Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number 000-53276

(SIMLATUS CORPORATION LOGO)

SIMLATUS CORPORATION

(Name of small business issuer in its charter)


Nevada		20-2675800
(State of incorporation)		(I.R.S. Employer Identification No.)

175 Joerschke Dr., Ste. A

Grass Valley, CA 95945

(Address of principal executive offices)

(530) 205-3437

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	x
Emerging growth company	o {

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o {

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 12, 2019, there were 303,958,932 shares of the registrant’s $0.00001 par value common stock issued and outstanding.

SIMLATUS CORP.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

ITEM 1.	CONDENSED FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	36
ITEM 4.	CONTROLS AND PROCEDURES	36

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	36
ITEM 1A.	RISK FACTORS	36
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	36
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	36
ITEM 4.	MINE SAFETY DISCLOSURES	36
ITEM 5.	OTHER INFORMATION	36
ITEM 6.	EXHIBITS	37

Special Note Regarding Forward-Looking Statements

Information included in this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Simlatus Corp. (the “Company”), to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that these projections included in these forward-looking statements will come to pass. Actual results of the Company could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, the Company has no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Please note that throughout this Quarterly Report, and unless otherwise noted, the words “we,”“SIML,” “our,” “us,” the “Company,” refers to Simlatus Corp.

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIMLATUS CORP.

BALANCE SHEETS

	June 30,			December 31,
	2019			2018
ASSETS		(unaudited)
Current Assets
Cash	$	62,021		$	5,982
Accounts receivable		6,003			29,350
Inventory, net		1,224			—
Prepaid expenses		228			—
Total current assets		69,476			35,332

Right-of-use asset		38,628			—
Security deposit		5,162			5,162

TOTAL ASSETS	$	113,266		$	40,494

LIABILITIES
Current Liabilities:
Accounts payable	$	344,808		$	307,410
Accounts payable - related parties		31,269			31,269
Accrued wages		1,024,276			1,058,808
Accrued expenses		41,387			41,313
Accrued interest		832,903			651,619
Convertible notes payable in default, net of discount		451,609			812,437
Convertible notes payable, net of discount		595,253			235,516
Derivative liabilities		7,178,091			4,888,497
Operating lease liabilities		36,661
Promissory notes		—			297,669
Related party liabilities		96,463			152,067
Total Current liabilities		10,632,720			8,476,605

Long term notes payable		18,500			61,000

Total liabilities		10,651,220			8,537,605

Commitments and contingencies		—			—

SHAREHOLDERS’ DEFICIT
Preferred stock 20,045,750 shares authorized
Series A: 10,000,000 shares authorized, par value $0.001		6,695			5,065
6,695,195 shares issued and outstanding at June 30, 2019
5,064,929 shares issued and outstanding at December 31, 2018
Series B: 10,000,000 shares authorized, par value $0.001		1			1
500 shares issued and outstanding at June 30, 2019
500 shares issued and outstanding at December 31, 2018
Series C: 45,750 shares authorized, par value $0.0001		5			—
45,750 shares issued and outstanding at June 30, 2019
0 shares issued and outstanding at December 31, 2018
Common stock, $0.00001 par value 975,000,000 authorized		1,717			1,081
171,650,354 shares issued and outstanding at June 30, 2019
108,077,937 shares issued and outstanding at December 31, 2018
Additional paid in capital		(6,333,447	)		(15,137,988	)
Accumulated earnings (deficit)		(4,212,925	)		6,634,730
Total shareholders’ deficit		(10,537,954	)		(8,497,111	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	113,266		$	40,494

The accompanying notes are an integral part of these financial statements

3

SIMLATUS CORP.

STATEMENT OF OPERATIONS

(Unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
Sales	$	117,021		$	160,809		$	264,443		$	293,835
Cost of materials		—			—			2,529			—
Gross profit		117,021			160,809			261,914			293,835

Operating expenses:
G&A expenses		242,344			101,404			3,426,793			206,655
Professional fees		14,410			—			21,271			—
Salaries and wages		155,480			79,128			329,458			153,023
Total operating expenses		412,234			180,532			3,777,522			359,678

Loss from operations		(295,213	)		(19,723	)		(3,515,608	)		(65,843	)

Other expense:
Loss on settlement of debt		(17,622	)		—			(27,622	)		—
Derivative expense		(4,449,805	)		—			(6,775,029	)		—
Interest expense		(316,649	)		(7,406	)		(527,561	)		(7,406	)
Total other expense		(4,784,076	)		(7,406	)		(7,330,212	)		(7,406	)

Net loss before income taxes		(5,079,289	)		(27,129	)		(10,845,820	)		(73,249	)
Income tax expense		—			—			—			—
Net loss	$	(5,079,289	)	$	(27,129	)	$	(10,845,820	)	$	(73,249	)

Per share information
Weighted average number of common shares outstanding, basic and diluted		163,513,589			—			141,956,775			—
Net loss per common share, basic and diluted	$	(0.03	)	$	(0.00	)	$	(0.08	)	$	(0.00	)

The accompanying notes are an integral part of these financial statements

4

SIMLATUS CORP.

STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX MONTHS JUNE 30, 2019 (unaudited)

	Preferred Stock						Preferred Stock				Preferred Stock								Additional			Accumulated			Total
	Series A						Series B				Series C				Common Stock				Paid-In			Earnings			Shareholders’
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		Capital			(Deficit)			Equity (Deficit)
Balances for December 31, 2018		5,064,929		$	5,065			500	$	1		—	$	—		108,077,937	$	1,081	$	(15,137,988	)	$	6,634,730		$	(8,497,111	)
Conversion of debt to common stock		—			—			—		—		—		—		50,786,076		509		119,870			—			120,379
Cashless warrant exercise		—			—			—		—		—		—		6,962,712		69		(69	)		—			—
Warrant shares exchanged for preferred stock		—			—			—		—		45,750		5		—		—		1,829,996			—			1,830,001
Derivative settlements		—			—			—		—		—		—		—		—		3,546,290			—			3,546,290
Preferred stock issued for services		1,675,978			1,675			—		—		—		—		—		—		2,998,325			—			3,000,000
Preferred stock converted to common stock		(2,413	)		(2	)		—		—		—		—		5,400,000		54		(52	)		—			—
Preferred stock repurchased and retired		(43,299	)		(43	)		—		—		—		—		—		—		(77,457	)		—			(77,500	)
Common stock issued for services		—			—			—		—		—		—		423,729		4		24,953			—			24,957
Debt settlement by related party		—			—			—		—		—		—		—		—		354,964			—			354,964
Imputed interest		—			—			—		—		—		—		—		—		7,721			—			7,721
Lease standard adoption		—			—			—		—		—		—		—		—		—			(1,835	)		(1,835	)
Net loss		—			—			—		—		—		—		—		—		—			(10,845,820	)		(10,845,820	)
Balances for June 30, 2019		6,695,195		$	6,695			500	$	1		45,750	$	5		171,650,454	$	1,717	$	(6,333,447	)	$	(4,212,925	)	$	(10,537,954	)

The accompanying notes are an integral part of these financial statements

5

SIMLATUS CORP.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(10,845,820	)	$	(73,249	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible debt discount		366,469			—
Stock based compensation		3,000,000
Imputed interest		7,721			—
Loss on debt settlement		27,622
Change in fair value of derivative liability		6,775,029			—
Decrease (increase) in operating assets and liabilities:
Accounts receivable		23,347			46,363
Inventory		(1,224	)		—
Prepaid expenses		(228	)
Right-of-use asset		(3,802	)		—
Accrued interest		277,780			7,405
Accounts payable		121,207			9,594
Accrued expenses		(34,458	)		6,879
Advances from related parties		(55,604	)		—
Net cash (used in) provided by operating activities		(340,961	)		(3,008	)

Cash flows from investing activities:
Cash paid for fixed assets		—			—
Net cash provided by investing activities		—			—

Cash flows from financing activities:
Proceeds from convertible debt		647,000
Repurchase of preferred series A shares - related party		(77,500	)
Payments on convertible debt		(125,000	)		—
Payments on promissory notes		(47,500	)		(1,500	)
Net cash (used in) provided for financing activities		397,000			(1,500	)

Net increase (decrease) in cash		56,039			(4,508	)

Cash, beginning of period		5,982			10,681
Cash, end of period	$	62,021		$	6,173

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	—		$	—
Cash paid for interest	$	—		$	—

Schedule of non-cash investing & financing activities:
Stock issued for debt conversion	$	120,379		$	—
Settlement of debt by related party	$	354,961		$	—
Discount from derivative	$	914,312		$	—
Preferred stock converted to common stock	$	54		$	—
Cashless warrant exercise	$	69		$	—
Lease adoption recognition	$	77,700		$	—
Derivative warrants settled with preferred C shares	$	1,830,001
Derivative settlements	$	3,546,290		$	—

The accompanying notes are an integral part of these financial statements

6

SIMLATUS CORP.

NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Description of Business

Satel Group merged with Simlatus Corporation (“SIML” or “Company”) on November 13, 2018 and is the premier provider of DirecTV to high-rise apartments, condominiums and large commercial office buildings in the San Francisco metropolitan area and is now expanding both their DirecTV and Internet services across the Bay Area. Simlatus continues to manufacture its own proprietary systems for major broadcast studios, such as Warner Bros., Fox News, CBS and DirecTV. Its video technology supports the major system used for underwater oil exploration in the world.

Simlatus Corporation was initially incorporated in the State of Nevada under the name Sunberta Resources Inc. on November 15, 2006, as a mining and exploration of mineral claims business. On November 18, 2009, the Company changed its name to Grid Petroleum Corp. and continued with the mining and exploration of mineral claims in Alberta, Canada, Vancouver Island, British Columbia, England and the United States.

On March 9, 2016, Grid Petroleum Corp. entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RJM and Associates, LLC, a California limited liability company (“RJM”) whereby RJM‟s owners became the directors of the Company and were to be issued $6,250,000 worth of the Company’s stock; $5,000,000 of Restricted Common Stock 90 days from the date of this agreement and $1,250,000 of Preferred Series-A Shares of the Company’s Preferred Stock. On the same date the entire management team of RJM became the entire management team of Grid Petroleum Corp.

The Company’s transaction with RJM has been treated as a reverse recapitalization of the Company, with the Company (the legal acquirer of RJM) considered the accounting acquiree, and RJM, whose management took control of the Company (the legal acquiree of the Company) considered the accounting acquirer. The Company did not recognize goodwill or any intangible assets in connection with the transaction. All costs related to the transaction are being charged to operations as incurred. The $6,250,000 worth of shares of Company stock, to be issued in conjunction with the transaction, was presented as a liability until such time that the shares were issued, and the liability reduced. The historical financial statements include the operations of the accounting acquirer for all periods presented.

On March 25, 2016, the Company approved a name change to Simlatus Corporation, stock symbol SIML, which was executed on April 4, 2016. The new name change better describes the Company’s new business and revenues from selling commercial broadcast equipment on a global basis. Simlatus Corporation develops, manufactures, markets and owns proprietary advanced broadcast equipment and software. These systems have been sold worldwide over the past 20 years to some of the most recognized, major broadcast companies in the Television Industry.

Satel Group Inc., a Nevada Corporation, merged with Simlatus Corporation on November 13, 2018. Satel Group, Inc., (the “Company” or “Satel”) was incorporated in the State of Nevada on August 15, 2016. The Company was originally formed as Satel, LLC on February 26, 2003 as a California limited liability company. Satel, LLC converted to a California Corporation, Satel, Inc., by Articles of Incorporation with a Statement of Conversion signed by Richard Hylen as managing member of Satel LLC, dated December 20, 2013 and filed with the California Secretary of State on December 23, 2013. On September 25, 2016 Satel Group, Inc. purchased all of the assets of Satel, Inc., and therefore this Company was organized and continues to operate with the same management while engaged in providing their existing High Speed Internet and DirecTV™ services to upscale, high-rise commercial buildings including large office complexes, apartments and condominiums in the City of San Francisco and throughout the Bay Area.

7

Financial Statement Presentation

The audited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Fiscal Year End

In conjunction with the closing of the Asset Purchase Agreement dated November 13, 2018, the Company changed its fiscal year from March 31 to a calendar year end of December 31 to coincide with the fiscal year end of Satel Group Inc.

Use of Estimates

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles of United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

Revenue Recognition and Related Allowances

The Company’s revenues are derived primarily by broadcast products. On January 1, 2018, we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition (Topic 605). Results for reporting periods beginning after January 1, 2018 are presented under Topic 606. The impact of adopting the new revenue standard was not material to our financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.

Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

	●	identification of the contract, or contracts, with a customer;

	●	identification of the performance obligations in the contract;

	●	determination of the transaction price;

	●	allocation of the transaction price to the performance obligations in the contract; and

	●	recognition of revenue when, or as, we satisfy a performance obligation.

8

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at the amount that management expects to collect from outstanding balances. Bad debts and allowances are provided based on historical experience and management’s evaluation of outstanding accounts receivable. Management evaluates past due or delinquency of accounts receivable based on the open invoices aged on due date basis. The allowance for doubtful accounts at June 30, 2019 and December 31, 2018 is $0.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are carried at amortized cost and represent liabilities for goods and services provided to the Company prior to the end of the fiscal year that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services.

Loss Per Share

Basic loss per share of common stock is computed by dividing the net loss by the weighted average number of common shares outstanding during the period after giving retroactive effect to the reverse stock split affected on November 1, 2017 (see Note 12).

Inventories

Inventories are stated at the lower of cost, computed using the first-in, first-out method and net realizable value. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.

In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs is expanded. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels and which is determined by the lowest level input that is significant to the fair value measurement in its entirety.

These levels are:

Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

9

The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 for each fair value hierarchy level:

June 30, 2019	Derivative Liabilities		Total
Level I	$	—	$	—
Level II	$	—	$	—
Level III	$	7,178,091	$	7,178,091

December 31, 2018	Derivative Liabilities		Total
Level I	$	—	$	—
Level II	$	—	$	—
Level III	$	4,888,497	$	4,888,497

In management’s opinion, the fair value of convertible notes payable and advances payable is approximate to carrying value as the interest rates and other features of these instruments approximate those obtainable for similar instruments in the current market. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, exchange or credit risks arising from these financial instruments. As of June 30, 2019 and December 31, 2018, the balances reported for cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, approximate the fair value because of their short maturities.

Income Taxes

The Company records deferred taxes in accordance with FASB ASC No. 740, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and loss carry-forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rules on deferred tax assets and liabilities is recognized in operations in the year of change. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.

As of the date of this filing, the Company is current in filing their tax returns. The last return filed by the Company was December 31, 2017, and the Company has not accrued any potential penalties or interest from that period forward. The Company will need to file returns for the year ending December 31, 2018, which are still open for examination.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which replaces existing revenue recognition guidance. The updated guidance requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the standard on January 1, 2018, using a modified retrospective approach, with the cumulative effect of initially applying the standard recognized in retained earnings at the date of adoption.

2. GOING CONCERN

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of June 30, 2019, the Company has a shareholders’ deficit of $10,537,973 since its inception and working capital deficit of $10,563,263, negative cash flows from operations, and has limited business operations, which raises substantial doubt about the Company’s ability to continue as going concern. The ability of the Company to meet its commitments as they become payable is dependent on the ability of the Company to obtain necessary financing or achieving a profitable level of operations. There is no assurance the Company will be successful in achieving these goals.

10

The Company does not have sufficient cash to fund its desired research and development objectives for its augmented/virtual reality product development for the next 12 months. The Company has arranged financing and intends to utilize the cash received to fund the research and development project. This financing may be insufficient to fund expenditures or other cash requirements required to complete the product design for the augmented/virtual reality markets. There can be no assurance the Company will be successful in completing any new product development. The Company plans to seek additional financing if necessary in private or public equity offering(s) to secure future funding for operations. There can be no assurance the Company will be successful in raising additional funding. If the Company is not able to secure additional funding, the implementation of the Company’s business plan will be impaired. There can be no assurance that such additional financing will be available to the Company on acceptable terms or at all.

These financial statements do not give effect to adjustments to the amounts and classification to assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

3. MERGER TRANSACTION

On November 13, 2018, the Company, and Satel Group Inc., a Nevada corporation, entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby Satel Group merged with and into Simlatus, with Satel Group remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of Satel Group extinguished and the stockholders of the Company were issued an aggregate of 1,086,592 of the Preferred Series A stock at a price of $1.79 per share and convertible pursuant the conversion rights as specified in the Articles of Incorporation for SIML. As a result of the Merger, the Company acquired the business of Satel Group and will continue the Simlatus business.

Because the prior owners of Satel Group, Inc.’s outstanding common stock owned more than 50% of the combined voting interest in the Company, on a fully-diluted basis, immediately following the merger, the Merger is treated as a “reverse merger” under the purchase method of accounting, with Satel Group, Inc. as the accounting acquirer. Accordingly, Satel Group, Inc’s historical results of operations replace Simlatus’ historical results of operations for all periods prior to the Merger and, for all periods following the Merger, the results of operations of the combined company will be included in the Company’s consolidated financial statements.

4. LEASES

The Company adopted the new lease guidance effective January 1, 2019 using the modified retrospective transition approach, applying the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. We elected the package of practical expedients which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change our previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. The adoption of the new guidance resulted in the recognition of ROU assets of $75,865 and lease liabilities of $77,700. The difference between the ROU assets and the lease liabilities is primarily due to unamortized initial direct costs, lease incentives and deferred rent related to the Company’s operating leases at December 31, 2018.

The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In calculating the present value of the lease payments, the Company elected to utilize its incremental borrowing rate based on the remaining lease terms as of the January 1, 2019 adoption date.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of month-to-month and less than 1 year, one of which includes an option to extend the lease term for a year.

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The Company has elected the practical expedient to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.

The new standard also provides practical expedients and certain exemptions for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases where the initial lease term is one year or less or for which the ROU asset at inception is deemed immaterial, we will not recognize ROU assets or lease liabilities. Those leases are expensed on a straight line basis over the term of the lease.

Operating Leases

On February 1, 2017, Simlatus Corp. entered into a standard office lease for approximately 1,700 square feet of office space at 175 Joerschke Drive, Suite A, Grass Valley, CA 95945. The lease has a term of 1 year, from February 1, 2017 through January 31, 2018, with a monthly rent of $1,400. On February 1, 2018, the Company entered into a month-to-month lease with a monthly rent of $1,400.

On January 31, 2018, Satel Group, Inc. entered into a standard office lease for approximately 1,006 square feet of office space at 330 Townsend Street, Suite 135, San Francisco, CA 94107. The lease has a term of 2 years, from December 1, 2018 through November 30, 2019, with a monthly rent of $5,718 and applicable common area maintenance expenses.

ROU assets and lease liabilities related to our operating leases are as follows:

	June 30, 2019
Right-of-use assets	$	38,628
Current lease liabilities		36,661
Non-current lease liabilities		—

Supplemental cash flow information and non-cash activity related to our operating leases are as follows:

	Six month period ended
	June 30, 2019
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities		(3,802	)
Non-cash activity:
Right-of-use assets obtained in exchange for lease obligations		77,700

5. ACCURED EXPENSES

As of June 30, 2019 and December 31, 2018, accrued expenses were comprised of the following:

	June 30,		December 31,
	2019		2018
Accrued expenses
Credit cards	$	17,889	$	18,122
Customer deposits		18,497		18,497
Employee liabilities		1,075		—
Sales tax payable		926		1,694
Short-term loan		3,000		3,000
Total accrued expenses	$	41,387	$	41,313

Accrued interest
Interest on notes payable	$	629,201	$	585,198
Interest on promissory notes		—		66,421
Interest on accrued wages		203,702		—
Total accrued interest	$	832,903	$	651,619

Accrued wages	$	1,024,276	$	1,058,808

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6. CONVERTIBLE NOTES PAYABLE

As of June 30, 2019 and December 31, 2018, notes payable were comprised of the following:

	Original	Due	Interest	Conversion	June 30,			December 31,
	Note Date	Date	Rate	Rate	2019			2018
Armada Investment #1	2/22/2019	11/22/2019	8%	Variable	$	47,250		$	—
Armada Investment #2	5/30/2019	2/29/2020	8%	Variable	$	27,500		$	—
Auctus Fund #1	12/16/2016	9/16/2017	24%	Variable		—			46,750
Auctus Fund #2	8/9/2017	5/9/2018	24%	Variable		—			46,750
BHP Capital NY #1	2/22/2019	11/22/2019	8%	Variable		47,250			—
BHP Capital NY #2	3/5/2019	10/18/2019	24%	Variable		14,450			—
BHP Capital NY #3	3/26/2019	3/26/2020	8%	Variable		28,600			—
BHP Capital NY #4	4/9/2019	1/9/2020	8%	Variable		55,000			—
BHP Capital NY #5	4/23/2019	4/23/2020	10%	Variable		40,000			—
BHP Capital NY #6	5/30/2019	2/29/2020	8%	Variable		27,500			—
Blackbridge Capital #2	5/3/2016	5/3/2017	5%	Variable		80,400			80,400
Coventry #3	5/31/2019	5/31/2020	10%	Variable		50,000			—
EMA Financial	11/9/2016	11/9/2017	24%	Variable		415,463			468,729
Emunah Funding #1	10/18/2017	10/18/2018	22%	Variable		97,400			110,000
Emunah Funding #2	10/18/2017	10/18/2018	0%	Variable		—			20,000
Emunah Funding #3	10/18/2017	10/18/2018	0%	Variable		—			30,000
Emunah Funding #4	10/20/2018	7/20/2019	24%	Variable		1,990			10,240
Emunah Funding #5	5/15/2018	5/15/2019	10%	Variable		—			37,778
Emunah Funding #6	10/31/2018	10/31/2019	10%	Variable		—			27,778
Emunah Funding #7	1/2/2019	12/31/2019	8%	Variable		—			—
Emunah Funding #8	1/31/2019	1/31/2020	8%	Variable		33,000			—
Emunah Funding #9	3/26/2019	3/26/2020	8%	Variable		28,600			—
Fourth Man #1	7/3/2018	7/3/2019	10%	Variable		44,770			44,770
Fourth Man #2	10/26/2018	7/20/2019	8%	Variable		18,645			40,000
Fourth Man #3	2/22/2019	11/22/2019	8%	Variable		47,250			—
Fourth Man #4	4/23/2019	4/23/2020	10%	Variable		26,400			—
James Powell	9/7/2015	Demand	8%	Variable		150,875			150,875
Jefferson St Capital #1	2/22/2019	11/22/2019	8%	Variable		47,250			—
Jefferson St Capital #2	3/5/2019	10/18/2019	0%	Variable		5,000			—
Jefferson St Capital #3	4/9/2019	1/9/2020	8%	Variable		55,000			—
Jefferson St Capital #4	4/23/2019	4/23/2020	10%	Variable		34,980			—
Jefferson St Capital #5	5/30/2019	2/29/2020	8%	Variable		27,500			—
Jefferson St Capital #6	6/21/2019	3/21/2020	8%	Variable		27,500			—
Power Up Lending #1	3/14/2019	3/14/2020	10%	Variable		73,000			—
Power Up Lending #2	5/13/2019	5/13/2020	10%	Variable		103,000			—
Power Up Lending #3	6/20/2019	6/20/2020	10%	Variable		53,000			—
						1,708,573			1,114,070
Less debt discount						(661,711	)		(66,117	)
Notes payable, net of discount*					$	1,046,862		$	1,047,953

*

As of June 30, 2019, the balance of notes payable, net of discount that are in default is $595,253.

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Armada Investment Fund LLC

On February 22, 2019, the Company issued a convertible note to Armada Investment Fund LLC for $47,250, which includes $5,000 to settle outstanding accounts payable, transaction fee interest of $4,250, and cash consideration of $38,000. The note bears interest of 8% (increases to 18% per annum upon an event of default), matures on November 22, 2019, and is convertible into common stock at 65% of the lowest trading price of the 15 trading day period ending on the latest complete day prior to the date of conversion. The Company recorded a debt discount from the derivative equal to $47,250 due to this conversion feature, and $22,154 has been amortized to the statement of operations. The debt discount and transaction fee interest had a balance at June 30, 2019 of $25,096. As of June 30, 2019, the note had a principal balance of $47,250 and accrued interest of $1,325.