Notes
to Financial Statements
December
31, 2016 and 2015
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 engages in new product development, production, marketing, distribution and sales of beverage
brands that are natural, USDA Organic and Non GMO Project Verified.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
financial statements are prepared in conformity with accounting principles generally accepted in the United States of America
("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 December 31, 2016 and 2015 was zero and $3,000, respectively.
Inventories
Inventories,
consisting solely of finished goods, 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 prepaid inventory for which the Company has not yet taken delivery.
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 3 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.
Revenue
Recognition
Revenues
from sales of products are recognized when title and risk of loss passes to the customer. Recognition of revenue also
requires reasonable assurance of collection of sales proceeds.
Deductions
from Revenue
Costs
incurred for sales incentives and discounts are accounted for as a reduction in revenue. These costs include payments to customers
for performing merchandising activities on our behalf, including in-store displays, promotions for new items and obtaining optimum
shelf space.
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
years ended December 31, 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
|
|
|
|
620,000
|
|
Shares
underlying warrants outstanding
|
|
|
3,096,919
|
|
|
|
2,614,776
|
|
Total
|
|
|
3,716,919
|
|
|
|
3,234,776
|
|
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 2010 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 December 31, 2016 and
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 employee
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 Topic 505-50, “Equity-Based
Payments to Non-Employees.” ASC Topic 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 and accrued expenses approximate
their fair values due to their short-term nature.
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
June 2014, FASB issued ASU No. 2014-12, “
Compensation – Stock Compensation (Topic 718); Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”.
The amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms
of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The
amendments require that a performance target that affects vesting and that could be achieved after the requisite service period
must be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards
with performance conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective
for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption
is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-12 on the Company's financial
statements.
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 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 is currently evaluating the impact of the adoption of ASU 2014-15
on the Company’s financial statements.
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 2015 Financial Statements have been reclassified to conform to the presentation used in the 2016 Financial Statements.
NOTE
3 – INCOME TAX
The
Company accounts for income taxes under the assets and liability method. Deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carry forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The
reconciliation of income taxes at the statutory rate of 34% to the provision for income taxes recorded in the Statements of Operations
is as follows:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Tax benefit
at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State tax expense,
net of federal benefit
|
|
|
5.6
|
|
|
|
5.6
|
|
Change
in valuation allowance
|
|
|
(39.6
|
)
|
|
|
(39.6
|
)
|
Effective
tax rate
|
|
|
—
|
|
|
|
—
|
|
The
reported provision for income tax differs from the amount computed by applying the statutory income tax rates to the loss before
income tax as follows:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Income
tax expense at statutory rate
|
|
$
|
(502,095
|
)
|
|
$
|
(708,052
|
)
|
Valuation
allowance
|
|
|
502,095
|
|
|
|
708,052
|
|
Income
tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Net
deferred tax assets consist of the following components:
|
|
As
of December 31,
|
|
|
2016
|
|
2015
|
Net operating
loss carryover
|
|
$
|
2,187,491
|
|
|
$
|
1,889,053
|
|
Stock-based
compensation
|
|
|
2,886,566
|
|
|
|
2,684,119
|
|
Deferred tax asset
|
|
|
5,074,057
|
|
|
|
4,573,172
|
|
Valuation
allowance
|
|
|
(5,074,057
|
)
|
|
|
(4,573,172
|
)
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
An
income tax benefit has not been recognized for operating losses generated in prior periods based on uncertainties concerning the
ability to generate taxable income in future periods. At December 31, 2016, the Company had available net operating
loss carry-forwards of approximately $5,268,748 which expire in various years through the year ending December 31, 2036. Utilization
of the tax loss carry-forwards are not assured, however, because the Company has incurred significant operating losses.
As a result, the deferred income tax asset arising from these net operating loss carry-forwards and from other temporary differences
are not recorded in the accompanying Balance Sheets. Due to the uncertainty of the Company’s realization of this
benefit, a valuation allowance was established to fully reserve such assets. The valuation allowance increased by $502,095 and
$708,052 for the years ended December 31, 2016 and 2015, respectively.
NOTE
4 – 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, par value $0.001 (“Common Stock”) to be
issued to Mr. Simpson upon the Company generating revenue of $3,000,000 during any 12 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 12 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 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. The Company
amended the Spinner Agreement effective December 31, 2016 by reducing the stock bonus shares in the Spinner Agreement by 1,500,000
shares.
As
of December 31, 2016, the revenue goals pursuant to the Simpson Agreement and the Spinner Agreement for the years ended December
31, 2016 and 2017 were met. As a result, Mr. Simpson and Mr. Spinner each earned the cash bonus for the years ended December 31,
2016 and December 31, 2017. In addition, Mr. Simpson earned the stock bonus for the years ended December 31, 2016 and 2017. Accordingly,
the accompanying financial statements include charges to income for cash and stock bonus of $165,600 and $160,000, respectively.
As of December 31, 2016, neither the cash nor the stock bonuses had been paid.
Lease
Commitment
The
Company maintains office space in Jersey City, New Jersey. The Company leases the space from a third-party pursuant to a lease
agreement dated September 15, 2016 at a rate of $2,230 per month. The lease agreement was terminated on February 28,
2017. The Company signed a new lease agreement for the period March 1, 2017 to February 28, 2018. The new rent under this agreement
is $2,259 per month. Lease expense amounted to $25,021 and $20,982 for the years ended December 31, 2016 and 2015, respectively.
Licensing
Agreement
On
March 27, 2015, pursuant to the terms of a license agreement, the Company was provided with written notice of termination effective
September 27, 2015. The notice demanded payment by the Company of liquidated damages and royalties. On May 29, 2015, the parties
settled the termination terms of the license agreement via letter agreement. The accompanying statement of operations for the
year ended December 31, 2015 reflects income of $417,223, representing the reversal of accrued royalties offset by the final termination
settlement amount of $90,000.
NOTE
5 – STOCKHOLDERS’ EQUITY
The
Company has authorized 190,000,000 shares of 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 shares of Common
Stock were offered to accredited investors for $0.35 per share. For every two shares purchased, the investor will receive 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. As of February 12, 2016, the Company received proceeds of $337,500 from the 2016 Subscription for a total Common
Stock and warrant issuance of 964,286 and 482,143 shares, respectively.
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 8 to the Notes to 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
|
|
|
|
(1,901,193
|
)
|
|
|
1.33
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Unvested
share balance, December 31, 2016
|
|
|
|
2,309,113
|
|
|
$
|
0.21
|
|
In
connection with the issuance of restricted stock, the Company recorded share-based compensation expense of $466,134 and $1,089,654
for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was $1,308,437 of unrecognized
compensation expense related to unvested share-based compensation which vests only upon the achievement of certain performance
criteria.
Stock
Warrants
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 December
31, 2016
|
|
|
3,096,919
|
|
Exercisable at December
31, 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 with Ian Thompson. In connection with this agreement, the Company issued 167,204
shares of restricted Common Stock and recorded consulting fees of $501,612 during 2013, which was the fair market value of the
stock on the date of issue. The stock is vested; however it is restricted from trading. Ian Thompson was also issued
200,000 shares of restricted Common Stock, which was to vest quarterly based upon the Company reaching certain market capitalization
and revenue goals, in addition to providing the above services, with the last tranche vesting scheduled to vest on June 30, 2014.
Consulting fees amounting to $105,000 and $280,000 were recorded in 2014 and 2013, respectively, related to the 200,000 shares
of Common Stock. Throughout the term of the agreement, the Company requested that Ian Thompson to render performance
under the agreement and to provide evidence of same. Ian Thompson failed to perform in all material respects under the terms of
the agreement and refused to provide evidence.
On
June 27, 2014, the Company terminated the agreement. The Company is taking all necessary steps for the cancellation
of the 367,204 shares, due to lack of delivery of consideration and material breach of the agreement.
NOTE 6
– 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 are exercisable in four equal tranches in December 2015, June
2016, December 2016 and June 2017. They expire in June 2020.
The
following table summarizes stock option activity under the Plans:
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
Outstanding,
January 1, 2015
|
|
|
|
830,000
|
|
|
$
|
0.714
|
|
|
|
3.4
|
|
|
Granted
|
|
|
|
35,000
|
|
|
$
|
0.255
|
|
|
|
5.0
|
|
|
Expired
|
|
|
|
(210,000
|
)
|
|
$
|
2.070
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
(35,000
|
)
|
|
$
|
0.255
|
|
|
|
3.7
|
|
|
Outstanding,
December 31, 2015
|
|
|
|
620,000
|
|
|
$
|
0.255
|
|
|
|
3.7
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding,
December 31, 2016
|
|
|
|
620,000
|
|
|
$
|
0.255
|
|
|
|
2.7
|
|
|
Exercisable,
December 31, 2016
|
|
|
|
611,250
|
|
|
$
|
0.255
|
|
|
|
2.7
|
|
During
the years ended December 31, 2016 and 2015, compensation expense of $45,097 and $77,135, respectively, was recorded. As of December
31, 2016, there was $1,330 of total unrecognized compensation cost related to non-vested stock options. That cost is expected
to be recognized in 2017.
The
aggregate intrinsic value of options outstanding and exercisable at December 31, 2016 and 2015 was $89,900 and $151,900, respectively. Aggregate
intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period,
which was $0.40 and $0.50 as of December 31, 2016 and 2015, respectively, and the exercise price multiplied by the number
of options outstanding.
The
following table summarizes weighted-average assumptions using the Black-Scholes option-pricing model used on the date of the grants
issued for the years ended December 31, 2015:
|
|
2015
|
Volatility
|
|
|
207
|
%
|
Expected term (years)
|
|
|
5
|
|
Risk-free interest
rate
|
|
|
1.71
|
%
|
Dividend yield
|
|
|
0
|
%
|
The
exercise price on the grant date in relation to the market price during 2015 is as follows:
|
|
2015
|
Exercise price lower than market price
|
|
$
|
—
|
|
|
|
|
|
|
Exercise price equal to market price
|
|
$
|
—
|
|
|
|
|
|
|
Exercise price exceeded market price
|
|
$
|
0.165
|
|
NOTE
7 – CONCENTRATIONS
Major
Customers
During
the year ended December 31, 2016, the Company had two customers that accounted for approximately 45% and 16% of revenue. Accounts
receivable at December 31, 2016 from these two customers amounted to $12,494 and zero, respectively. For the year ended December
31, 2015, there were no major customers accounting for more than 10% of total revenue.
Major
Suppliers
During
the year ended December 31, 2016, the Company purchased its inventory from a single supplier. The Company has established relationships
with other suppliers which management believes could meet its needs on similar terms. Accounts payable at December 31, 2016 to
this supplier was zero. At December 31, 2016, the supplier owed the Company $14,381, which amount was included in prepaid expenses.
NOTE
8 – RELATED PARTY TRANSACTIONS
As
of December 31, 2016, accrued payroll of $484,600 was payable to the Chief Executive Officer (the “CEO”) and the Chief
Operating Officer (the “COO”). This amount included unpaid bonus as well as unpaid salary. As of December 31, 2015,
accrued payroll of $3,050 was payable to the CEO, COO and Controller (and Principal Accounting Officer) of the Company.
During
2016, the CEO and the COO forgave unpaid salary due to them of $96,000 and $81,000, respectively. During 2015, the CEO,
the COO and the Controller of the Company forgave unpaid salary due to them of $307,000, $85,000, and $43,032, respectively.
This resulted in increases to additional paid in capital of $177,000 and $435,032 for the years ended December 31, 2016 and
2015, respectively.
In
January 2016, the Company sold 285,715 shares of Common Stock and warrants to purchase 142,857 shares of Common Stock at $0.70
per share to Wyatts Torch Equity Partners, LP (“Wyatts”) for $100,000 pursuant to the 2016 Subscription. The managing
member of Wyatts is the COO of the Company, as well as a Director of the Company.
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 twelve month period on or prior to June 26, 2025.
Also
in August 2015, the Company entered into the 2015 Subscription with Wyatts 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 5 for further discussion.
NOTE
9 – SUBSEQUENT EVENTS
In
accordance with ASC Topic 855,
“Subsequent Events,”
the Company evaluates events and transactions that occur
after the balance sheet date for potential recognition in the financial statements. The effects of all subsequent events that
provide additional evidence of conditions that existed at the balance sheet date are recognized in the financial statements as
of December 31, 2016. In preparing these financial statements, the Company evaluated the events and transactions that occurred
through the date these financial statements were issued.
On
March 3, 2017, the Company entered into an Amended and Restated Employment Agreement with Peter Spinner, reducing the eligible
bonus shares by 1,500,000 shares.
In
connection with two private placement offerings in March 2014, investors received one purchase warrant at $0.91 per share
for each share of Common Stock purchased. The warrants issued to Wyatts were incorrectly calculated. On March 6, 2017, the
Company issued warrants to purchase 915,447 shares of Common Stock at $0.91 per share to Wyatts to correct for this error. There was no financial impact resulting from this warrant understatement other than an understatement of potentially dilutive shares.