Notes
to Condensed Financial Statements
September
30, 2016
NOTE
1 – BUSINESS
Overview
MOJO
Organics, Inc. (“MOJO” or the “Company”) was incorporated in the State of Delaware on August 2, 2007.
Headquartered in Jersey City, NJ, the Company develops emerging beverage brands that are natural, USDA Organic and Non GMO Project
verified.
Beginning
in December 2015, the Company began selling its line of coconut water beverages. Previously, the Company produced juice under
a license branding agreement (the “License Agreement”). The License Agreement was terminated September 27, 2015. See
Note 5 in the Notes to the Condensed Financial Statements.
Interim
Financial Statements
The
accompanying unaudited interim condensed financial statements have been prepared pursuant to the rules and regulations for reporting
on Form 10-Q and article 10 of Regulation S-X and the related rules and regulations of the Securities and Exchange
Commission (“SEC”). Accordingly, certain information and disclosures required by accounting principles generally accepted
in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the disclosures included in these financial statements are adequate
to make the information presented not misleading. The unaudited interim condensed financial statements included in this document
have been prepared on the same basis as the annual audited financial statements, and in the Company’s opinion, reflect all
adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The
results for the nine months ended September 30, 2016 are not necessarily indicative of the results that the Company will have
for any subsequent period. These unaudited condensed financial statements should be read in conjunction with the audited financial
statements and the notes to those statements for the year ended December 31, 2015 included in the Company’s Annual Report
on Form 10-K.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
financial statements are prepared in conformity with GAAP. Management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
equivalents include investment instruments and time deposits purchased with a maturity of three months or less.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company provides for probable
uncollectible amounts based upon its assessment of the current status of the individual receivables and after using reasonable
collection efforts. The allowance for doubtful accounts as of September 30, 2016 and December 31, 2015 was zero and $3,000, respectively.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market. When necessary, the Company provides allowances to adjust
the carrying value of its inventories to the lower of cost or net realizable value.
Supplier
Deposits
Supplier
Deposits consist of payments to manufacturers for future production.
Property
and Equipment and Depreciation
Property
and equipment are stated at cost. Depreciation is computed using the straight line method over the estimated useful
life of the respective assets. Computer equipment is depreciated over a period of three years. Computer Software
is depreciated over a one year period. Maintenance and repairs are charged to expense when incurred. When property
and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is credited or charged to income. At September 30, 2016 and December 31, 2015, accumulated
depreciation related to property and equipment was $869 and $935, respectively.
Revenue
Recognition
Revenue
from the sale of products is recognized when persuasive evidence of an arrangement exists, delivery of products has occurred,
the sales price is fixed or determinable and collectability is reasonably assured. Costs incurred for sales incentives and discounts
are accounted for as a reduction in revenue.
Shipping
and Handling Costs
Shipping
and Handling Costs incurred to move finished goods from our sales distribution centers to customer locations are included in the
line Selling, General and Administrative Expenses in our Statements of Operations.
Net
Loss Per Common Share
The
Company computes per share amounts in accordance with the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 260, “
Earnings per Share
”. ASC Topic 260 requires
presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to common stockholders
by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during the periods.
The
following potentially dilutive securities have been excluded from the computation of weighted average shares outstanding for the
nine months ended September 30, 2016 and 2015, as they would have had an anti-dilutive impact on the Company’s net loss
per common share:
|
|
2016
|
|
2015
|
Shares underlying options
outstanding
|
|
|
620,000
|
|
|
|
830,000
|
|
Shares underlying
warrants outstanding
|
|
|
3,096,919
|
|
|
|
1,114,776
|
|
Total
|
|
|
3,716,919
|
|
|
|
1,944,776
|
|
Start-Up
Costs
In
accordance with ASC topic 720-15, “
Start-Up Costs
,” the Company charges all costs associated with its start-up
operations to expense as incurred.
Income
Taxes
The
Company provides for income taxes under ASC topic 740, “
Income Taxes
,” which requires the use of an asset and
liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between
the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected
to reverse. ASC Topic 740 also requires the reduction of deferred tax assets by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Tax returns
for the years from 2012 to 2015 are subject to examination by tax authorities.
The
Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of September 30, 2016 and
December 31, 2015, the Company had no accrued interest or penalties. The Company has had no Federal or state tax examinations
in the past nor does it have any at the current time.
Stock-Based
Compensation
ASC
Topic 718, “
Accounting for Stock-Based Compensation
” prescribes accounting and reporting standards for stock-based
compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights.
ASC Topic 718 requires employee compensation expense to be recorded using the fair value method. The Company accounts for
employee stock based compensation in accordance with the provisions of ASC Topic 718.
The
Company accounts for equity based transactions with non-employees under the provisions of ASC Subtopic 505-50, “
Equity-Based
Payments to Non-Employees
.” ASC Subtopic 505-50 establishes that equity-based payment transactions with non-employees
shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever
is more reliably measurable. When the equity instrument is utilized for measurement the fair value of (i) common stock issued
for payments to non-employees is measured at the market price on the date of grant; (ii) equity instruments, other than common
stock, is estimated using the Black-Scholes option valuation model. In general, we recognize an asset or expense in the same manner
as if it is to pay cash or services instead of paying with or using the equity instrument.
Fair
value of financial instruments
The
carrying amounts of financial instruments, which include cash, accounts receivable, accounts payable, accrued expenses and debt
obligations approximate their fair values due to their short-term nature and/or variable interest rates. The Company’s debt
obligations bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and,
accordingly, the carrying values for these instruments approximate fair value.
The
Company adopted ASC Topic 820, “
Fair Value Measurement
,” which established a framework for measuring fair value
and expands disclosure about fair value measurements. ASC Topic 820 defines fair value as the amount that would be
received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC Topic 820 describes the following three levels of inputs that may be used:
|
•
|
Level
1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,, unrestricted assets
or liabilities;
|
|
•
|
Level
2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability;
|
|
•
|
Level
3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
Company did not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2016 or December
31, 2015. The Company did not have any fair value adjustments for assets and liabilities measured at fair value on a
nonrecurring basis during the nine months ended September 30, 2016 or 2015.
New
Accounting Pronouncements
In
May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, which creates ASC Topic 606, “
Revenue
from Contracts with Customers”
, and supersedes the revenue recognition requirements in Topic 605,
“
Revenue
Recognition”
, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification.
In addition, ASU 2014-09 supersedes the cost guidance in Subtopic 605-35, “
Revenue Recognition—Construction-Type
and Production-Type Contracts
,” and creates new Subtopic 340-40, “
Other Assets and Deferred Costs—Contracts
with Customers
.” In summary, the core principle of ASC Topic 606 is to recognize revenue when promised goods or services
are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.
The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period, and early application is not permitted. Therefore the amendments in ASU 2014-09 will become
effective for us as of the beginning of our 2017 fiscal year. The Company is currently assessing the impact of implementing the
new guidance.
In
August 2014, FASB issued ASU 2014-15, “
Presentation of Financial Statements Going Concern
(Subtopic 205-40) –
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
”. Currently, there is
no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s
ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance.
In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments
require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain
principles that are currently in U.S. auditing standards.
Specifically,
the amendments (1) provide a definition of the term
substantial doubt,
(2) require an evaluation every reporting period
including interim periods, (3) provide principles for considering the mitigating effect of
management’s
plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s
plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment
for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in
this ASU are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is
permitted. The Company adopted SU 2014-15 during the nine months ended September 30, 2016.
Management
does not believe that any other recently issued, but not yet effective accounting standards, if currently adopted, would have
a material effect on the accompanying financial statements.
Reclassifications
Certain
amounts in the September 30, 2015 Financial Statements have been reclassified to conform to the presentation used in the September
30, 2016 Financial Statements.
NOTE
3 – GOING CONCERN
The
expansion and development of our business has been funded primarily through the sale of Company stock. During the nine months
ended September 30, 2016, the Company raised $337,500 in a private placement (see Note 6 for further information). As of September
30, 2016, the Company had working capital of $326,038. The Company has received purchase orders to be fulfilled from both new
customers and existing customers. As a result, the Company believes it has sufficient cash and revenue commitments to finance
its operations over the next twelve month period. We continue to market our products in accordance with our business plan. There
can be no assurances, however, that we will be successful in our efforts to generate sufficient revenues through our marketing
efforts.
NOTE
4 – INVENTORY
As
of September 30, 2016 and December 31, 2015, inventory consisted of finished goods of $215,914 and $33,473, respectively.
NOTE
5 – COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On
June 15, 2015, the Company entered into an Amended and Restated Employment Agreement (the "Simpson Agreement") with
Glenn Simpson pursuant to which Mr. Simpson will continue to act as the Company's CEO and Chairman for a term of five (5) years
as extended in consideration of (i) a base salary of $5,000 per month from June 2015 through September 2015 and then increasing
to $18,500 per month, (ii) 1,544,737 shares of common stock of the Company to be issued to Mr. Simpson upon the Company generating
revenue of $3,000,000 during any consecutive twelve month period during the term (the “Simpson Shares”) and (iii)
an annual bonus comprised of cash and Common Stock based on performance goals established by the Board of Directors of the Company
as set forth in the Simpson Agreement. The cash bonus is established at 20% of the annual salary. The stock bonus is set
at 200,000 shares of Common Stock per year through December 31, 2021 based upon revenue performance goals. The revenue goals range
from $900,000 to $19,200,000 per year. The bonus awards may be accelerated should revenue exceed the annual target amounts. On
December 15, 2015, the Company and Mr. Simpson entered into an amendment to the Simpson Agreement increasing the Simpson Shares
by 337,500.
On
June 15, 2015, the Company entered into an Amended and Restated Employment Agreement (the "Spinner Agreement") with
Peter Spinner pursuant to which Mr. Spinner will continue to act as the Company's COO for a term of five (5) years as extended
in consideration of (i) a base salary of $8,000 per month from June 2015 through September 2015 and then increasing to $16,000
per month, (ii) 252,632 shares of common stock of the Company to be issued to Mr. Spinner upon the Company generating revenue
of $3,000,000 during any consecutive twelve month period during the term (the “Spinner Shares”) and (iii) an annual
bonus comprised of cash and Common Stock based on performance goals established by the Board of Directors of the Company as set
forth in the Spinner Agreement. The cash bonus is established at 20% of the annual salary. The stock bonus is set at 375,000
shares of Common Stock per year through December 31, 2018 and 200,000 shares of Common Stock per year from 2019 through December
31, 2021 based upon revenue performance goals. The revenue goals range from $900,000 to $19,200,000 per year. The bonus awards
may be accelerated should revenue exceed the annual target amounts. On December 15, 2015, the Company and Mr. Spinner entered
into an amendment to the Spinner Agreement increasing the number of Spinner Shares by 345,000.
Lease
Commitment
The
Company maintains office space in Jersey City, New Jersey. The Company leases the space from a third-party for $2,230 per month
pursuant to a lease agreement effective September 15, 2016 and ending on April 30, 2017. Lease expense amounted to $17,488 and
$17,356 for the nine months ended September 30, 2016 and 2015, respectively.
Licensing
Agreement
On
March 27, 2015, pursuant to the terms of the License Agreement, the Company was provided with written notice of termination effective
September 27, 2015. The notice demanded payment by the Company of $2,283,085, comprised of liquidated damages amounting to $1,515,076
and outstanding royalties of $768,009.
On
May 29, 2015, the liquidating damages and outstanding royalties were settled for $90,000. As a result, the Company reversed the
license fees recorded during the nine months ended September 30, 2015 of $417,223 and recorded net income amounting to $417,223
for the year ended December 31, 2015.
NOTE
6 – STOCKHOLDERS’ EQUITY
The
Company has authorized 190,000,000 shares of common stock (“Common Stock”) and 10,000,000 shares of preferred stock
(“Preferred Stock”), each having a par value of $0.001.
In
October 2015, the Company approved the 2015 Incentive Stock Plan, which provides the Company with the ability to issue stock options,
stock awards and/or restricted stock purchase offers for up to an aggregate of 1,500,000 shares of Common Stock.
In
March 2013, the Company approved the 2012 Long-Term Incentive Equity Plan (the “2012 Plan”), which provides the Company
with the ability to issue stock options, stock appreciation rights, restricted stock and/or stock based awards for up to an aggregate
of 2,050,000 shares of Common Stock.
Private
Placement Offerings
On
January 20, 2016, the Company approved a subscription agreement (the “2016 Subscription”) whereby 1,428,572 shares
of Common Stock were offered to accredited investors for $0.35 per share. For every two shares purchased, the investor received
a warrant to acquire one share of Common Stock at an exercise price of $0.70 per share exercisable for a period of two years from
the date of issuance representing a potential aggregate of 714,286 shares of Common Stock. The Company issued a total of 964,286
shares of Common Stock and two year purchase warrants to acquire a total 482,143 shares of Common Stock to four accredited investors
in consideration of $337,500.
In
August 2015, the Company entered into a subscription agreement (the “2015 Subscription”) whereby 750,000 shares of
Common Stock were sold to an accredited investor for a total of $150,000, along with a purchase warrant for 1,500,000 shares of
Common Stock at a price of $0.40 per share. The five year warrant is immediately exercisable.
Restricted
Stock Compensation
The
Company issued shares of restricted Common Stock to certain of its directors, executive officers and employees. Unvested restricted
shares are subject to forfeiture. With the exception of 1,726,485 shares issued to employees and directors and 582,626 shares
issued to a former director, which vest based upon achieving certain milestones, the Company records compensation expense over
the vesting period based upon the fair market value on the date of grant for each share, adjusted for forfeitures.
In
December 2015, the Company entered into a settlement with a former director of the Company whereby restricted Common Stock amounting
to 1,165,251 shares was cancelled. The former director was issued 582,626 shares of restricted Common Stock subject to a lock
up legend providing that the Company generate certain minimum revenues and providing for limitations on the amount of Common Stock
that the former director can sell per quarter.
In
June 2015, the Company awarded 2,023,854 shares of Common Stock to its officers and employees. The Company issued 226,485 shares
in August 2015, which shares will vest upon the Company reaching a $3,000,000 revenue threshold during any twelve month period.
The balance of 1,797,369 shares will be issued and will vest upon the Company reaching a $3,000,000 revenue threshold during any
twelve month period. In December 2015, the Company awarded 682,500 shares of Common Stock to its officers and employees. These
shares will be issued and will vest upon the Company reaching a $3,000,000 revenue threshold during any twelve month period. See
Note 5 to the Notes to the Condensed Financial Statements.
A
summary of the restricted stock issuances to directors, executive officers and employees is as follows:
|
|
Number
of Shares
|
|
Weighted
Average
Grant
Date Fair Value
|
|
Unvested share balance, January
1, 2015
|
|
|
|
6,091,992
|
|
|
$
|
1.07
|
|
|
Granted
|
|
|
|
809,111
|
|
|
|
0.34
|
|
|
Vested
|
|
|
|
(1,525,546
|
)
|
|
|
1.32
|
|
|
Forfeited
|
|
|
|
(1,165,251
|
)
|
|
|
1.40
|
|
|
Unvested share balance, December 31, 2015
|
|
|
|
4,210,306
|
|
|
$
|
0.75
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
|
(1,901,192
|
)
|
|
|
1.33
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Unvested share balance, September 30, 2016
|
|
|
|
2,309,111
|
|
|
$
|
0.21
|
|
In
connection with the issuance of restricted stock, the Company recorded share-based compensation expense of $466,134 and $857,558
for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was $490,426 of
total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based compensation which vests only
upon the achievement of certain performance criteria.
Stock
Warrants
In
connection with the 2016 Subscription, warrants to purchase 482,143 shares of Common Stock were issued at a price of $0.70 per
share and are exercisable for a period of two years from the date of issuance.
Warrants
to purchase 1,500,000 shares of Common Stock were issued as part of the 2015 Subscription at a price of $0.40 per share. The warrants
are exercisable for five years from the date of issuance.
The
following table summarizes warrant activity during the period:
|
|
Number of
Warrants
|
Outstanding at January 1,
2015
|
|
|
1,114,776
|
|
Issued in connection
with the 2015 Subscription
|
|
|
1,500,000
|
|
Outstanding at December 31, 2015
|
|
|
2,614,776
|
|
Issued in connection
with the 2016 Subscription
|
|
|
482,143
|
|
Outstanding at September
30, 2016
|
|
|
3,096,919
|
|
Exercisable at September
30, 2016
|
|
|
3,096,919
|
|
Advisory
Services
On
October 3, 2013, the Company entered into an agreement with Ian Thompson for strategic business advisory services, public relations
services and investor relations services. In connection with this agreement, the Company issued 167,204 shares of restricted Common
Stock to Ian Thompson and recorded consulting fees of $501,612 during 2013, which was the fair market value of the stock on the
date of issue; there was no cash payment to Ian Thompson by the Company. The stock is fully vested, however it is restricted from
trading. Ian Thompson was also issued 200,000 shares of restricted Common Stock for future services that included, but not limited
to strategic business advisory services, public relations services and investor relations services which was to vest in mid-2014.
Consulting fees of $105,000 and $280,000 were recorded in 2014 and 2013, respectively, related to the 200,000 shares of Common
Stock issued to Ian Thompson.
During
the term of the agreement, the Company requested Ian Thompson to render performance under the agreement and to provide evidence
of same in consideration of the payment of $886,612. Ian Thompson failed to perform in all material respects under the terms of
the agreement and failed to provide evidence.
On
June 27, 2014, by a unanimous written consent of the board of directors, the Company terminated the agreement with Ian Thompson
and authorized the cancellation of the 367,204 shares issued with a value of $886,612, due to lack of delivery of consideration
and material breach of the agreement.
NOTE 7
– STOCK
OPTIONS
In
June 2015, the Company granted a director of the Company stock options to purchase 35,000 shares of Common Stock pursuant to the
2012 Plan. The exercise price is $0.255 per share and the options become exercisable in four equal tranches in December 2015,
June 2016, December 2016 and June 2017. They expire in June 2020.
During
the nine months ended September 30, 2016 and 2015, compensation expense related to stock options of $44,371 and $57,723, respectively,
was recorded. As of September 30, 2016, there was $2,056 of total unrecognized compensation cost related to non-vested stock options.
That remaining cost is expected to be recognized by June 30, 2017.
NOTE
8 – RELATED PARTY TRANSACTIONS
During
the nine months ended September 30, 2016, the Chief Executive Officer (the “CEO”) and the Chief Operating Officer
(the “COO”) of the Company forgave unpaid salary due to them of $96,000 and $81,000, respectively. This resulted in
an increase to additional paid in capital of $177,000 for the nine months ended September 30, 2016
As
of September 30, 2016 and December 31, 2015, accrued payroll of $132,591 and $3,050 was payable to the CEO, the COO and Controller
(and Principal Accounting Officer) of the Company, respectively.
In
January 2016, the Company entered into the 2016 Subscription with Wyatts Torch Equity Partners, LP (“Wyatt”) for the
sale of 285,714 shares of Common Stock for $100,000 and warrants to purchase 142,857 shares of Common Stock at $0.70 per share.
The managing member of Wyatt is the COO of the Company, as well as a Director of the Company. See Note 6 for further discussion.
In
August 2015, the Company issued its Controller 226,485 shares of Common Stock of the Company in consideration of her previous
and continued services as Controller of the Company. These shares will vest upon the Company generating revenue of $3,000,000
during any consecutive twelve month period on or prior to June 26, 2025
In
August 2015, the Company entered into the 2015 Subscription with Wyatt for the sale of 750,000 shares of Common Stock for $150,000
and warrants to purchase 1,500,000 shares of Common Stock at $0.40 per share. See Note 6 for further discussion.