) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. | ||
| (5) | For determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: | ||
| i. | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (Sec. 230-424); | ||
| ii. | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the registrant; | ||
| iii. | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. | ||
| (6) | That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | ||
| (7) | That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof | ||
| (8) | Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. | ||
Item 17.Undertakings
The undersigned registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(A) Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the registration statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended (“Securities Exchange Act of 1934”) (15 U.S.C. 78m or 78o(d)) that are incorporated by reference in the registration statement; and
(B) Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended (“Securities Act”) each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining any liability under the Securities Act, each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability under the Securities Act to any purchaser:
(i) If the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(6) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrantRegistrant certifies that it has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Burbank, State of California, on the 15th day of January,September 2, 2020.
| QUANTA, INC. | ||
| By: | /s/ Eric Rice | |
| Eric Rice | ||
| Chairman, Chief Executive Officer and Chief Financial Officer | ||
Each person whose signature appears below constitutes and appoints Eric Rice and Jeffrey Doiron, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant toIn accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | ||
| /s/ Eric Rice | Chairman, Chief Executive Officer and | |||
| Eric Rice | Chief Financial Officer (principal executive officer and principal financial officer) | |||
| /s/ Jeffrey Doiron | President and Chief Operations Officer | |||
| Jeffrey Doiron |
| III-5 |