Summary of Significant Accounting Policies (Policies) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation |
Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Notes to the unaudited interim condensed consolidated financial statements that would substantially duplicate the disclosures contained in the audited condensed consolidated financial statements for fiscal year 2018 have been omitted. This report should be read in conjunction with the audited condensed consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2018 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on April 16, 2019. |
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| Principles of Consolidation |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries 12HK, 12JP, 12EU. 12 Retail, Rune NYC, LLC, Red Wire Group, LLC (“RWG”), and Emotion Fashion Group which included Emotion Apparel, Inc., Lexi Luu Designs, Inc., Punkz Gear, Skipjack Dive and Dance Wear, Inc. and Cleo VII, Inc. Since January 2019, the consolidation includes both Rune and RWG which were acquired in the first quarter 2019. All inter-company accounts and transactions have been eliminated. We currently have no investments accounted for using the equity or cost methods of accounting. On October 1, 2019, Bluwire Group, LLC will be included in the consolidation. |
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| Use of Estimates |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ from these good faith estimates and judgments. |
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| Software Development Costs |
Software Development Costs
At September 30, 2019 and December 31, 2018 software development costs totaled $0 and $371,118, respectively. Capitalized costs related to the software under development are treated as an asset until the development is completed and the software is available for licensure under a software-as-a-service (“SaaS”) arrangement. Periodically, management reviews its capitalized costs to determine if they are properly valued or should they be impaired. As of June 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. As a result, management believed that the capitalized costs for the software development should be fully impaired as of that date. As of September 30, 2019, management has not since revised its opinion. Please see Management, Discussion Analysis for further details in the resulting cutting of costs in 12 Europe and 12 Japan. |
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| Goodwill |
Goodwill
Goodwill represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired.
The goodwill amount of $480,381 related to the acquisition of RWG and $394,440 related to the acquisition of Rune as of September 30, 2019. Goodwill is not amortized, but is tested annually for impairment, or if circumstances occur that more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company has determined that there has been no impairment of goodwill at September 30, 2019. The Company performs its annual test during the fourth quarter. |
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| Revenue Recognition |
Revenue Recognition
The Company recognizes revenue from the sale of products and services in accordance with ASC 606, “Revenue from Contracts with Customers”. Revenue is recognized when the earnings process is complete typically when services or products are provided to the customer. |
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| Convertible Debt and Convertible Preferred Stock |
Convertible Debt and Convertible Preferred Stock
When the Company issues convertible debt or convertible preferred stock, it first evaluates the balance sheet classification of the convertible instrument in its entirety to determine whether the instrument should be classified as a liability under ASC 480, Distinguishing Liabilities from Equity, and second whether the conversion feature should be accounted for separately from the host instrument. A conversion feature of a convertible debt instrument or certain convertible preferred stock would be separated from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone instrument, meets the definition of an “embedded derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity, as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized currently in the consolidated statements of operations.
If a conversion feature does not meet the conditions to be separated and accounted for as an embedded derivative liability, the Company then determines whether the conversion feature is “beneficial”. A conversion feature would be considered beneficial if the conversion feature is “in the money” when the host instrument is issued or, under certain circumstances, later. If convertible debt contains a beneficial conversion feature (“BCF”), the amount of the amount of the proceeds allocated to the BCF reduces the balance of the convertible debt, creating a discount which is amortized over the debt’s term to interest expense in the consolidated statements of operations.
When a convertible preferred stock contains a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized over the period beginning when the convertible preferred stock is issued up to the earliest date the conversion feature may be exercised, or if the convertible preferred stock is immediately exercisable, the discount is fully amortized at the date of issuance. The amortization is recorded similar to a dividend. |
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| Derivative Liabilities and Fair Value Measurements |
Derivative Liabilities and Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Observable inputs are based on market data obtained from sources independent of the Company. Unobservable inputs reflect our own assumptions based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels, defined as follows:
The Company carries certain derivative financial instruments using inputs classified as “Level 3” in the fair value hierarchy on the Company’s consolidated balance sheets.
The Company classified certain conversion features in the convertible notes issued during 2019 and 2018 as embedded derivative instruments due to down-round ratchet provisions and potential adjustments to conversion prices due to events of default and accordingly measures and carries the conversion features as derivative liabilities in the consolidated financial statements. Also, the Company determined that the certain notes should be measured and carried at fair value in the consolidated financial statements according to ASC 480, as they are settleable in a variable number of shares based on a fixed monetary amount known at inception. These fair value estimates were measured using inputs classified as “Level 3” of the fair value hierarchy. The Company develops unobservable “Level 3” inputs using the best information available in the circumstances, which might include its own data, or when it believes inputs based on external data better reflect the data that market participants would use, its bases its inputs on comparison with similar entities. Due to the existence of down round provisions, which create a path-dependent nature of the conversion prices of the convertible notes, the Company decided a Black Scholes Simulation model, which incorporates inputs classified as “Level 3” was appropriate.
The conversion feature was recognized as an embedded derivative and was valued using a Black Scholes model that resulted in a derivative liability of $14,494,342 and $2,696,470 at September 30, 2019 and December 31, 2018, respectively.
In connection with convertible notes payable, the Company records derivative liabilities for the conversion feature. During the year ended December 31, 2018, the Company recorded initial derivative liabilities of $3,229,344. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible note payables by approximately $1,637,572, which was recorded as a day one loss on derivative liability. On December 31, 2018, the derivative liabilities were revalued at $2,696,470 resulting in a loss of $760,508 related to the change in fair market value of the derivative liabilities during the year ended December 31, 2018. In connection with convertible notes, as disclosed in Note 8, the Company reclassified derivative liabilities with a fair value of $1,418,516 to additional paid-in capital during year ended December 31, 2018. The Company revalued the derivative liabilities at each conversion date recording the pro-rata portion of the derivative liability as compared to the portion of the convertible note converted to the pre-conversion carrying value to additional paid-in capital.
During the nine months ended September 30, 2019, the Company recorded additional derivative liabilities of $1,150,152 related to convertible notes payable and $2,717,043 for various series of preferred stock. The Company also recorded $4,555,575 of additional derivative liability for the default reserve related to the potential additional liability for the default on convertible notes and certain Series D Preferred Stock. See further details convertible notes below and management discussion analysis section. On September 30, 2019, the derivative liabilities were revalued at $14,494,342 resulting in a loss of $4,169,269 related to the change in fair market value of the derivative liabilities during the nine months ended September 30, 2019.
Management views these convertible notes, due to their conversion feature to be viewed as equity, and the expenses associated through derivative calculations to be estimates that are only finalized once the actual conversion has been consummated. For the balance outstanding, please see Note 8. |
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| Commitments and Contingencies |
Commitments and Contingencies
The Series B Redeemable Convertible Preferred Stock is classified as temporary equity, as it is mandatorily redeemable by the holder at a future date. The Series D-2 Preferred Stock is classified as temporary equity due to the fact that it is redeemable immediately. The Series D-3 Preferred Stock is also classified as temporary equity due to the existence of the PUT. Under the terms of the acquisition of the Red Wire Group, certain members received Series D-5 with a PUT option with a face value of $150,000. If those members so elect, to not convert those shares to common stock, they have the right to PUT those shares to the Company for cash. This would be an additional cash constraint on the company. For additional detail, See Note 3 Acquisitions. |
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| Earnings Per Share |
Earnings (Loss) per Share
The Company follows ASC 260, “Earnings per Share” (“EPS”), which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying financial statements, basic earnings (loss) per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. As a subsequent event, on October 18, 2019, the Company successfully completed its reverse stock split and reduced its common stock outstanding by a ratio of one hundred for one. Per ASC 505-10, if a reverse split occurs after the date of the latest reported balance sheet but before the release of the financial statements, then such changes in the capital structure must be given retroactive effect in the balance sheet. As such, the reverse split has been retroactively applied to these financial statements.
Diluted earnings per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in the Company’s earnings subject to anti-dilution limitations. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact. For the nine months ended September 30, 2019, potentially dilutive common shares consist of common stock issuable upon the conversion of convertible notes payable, Series A Preferred Stock, Series B Preferred Stock, Series D-2 Preferred Stock, Series D-3 Preferred Stock, Series D-5 Preferred Stock and Series D-6 Preferred Stock (using the if converted method). All potentially dilutive securities were excluded from the computation of diluted weighted average number of shares of common stock outstanding as they would have had an anti-dilutive impact. If all dilutive securities were converted the Company would be in excess of their authorized shares of common stock. |
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| Financial Instruments |
Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, due to stockholders and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. |
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| Recent Accounting Pronouncements |
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements. |
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