Forward-Looking Statements
This Annual Report contains forward-looking statements. These statements relate
to future events or the future financial performance of Parallax Health
Sciences, Inc. ("Parallax" or the "Company"), and include statements made by the
Company regarding pharmaceutical insurance reimbursements, state licenses,
product development and obtaining FDA clearances. In some cases, forward-looking
statements can be identified by terminology such as "may", "should", "expects",
"plans", "anticipates", "believes", "estimates", "predicts", "potential" or
"continue" or negative of these terms or other comparable terminology. These
statements are only predictions and involve known and unknown risks,
uncertainties and other factors" that may cause the Company's or its industry's
actual results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Except as required by applicable
law, including the securities laws of the United States, the Company does not
intend to update any of the forward-looking statements to conform these
statements to actual results.
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Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results.
Unless otherwise specified, all dollar amounts are expressed in United States
Dollars and are prepared in accordance with United States Generally Accepted
Accounting Principles. All references to "Common Stock" refer to the common
shares; and "Preferred Stock" refer to the preferred shares; of the Company's
capital stock.
You should read the following discussion of the Company's results of operations
and financial condition with the consolidated financial statements and related
notes included elsewhere in this Annual Report. The Company intends for this
discussion to provide you with information that will assist you in understanding
the Company's financial statements, the changes in certain key items in those
financial statements from year to year, and the primary factors that accounted
for those changes.
NOTE: The following sections of this report and any further reference made to
"the Company", "we", "us", "our" and "Parallax " shall mean Parallax Health
Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc.,
Parallax Health Management, Inc., Parallax Behavioral Health, Inc., and Parallax
Communications, Inc., unless otherwise indicated. The Company's former
wholly-owned subsidiary, RoxSan Pharmacy, Inc., was derecognized effective May
14, 2018. (See "RoxSan Pharmacy" and "Legal Proceedings" sections contained
within this Annual Report.)
Corporate History
The Company was incorporated in the State of Nevada on July 6, 2005. On
November 1, 2012, we, formerly Endeavor Power Corporation, and its wholly-owned
subsidiary Endeavor Holdings, Inc., a Nevada corporation, entered into an
Agreement and Plan of Merger with Parallax Diagnostics, Inc., a Nevada
corporation ("Parallax Diagnostics"), whereby Parallax Diagnostics became a
wholly-owned subsidiary. On January 9, 2014, the Company changed its name to
Parallax Health Sciences, Inc. ("Parallax"). (OTCQB.PRLX)
The Parallax business was founded on the Company's point of care diagnostic
business, Parallax Diagnostics, Inc., in 2010, when the Company acquired the
right, title, and interest, through an exclusive license with Montecito
BioSciences, Ltd. ("MBS"), to develop, manufacture and commercialize the Target
System, an immunoassay point-of-care diagnostic testing system. Concurrently,
through an Assignment Agreement with MBS, the Company acquired the right, title,
and interest to twenty-five (25) FDA-cleared tests in the area of infectious
disease, medical conditions, drugs of abuse, cardiac and pregnancy, that are
designed to be utilized with the Target System.
In August 2015, the Company acquired RoxSan Pharmacy, Inc. ("RoxSan" or the
"Pharmacy"). In December 2017, the Pharmacy ceased operations, and in May 2018,
RoxSan filed a Chapter 7 bankruptcy petition. See " RoxSan Dissolution "
below.
On August 31, 2016, the Company entered into an agreement with Qolpom®, Inc., an
Arizona corporation in the remote healthcare monitoring and telehealth business
("Qolpom®") and its shareholders (the "Seller") to purchase 100% of the issued
and outstanding shares of Qolpom®'s common stock and its assets, inventory and
intellectual property. The agreement was fully executed on September 20, 2016,
and the transaction was completed. The consideration for the acquisition
resulted in a fair market value of $290,000, and goodwill of $785,060. In
addition, the agreement included contingent royalties and revenue sharing for
future revenues generated from the Qolpom® technology. The Qolpom® name was
later changed to Parallax Health Management, Inc. ("PHM").
On March 22, 2017, the Company formed Parallax Behavioral Health, Inc. ("PBH"),
a Delaware corporation and wholly-owned subsidiary, and on April 26, 2017,
completed the asset acquisition of 100% of certain intellectual property
("Intellectual Property") from ProEventa Inc., a Virginia Corporation
("ProEventa"), in accordance with the Intellectual Property Purchase Agreement
between the Company, PBH and ProEventa (the "ProEventa Agreement"). ProEventa
has an expertise in the development of behavioral health technologies, and is
the wholly-owned subsidiary of Grafton Integrated Health Network, Inc., a
non-profit Virginia corporation ("Grafton"). Pursuant to the ProEventa
Agreement, the initial consideration for the Intellectual Property was paid to
ProEventa in the form of a stock purchase agreement to purchase 2,500,000 shares
of the Company's Common Stock for $2,500, resulting in a net cost for the
Intellectual Property of $622,500. In addition, the Agreement included
conditional contingent royalties and revenue sharing for future revenues
generated from the Intellectual Property.
On September 20, 2018, the Company formed Parallax Communications, Inc, a
Delaware corporation and wholly-owned subsidiary of Parallax Health Management,
Inc.
Effective December 24, 2018, pursuant to a majority shareholder consent, the
Company increased its authorized Common Stock from 250,000,000 shares to
500,000,000 shares, with a par value of $0.001 per share. On January 28, 2019,
the amended articles of incorporation were filed with the state of Nevada.
On August 28, 2019, the Company entered into a Purchase Agreement (the "Purchase
Agreement") with Global Career Networks Inc., a Delaware corporation, ("GCN") to
acquire a 19% interest in GCN. The Purchase Agreement was fully executed on
September 6, 2019, with an effective date of October 15, 2019 (the "Effective
Date"). Pursuant to the Purchase Agreement, in exchange for 6,666,667 shares of
the Company's restricted Common Stock, valued at $1,000,000, the Company
acquired 760 shares of GCN common stock. In addition, in the event the market
value of Parallax Common Stock one (1) year from Effective Date, is greater than
$0.075 per share but less than $0.30 per share, the Company is required to issue
GCN up to an additional 20,000,000 shares of restricted Common Stock, for an
aggregate value of the Company's Common Stock held by GCN of $2,000,000. At
December 31, 2019, the Company recorded an impairment on the investment of
$1,000,000.
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Recent Developments
In April 2019, the Company entered into an employment agreement with Mr. David
Appell to serve as the Company's Chief Operating Officer. The agreement
commenced May 15, 2019, is for an initial term of two (2) years, and provides a
base compensation of $250,000 year one, and $275,000 in year two, as well as
various performance bonuses, and customary employee benefits. In addition, the
agreement includes a grant to purchase 3,000,000 restricted common shares,
valued at $201,300, for cash in the amount of $3,000, of which 25% vest
immediately, and the remainder vest when certain earnings goals are met; as well
as options granted to purchase 3,000,000 shares of the Company's Common Stock at
an exercise price of $0.25 per share. The options, valued at $195,600 using the
Black-Scholes method, are for a period of five (5) years, and vest annually over
the term of the agreement, with an initial vesting of 25%. The assumptions used
in valuing the options were: expected term 4.75 years, expected volatility 2.21,
risk free interest rate 2.15%, and dividend yield 0%. On February 2, 2020, Mr.
Appell resigned as the Company's Chief Operating Officer. His resignation was
not the result of a disagreement with the Company on any matters relating to the
Company's operations, policies, or practices. Concurrent with his resignation
as COO, Mr. Appell will serve as Managing Director of the Company's wholly-owned
subsidiary, Parallax Communications, Inc. ("PCOM"). As Managing Director, Mr.
Appell will provide business advisory and strategic planning advice to the
Company with PCOM. In exchange for these services, Mr. Appell will be paid
$2,000 per month plus medical benefits.
In May 2019, the Company established a second location at 28 West 36th Street,
8th Floor, New York, NY 10018.
In June 2019, the Company filed a Registration Statement on form S-1 for the
registration, as amended, of 32,583,436 shares of Common Stock, and, after
resolving the comments and questions from the SEC in relation to the filing, the
Company received an effective date from the SEC of December 20, 2019.
In June 2019, pursuant to a resolution of the board of directors, the Company
adopted the 2019 Stock Incentive Plan (the "2019 Plan"), wherein forty million
(40,000,000) shares of the Company's restricted Common Stock were reserved for
issuance. The 2019 Plan was intended to assist the Company in securing and
retaining key employees, directors and consultants by allowing them to
participate in the Company's ownership and growth through the grant of incentive
and non-qualified options. The 2019 Plan is currently administered by the
Company's Board. Subject to the provisions of the plan, the board will determine
who shall receive options, the number of shares of Common Stock that may be
purchased under the options. On June 17, 2019, the Company filed a Registration
Statement on form S-8 for the registration of shares reserved under the 2019
Plan.
Effective February 12, 2020 (the "Effective Date"), the Company and Shahla
Melamed and Hootan Melamed (collectively the "Melameds") reached agreeable
settlement terms in connection with the pending legal actions between the
parties. The Settlement is by and between Parallax Health Sciences, Inc.,
RoxSan Pharmacy, Inc., Michael Redmond, Edward Withrow III, Huntington Chase
Financial Group, LLC, Calli Bucci and Dave Engert (collectively, "Parallax"),
and the "Melameds, and resolves all pending lawsuits between the parties in
connection with the acquisition of RoxSan Pharmacy. In consideration of the
resolution of all existing and potential claims, including the cancellation of
the Note in the principal sum of $20,500,000, and accrued interest of
approximately $4,500,000, and without further action or litigation and without
admission of liability by either party, the Settlement terms include the
following:
?A payment of $4,000,000 (the "Settlement Sum") to the Melameds, to be paid as
follows:
?$1,250,000 within 90 days of the Effective Date;
?$1,250,000 within one (1) year of the Effective Date;
?$1,500,000 within two (2) years of the Effective Date.
?The issuance of ten (10) million shares of the Company's Common Stock to an
entity owned by Shahla Melamed.
In addition, in the event forty percent (40%) or more of the Company and/or its
subsidiaries (including by way of merger) is sold within two (2) years of the
Effective Date, the Company shall pay the Melameds, within two (2) weeks of
receipt of the proceeds from such sale (the "Sale Proceeds"), any outstanding
unpaid Settlement Sum plus an additional 10% of the Sale Proceeds received, up
to a total of an additional $3,000,000 over and above the Settlement Sum.
In the event the Company fails to cure a breach of timely payment of any portion
of the Settlement Sum within thirty (30) days of a notice of default, a
Stipulated Judgement may be filed by Melamed in the sum of $20,000,000, less any
Settlement Sum amounts previously paid by the Company.
On April 7, 2020, the Company executed an Executive Agreement (the "Executive
Agreement") for the appointment of Dr. David L. Stark as the Company's
President, with an effective date of March 1, 2020. The Executive Agreement
replaces any other agreement between Dr. Stark and the Company or any of its
subsidiaries, and provides a base compensation of $225,000 in year one, $250,000
in year two and $275,000 in year three, commencing after the initial term
estimated at approximately six (6) months, during which time Dr. Stark will
devote fifty percent (50%) of his time at a compensation proportionate to the
year one base compensation. The Executive Agreement also provides for various
performance bonuses, and customary employee benefits, as well as (i) a grant to
purchase 2,000,000 restricted common shares at $0.001 per share, of which 25%
vest immediately, and the remainder vest upon the Company's achievement of
certain earnings goals; and (ii) stock options to purchase 3,000,000 shares of
the Company's Common Stock at an exercise price of $0.25 per share for a period
of five (5) years, of which 25% vest immediately, and the remainder vest
quarterly in equal amounts over the term of the Agreement.
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COVID-19 Pandemic
In December 2019, an outbreak of the COVID-19 virus was reported in Wuhan,
China. On March 11, 2020, the World Health Organization ("WHO") declared the
COVID-19 virus a global pandemic, and on March 13, 2020, President Donald J.
Trump declared the virus a national emergency in the United States. As of the
date of the filing of this Annual Report, the WHO reports over 4 million
confirmed COVID-19 cases and over 275,000 deaths worldwide, including over
75,000 in the U.S. This highly contagious disease has spread to most of the
countries in the world and throughout the United States, creating a serious
impact on customers, workforces and suppliers, disrupting economies and
financial markets, and potentially leading to a world-wide economic downturn. It
has caused a disruption of the normal operations of many businesses, including
the temporary closure or scale-back of business operations and/or the imposition
of either quarantine or remote work or meeting requirements for employees,
either by government order or on a voluntary basis.
The COVID-19 pandemic may adversely affect the Company's customers' operations,
its employees and its employee productivity. It may also impact the ability of
the Company's subcontractors, partners, and suppliers to operate and fulfill
their contractual obligations, and result in an increase in costs, delays or
disruptions in performance. These effects, and the direct effect of the virus
and the disruption on the Company's employees and operations, may negatively
impact both the Company's ability to meet customer demand and its revenue and
profit margins. The Company's employees, in many cases, are working remotely and
using various technologies to perform their functions. The Company might
experience delays or changes in customer demand, particularly if customer
funding priorities change. Further, in reaction to the spread of COVID-19 in the
United States, many businesses have instituted social distancing policies,
including the closure of offices and worksites and deferring planned business
activity. Additionally, the disruption and volatility in the global and domestic
capital markets may increase the cost of capital and limit the Company's ability
to access capital. Both the health and economic aspects of the COVID-19 virus
are highly fluid and the future course of each is uncertain. For these reasons
and other reasons that may come to light if the coronavirus pandemic and
associated protective or preventative measures expand, the Company may
experience a material adverse effect on its business operations, revenues and
financial condition; however, its ultimate impact is highly uncertain and
subject to change.
In response to the global need for diagnostics and personal protective gear and
equipment, the Company, through its wholly-owned subsidiary, Parallax
Diagnostics, Inc., has registered with the Food and Drug Administration (FDA),
and has established strategic relationships with wholesale suppliers of various
FDA-approved diagnostic tests and Personal Protective Equipment ("PPE") for
distribution to US medical practices, hospitals, nursing operations, emergency
centers, and nursing homes. Included in the products available are COVID-19
diagnostic test kits, PPE such as protective masks, sterile gowns, and eye
goggles, as well as ventilators and other medical grade equipment, The Company
also intends on adapting its own proprietary diagnostics test and SPARKS Mobile™
testing device to be able to identify markers to the coronavirus. Parallax is
profoundly gratified by its ability to help those in need during this crisis.
Trading Suspension
On April 13, 2020, the Company received an Order of Suspension of Trading dated
April 10, 2020 (the "Order") from the United States Securities and Exchange
Commission ("SEC"). The temporary suspension period is from 9:30 a.m. EDT on
April 13, 2020, through 11:59 p.m. EDT on April 24, 2020. The Order refers to
questions raised regarding the accuracy of the Company's recent press releases
in relation to the Company's development of a rapid screening test for COVID-19,
and the Company's access to "large quantities of COVID-19 diagnostics testing
kits and personal protective equipment."
In an effort to protect the interests of shareholders, the SEC has issued
similar orders and suspensions recently to several registrants, with concerns
over the validity of claims made in connection with the availability of COVID-19
tests and supplies.
The Company, along with its counsel, is cooperating fully with the SEC to
substantiate the Company's recent public announcements and business endeavors,
and is addressing any questions and/or concerns raised regarding the accuracy of
the assertions made in the Company's press releases.
Pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the
trading suspension, no quotation may be entered unless and until the Company has
strictly complied with all provisions of the rule, including the filing of a new
Form 15c2-11 with FINRA.
The Company is required to file its Annual Report with the SEC for the purposes
of satisfying its financial reporting requirements. However, in addition to the
Company's reporting obligations, the Company must have a FINRA Member Market
Maker file a 15c2-11 with FINRA in order for the Company's shares to resume
trading on the OTCQB market. These actions do not impact or otherwise affect the
Company's results of operations or disclosures as set out in this Annual Report.
The Company believes that this Annual Report fully complies with the
requirements of the Securities Exchange Act of 1934, as amended and, in
accordance with generally accepted accounting principles, that it fairly
presents, in all material respects, the financial condition and results of
operations of the Company as at the relevant dates.
As of the date of filing of this Annual Report, the trading suspension period
expired, and the Company is in the process compiling the information required
for its 15c2-11 submission by a FINRA Member Market Maker. The Company
anticipates the filing of a new Form 15c2-11 within the next 30 days. If any
party has any questions as to whether the Company has complied with the rule,
they should contact the staff in the Division of Trading and Markets, Office of
Interpretation and Guidance, at (202) 551-5777.
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These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for its common stock. Many brokers may
be unwilling to engage in transactions in its common stock because of the added
disclosure requirements, thereby making it more difficult for stockholders to
dispose of their shares.
Changes in Management
On April 6, 2017, the Company's board of directors (the "Board") elected Mr. J.
Michael Redmond as Chairman, to serve until the next annual meeting of the
shareholders, in accordance with the Company's bylaws, and/or until his
successor is duly appointed, or a resignation is duly tendered.
Effective July 6, 2017, the Board caused the departure of Mr. Redmond from his
position as President and Chief Executive Officer of Parallax and RoxSan
Pharmacy, Inc., and concurrently Mr. Redmond was removed from all board member
seats.
Effective July 7, 2017, pursuant to a unanimous Board resolution, Mr. Paul R.
Arena was appointed as the Company's President and Chief Executive Officer, and
the Board caused Mr. Arena's election to the Board and the board of directors of
the Company's wholly-owned subsidiaries, Parallax Health Management, Inc. and
Parallax Behavioral Health, Inc.
On July 26, 2017, Dr. Jorn Gorlach resigned as a member of the Board. This
resignation did not involve any disagreement with the Company.
On June 4, 2018, Mr. Anand Kumar resigned as a member of the Board. This
resignation did not involve any disagreement with the Company. Mr. Nathaniel T.
Bradley, currently serving as Chief Technology Officer, succeeded him; and
agreed to serve as a member of the Board until the next annual meeting of the
shareholders and/or until his successor is duly appointed.
On May 15, 2019, Mr. David Appell joined the Company as its Chief Operating
Officer. On February 2, 2020, Mr. Appell resigned his position. His
resignation was not the result of a disagreement with the Company on any matters
relating to the Company's operations, policies or practices. Concurrent with
his resignation as COO, Mr. Appell will serve as Managing Director of the
Company's wholly-owned subsidiary, Parallax Communications, Inc. ("PCOM"). As
Managing Director, Mr. Appell will provide business advisory and strategic
planning advice to the Company with PCOM. In exchange for these services, Mr.
Appell will be paid $2,000 per month plus medical benefits.
On March 1, 2020, Dr. David L. Stark was appointed as the Company's President.
In connection with the appointment, Mr. Paul R. Arena, who has held the
position of President since July 2017, remains the Company's Chief Executive
Officer and Chairman of the Board of Directors, but resigned the position of
President to afford Dr. Stark's appointment.
Dispute with Former Owner of RoxSan
On August 13, 2015, the Company completed the acquisition of RoxSan Pharmacy,
Inc. ("RoxSan" or the "Pharmacy"). Shortly thereafter, the Company's management
and the former owner ("Former Owner" or "Melamed") clashed over control of the
RoxSan Pharmacy business operations and bank accounts.
In October 2015, shortly following the Company's acquisition of RoxSan, Melamed
initiated two (2) legal actions against the Company in the Superior Court of the
State of California, County of Los Angeles, West District, Shahla Melamed v.
Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125702. In the
matter, action No. SC 124873, Melamed sought rescission of the August 13, 2015,
Purchase Agreement. In the Matter, action No. SC125702, Melamed alleges that the
Company is in default under the terms of the Purchase Agreement and Secured
Note, and the Company's termination of Melamed's employment agreement.
The Company also initiated legal action against Melamed and filed a complaint in
October 2015, action number SC 124898, in the Superior Court of the State of
California, County of Los Angeles, West District, Parallax Health Sciences,
Inc., et al. v. Shahla Melamed, et al. The complaint in that action alleges
that Melamed breached several obligations under the Purchase Agreement, and the
Company sought to reduce the Secured Note due to undisclosed material changes in
the business.
Settlement Reached:
In January 2019, Melamed requested mediation, seeking settlement of the pending
litigation with the Company, including that which was initiated against the
Company by her son, Hootan Melamed (Shahla and Hootan, collectively, the
"Melameds"). Through mediation, the Company and the Melameds reached agreeable
settlement terms, and on February 19, 2020, the Company received a
counter-signed Settlement and Release Agreement (the "Settlement"). Effective
February 12, 2020 (the "Effective Date"), the Settlement is by and between
Parallax Health Sciences, Inc., RoxSan Pharmacy, Inc., Michael Redmond, Edward
Withrow III, Huntington Chase Financial Group, LLC, Calli Bucci and Dave Engert
(collectively, "Parallax"), and the Melameds, and resolves all pending lawsuits
between the parties in connection with the acquisition of RoxSan Pharmacy.
In consideration of the resolution of all existing and potential claims,
including the cancellation of the Note in the principal sum of $20,500,000, and
accrued interest of approximately $4,500,000, and without further action or
litigation and without admission of liability by either party, the Settlement
terms include the following:
?A payment of $4,000,000 (the "Settlement Sum") to the Melameds, to be paid as
follows:
?$1,250,000 within 90 days of the Effective Date;
?$1,250,000 within one (1) year of the Effective Date;
?$1,500,000 within two (2) years of the Effective Date.
?The issuance of ten (10) million shares of the Company's Common Stock to an
entity owned by Shahla Melamed.
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In addition, in the event forty percent (40%) or more of the Company and/or its
subsidiaries (including by way of merger) is sold within two (2) years of the
Effective Date, the Company shall pay the Melameds, within two (2) weeks of
receipt of the proceeds from such sale (the "Sale Proceeds"), any outstanding
unpaid Settlement Sum plus an additional 10% of the Sale Proceeds received, up
to a total of an additional $3,000,000 over and above the Settlement Sum.
In the event the Company fails to cure a breach of timely payment of any portion
of the Settlement Sum within thirty (30) days of a notice of default, a
Stipulated Judgement may be filed by Melamed in the sum of $20,000,000, less any
Settlement Sum amounts previously paid by the Company.
RoxSan Dissolution
On May 14, 2018, pursuant to unanimous resolutions of the boards of directors of
RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter
7 petition in the United States Bankruptcy Court for the Central District of
California (the "Court"). Mr. Timothy Yoo was appointed trustee ("Trustee") on
May 15, 2018. In connection with this filing, RoxSan seeks to discharge
approximately $5 million of liabilities owed to various parties, and
intercompany loans in excess of $1 million owed to Parallax. The Chapter 7
bankruptcy proceeding by RoxSan Pharmacy, Inc. was fully discharged and the case
was closed on March 13, 2019, in U.S. Bankruptcy Court, Central District of
California.
Due to, among other things, the reduction in RoxSan's cash flows during 2016 and
2017, RoxSan became delinquent in its payroll tax depository obligations,
resulting in a liability owed to federal and state taxing agencies in the
aggregate of $1,148,811, which includes $601,148 in taxes withheld from
employees ("Trust Fund Taxes"), employer taxes of $183,172, and penalties and
interest of $364,491 through December 31, 2018. The liability was included as
part of the Chapter 7 bankruptcy petition, and certain portions of the liability
may be discharged. However, in accordance with California bankruptcy laws,
federal and state Trust Fund Taxes are not dischargeable. The Company has
retained a tax resolution specialist and is in communications with the taxing
agencies in order to resolve RoxSan's liability.
As a result of the loss of financial control of RoxSan, the Company derecognized
the subsidiary as of September 30, 2018. The derecognition resulted in a gain of
$4,478,268. The Company also extinguished $22,778,281 in debt and accrued
interest related to the acquisition of RoxSan.
Disputes with Former Executives
On March 9, 2017, Mr. Dave Engert filed a lawsuit in Arizona and then on or
about May 5, 2017, Mr. Engert, changed the venue and filed suit against the
Company and RoxSan Pharmacy, Inc. in the United States District Court, Central
District of California for an amount exceeding $75,000. The Company filed an
answer and counterclaims against Mr. Engert for an amount exceeding $100,000.
The counterclaims included possible fraud and negligence committed by Mr.
Engert and Mr. J. Michael Redmond, former successor Chairman of Mr. Engert,
director, President and Chief Executive Officer of the Company and former
President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy,
Inc. On October 8, 2018, a settlement was reached between Mr. Engert and the
Company (the "Engert Settlement"). The Engert Settlement includes, among other
things, a cash payment to Mr. Engert in the amount of $139,000, and the
cancellation of all of Mr. Engert's equity holdings in the Company. The Engert
Settlement resulted in a net loss to the Company of $33,272. On April 10, 2019,
a stipulation for dismissal was filed, and the matter has been fully resolved.
On March 28, 2018, Mr. J. Michael Redmond filed a lawsuit against the Company
and RoxSan Pharmacy, Inc. in the United States District Court, Central District
of California for an amount exceeding $75,000. The Company intends to
vigorously defend against this action. There are counterclaims that include
possible fraud and negligence committed by Mr. Redmond, former President, Chief
Executive Officer, Chairman and director of the Company and of RoxSan Pharmacy,
Inc. An Arbitration is still pending.
Disputes with Lenders
On March 18, 2020, the Company initiated legal action and filed a complaint
against EMA Financial, LLC ("EMA") a third-party lender, in the US District
Court, Southern District of New York, case index number 20-cv-2375, citing
fraud, unjust enrichment, and securities law violations, among other things. On
April 27, 2020, EMA filed an answer substantially denying the Company's claims,
and filed counterclaims against the Company, including damages in excess of $2
million. The matter is currently pending.
There are currently two (2) legal matters pending. For additional information
on these proceedings, see " ITEM 3. LEGAL PROCEEDINGS " section contained
within this Annual Report.
Extinguishment of Debt
As a result of the loss of financial control and derecognition of the
subsidiary, RoxSan Pharmacy, Inc., the Company extinguished $22,778,281 in debt
and accrued interest related to the acquisition of RoxSan.
In addition, management determined that there is no future sacrifice of economic
benefit arising from certain debt previously recognized by the Company to
transfer assets or provide services in the future. As a result, certain notes
and loans payable in the amount of $95,975, accrued interest in the amount of
$56,892, and accounts payable in the amount of $284,714, were extinguished, and
a loss of $357,853 was recognized from a debt exchange transaction.
In 2019, the Company recognized losses in the amount of $1,028,766 resulting
from the exchange and conversion of certain debt instruments. In addition, a
gain of $101,367 was recognized in connection with the cancellation of certain
vendor debt.
The total gain (loss) on extinguishment of debt for the years ended December 31,
2019 and 2018, respectively was ($927,399) and $22,858,009.
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Description of Business
Parallax Health Sciences, Inc. is a healthcare company focused on developing
products and services that can provide remote communication, diagnosis,
treatment, and monitoring of patients on a proprietary platform. Through its
innovative technologies, both patented and patent-pending, the Company's
principal mission is to deliver solutions that empower patients, reduce costs,
and improve the quality of care.
The Company has developed, acquired and licensed multiple platforms, proprietary
and exclusive, that provide services and products across the healthcare
continuum. These platforms are designed to allow for multiple points of
reciprocal consideration through innovative business models that provide
patients with increased quality of services and products at reduced cost of time
and money. They also provide healthcare providers with increased access to
their patients, the ability to deliver better and more efficient service and
increase their income from the services they supply.
The Company believes that its products and services can provide solutions that
mitigate rising costs, reduce waste in spending and the amount of unnecessary
services, and increase the health and wellness of patients. The Company's
endeavors to change the healthcare industry are strengthened by providing
solutions to real problems facing healthcare stakeholders today. The Company's
products and services have been developed, and are continuing to be developed,
to address these issues now.
The Good Health Outcomes™ technology-enabled digital healthcare system is
structured with three separate divisions that can operate independently of one
another, or integrate services to meet the various needs of the Company's
clientele: Optimized Outcomes, Connected Health and Smart Data. Each of these
divisions target a separate vertical market that are synergistic, compliment,
and strengthen each other and the Company's value proposition as a whole.
?Optimized Outcomes
The Company's REBOOT™ technology, an acronym for "Reliable Evidence-Based
Outcome Optimization Technology," is at the heart of the Company's behavioral
technology provides reliable evidence-based outcome optimization through a
patented machine learning platform. REBOOT™ has been specifically designed to
improve health treatment outcomes through internet-based and mobile behavioral
technology systems that enable its users and user groups to more effectively
achieve goals within a prescribed timeline, with the potential to transform the
cost of treating and managing chronic illnesses such as pulmonary-COPD-asthma,
diabetes, and cardiovascular disease by effecting the modification of behavior
in patients being treated for these chronic diseases. The REBOOT™ technology,
developed and commercially tested for over 5 years at a cost exceeding
$4,000,000, provides reliable evidence-based outcome optimization through a
patented machine learning platform delivered through:
?A cloud-based software system, scalable for use from one patient to over 100
million;
?A mobile application, COMPASS™, that is interchangeable from one disease to
another, and one patient to another; and
?A stratification tool, WIZARD™, which was developed specifically to support
scalability of the REBOOT™/ COMPASS™ platform.
REBOOT™ can be sold as a product line into certain defined verticals,
independent of, or in combination with, the Company's connected healthcare and
data platforms, products and services. The REBOOT™ technology is currently
protected by patents issued in U.S., China, India, and Hong Kong and Macao.
?Connected Health
Fotodigm®
Fotodigm® is the Company's patent-pending, integrated, interoperable,
cloud-based platform, that allows for ease of use of the Company's proprietary
products and services and third-party Plug-n-Play interfaces. Designed with
increased accessibility and accelerated adoption in mind, Fotodigm® enables
patients and doctors to use a singular, integrated, interoperable platform for:
?Telehealth;
?Remote Patient Monitoring ("RPM");
?Point-of-Care ("POC") testing;
?Personal Protective Equipment ("PPE")
?Healthcare education services.
Fotodigm® provides simple, cost-effective, accessible and affordable products
and services that deliver industry breakthrough advantages. The Fotodigm®
construct was developed to provide payers, patients and providers with the
ability to choose and interchange their services, and be able to interchange
where the healthcare practitioner deems it the best course of action. The
Fotodigm® system is being developed to utilize a proprietary Machine Face
Recognition engine along with proven and existing Optical Character Recognition
("OCR") technology through third-party license. The technology has been beta
tested and utilized in the field by patients within remote patient monitoring
systems for the reduction of hospital readmissions.
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The Target System
The Target System is the Company's proprietary diagnostic immunoassay testing
platform and test cartridges designed for twenty-five specific FDA-cleared tests
in areas of infectious diseases, cardiac markers, drugs of abuse and various
other medical conditions. The Target System is comprised of:
?the VT-1000, an FDA-cleared, clinically and commercially proven bench-top
quantitative and qualitative immunoassay testing system specifically designed to
reside in the primary care physician office;
?the SPARKS Mobile™, a patented (US, China, India, Hong Kong, Macao, and India)
mobile testing system, currently in development, that incorporates the VT-1000
feature set with smartphone capabilities (to be completed before
commercialization, includes design and build, then certification);
?25 FDA-cleared rapid tests in the areas of:
?Cardiac;
?Infectious diseases;
?Medical conditions;
?Drugs of abuse;
?Pregnancy.
?the Target Antigen Detection System ("TADS"), a unique, patented single-use
device cartridge that allows for positive, controlled sample processing, a
system of specific immune reactions to detect individual disease conditions, and
a quick response diagnostic system that provides answers to specific screening
problems under ten minutes.
The Target System has the capacity to test hundreds of conditions, and is to be
offered to doctors for use at the doctors' offices and at patients' homes, or in
triage and ambulatory environments.
The Target System is not commercially available at this time, as the product is
currently in redesign and development, with a primary focus on developing the
SPARKS Mobile™, the patented handheld mobile version of the VT-1000 desktop
analyzer.
?Smart Data
Parallax's Intrinsic Code™ is the Company's unique Smart Data patient data
collection and repository system. Intrinsic Code™ not only identifies the
traditional data from patients, but is also designed to provide actionable
insights into the behavioral changes in patients, which has resulted in
increased adherence to their medical regimens and pharmacologic therapies.
These insights are extremely valuable to pharmaceutical companies, as
medication nonadherence creates false efficacy results of therapies in the
manner in which they were designed, tested and provided regulatory approval
upon. Payers are deeply concerned with the data on adherence to medical and
medication therapy regimens, as it directly affects their financial performance.
Management
Parallax is led by experienced veterans from the healthcare, technology, finance
and management fields. The Company's disciplined and organized approach is
balanced by its optimism for the future, and the opportunities present in the
current healthcare market. The Parallax team is grounded in a belief that
success in business is built on a combination of research, planning and
execution.
Operating Segments
The Company's current operations include the following business segments for
financial statement presentation: Remote Patient Monitoring (RPM), Behavioral
Health Services (BHS), and Corporate.
?Remote Patient Monitoring
Parallax has developed a distinctive technology platform that provides for the
complete remote patient care delivery system: the patent-pending Fotodigm®
platform, which utilizes proprietary software and technology to bridge clinical
behavioral science with technology and logistics for payers, providers and
clinical professionals across a variety of wellness and clinical devices,
including both fitness and clinical applications. Fotodigm® is a secure and
scalable platform for collecting, transmitting and analyzing biometric,
pharmaceutical, and health data to healthcare providers, primarily hospitals,
accredited nursing operations, and physicians using optical character
recognition, otherwise known as "Machine Face Recognition" technology that is
licensed from others.
The RPM segment generates revenues through fees charged for the license and
utilization of its proprietary system that provides software integrations of the
Fotodigm® platform. Additionally, the RPM segment generates incremental
revenues through the delivery of acute, post-acute and chronic health patient
management software systems that enable Parallax customers to bill for and
collect payments from patients and third-party payers for telemonitoring and
remote services that they deliver.
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?Behavioral Health Services
In April 2017, the Behavioral Health Services segment commenced with the
acquisition of the REBOOT™ and Intrinsic Code™ technologies. The BHS segment
will generate revenues primarily through licensing and subscription of software
and systems. As of December 31, 2019, the BHS segment had not yet begun full
operations, generating limited test market sales.
?Diagnostics/Corporate
The Diagnostics/Corporate Segment supports the costs and operating expenses
related to the continued development and exploitation of the Company's
proprietary Target System POS medical diagnostic and monitoring platform and
processes. In addition, the Diagnostics/Corporate Segment provides management
and administrative services to support the Company and consists of certain
aspects of the Company's executive management, corporate relations, legal,
compliance, human resources, and corporate information technology and finance
departments.
The following summary of the Company's financial condition and results of
operations should be read in conjunction with the Company's audited consolidated
financial statements for the years ended December 31, 2019 and 2018, which are
included herein. The financial information of Parallax Health Sciences, Inc.,
and its wholly-owned subsidiaries, Parallax Diagnostics, Inc., Parallax Health
Management, Inc., Parallax Behavioral Health, Inc., and Parallax Communications,
Inc. is provided below on a consolidated basis, unless otherwise indicated. All
significant intercompany accounts and transactions have been eliminated.
Balance Sheet
As of December 31, 2019, the Company had total assets of $1,359,896 compared
with total assets of $1,364,357 at December 31, 2018. The decrease in total
assets of $4,461 is attributable to an increase in cash of $6,183, an increase
in operating lease asset of $52,176, an increase in investments, net of
impairment, of $50,000, $120,620 of amortization related to intangible assets,
and an increase in deposits of $7,800.
As of December 31, 2019, the Company had total liabilities of $11,614,479
compared with total liabilities of $7,314,811 at December 31, 2018. The increase
in total liabilities of $4,299,668 is attributable to a decrease in accounts
payable and accrued expenses of $572,160, an increase in operating lease
liability of $52,176, an increase in short-term settlements payable of
$2,824,200, an increase in short-term derivative liability of $38,875, a
decrease in short-term convertible debentures of $724,903, a decrease in
short-term related party convertible debentures of $411,006, an increase in
short-term notes payable of $345,000, an increase in short-term note payable,
bank of $18,616, an increase in short-term related party notes payable of
$126,152, an increase in short-term convertible notes payable of $806,364, an
increase in related party payables of $103,760, an increase in long-term
settlements payable of $1,240,000, an increase in license fees payable of
$12,000, an increase in royalties payable of $15,165, a decrease in long-term
derivative liability of $34,000, a decrease in long-term debentures of $184,870,
a decrease in long-term notes payable, bank of $28,995, an increase in related
party note payable of $633,294, and an increase in convertible notes payable of
$40,000.
Results of Operations
The year ended December 31, 2019, compared to the year ended December 31, 2018
For the year ended
December 31,
December 31, 2019 2018
Revenue $ 128,600 $ 11,739
Cost of sales $ 16,827 $ 20,339
Gross profit (loss) $ 111,773 $ (8,600 )
General and administrative expenses $ 6,505,461 $ 6,626,063
Operating loss $ (6,393,688 ) $ (6,634,663 )
Gain on disposal of subsidiary $ -- $ 4,478,268Gain (loss) on extinguishment of debt $ (927,399 ) $ 22,858,009
Gain (loss) on fair value adjustments $
194,511 $ (123,875 )
Loss on settlements $ (4,134,972 ) $ --
Impairment losses $ (1,002,276 ) $ --
Discount amortization $ (20,000 ) $ (2,805,000 )
Interest expense $ (582,508 ) $ (2,164,530 )Net income (loss) - continuing operations $ (12,866,332 ) $ 15,608,209
Net income (loss) - discontinued operations $
-- $ (824,398 )
Net income (loss) $ (12,866,332 ) $ 14,783,811--------------------------------------------------------------------------------
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Revenue
Revenue in the amount of $128,600 for the year ended December 31, 2019, consists
of license fees in the amount of $125,000 in connection with the Company's
intellectual property, contract fees and equipment sales related to the
Company's remote health care systems in the amount of $1,800, and subscription
fees related to the Company's behavioral health services in the amount of
$1,800.
Revenue in the amount of $11,739 for the year ended December 31, 2018, consists
contract fees and equipment sales related to the Company's remote health care
systems in the amount of $9,939, and subscription fees related to the Company's
behavioral health services in the amount of $1,800.
The Company's behavioral health services segment had not yet begun full
operations, generating limited test market sales. The Company has not yet fully
launched the medical diagnostics and testing activities of the Company's
Connected Health division.
Cost of sales
Costs of sales in the amount of $16,827 for the year ended December 31, 2019,
consists of equipment and other costs related to the Company's remote health
care systems.
Costs of sales in the amount of $20,339 for the year ended December 31, 2018,
consists of equipment and other costs related to the Company's remote health
care systems.
The Company's behavioral health services segment had not yet begun full
operations, generating limited test market sales. The Company has not yet fully
launched the medical diagnostics and testing activities of the Company's
Connected Health division.
General and Administrative Expenses
For the year ended
December 31, 2019 December 31, 2018 Variances
Legal, accounting, and management $ 2,020,488 $ 2,166,590 $ (146,102 )
services
Stock compensation/stock option
2,782,426 3,513,710 (731,284 )
amortization
Professional fees and outside 586,422 210,191 376,231
services
Salaries, and related taxes 167,239 181,656 (14,417 )
Benefits and allowances 180,213 126,070 54,143
Marketing 255,507 8,455 247,052
Product development 76,617 73,896 2,721
Depreciation and amortization 120,972 120,620 352
Rent expense-office 139,520 73,351 66,169
Travel, meals and entertainment 49,893 50,767 (874 )
Office supplies and miscellaneous 126,164 100,757 25,407
expenses
Total general and administrative $ 6,505,461 $ 6,626,063 $ (120,602 )
expenses
General and administrative expenses in the amount of $6,505,461 for the year
ended December 31, 2019, were comprised of $2,020,488 in legal, accounting and
management fees, $2,782,426 in stock compensation/stock option amortization,
$584,422 in professional fees and outside services, $167,239 in salaries and
related taxes, $180,213 in benefits and allowances, $255,507 in marketing,
$76,617 in product development, $120,972 in depreciation and amortization,
$139,520 in rent expense, $49,893 in travel, meals and entertainment, and
$126,164 in office overhead and other general and administrative expenses.
General and administrative expenses in the amount of $6,626,063 for the year
ended December 31, 2018, were comprised of $2,166,590 in legal, accounting and
management fees, $3,513,710 in stock compensation/stock option amortization,
$210,191 in professional fees and outside services, $181,656 in salaries and
related taxes, $126,070 in benefits and allowances, $8,455 in marketing, $73,896
in product development, $120,620 in depreciation and amortization, $73,351 in
rent expense, $50,767 in travel, meals and entertainment, and $100,757 in office
overhead and other general and administrative expenses.
General and administrative expenses for the year ended December 31, 2019, were
$6,505,461 as compared to $6,626,063 for the year ended December 31, 2018, which
resulted in a decrease in general and administrative expenses for the current
year of $120,602.
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Significant changes in general and administrative expenses of $120,602 during
the year 2019 compared to 2018 were attributable to the following items:
?a decrease in legal, accounting and management services of $146,102, primarily
due to a decrease in legal costs of $372,253 resulting from the settlement of
pending litigation; a decrease in the $250,000 reserve established in prior year
for anticipated future legal costs related to pending litigation; an increase in
accounting and audit fees of $128,016 due to additional services required as a
result of a financial statement restatement and the Company's S-1 filing; an
increase management consulting fees of $203,218 resulting from changes in
management; an increase of $106,000, resulting from the establishment of
director compensation plan; and an increase in miscellaneous management fees of
$38,917; and
?a decrease in stock compensation/stock option amortization of $731,284,
primarily due to a decrease in stock compensation of $440,976; a decrease in
amortization of deferred stock award compensation of $409,640; an increase in
amortization of stock option compensation $145,522; and a decrease in
amortization of deferred warrant compensation of $26,190; and
?an increase in professional fees and outside services of $376,231, primarily
due to an increase in investing and financing advisory services and due
diligence costs; and
?a decrease in salaries and related taxes of $14,417, primarily due to a
decrease in compensation of $55,779 resulting from a decrease in staff; and an
increase in payroll tax expense of $41,362 resulting from a reduction in accrued
compensation and related payroll taxes in the prior year; and
?an increase in benefits and allowances of $54,143, primarily due to an increase
in insurance benefits of $2,943; and an increase in contractual expense
allowances of $51,200 resulting from a full year of expense in the current year
compared to a partial year of expense for the prior year; and
?an increase in marketing of $247,052, primarily due to the engagement of
marketing firms, resulting in an increase of $198,000; and an increase in other
marketing fees of $49,052; and
?an increase in product development of $2,721, primarily due to a decrease in
development costs of $5,219; and an increase in patent costs of $7,940; and
?an increase in depreciation and amortization of $352, primarily due to office
equipment acquired in the current year, resulting in additional depreciation of
$352; and
?an increase in rent expense for office space of $66,169, primarily due to
additional office space leased in the current year; and
?a decrease in travel, meals and entertainment of $874, primarily due to a
decrease in travel costs of $5,065; and an increase in meals and entertainment
of $4,191; and
?an increase in office supplies and miscellaneous expenses of $25,407, due to
increases in automobile expense of $17,142, computer and internet costs of
$5,557, repairs and maintenance of $7,419, royalties of $7,165; taxes, licenses
and permits of $4,644, telephone expense of $5,747, transfer agent fees of
$4,787, and other general office and administrative expenses of $3,781; and
decreases in insurance expense of $6,654 and storage and moving of $24,181.
General and administrative expenses for both 2019 and 2018 were incurred for the
purpose of advancing the Company closer to its financing and operating goals in
the bio-medical and digital healthcare sectors.
Net Income (Loss)
During the year ended December 31, 2019, the Company generated a net loss from
continuing operations of $12,866,332, compared with net income from continuing
operations of $15,608,209 for the year ended December 31, 2018. The decrease in
net income from continuing operations of $28,474,541 is attributable to an
increase in gross profits of $120,373, a decrease in general and administrative
expenses of $120,602, a decrease in the gain from the disposal of a subsidiary
of $4,478,268, a decrease in the gains from extinguishment of debt of
$23,785,408, an increase in gains from fair value adjustments of $318,386, an
increase in losses on settlements of $4,134,972, an increase in impairment
losses of $1,002,276, a decrease in discount amortization of $2,785,000, and a
decrease in interest expense of $1,582,022.
Liquidity and Capital Resources
Working Capital Increase
December 31, 2019 December 31, 2018 (Decrease)
Current assets $ 58,621 $ 262 $ 58,359
Current liabilities 7,722,766 5,115,692 2,607,074
Working capital (deficit) $ (7,664,145 ) $ (5,115,430 ) $ (2,548,715 )As of December 31, 2019, the Company had cash in the amount of $6,445 compared
to $262 as of December 31, 2018.
The Company had a working capital deficit of $7,664,145 as of December 31, 2019,
compared to a working capital deficit of $5,115,430 at December 31, 2018. The
decrease in working capital deficit of $2,548,715 is primarily attributable to
increases in cash of $6,183, and operating lease asset of $52,176; increases in
operating lease liability of $52,176, short-term settlements payable of
$2,824,200, short-term derivative liability of $38,875, notes payable of
$345,000, notes payable to bank of $18,616, related party note payable of
$126,152, convertible notes payable of $806,364, and related party payable of
$103,760; and decreases in accounts payable and accrued expenses of $572,160,
short-term debentures of $724,903, and related party short-term debentures of
$411,006.
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Cash Flows For the year ended Increase
December 31, 2019 December 31, 2018 (Decrease)
Net cash used by operating $ (2,945,573 ) $ (1,291,984 ) $ 1,653,589
activities
Net cash used by investing (2,628 ) -- 2,628
activities
Net cash provided by financing 2,954,384 1,332,005 1,622,379
activities
Net cash provided (used) by $ 6,183 $ 40,021 $ 33,838
continuing operations
Net cash provided (used) by -- (39,942 ) 39,942
discontinued operations
Net increase (decrease) in $ 6,183 $ 79 $ 6,104
cash
Cash Flows from Operating Activities
During the year ended December 31, 2019, the Company used $2,945,573 of cash
flow for operating activities of continuing operations, compared with $1,291,984
for the year ended December 31, 2018. The increase in cash used by operating
activities of $1,653,589 is primarily attributable to a decrease in net income
from continuing operations of $28,474,541; increases in depreciation and
amortization of $66,761, securities issued in exchange for licenses sold of
$50,000, losses on settlements of $4,134,972, and impairment losses of
$1,002,276; decreases in stock compensation/stock option amortization of
$731,284, discount amortization of $2,780,209, and allowance for bad debt of
$236; decreases in gains from disposal of subsidiary of $4,478,268, and
extinguishment of debt of $23,785,408; decreases in losses from fair value
adjustments of $318,386, and debt accretion of $924,153; increases in deposits
of $7,800, royalties payable of $7,165, and related party payables of $96,398;
and decreases in accounts receivable of $3,039, and accounts payable and accrued
expenses of $1,935,189.
Cash Flows from Investing Activities
During the year ended December 31, 2019, the Company used $2,628 of cash flow
for investing activities, compared with none for the year ended December 31,
2018. The increase in cash used by investing activities is attributable to the
purchase of professional equipment in the amount of $2,628.
Cash Flows from Financing Activities
During the year ended December 31, 2019, the Company was provided with
$2,954,384 in cash flows from financing activities of continuing operations,
compared to $1,332,005 during the year ended December 31, 2018. The increase in
cash flows provided by financing activities of $1,622,379 is attributable to
increases in lease payments of $71,200, proceeds from notes and loans payable of
$330,000, repayment of notes and loans payable of $141,134, proceeds from
convertible notes payable of $767,280, repayment of convertible notes payable of
$348,580, repayment of debentures of $754,369, and proceeds from the issuance of
common shares of $2,296,382; and decreases in the proceeds from the issuance of
debentures of $225,000, and proceeds from the issuance of preferred shares of
$231,000.
As of December 31, 2019, related parties are due a total of $2,359,026,
consisting of $796,175 in accrued compensation owed to related parties; $312,305
in accrued benefits owed to related parties, and cash advances from related
parties for operating expenses; $759,446 in promissory notes, and $491,100 in
convertible promissory notes.
As of December 31, 2019, a convertible promissory note is payable to a related
party in the aggregate sum of $491,100, representing cash loans and unpaid
compensation. The note bears interest at a rate of 7% per annum, matures
December 31, 2023, and contains a repayment provision to convert the debt into
restricted shares of the Company's Common Stock. On December 31, 2019, the note
was modified to change the conversion rate from $0.10 to $0.08 per share.
During the year ended December 31, 2019, interest in the amount of $33,663 was
expensed, and $98,642 was converted to Common Stock. As of December 31, 2019, a
total of $9,795 in interest remains accrued.
During the year ended December 31, 2019, the Company exchanged related party
convertible debentures in the principal sum of $411,006, plus accrued interest
of $42,778, to non-convertible Senior Secured Promissory Notes (the "Senior
Notes") in the aggregate principal of $759,446. The Senior Notes bear interest
at a rate of 8% per annum, with payments of $126,152 plus interest accrued
thereon due December 31, 2019; $300,000 due December 31, 2020; and the remaining
principal and accrued interest due December 31, 2021. In connection with the
exchange, the Company issued the following in favor of the lender: 1,380,811
shares of the Company's restricted Common Stock, valued at $131,315; and
warrants, valued at $92,150, to purchase 2,528,413 shares of the Company's
Common Stock for a period of five (5) years at an exercise price of $0.10461.
As a result, the Company recognized a net loss on the exchange in the amount of
$434,837, net of $2,140 in derivative liability remaining from the warrants
issued with the debentures. As of December 31, 2019, no accrued interest
remains.
The Company's principal sources of funds have been from the Company's sales of
its Preferred and Common Stock, and loans from related parties and third-party
lenders.
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Defaults
The following represents the obligations previously in default as a result of
cash flow constraints, which have been cured to the satisfaction of the
noteholder:
Default Aggregate
Debt Type Principal APR Maturity Date Cured Settlement
Convertible Promissory $ 100,000 20% 05/2018 08/2019 $ 435,000 [1]
Notes
[1]Consists of $125,000 in new non-convertible promissory note, $30,000 in cash
and 2,400,000 shares of Common Stock, valued at $280,000.
A convertible promissory note in the principal sum of $100,000 matured in May
2018. Due to cash flow constraints, the note went into default. In August
2019, a settlement was reached with the noteholder, the terms of which include
the issuance of a new non-convertible promissory note in the amount of $125,000,
a cash payment in the amount of $30,000, and 2,400,000 shares of the Company's
Common Stock, valued at $280,000, at which time the default was cured. The new
promissory note bears interest at a rate of 8% and matures August 2020.
In addition to the cured defaults disclosed above, $91,000 of the Company's
short-term indebtedness at December 31, 2019, has been extended by verbal
agreement from its original maturity date. Under the verbal agreements, the
noteholders have agreed to extend the due date until such time as the Company
completes its private placement offering; or the noteholders opt to convert the
debt into Common Stock. With the exception of the extension the maturity date,
the terms of the notes under verbal agreement remain the same as the original
notes, which bear interest at a rate of 10%-12% per annum, and are convertible
into restricted shares of the Company's Common Stock at a conversion rate of
$0.10 per share. As of the date of this filing, no demand for payment or
request for conversion has been made. For further information on the short-term
indebtedness and verbal agreements mentioned above, please refer to Exhibit
4.20 to the Company's Registration Statement on Form S-1/A filed December 2,
2019.
Future Financings
The Company has suffered recurring losses from operations. The continuation of
the Company's operations is dependent upon the Company's attaining and
maintaining profitable operations and raising additional capital as needed. The
Company anticipates that it will have to raise additional funds through private
placements of the Company's equity securities and/or debt financing to complete
its business plan.
The Company will require additional financing in order to proceed with its plan
of operations, including approximately $5,000,000 over the next 12 months to pay
for its ongoing expenses and debt obligations. These cash requirements include
working capital, general and administrative expenses, the development of the
Company's product line, the reduction of contractual debt obligations, and the
pursuit of acquisitions. These cash requirements are in excess of the Company's
current cash and working capital resources. Accordingly, the Company will
require additional financing in order to continue operations and to repay its
liabilities. There is no assurance that the financing will be completed as
planned or at all. If the Company is unable to secure adequate capital to
continue the Company's planned operations, the Company's shareholders may lose
some or all of their investment and the Company's business may fail.
In January 2020, the Company issued a short-term non-related party convertible
promissory note in the principal sum of $78,000, less original issue discount of
$3,000, for proceeds in the amount of $75,000. The note bears interest at a
rate of 12% per annum, matures in one (1) year, and is convertible into shares
of the Company's Common Stock at a conversion price equal to the lower of 1)
$0.12 per share; or 2) 65% of the average of the lowest three (3) trading prices
during the fifteen (15) trading days preceding the conversion date.
In February 2020, the Company made principal repayments on non-related party
notes payable of $75,000. As a result, $270,000 in non-related party notes
payable remains.
In February 2020, the Company filed a Certificate of Designation ("Designation")
with the secretary of state of Nevada for the designation of 10,000 shares of
Series B1 Convertible Preferred Stock. The Series B1 Stock is redeemable at 120%
of face value and unpaid dividends; is convertible into Common Stock at a
conversion rate of $0.15; carries an annual dividend of 10%; and matures in two
(2) years, at which time the Series B1 Stock will automatically convert into
Common Stock.
In February 2020, in connection with a $5,000,000 maximum offering of the
Company's Series B1 Convertible Preferred Stock (the "Series B1 Stock"), the
Company received a Subscription from an accredited investor (the "Subscription")
for the purchase of 69 shares of Series B1 Stock at a price of $10,000 per
share, net of an original issue discount of 15%, or $8,500 per share, for
proceeds in the amount of $586,500, pursuant to that certain Securities Purchase
Agreement dated February 10, 2020. In addition, the Subscription includes 50%
warrant coverage at an exercise price of $0.25 per share for a period of three
(3) years.
In March 2020, the Company received subscriptions from accredited investors for
the purchase of 36 shares of the Series B1 Stock at a price of $10,000 per
share, net of an original issue discount of 15%, or $8,500 per share, for
proceeds in the amount of $306,000.
The Company anticipates continuing to rely on equity sales of its Common Stock
and Preferred Stock in order to continue to fund its business operations.
Issuances of additional shares will result in dilution to the Company's existing
stockholders. There is no assurance that the Company will achieve any additional
sales of its equity securities or arrange for debt or other financing to fund
its planned business activities.
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Personnel
As of December 31, 2019, the Company had 9 employees, inclusive of 4 executive
officers. All 9 employees were full-time employees.
Currently, the Company has 9 employees, inclusive of 4 executive officers. All 9
employees are full-time employees.
Contractual Obligations
The Company is a smaller reporting company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934 and is not required to provide the information
under this item.
Going Concern
The Company has incurred losses since inception resulting in an accumulated
deficit of $32,057,254, and further losses are anticipated in the development of
its business. The Company's ability to continue as a going concern is dependent
upon its ability to generate profitable operations in the future and/or to
obtain the necessary financing to meet its obligations and repay its liabilities
arising from normal business operations when they come due, which may not be
available at commercially reasonable terms. There can be no assurance that the
Company will be able to generate profitable operations and/or continue to raise
funds, in which case the Company may be unable to meet its obligations and the
Company may cease operations. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
The audited consolidated financial statements included with this Annual Report
have been prepared on the going concern basis which assumes that adequate
sources of financing will be obtained as required and that the Company's assets
will be realized and liabilities settled in the ordinary course of business.
Accordingly, the audited consolidated financial statements do not include any
adjustments related to the recoverability of assets and classification of assets
and liabilities that might be necessary should the Company be unable to continue
as a going concern.
Off-Balance Sheet Arrangements
The Company has no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to stockholders.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's audited consolidated financial
statements, which have been prepared in accordance with the accounting
principles generally accepted in the United States of America. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses. These
estimates and assumptions are affected by management's application of accounting
policies. The Company believes that understanding the basis and nature of the
estimates and assumptions involved with the following aspects of the Company's
financial statements is critical to an understanding of its consolidated
financial statements. The following should be read in conjunction with Note 3
to the Company's consolidated financial statements, "Summary of Significant
Accounting Policies":
Impairment reviews
Management is required to perform tests annually, or more often if necessary,
for impairment of its finite lived and indefinite lived assets, to determine if
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Impairment testing is an area involving management judgement, requiring
assessment as to whether the carrying value of assets can be supported by the
net present value of future cash flows derived from such assets using cash flow
projections, when available, which have been discounted at an appropriate rate.
In calculating the net present value of the future cash flows, certain
assumptions are required to be made in respect of highly uncertain matters,
including management's expectations of:
?growth in EBITDA, calculated as adjusted operating profit before depreciation
and amortization;
?long term growth rates; and
?the selection of discount rates to reflect the risks involved.
For the purpose of determining goodwill impairment, if any, the Company prepares
five year projections and uses these as the basis for its impairment reviews.
Changing the assumptions selected by management, in particular the discount rate
and growth rate assumptions used in the projections, could significantly affect
the Company's impairment evaluation and, hence, results.
The Company's review for impairment also includes the evaluation of key
assumptions related to sensitivity in the projections. Included are estimates
for varying levels of growth, including aggressive, median, and conservative.
In the Company's evaluation, the conservative level of growth is utilized. For
additional information, see Impairment of Long-Lived Assets under Note 3,
Summary of Significant Accounting Policies, in the Notes to the Financial
Statements.
Contingent liabilities
The Company's contingent liabilities require significant judgement in
determining potential liabilities resulting from estimated future earnings
derived from its intangible assets. Each accounting period, estimated revenues
are evaluated and adjusted as necessary, to determine royalty and earn-out
contingencies. In addition, potential liabilities are evaluated in connection
with pending legal claims. For additional information, see Note 10, Commitments
and Contingencies, in the Notes to the Financial Statements.
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