12 RETECH CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report. References in the following discussion and throughout this annual report to "we", "our", "us", "12ReTech Corporation ", "12 ReTech", "RETC", "the Company", and similar terms refer to,12 ReTech Corporation . unless otherwise expressly stated or the context otherwise requires. This discussion contains forward-looking statements that involve risks and uncertainties.12 ReTech Corporation actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this filing. Company
12 ReTech Corporation is a holding company with subsidiaries that develop, sell and install software that we believe will REINVENT RETAIL for shoppers and retailers. As a holding company we also acquire synergistic operating companies that manufacture and sell Fashion products to other retailers as well as selling products online. InOctober 2019 we also acquired 12 retail stores in airport terminals and casinos creating a true Omni-Channel retailer. This will allow us to deploy our cutting-edge software inthe United States to demonstrate its effectiveness as well as to test, real time new software products to continue to delight consumers and generate additional revenue and profits for retailers. During the 4th quarter 2019 and continuing in the first quarter 2020 (as subsequent events) and with the effects of the pandemic created by COVID-19, the Company consolidated operations around two operating entities; 12Tech, Inc. , formed inArizona inDecember 26, 2019 ("12 Tech") and 12Retail Corporation , formed onJune 27th, 2017 ("12 Retail"). 12 Retail is itself divided into two operating units;Bluwire Group, LLC ("Bluwire") that operates our 12 retail stores in airports and casinos and 12Fashion Group , an unincorporated division of 12 Retail that operates our fashion wholesale and direct to consumer brands, including Rune NYC, Social Sunday, Red Wire Design,Emotion Fashion Group . 12 Retail will serve to demonstrate the effectiveness of the software technology created by 12 Tech in improving revenues and profits for emailers as well as providing access to other retailers through our whole fashion business relationships. 12Tech, Inc , provides technology solutions to physical retailers currently mainly inAsia and is now positioned inthe United States market, the world's largest. We have consolidated or shuttered our international units focused on our technology deployment ("12Japan " and "12 Europe"), and consolidated our software company 12Hong Kong, Ltd ("12 HK") under 12 Tech to further streamline operations. As the retail environment continues to evolve, we as retailers and as primarily a technology company will evolve with it. We believe our developed software and those products in development will delight consumers, provide contactless experiential shopping, and bring revenue back to retailers as they combat the dual threat of Amazon and Walmart. Our software, once fully deployed and implemented, may provide retailers with another electronic and effective sales channel other than$1 million in quarterly revenues for the first time ($1,003,549 vs$ 19,105 in 2018). Subsequent toDecember 31,2019 in the first quarter of 2020 the processes discussed here continued and accelerated until our business was interrupted by nationwide closures due to the COVID-19 pandemic. Management used this period once most operations were closed to more swiftly shutter unprofitable retail stores, close the unprofitableUtah factory, and further streamline operations which management believes may make the Company a much stronger player post COVID-19 pandemic. (See Risk Factors). During the 4th quarter of 2019 the company completed the last two acquisitions for the year (Bluwire Group, LLC & Social Decay d/b/a Social Sunday) and began to consolidate them into 12 Retail. 12 Retail was itself divided into two operating segments; Retail and Fashion (Bluwire and 12Fashion Group respectively). Angelo Ponzetta our CEO who had 25 years of retail experience was named as the acting CEO of Bluwire andEmily Santamore with over 10 years of experience in the fashion industry was named President of the unincorporated division of 12Retail Corporation we call 12Fashion Group . 21 Principal subsidiaries The details of the principal subsidiaries of the Company as ofDecember 31, 2019 , are set out as follows (additional consolidation may occur in the future): Attributable Name of Place of Date of Acquisition Equity Company Incorporation Incorporation Date Interest % Business 12 Retail Arizona, USA Sept. 18, Formed by 12 100 % As a holding Corporation 2017 ReTech Company to execute ("12 Corporation the Company's roll Retail") up acquisition strategy as well as to penetrate the North American market with our technology to select retailers. Separated into two division: 12 Fashion Group, an unincorporated division, and Bluwire Group, LLC. Emotion Incorporated, Incorporated Formed by 12 100 % Operated by 12 Fashion in Utah, USA on July 6, Retail May Fashion Group, an Group, Inc. 2018 and 1, 2018 unincorporated changed its division of 12 name on July Retail 26, 2018. Red Wire Utah, USA July 2, 2015 February 19, 100 % Operations are Group, LLC 2019 consolidated into 12 Fashion Group, and this company is closed and we filed a Chapter 11 Subsection V on March 6, 2020. Rune NYC, New York, USA Jan 23, 2013 March 14, 92.5 % Operated by 12 LLC 2019 Fashion Group, an unincorporated division of 12 Retail. Operates contemporary women's 'Athleisure' brand which is primarily sold to retailers. Bluwire Florida, USA Feb 1, 2010 October 1, 60.5 % A subsidiary of 12 Group, LLC 2019 Retail with 12 ("Bluwire") brick and mortar stores was acquired. Social New York, USA Sept 24, 2014 November 1, 100 % Operated by 12 Decay, LLC 2019 Fashion Group, an dba Social unincorporated Sunday division of 12 ("Social Retail. Operates a Sunday") contemporary women's clothing brand primarily sold to wholesalers. 12 Tech Inc Arizona, USA Dec 26,2019 Formed Dec 100 % As a holding 26,2019 Company to execute the Company's technology strategy. 12 Hong Kong Hong Kong, February 2, June 27, 100 % A subsidiary of 12 Limited China 2014 2017 Tech Inc. ("12HK") Development and sales of technology applications. Services customers in Asia, including japan. 12 Japan Tokyo, Japan February 12, July 31, 100 % A subsidiary of 12 Limited 2015 2017 Tech Inc. ("12JP") Consultation and sales of technology applications. As of June 2020, our Japanese customer (s) is serviced by 12 Hong Kong. 12 Europe AG Switzerland August 22, October 26, 100 % As of September ("12EU") 2013 2017 2019, this company is closed.
12
-OnFebruary 19 . 2019 we acquiredRed Wire Group, LLC . ("RWG") aUtah Limited Liability company pursuant to a Share Exchange Agreement whereby the Company exchanged and the members of RWG (the "Members") Pursuant to the terms of the Exchange Agreement, the Company will acquire (i) 75% of the membership interests of RWG in exchange for 54,000 shares of the Corporation's Series D-6 Preferred Stock and with a stated value of$5.00 (ii) the remaining 25% of the membership interests of RWG in exchange for 37,500 shares of the Corporation's Series D-5 Preferred Stock with a stated value of$4.00 per share, RWG operates its own "cut & sew operation for independent third parties contract to produce cloths operating out of its factory inSalt Lake City , Utah.12. As of the end ofNovember 30, 2019 , we closed the factory inUtah while 12Fashion Group retained the customers by completing the orders in process. We were able to produce the products through 3rd party factories inNew York City andLos Angeles for less than it cost us to produce the products in our own factory inSalt Lake City, Utah . Subsequent toDecember 31, 2019 , onMarch 6, 2020 we filed a Chapter 11 Bankruptcy filing inPhoenix Arizona . This filing may allow us to sell the equipment we no longer need, pay off the secured creditors and shed all of Red Wire's debt from our balance sheet. 12Fashion Group continues to service those customers acquired as well as obtaining new accounts by marketing under the d/b/a Red Wire Designs. 22
- One
pursuant to a Share Exchange Agreement whereby the Company exchanged with the
members of Rune (the "Members"), the members of representing 92.5% of the
membership interests have agreed to tender their interests to the Corporation,
and the Corporation closed out the tender offer period and the Exchange
Agreement became effective. Accordingly, pursuant to the terms of the Exchange
Agreement, at closing the Company acquired 92.5% of the membership interests
of Rune in exchange for 82,588 shares of the Corporation's Series D-5
Preferred Stock with a stated value of
continued uninterrupted in
key employees as the leading part of 12 Fashion Group .
- On
Limited liability company, was acquired by the Company pursuant to a share
exchange agreement whereby the Company exchanged the Company's 30,000 D-6
Shares for 100% of the total outstanding equity of Social and the member of
Social (the "Member"). That Member was retained by the Company, but subsequent
to the year end on
the additional 12,000 D-6 Shares held in escrow as a performance incentive.
The D-6 shares have a face value of
the Company's common shares. Subsequent to year end in
print factory was closed in part due to the COVID-19 Pandemic. Social's
products are marketing and manufactured by the staff of 12
-
the Company completed the acquisition of
Company exchanged 1.0 million of its common shares for 100% of the outstanding
equity of EAI, in a third-party transaction. (This company shed this
subsidiary as of September 30th, 2019 see below)
Prior to 2019 the Company had acquiredEmotion Apparel, Inc. , and formed a new entity under the nameEmotion Fashion Group, Inc , aUtah Corporation . The products ofEmotion Fashion Group ; Lexi-Lu Dancewear and Emotion Fashions will continue to be designed, manufactured and marketed by the staff at 12Fashion Group .
The history of the
The Original EAI Transaction was accounted for as follows: The fair value of the 1.0 million shares of common stock issued amounted to$80,000 . EAI owned four wholly-owned and majority-owned subsidiaries:Lexi Luu Designs, Inc , (aNevada Corporation ),Punkz Gear, Inc , (aWyoming Corporation ),Cleo VII, Inc. (aNevada Corporation ) andSkipjack Dive & Dance Wear, Inc. (aNevada Corporation ), which together owns five microbrands that were included in this transaction and target specific niche markets: Lexi-Luu Dancewear, Punkz Gear, Cleo VII, Skipjack Dive & Dance Wear, andE-motion Apparel, Inc. The acquisition of EAI was accounted for under ASC 805 where purchase price was allocated based on assets acquired and liabilities assumed as of the acquisition dateMay 1, 2018 , at the estimated fair value. During the fourth quarter of 2018, the Company determined that the goodwill associated with the acquisition should be fully impaired, and as such was expensed during the fourth quarter of 2018. OnJuly 6, 2018 , the Company incorporated a newEmotion Apparel Inc in the state ofUtah and immediately re-named it asEmotion Fashion Group, Inc. ("Emotion Fashion Group " or "EFG") and does business under the brand name, "Emotion Fashions". The EAI share exchange agreement included terms that the Company would provide funding of at least$200,000 in the first 12 months after acquisition and the Seller, who remained as manager, would produce revenues in excess of$1.3 million dollars over that period. The Company secured its investment with a secured line of credit and a landlord's lien through one of its other subsidiaries. Those liens covered all of the intellectual property and physical assets ofEmotion Apparel, Inc. OnSeptember 30, 2019 , the Company effectively foreclosed on its liens taking possession of the assets including the brands; Lexi-Luu,Emotion Fashion Group , Punkz Gear and returned the stock inEmotion Apparel, Inc. and its subsidiaries to the Seller. In the 4th quarter 2019 the Company plans to market those brands under new management as part of its consolidation of its acquisitions and utilize itsEmotion Fashion Group, Inc , subsidiary that was incorporated inUtah inJuly 2018 . As a result, the related accounts payable and accrued expenses which were payable byEmotion Apparel, Inc. which totalled$511,486 including$250,000 Note Payable, were offset to other income. For further details see Note 7 Accounts Payable and Accrued Expenses and 9 Notes Payable for further details. 23
-
11 airport terminal locations and one casino location under an equity exchange
agreement. Under the terms of the Agreement the Company issued to the Sellers
500,000 Series A Preferred Shares in exchange for 51% of the equity in Bluwire
Bluwire and 19% is reserved for 12 months for potential equity investors into
Bluwire. Any of that equity not used to raise capital for Bluwire over that
period would be divided equally between the Company and the Sellers. The
Sellers will continue to manage Bluwire under consulting agreements.
- 12
Company formed 12 Tech to spearhead the Company's software technology
development and to focus more effort on the largest retail market in the
world;
under 12 Tech all its other software technology companies:
- 12
exchange transaction. Originally this is the Company that managed all the
Company's proprietary and licensed technology that is utilized and sold by the
other subsidiaries. With the formation of 12 Tech that role is now being
managed by 12 Tech. Today, 12 HK operates as a subsidiary of 12 Tech and
serves as the marketing and sales hub for
market and now services our customers in
Ltd.
- 12
and the first half of 2018 the Company made several acquisitions including; 12
consolidate the assets and streamline operations that effectively by the end
the 3rd quarter 2019, this Company no longer functions as independent
subsidiary. In the third quarter of 2019 the Company closed the offices of 12
serviced and managed by 12 Hong Kong.
- 12
against expectation. In the third quarter 2019 it was determined by management
that the costs of continuing to support the expenses of an independent 12
previous master representation agreement between 12
supported and then closed its operations in
Company had successfully discharged all of its debts associated with 12 Europe
A.G., as part of the completion of the 12
except for certain social benefit payments still owed approximately
the Company. Therefore, this subsidiary is no longer in existence. Management
does not consider this closure as a condition for discontinued operations as
master representation agreement between 12 Europe is now been transferred to
12 Hong Kong and Coppola AG . As such, software customer in Europe will
continue to be supported.
Business and Operations
12 ReTech Corporation is a holding company with subsidiaries that develop, sell
and install software that we believe will REINVENT RETAIL for shoppers and
retailers. As a holding company we also acquire synergistic operating companies
that manufacture and sell products to other retailers as well as selling
products online. In October 2019 , we acquired 12 retail stores in airport
terminals and casinos creating a true Omni-Channel retailer. This will allow us
to deploy our cutting-edge software in the United States to demonstrate its
effectiveness as well as to test, real time new software products to continue to
delight consumers and generate additional revenue and profits for retailers.
24
12 Retail is itself divided into two operating units; Bluwire Group, LLC
("Bluwire") that operates our 12 retail stores in airports and casinos and 12
Fashion Group , an unincorporated division of 12 Retail that operates our fashion
wholesale and direct to consumer brands. including; Rune NYC, Social Sunday, Red
Wire Design, Emotion Fashion Group . 12 Retail will serve to demonstrate the
effectiveness of the software technology created by 12 Tech in improving
revenues and profits for emailers as well as providing access to other retailers
through our whole fashion business relationships.
12 Tech, Inc. provides technology solutions to physical retailers currently
mainly in Asia and is now positioned in the United States market, the world's
largest. We have consolidated or shuttered our international units ,focused on
our technology deployment ("12 Japan " and "12 Europe"), and consolidated our
software company 12 Hong Kong, Ltd ("12 HK") under 12 Tech to further streamline
operations.
As the retail environment continues to evolve, we as retailers and as primarily
a technology company will evolve with it. We believe our developed software and
those products in development will delight consumers, provide contactless
experiential shopping and bring revenue back to retailers as they combat the
dual threat of Amazon and Walmart. Our software, once fully deployed and
implemented, may provide retailers with another electronic and effective sales
channel other than Google , Amazon, and/or Facebook/Instagram.
To summarize the Company earns money from four different revenue streams (in
declining order): Retail Sales, Wholesale and Online sales of Fashion products,
Royalty Payments for 3rd party licensing of the Bluwire name, and technology
sales.
As an innovative holding company that has been built through acquisitions and
ideas, we will continue to search for other synergistic acquisitions that bring
additional revenues, and/or provide innovative software solutions.
For more information about our technology please visit our website at www.12retech.com.
Financing and Convertible Debt
To finance our operations the Company has historically resorted to a number of convertible debt providers (see Note 10). These debt providers have in many cases exercised their rights to convert their debt into the Company's common stock at a discount to market. They then sell that stock to recover their investment and profits. This has over time depressed the value of our Company's common stock and caused a significant dilution to our shareholders. This could not be avoided and management believes it was necessary in order to provide continuation of the Company's business so that we could make significant acquisitions. The Company has been building revenue momentum through these acquisitions and is no longer exclusively reliant on this form of fund raising. The vast majority of the funds the Company has received over the last 4 months have been sourced through non-convertible debt incurred by our operating subsidiaries. There is however, still a considerable amount of convertible debt that needs to be retired over the near term. Management is working closely with the convertible note holders to find less dilutive alternatives and management believes that first half of 2020 it will arrive at a solution that will involve less dilution, may require some cash payments from other sources including an equity offering and/or debt offerings through one or more of its subsidiaries as well as leak out provisions negotiated with the convertible debt holders themselves. The Company had also entered into a$12 million dollar Equity Line of Credit withOasis Capital which it has been unable to access due to some delays in the audits of one of its acquired subsidiaries. That has been resolved and Management has been in talks with Oasis on amending that original offering, so that the Company may refile the S-1 required with theSEC . The equity line of credit is ineffective at the current share price, and we will not be able to reinstitute at current share price levels. In addition, Management has received tentative commitments for preferred Equity Funding that if completed would allow the Company to fully retire the convertible debt. Management, however, cautions readers that while promising no Equity or Debt funding can truly be counted upon until the money is in the bank. The exact amount of the final funding and timing have not been fully determined at this time.
However, management believes that now that the Company has significant and growing revenue, has streamlined operations, is set to launch its software products in its own stores inthe United States and has access to more standard debt capital, that the issues associated with the convertible debt have become more manageable and therefore will be resolved more favorably to the Company than was previously observed. 25
YEAR ENDED
Amounts reflected in our financial statements are accounted for under common control accounting (see footnotes).
Revenues During the year endedDecember 31, 2019 our revenues increased to$1,628,607 from$92,831 in the prior comparable year. This represents an increase of$1,535,776 or 1,654%, which is primarily the result of the new 2019 acquisitions ofBluwire Group , RWG, Rune and Social Sunday. Cost of revenues During the twelve months endedDecember 31, 2019 we incurred Cost of Revenues associated with the delivery of our products in the amount of$1,122,086 , as compared to$50,558 for the comparable period in 2018. These expenses are related to costs of delivering goods. In 2019, our Cost of Revenues as a percentage of Revenues was 68.9% as compared to 54.5% in the prior comparable period. The higher Cost of Revenues as a percentage of Revenues in 2019 is mainly the result of higher purchasing costs of the Bluwire operations in the 4th quarter due to the lack of cash on their balance sheet when acquired. This was compounded by extraordinary expenses incurred by 12Fashion Group in the second half during a particularly complicated production project. General and Administrative Our general and administrative expenses for the year endedDecember 31, 2019 were$2,124,372 , a slight decrease of$22,013 or 1.0% when compared to$2,146,385 for the year endedDecember 31, 2018 . The decrease is a result of increase in general and administrative expenses from the 2019 acquisitions offset by general and administrative cost reductions implemented in the parent as described above. Professional fees Our professional fee expenses for the year endedDecember 31, 2019 were$1,225,699 an increase of$83,542 or 7.3% when, compared to$1,142,127 for the year endedDecember 31, 2018 . Our professional fees include expenses related to our external auditors, legal costs, and consultants. Other Expense Our Other Expenses increased by$3,692,762 or 67.0% to$9,204,291 for the year endedDecember 31, 2019 compared to$5,511,530 for the year endedDecember 31, 2018 . There are four main components of the increase of the 2019 Other Expense category: 1. An increase in other income to$1,023,965 for the year endedDecember 31, 2019 compared to$4,691 for twelve months endedDecember 31, 2018 resulting from the write off of certain debts as described in the Other Income discussion below. 2. An increase in interest expense to$8,995,066 compared to$1,295,055 for the endedDecember 31, 2018 . This was offset by a decrease in derivative liability of$7,119,916 for the year months endedDecember 31, 2019 to ($3,524,861 ) compared to$3,595,055 , for the year endedDecember 31, 2018 . 3. An increase in general default reserve expense of for the year endedDecember 31, 2019 of$2,139,961 compared to zero as ofDecember 31, 2018 . 4. An increase in expense as a result of the company recognizing an impairment of goodwill of$2,139,961 compared to zero for the year endedDecember 31, 2019 comparedDecember 31, 2018 . 26
See these components described in further detail below.
Other Income The Company recognized a loss impairment of software development costs of$513,601 December 31, 2019 without a similar comparable expense during the prior period endingDecember 31, 2018 . Periodically, management reviews its capitalized costs to determine if they are properly valued or should they be impaired. As ofSeptember 30, 2019 . Management had capitalized approximately$513,601 in development costs for its 12 Technology Suite and 12 Sconti APP. While management still believes in the long-term validity of these software applications, the fact remains that adoption by retailers has not met management's expectations. This led management to cut costs in the 12 Europe and 12 Japan operations. Therefore, management believes that the capitalized costs for the software development should be fully impaired during the 4th quarter of 2019. 12 Sconti App was initially deployed in early 2019 as the Company partnered with the major Swiss retailerJelmoli .Jelmoli did not adopt the rest of the 12 Technology Suite. In the second half of 2019, 12 Europe's office has been closed and the technology licensed to a third party so that any revenues generated would not have significant related costs. Many elements of the 12 Technology Suite were launched inJapan more than 3 years ago at one specific retailer, ITOYA. In 2018, elements of the 12 Technology Suite were installed in a second new ITOYA store. ITOYA has indicated interest in expanding its use of elements of the 12 Technology Suite to the remainder of its stores (more than 25) and while talks are ongoing, no decisions have been made. Management has decided to minimize its costs by downsizing 12 Japan, closing the office and hiring the one former employee as a contractor of its 12 Hong Kong subsidiary.
The Company recognized other income primarily from 12 Europe declaring
bankruptcy on
In addition, as discussed in Note 4, the Company effectively foreclosed on its liens against the assets ofEmotion Apparel, Inc. taking possession of assets including the brands; Lexi-Luu,Emotion Fashion Group , Punkz Gear and retuned the equity ofEmotion Apparel, Inc. and its subsidiaries to the Seller. As a result of the debts related toEmotion Apparel, Inc , which reverted to the Seller including all accounts payable, accrued expenses and notes payable resulting in a gain of$511,486 to the Company. Lastly, after careful review by management, certain accounts payable were determined not to be valid expenses. These payables totaling approximately$68,000 were offset as a gain to other income. Interest Expense There was also an increase in interest expense of$7,700,011 compared to$8,995,066 for the period endedDecember 31, 2019 compared to$1,295,055 the periodDecember 31, 2018 . Increase in interest expenses is related to increase in convertible notes' convertible preferred stock during the same period. As well as a significant increase in interest expense associated with the additional derivative liability and for the general default reserve.
Change in Derivative Liability
There was a gain as a result of the change of derivative liability of$3,524,861 for the period endedDecember 31, 2019 compared to a loss$3,595,055 as ofDecember 31, 2018 . The reason for the change was because of a change in the calculation method from Black-Scholes model to the more accurate Lattice model, which is the preferred valuation method. General Reserve Expense The company recognized a general default reserve expense of for the year endedDecember 31, 2019 of$2,139,961 compared to zero as ofDecember 31, 2018 . OnJuly 25, 2019 the Company was served with a lawsuit fromAuctus Fund, LLC ("Auctus"). For additional details, see MD&A including the settlement of$120,375 which is still pending. However, management calculated a default reserve which represents the additional amount management would have to payout to all note holders in the event of the default. Management quantified what this amount would be which includes additional premiums, additional accrued interest and default accrued interest. The total reserve quantified by management amounted to$2,139,961 . 27 Impairment ofGoodwill The Company recognized an impairment of goodwill associated with acquisition of Bluwire, Rune, RWG and Social Sunday of$1,971,677 for the year endedDecember 31, 2019 compared to zero for the year endedDecember 31, 2018 . The Company tested goodwill for impairment as ofDecember 31, 2019 and determined that the goodwill was impaired based on the various factors. There were a number of factors which included representations made by management which were 50% less than realized. Please see further detail inGoodwill in the Notes of this filing. Net Income During the year endedDecember 31, 2019 , we incurred a net loss of$12,150,698 compared to a net loss of$8,767,383 for the year endedDecember 31, 2018 . This increased loss is primarily the result of the increase in interest expense, general default reserve expense offset by the change in derivative liability and gain in other income. The Company is expending working capital to further their business plan. This includes the further development, refinement and improvement of their software and its adaptation to various languages and geography. The Company is also expending working capital on the development of new technology which is designed to further enhance the attractiveness of their offerings to their target customer base.
Significant Acquisitions in 2019
In the first quarter of 2019 the Company made two significant acquisitions as detailed above with the acquisition ofRed Wire Group onFebruary 19, 2019 andRune NYC, LLC onMarch 14, 2019 . the Company gained two revenue-producing operations. As also detailed above onOctober 1, 2019 the Company acquiredBluwire Group, LLC and effectiveNovember 1, 2019 , the Company acquiredSocial Decay, LLC dba Social Sunday. With the combination of these acquisitions, management believes that the Company will benefit, and it will significantly expand the sales channels for all of its brands. As ofDecember 31, 2019 , the Company performed its annual impairment test on all reporting units and determined that each unit had indicating factors of impairment due to failure to meet respective sales projections. For further details, see Note 3. Management believes that these acquisitions are "game changers" for the Company for two more reasons; 1) the wholesale customers acquired sell to are and will become targets for the Company to sell its disruptive retail technology solution to other retailers and 2) is already attracting interest among other companies that would like to join the12 ReTech team either through acquisition or through strategic partnership. While management believes the results of operations for 2019 for the acquired companies are not indicative of the future results for all of the reasons herein above combined with impact of COVID -19, management believes it is important to show how materially the prior year's revenues would have been for the Company had they been acquired at the beginning of 2019 without the material improvements we have made since acquiring them.
Company Initiatives to Enhance Shareholder Value
The Company continues to take steps to enhance shareholder value.
Consolidation of Operations
In order to achieve cost synergies, the Company continues to take steps to reduce and eliminate redundant and unnecessary costs in its operations. Management recently created the 12Fashion Group division of 12 Retail to house and operate its fashion brand operations. The operations of Rune NYC,Red Wire Group and Social Sunday were combined, and steps were taken to reduce expenses while still working to expand the business. Management's recent decision in the 1st quarter of 2020 to outsourceRed Wire Group's manufacturing operations to qualified third parties has increased the potential for profitability of the 12Fashion Group's DIFY ("Do it For You") apparel design and apparel manufacturing Today, we no longer operate our own factory but still service existing customers and recruit new customers. As a result, we have cut expenses dramatically and no longer have a manufacturing factory's expenses such as payroll and rent. We have increased the customer base and conduct our business providing design and project management services to our client base. We have also decided to put theRed Wire Group into bankruptcy protection which will eventually allow us to eliminate the debts of the former operation. This may result in future gains in net income as well as allowing the successor business to operate with a cost structure that doesn't need to scale up with operational expansion and potentially earn a profit. During the transition, Red Wire Design had a number of customer projects where they had taken deposits (typically 50% of total project revenues) and could not finish the project in its own factory. 12Fashion Group found manufacturing partners who were willing to finish each and every unfinished project. The completed projects were invoiced for the remainder of the balances due and the resultant payments were used to pay the manufacturing partners for their services. As a result, customer relationships were salvaged, and we can expect that 12Fashion Group will continue to receive business from these former customers of Red Wire Design. This salvage operation allowed the Company to recognize revenues and expenses as it would have done ifRed Wire Group had completed their projects on their own. However, there was a negative cash flow effect as all the resultant collected accounts receivables generated by these projects went out to pay the manufacturing partners. Management expects this to negatively affect gross margins for the Company in the upcoming financial reports of the 1st quarter of 2020. Going forward in the second half of 2020, Management expects gross margins to return to levels of between 30% and 40% for the 12Fashion Group business. 28 Social Sunday's operations are also being restructured. Management has taken steps to reduce cash outflows while it makes a decision regarding the future of the Social Sunday operation. In the meantime, this business has been stood still and it may be that we will use the bankruptcy laws to eliminate the debts. Rune's business has also been consolidated into the 12 Fashion Group Division with Rune's President;Emily Santamore installed as President for the 12Fashion Group's operation. Rune's business continues to service existing clients and recruit new clients. It is Management's strategy that the improved cost structures of the 12Fashion Group will allow the business to grow and generate profits over the next 12 months and beyond. Beginning in earlyMarch 2020 , the apparel business of 12Fashion Group was affected by the business shutdowns of geographies in theUSA related to the COVID-19 pandemic. Manufacturing partners had to shut down their operations unless they were producing products such as face masks or hospital gowns that were deemed essential to the fight against this infectious disease. As such, 12Fashion Group and select manufacturing partners got into the face mask business. So far, this business has produced quantities of product and revenues that are approximately a third of what management would consider normal business activity levels. Management does not expect business activities of the fashion industry to return to normal levels until the following year. In another consolidation of operations and expenses, Management has consolidated the operations of 12 Japan into 12 Hong Kong. In so doing, we are eliminating the overhead expenses of one of the Asian operations while retaining the ability to service our existing customer base.Bluwire Group which provided the bulk of the revenue growth of the 4th quarter of 2019 has also been impacted by the COVID-19 pandemic. On or aboutMarch 16, 2020 every one of the Bluwire stores was shut down by local government mandate. Stores were shuttered and our staff was laid off. We are staying in close communication with our landlords and the various airport authorities where we have stores located. At this point, Management still does not have a timeline for the reopening of these business operations. This shutdown has negatively impacted the Company's revenues and cash flow. We have applied for and received CARES Act Payment Protection Program funding for each of the stores. These funds will help Bluwire get back on its feet when the airport and casino stores are allowed to reopen. Management predicts that it will likely be the following year before airport traffic levels get back to normal if not longer. We are currently expecting to report large negative impacts to the Bluwire business in terms of revenues for the balance of this year.
Select unaudited Pro-forma 2019 Financial Information.
The following table will show the unaudited combined revenues, costs of goods sold, and resultant gross margins of the Company together with the four acquisitions as if these acquisitions had been acquired at the beginning of FY2019 and 2018, without any material improvements from consolidation. Please note the acquisition of RWG and Rune are included in12 ReTech numbers and figures for Bluwire and Social Sunday post acquisitions are included in12 ReTech column. Unaudited FY2019 Proforma P&L 12 ReTech Bluwire Social Sunday Proforma Sales 1,708,607 3,133,735 376,959 5,219,301 Cost of Goods Sold 1,202,086 1,415,577 227,667 2,845,331 Gross Profit 506,521 1,718,158 149,292 2,373,970 Total Expenses 3,449,178 2,045,001 305,535 5,799,715 Net Other Income (Expense) (9,204,291 ) - (9,204,291 ) Net Income (12,146,948 ) (326,843 ) (156,244 ) (12,630,036 ) 29 Unaudited FY2018 Proforma P&L 12 ReTech Bluwire Social Sunday Proforma Sales 1,592,749 6,140,750 662,992 8,396,491 Cost of Goods Sold 1,114025 2,785,150 272,228 4,172,402 Gross Profit 478,734 3,355,600 389,763 4,224,008 Total Expenses 3,105,512 3,544,814 417,149 7,067,476 Net Other Income (Expense) (5,511,529 ) - (5,511,529 ) Net Income (8,138,318 ) (189,214 ) (27,386 ) (8,354,917 )
The four acquisitions would have resulted in significantly larger revenues than the standalone12 ReTech had generated in FY2019. The gross margins of the Bluwire operations are larger than the Company's own gross margins. Management believes that with the improvements that the combined operation is exhibiting since acquisition that the results for 2020 will be considerably improved from the FY2019 standalone12 ReTech financial results not-withstanding the impact of COVID -19. Please note the net loss in pro forma net loss is primarily due to non-cash expenses related to reserve expenses, interest expense and offset by change derivative liability expense noted above.
Liquidity and Capital Resources
The Company has met its current capital requirements primarily through the issuance of debt-equity and preferred stock. Management views the working capital that is raised through debt-equity or preferred equity offerings as being equivalent to raising working capital via common equity subscriptions, but with the added bonus of allowing the common equity value to rise through the passage of time and simultaneous achievement of the Company's business goals. Any conversion of debt into equity could occur at a higher equity valuation then the Company currently has. The Company has reserved the right to repurchase these debt-equity interests and preferred stock at a predetermined premium should management determine that this is in the best interests of shareholders at an appropriate future point in time. Operating expenses for the Company have been paid from revenue as well as from the issuance of debt-equity and preferred stock subscriptions. AtDecember 31, 2019 , the Company had a deficit in working capital (current liabilities in excess of current assets) of$11,786,147 . A portion of this working capital deficit has been financed loans from stockholders. As ofDecember 31, 2019 , amounts owed to stockholders totaled$384,091 . AtDecember 31, 2018 , the Company had a deficit in working capital (current liabilities in excess of current assets) of$6,324,849 . A portion of this working capital deficit has been financed loans from stockholders. As ofDecember 31, 2018 , amounts owed to stockholders totaled$766,397 . The increase in working capital deficit when compared toDecember 31, 2018 was principally due to an increase in notes payable ("debt-equity") due to unrelated parties, amounts owed to stockholders, issuance of preferred stock and to a lesser extent, increase in accounts payable. 30
The Company has financed our cash flow requirements through the issuance of debt-equity and preferred stock. As the Company expands, we may continue to experience net negative cash flows from operations, pending generation of significant revenues. Additionally, we anticipate obtaining additional financing to fund operations through debt-equity and preferred stock offerings to the extent available or to obtain additional financing to the extent necessary to augment our working capital balances. Management believes that our acquisition strategy will successfully provide significant revenues, potential profits as well as access to traditional bank and asset-based credit lines. In addition, Management believes that existing shareholders, lenders and prospective new investors will provide the additional cash needed to meet our obligations as they become due. The Company filed a Certificate of Designation onJanuary 9, 2019 to create 1,000,000 Series D-5 Convertible Preferred Stock with par value$0.00001 and stated value of$4.00 per share. Also onJanuary 9, 2019 , the Company filed a Certificate of Designation to create One Million (1,000,000) Series D-6 Convertible Preferred Stock with par value$0.00001 and stated value of$5.00 per share. The Company filed an amendment onJanuary 11, 2019 to Series C Preferred shares where each issued and outstanding shares of Series C Preferred Stock shall be entitled to 8,000,000,000 votes at each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration (by vote or written consent). Holders of shares of Series C Preferred Stock shall vote together with the holders of Common Shares as a single class. The Company also filed with theState of Nevada an Amendment to its Articles of Incorporation onMarch 8, 2018 , that increased it authorized common shares from One billion to eight billion common shares authorized. OnMarch 14, 2019 , the Company entered into a PIPE Equity Purchase Agreement whereby an institutional investor agreed to purchase up to$500,000 worth of the Company's D-2 Preferred Shares with a$2.00 face value at to be determined discount to face value. Concurrent with the execution of this Agreement, the Company sold 103,500 preferred D-2 Preferred Shares and received net proceeds after expenses of$100,000 (Tranche #1). The D-2 Preferred Shares are convertible to common shares after a 6 month or more holding period at market price. (See Form 8-K filed
onMarch 20, 2019 ). Concurrent with the execution of the PIPE Funding Agreement the Company executed an Exchange Agreement with the same institution investor whereby that investor exchange all of its Series D-1 preferred shares for newly issued Series D-2 Preferred Shares. (See Form 8-K filed onMarch 20, 2019 ). In connection with the with PIPE Funding Agreement and the Exchange Agreement listed above the Company filed with theState of Nevada a new Certificate of Designation which took 2.5 million of the blank check preferred shares the Company has and designated them as Series D-2 Preferred Shares. (See Form 8-K filed onMarch 20, 2019 ). OnSeptember 25 . 2019, the Company's Rune subsidiary entered into two separate future receivables purchase agreements with Vox Funding and received gross proceeds for$49,000 which were used in part to retire a previous and smaller obligation to Vox Funding. The Agreements provided for payment over 6 months and carries a fee of$1,470 . This obligation is not convertible under any terms
into Company Stock.
On
31 In connection with the acquisition ofBluwire Group, LLC , onOctober 3, 2019 one of the Sellers of Bluwire provided$300,000 to its Bluwire subsidiary under a secured demand promissory note executed jointly by Bluwire and the Company. This note caries interest of 15%. This obligation is not convertible into Company stock under any terms. OnOctober 3, 2019 , one of the Bluwire Sellers made a capital contribution to Bluwire on that has not been adequately documented. In an effort to be conservative, we have added a 15% interest rate although final terms have not been agreed between the parties for payment and cost. In Addition, onOctober 15, 2019 the Company's Bluwire subsidiary entered into a future receivable purchase agreement with Libertas Funding and received$343,000 . This agreement provides for payment over 8 months and caries a fee of$7,000 . This obligation is not convertible under any terms into Company stock. Lastly, onNovember 5 . 2019, the Company's Rune subsidiary entered into a future receivables purchase agreement with Vox funding and received gross proceeds for$145,500 which were used in part to retire a previous and smaller obligation to Vox Funding. The Agreement provided for payment over 6 months and caries a fee of$4,500 . This obligation is not convertible under any terms into Company Stock. As a subsequent event, onMarch 18, 2020 the Company entered into a back end promissory note agreement withAdar Alef, LLC ("Adar") for loans totaling$33,600 . The consideration to the Company was$30,000 with$3,600 of legal fees. As a subsequent event, onMarch 25, 2020 the Company entered into a back end promissory note agreement withLG Capital, LLC ("LG") for loans totaling$33,600 . The consideration to the Company was$30,000 with$3,600 of legal fees. The note is convertible after 181 days at a (i)$0.0075 ceiling or (ii) 60% of the lowest trading price over the past twenty trading days prior to the conversion date. OnMarch 5, 2020 , the Company's Bluwire subsidiary entered into a second future receivable purchase agreement with Reliant Funding and received$83,000 . This agreement provides for payment over 6 months and caries a fee of$3,000 . This obligation is not convertible under any terms into Company stock. In the future we will need to generate sufficient revenues from operations in order to eliminate or reduce the need to sell additional stock or obtain additional loans. However, there can be no assurance we will be successful in raising the necessary funds to execute our high growth business plan.
At
During the year endedDecember 31, 2019 , the current liabilities increased by$5,860,651 when compared toDecember 31, 2018 . The primary reason for the increase was the increase in due to derivative liabilities of$2,662,972 and default reserve of$1,769,791 as ofDecember 31, 2019 compared to zero as ofDecember 31, 2018 and increase in accounts payable and accrued expenses of$932,789 as ofDecember 31, 2019 compared toDecember 31, 2018 , and to a lesser extent, increase in convertible notes payable of$683,247 for the same period.
As discussed earlier, it is likely that the Company will need to obtain additional working capital through debt-equity and preferred stock capital raises until the Company can generate sufficiently profitable revenues to sustain the cash burn rate that the Company's business plan calls for.
Although, our business plan calls for high growth we anticipate that we may continue to incur operating losses during the next twelve months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies at our stage, particularly companies in new and rapidly evolving markets. Our roll up acquisition strategy seeks to mitigate some of those risks, but until more acquisitions can be completed, consolidated, and we reap the benefits of consolidation, we cannot accurately include their results in our projection of cash needs. Risks include, but are not limited to, an evolving and unpredictable business model and the management of growth and the consummation and assimilation of multiple acquisitions. These factors raise substantial doubt about our ability to continue as a going concern. To address these risks, we must, among other things, increase our customer base, implement and successfully execute our business and marketing strategy, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations. 32
Impact of COVID-19 (subsequent event)
Like most other business inthe United States , our businesses have been severely impacted by the COVID-19 Pandemic. While the first quarter of any calendar year is historically the slowest quarter of the year for revenues for our main operating subsidiaries the first quarter of 2020 was severely impacted byUS Government's business shut downs and stay at home orders related to COVID-19.We derive most of our revenue from our 12Retail Corporation which is itself composed of two Operating units: 12Fashion Group andBluwire Group, LLC . In response to the President's "stay at home orders" onMarch 16, 2020 we promptly laid off almost all of our 12Fashion Group employees and contractors. 12Fashion Group retained three employee/contractors and focused on producing and selling of washable reusable masks, both wholesale and direct to consumer online. Our Bluwire retail stores inNewark airport ,Dallas airport and JFK international airport were temporarily closed on or aboutMarch 17, 2020 . Our Casino location was temporarily closed on or aboutMarch 17, 2020 when theMohegan Sun Casino itself was closed. We laid off all of our Bluwire employee/contractors except two members of the headquarters staff who continued to source innovative products for our stores when they re-open, some of which will be uniquely desired by consumers due to changing buying habits due to COVID-19.
The financial effects of these closures are reflected in the Management Discussion and Analysis.
The Cares Act and the Payroll Protection Program SBA Loans (PPP Loans).
The Company has applied for PPP Loans for all of itsU.S. operating Companies and is in the process of analysing if it would qualify for similar governmental assistance for its reduced operating unit inJapan (12Japan Ltd ). The Company has qualified for an aggregate of$294,806.78 of PPP Loans for its operating companies. These funds are being used to re-hire previously laid off personnel where appropriate and hire new personal that management believes better fits the post COVID-19 shut down environment. The Company is hiring personnel that will help the operating units generate revenues in a more contactless environment and to create changes to our cutting edge retail software to help pier stores and well as other retailers attract consumers in this new environment. The Cares Act provides very favorable terms for the repayment or forgiveness of the monies lent to qualifying businesses like ours. While the final rules are not yet formalized the initial guidelines allows for complete forgiveness for monies spent on approved expenses such as payroll and labor with non- approved expenses to be paid back over 2 years at 1% annual interest with no payments for the first 6 months after receipt. No collateral was pledged for these loans and management did not have to sign any personal guarantees. Management will make every effort to utilize these PPP loan funds in a manner that may allow for complete forgiveness of the loan(s) while providing the best opportunity for the continuity and growth of the business. During the COVID-19 shutdown period management sourced new products and vendors for its businesses and is now optimistic that it will shortly obtain additional funding of debt or preferred equity to grow our business.
Reliance on the
As a direct result of the COVID-19 shutdowns and travel restrictions theSEC provided for any public company impacted by COVID-19 to extend its filing of its 10-K or 10-Q or other required filings for 45 additional days and would still be eligible for the further normal extensions of 15 and 5 days respectively. As noted herein we have been extremely impacted on an operational level, delayed in obtaining information from our foreign subsidiaries inHong Kong andJapan as well as being delayed in our ability to obtain capital for the professional fees to complete our filings and further compromised by the fact that our CEO and CFO are both restricted from travel tothe United States at this time as they are inHong Kong andJapan respectively. Therefore, we filed for a 45 day and 15 day NT10-KA Filing extensions in reliance on theMarch 25, 2019 order and have further been in communication with theSEC for additional consideration for timely filing under these extraordinary circumstances. Going Concern The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America , which contemplates continuation of the Company as a going concern. Since we have not yet generated significant revenue, we have negative cash flows from operations, and negative working capital we have included a reference to the substantial doubt about our ability to continue as a going concern in connection with our consolidated financial statements for the year endedDecember 31, 2019 . Our total accumulated deficit atDecember 31, 2019 was$22,756,345 compared to$11,180,903 as ofDecember 31, 2018 . These consolidated financial statements have been prepared on the going concern basis, which assumes that adequate sources of financing will be obtained as required and that our assets will be realized, and liabilities settled in the ordinary course of business. If we are unable to obtain additional financing, we may cease operations and not be able to execute on operating plans. Accordingly, these 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 we be unable to continue as a going concern.
33
Elected Mandatory Filer Status
The Company filed Form 8A-12G with theSecurities and Exchange Commission onMarch 16, 2018 and therefore became a mandatory filer with theSecurities and Exchange Commission .
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted inthe United States requires us to make estimates and judgments that affect our reported assets, liabilities, and expenses and the disclosure of contingent assets and liabilities. We use assumptions that we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. We believe there have been no significant changes in accounting policies during the year endedDecember 31, 2019 . See Note 3 to the consolidated statements in this Annual Report for a complete discussion of our significant accounting policies and estimates.
Recently Issued Accounting Standards
The Company has reviewed all recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its consolidated financial statements. See Note 3 to the consolidated statements in this Annual Report for a complete discussion of our significant accounting policies and estimates.
© Edgar Online, source
