Notes to Consolidated Financial Statements
(Audited)
Organizational
h
istory
Darlington Mines Ltd. (“Darlington”) was incorporated in the State of Nevada on August 23, 2006. On February 15, 2011 Darlington Mines Ltd. closed a voluntary share exchange transaction with a private Colorado company, The Pulse Beverage Corporation, which was formed on March 17, 2010, by and among us, The Pulse Beverage Corporation and the stockholders of The Pulse Beverage Corporation. The Pulse Beverage Corporation became a wholly-owned subsidiary. On February 16, 2011 Darlington’s
name was changed to “The Pulse Beverage Corporation”.
Nature of business
We manufacture and distribute Natural Cabana® Lemonade, Limeade and Coconut Water. Our product line, PULSE® Heart & Body Health functional beverage has been discontinued. Our products are distributed nationwide primarily through a series of distribution agreements with various independent local and regional distributors and on a warehouse direct basis with major retail chain stores.
Going concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. We have generated significant revenues but
have sustained substantial losses since inception and have never paid any dividends and are unlikely to pay dividends in the immediate or foreseeable future. Our continuation as a going concern is dependent upon our ability to obtain necessary debt and/or equity financing to fund our growth strategy, pay debt when due, to continue operations, and to attain profitability.
As at December 31, 2016 we had a working capital deficit of $1,688,195 and a stockholders’ deficit of $16,694,716. All of these factors combined raises substantial doubt regarding our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Since our inception through December 31, 2016, we have obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business.
We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our debt and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.
2.
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Summary of Significant Accounting Policies
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Basis of presentation
The accompanying consolidated financial statements include the accounts of our wholly-owned Mexico subsidiary, Natural Cabana SA de CV and our wholly-owned California subsidiary, Natural Cabana Distribution Inc. and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the Securities and Exchange Commission (SEC) rules and regulations applicable to financial reporting. All intercompany transactions are eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in accordance with United States generally accepted accounting principles requires us 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 in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not clear from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash invested in money market accounts. As of December 31, 2016, there were no cash equivalents.
Accounts receivable
Accounts receivable primarily consists of trade receivables due from wholesalers, distributors and large chain stores. We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. Accounts receivable is reported as the customers’ outstanding balances less any allowance for doubtful accounts. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance. The allowance for doubtful accounts was $nil and $156,090 at December 31, 2016 and 2015, respectively.
Inventory
Inventories consist of raw materials and finished goods and are stated at the lower of cost or market and include adjustments for estimated obsolete or excess inventory. Cost is based on actual cost on a first-in first-out basis. Raw materials that will be used in production in the next twelve months are recorded in inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in the Statements of Operations. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Equipment consists of bottle molds, office and warehouse equipment, and display coolers, all of which have an estimated life of five years.
Long-Lived Assets
We account for long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. We assess recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.
Intangible Assets
Intangible assets are comprised primarily of the cost of trademarks that represent our exclusive ownership of “Natural Cabana®”, used in connection with the manufacture, sale and distribution of our products. We do not amortize trademarks as they have an indefinite life; we amortize our website over a period of 5 years on a straight-line basis. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the years ended December 31, 2016 and 2015, we identified impairment of formulations, intellectual property and trademarks of $1,031,540 and $nil, respectively.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50.
All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor terminations, we may accept returned product. To date, such returns have been de minimis.
Shipping and handling costs
The actual costs of shipping and handling for freight to our customers are included in operating expenses.
Comprehensive loss
We have no elements of comprehensive income or loss during the years ended December 31, 2016 and 2015.
Seasonality
Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. Historically, we have generated a higher percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the entire fiscal year.
Advertising costs
Advertising costs are expensed as incurred. During the years ended December 31, 2016 and 2015, we incurred advertising costs of $66,479 and $80,269, respectively.
Fair Value
ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability. We have no level 3 assets or liabilities. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
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Carrying Value
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Fair Value Measurements
Using Fair Value Hierarchy
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Level
1
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Level
2
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Level
3
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Derivative Liabilities – December 31, 2015
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$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative Liabilities – December 31, 2016
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$
|
93,206
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
93,206
|
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Financial Instruments
We have financial instruments whereby the fair value of the financial instruments could be different from that recorded on a historical basis. Our financial instruments consist of cash, accounts and loans receivables, accounts payable and accrued expenses. The carrying amounts of our financial instruments approximate their fair values as of December 31, 2016 and 2015 due to their short-term nature.
Income Taxes
We follow ASC subtopic 740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The determination of taxes payable includes estimates. We believe that we have appropriate support for the income tax positions taken, and to be taken, on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. No reserves for an uncertain income tax position have been recorded for the years ended December 31, 2016 or 2015.
Concentration of Business and Credit Risk
Financial instruments and related items, which potentially subject us to concentrations of credit risk, consist primarily of cash and receivables. We place our cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of December 31, 2016, and 2015, we exceeded insurance limits by $nil and $139,381, respectively.
We review a customer’s credit history before extending credit. At and for the year ended December 31, 2016 there were no customers with a balance owing to us of greater than 10% of accounts receivable. In 2015, there was one customer with a balance owing to us of 39% of accounts receivable. There was one customer representing 17% of net sales in 2016 and one customer representing 13% for 2015.
Stock-based Compensation
We account for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the statement of operations based on their fair values at the date of grant.
We account for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date.
We calculate the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. We estimate forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, we monitor both stock option and warrant exercises as well as employee termination patterns.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
Basic and Diluted Net Income (Loss) Per Share
Net loss per share is computed in accordance with ASC subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of our statements of operations. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if common stock was issued upon the exercise of stock options and warrants. For the years ended December 31, 2016 and 2015, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of outstanding warrants on our net loss. Total potentially dilutive common share equivalents relating to stock purchase warrants and options granted or issued, at December 31, 2016 and 2015 were 14,198,330 and 34,230,080, respectively. At April 15, 2017, there were 11,347,777 potentially dilutive common share equivalents.
Reclassification of Prior Period
Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no impact on reported net loss, total assets or liabilities.
Recent Pronouncements
We continually assess any new accounting pronouncements to determine their applicability to our operations and financial reporting. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect the change.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.” Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016
. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. It also provides guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows
.
In January 2015, the FASB issued ASU 2015-01, "Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)," effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates from GAAP the concept of extraordinary items. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments. The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40), effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows
.
Recent Accounting Pronouncements Issued but Not Adopted as of December 31, 2016
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity should recognize revenue to depict 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. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we expect to adopt this guidance on January 1, 2018. We have not yet determined our approach to adoption or the impact the adoption of this guidance will have on our financial position, results of operations or cash flows, if any.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this guidance.
In February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this guidance may have on our financial statements.
In March 2016, the FASB issued an accounting standards update which simplifies the accounting for share-based payment transactions, inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. The adoption of this guidance is not expected to have a significant impact on our financial statements.
In August 2016, the FASB issued new guidance related to the statement of cash flows which clarifies how companies present and classify certain cash receipts and cash payments. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We are currently assessing the effects this guidance may have on our financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions. Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.
Accounts receivable consists of the following as of December 31:
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201
6
|
|
|
2015
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|
Trade accounts receivable
|
|
$
|
138,229
|
|
|
$
|
534,727
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|
Less: Allowance for doubtful accounts
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|
|
-
|
|
|
|
(156,090
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)
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Trade accounts receivable - net
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|
|
138,229
|
|
|
|
378,637
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|
Value added tax recoverable
|
|
|
-
|
|
|
|
2,290
|
|
Due from suppliers of services
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|
|
-
|
|
|
|
5,535
|
|
Other
|
|
|
8,095
|
|
|
|
-
|
|
Total Accounts Receivable
|
|
$
|
146,324
|
|
|
$
|
386,462
|
|
Inventories consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
251,692
|
|
|
$
|
344,764
|
|
Deposit on finished goods
|
|
|
5,837
|
|
|
|
-
|
|
Raw materials
|
|
|
523,940
|
|
|
|
644,146
|
|
Total Inventory
|
|
$
|
781,469
|
|
|
$
|
988,910
|
|
5.
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Property and Equipment and Intangible Assets
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Property and equipment consists of the following as of December 31:
|
|
201
6
|
|
|
201
5
|
|
Manufacturing, warehouse, display equipment and molds
|
|
$
|
289,759
|
|
|
$
|
337,253
|
|
Office equipment and furniture
|
|
|
41,581
|
|
|
|
41,581
|
|
Mobile display unit and vehicles
|
|
|
130,500
|
|
|
|
134,500
|
|
Less: depreciation
|
|
|
(310,605
|
)
|
|
|
(266,099
|
)
|
Total Property and Equipment
|
|
$
|
151,235
|
|
|
$
|
247,235
|
|
For the years ended December 31, 2016 and 2015, depreciation expense was $105,565 and $93,288, respectively
Intangible assets consist of the following as of December 31:
|
|
201
6
|
|
|
201
5
|
|
Formulations, rights and patents
|
|
$
|
-
|
|
|
$
|
969,696
|
|
Website
|
|
|
62,675
|
|
|
|
62,675
|
|
Less: amortization
|
|
|
(61,926
|
)
|
|
|
(52,682
|
)
|
Trademarks – not amortized due to indefinite life
|
|
|
85,891
|
|
|
|
152,104
|
|
Total Intangible Assets
|
|
$
|
86,640
|
|
|
$
|
1,131,793
|
|
For the years ended December 31, 2016 and 2015, amortization expense was $12,535 and $13,135, respectively. Estimated amortization expense to be recorded in 2017 is $748, thereafter, $nil. In 2016, we recorded an impairment of $
1,031,540 related to formulations, rights and patents related to the products offered under the Pulse Heart Health brand. We are not presently marketing this product as we have made a decision to reformulate and repackage the product. For conservatism, we have decided to write-down these assets to $nil.
6.
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Promissory Notes Payable
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On June 30, 2016, we negotiated settlements with two freight vendors by issuing promissory notes. These notes are unsecured as follows:
|
a)
|
Promissory Note #1 - $46,673 repayable in escalating monthly instalments ending June 24, 2017 until paid. Interest is at 10%; and
|
|
b)
|
Promissory Note #2 - $24,914 – no specific repayment terms.
|
Loans payable consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Short-term loan – (a) below
|
|
$
|
14,069
|
|
|
$
|
15,000
|
|
Short-term loan – related party – (a) below
|
|
|
120,374
|
|
|
|
130,000
|
|
Total short-term loans
|
|
|
134,442
|
|
|
|
145,000
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Note – (b) below
|
|
|
1,657,942
|
|
|
|
844,040
|
|
Less: unamortized debt issuance costs
|
|
|
-
|
|
|
|
(233,269
|
)
|
Net carrying value
|
|
|
1,657,942
|
|
|
|
610,771
|
|
Total loans payable
|
|
$
|
1,792,384
|
|
|
$
|
755,771
|
|
|
a)
|
In September 2015, we received short-term loans totaling $145,000 of which $130,000 was received from a family trust of our Chief Executive Officer. These loans bear interest at 10%, are unsecured and due on demand. As of April 15, 2017, no demand for repayment has been received.
|
|
b)
|
On November 6, 2015, we entered into a Credit Agreement with TCA Global Credit Master Fund, LP (“TCA”). Under the terms of the Credit Agreement, TCA committed to lend up to $3,500,000 (the “Credit Facility”) pursuant to a senior secured revolving note (the “Note”). TCA has funded to date $1,750,000, $900,000 in fiscal 2015 and $850,000 in fiscal 2017. The Credit Facility is secured by a senior secured interest in all our assets. We are charged a 12% per annum rate of interest plus a 6% per annum administration fee on the daily loan balance outstanding. The Lender has the right, in the Event of Default, to convert any outstanding amounts under the Note into restricted shares of our common stock based on 85% of the weighted value average price of our common shares over the prior 5 trading days prior to conversion. However, the Lender may not convert any portion of the Note to the extent that after giving effect to the shares which would be received on conversion, the Lender would beneficially own more than 4.99% of our common stock. In connection with the Credit Facility and subsequent loans therein, we were obligated to pay a total of $500,000 in investment banking fees to TCA. As security for the initial fee of $150,000 we issued 3,000,000 common shares to TCA of which a total of 2,238,200 shares were sold for proceeds of $107,186 leaving an accrued liability of $42,814. This liability, together with the second investment banking fee commitment of $350,000 has been added to the principal owing to TCA as at December 31, 2016. During 2016, we repaid a total of $399,161 of principal and had unapplied principal repayments of $29,752 in our lockbox available for future principal repayments. The original maturity of the Note was November 6, 2016. We continue to work with TCA to repay this note (See Note 18 (c)). TCA has verbally agreed to extend the maturity date to a future date but as of April 15, 2017 we have not reached an agreement with TCA on this extension.
|
Associated with the Credit Facility we incurred $742,870 of debt issuance costs which was amortized to interest expense - debt issuance costs over the term of the loan to November 6, 2016.
Convertible note consists of the following as of December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Face value of convertible note on October 7, 2016
|
|
$
|
80,750
|
|
|
$
|
-
|
|
Less discount
|
|
|
(80,750
|
)
|
|
|
-
|
|
Revaluation of note at December 31, 2016
|
|
|
9,630
|
|
|
|
|
|
|
|
|
9,630
|
|
|
|
-
|
|
Less: unamortized debt issuance costs
|
|
|
(7,605
|
)
|
|
|
-
|
|
Net carrying value
|
|
$
|
2,025
|
|
|
$
|
-
|
|
On October 7, 2016, we issued a convertible note in the principal amount of $80,750 due on demand on or after October 7, 2017. We received a net amount of $75,000, after debt issuance costs of $7,500. The note has a cash redemption premium of 115% of the principal amount in the first 30 days following the execution date, of 125% for days 31-90 following the execution date, and 135% after the 91st day. After 180 days, cash redemption is only available upon approval by the holder at a cash redemption premium of 140%. The note bears interest at 9% per annum and is convertible into common shares at a 40% discount to the average of the three lowest trading prices during the previous 20 trading days to the date of conversion. The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “
Derivatives and Hedging
”. The initial fair value of the conversion feature of $90,575 resulted in a discount to the note payable of $80,750 and the recognition of a loss on derivatives of $9,825. During the year ended December 31, 2016, we recorded accretion of $9,630 increasing the carrying value of the note to $9,630. Accrued interest as at December 31, 2016 was $1,450. As of April 15, 2017, we have not received a conversion notice. We have reserved up to 37,000,000 shares for future conversion of this note.
The embedded conversion option of the convertible debenture described in Note 8 contains a conversion feature that qualifies for embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of period
|
|
$
|
-
|
|
|
$
|
-
|
|
Original discount limited to proceeds of notes
|
|
|
80,750
|
|
|
|
-
|
|
Fair value of derivative liabilities in excess of note proceeds received
|
|
|
9,825
|
|
|
|
-
|
|
Change in fair value of embedded conversion option
|
|
|
2,631
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
-
|
|
Balance at the end of the period
|
|
$
|
93,206
|
|
|
$
|
-
|
|
The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Markets), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
|
|
Expected
Volatility
|
|
|
Risk-free
Interest Rate
|
|
|
Expected
Dividend Yield
|
|
|
Expected Life
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At issuance
|
|
|
156
|
%
|
|
|
0.66
|
%
|
|
|
0
|
%
|
|
|
1.00
|
|
At December 31, 2016
|
|
|
189
|
%
|
|
|
0.85
|
%
|
|
|
0
|
%
|
|
|
0.77
|
|
10 Common Stock
A Special Meeting of our shareholders was held on January 23, 2017. At the meeting a proposal was approved to amend the Company’s Articles of Incorporation such that we would be authorized to issue up to 500,000,000 shares of common stock. We have 500,000,000 shares of common stock authorized at a par value of $0.00001.
Equity transactions d
uring the year ended December 31, 2016:
|
a)
|
On January 31, 2016
, we issued 238,889 common shares and on February 29, 2016 we issued 238,889 common shares having an aggregate fair value of $40,611 pursuant to an employment contract with an officer/director. This contract expired on March 8, 2016;
|
|
b)
|
On April 12, 2016, we issued 50,000 common shares to a former Advisory Board Member for the past use of her name on our website. The value of these shares being $3,875 was charged to operations;
|
|
c)
|
On May 5 and June 7, 2016, we issued 1,200,000 common shares to settle $120,000 of creditor debt. These shares were valued at $0.10 based on a negotiated settlement price dated April 21, 2016;
|
|
d)
|
On May 11, 2016, we issued 250,000 common shares at $0.15 per share to a service provider pursuant to a Strategic Advisory and Services Agreement. These shares were valued at the 5-days weight average price prior to issuance. The service provider was to source new equity or debt capital. This contract expired and the value of these shares, being $37,500, has been charged to operations as a financing expense; and
|
|
e)
|
From April 12, 2016 to September 22, 2016 we issued a total of 500,000 common shares at an average fair value of $0.10 per share to a service provider pursuant to a Consultant Agreement dated April 11, 2016. The aggregate value of these shares, being $51,041, was charged to operations.
|
Equity transactions d
uring the year ended December 31, 2015:
|
a)
|
On March 27, 2015
, we sold 10,050,000 Units at $0.10 per Unit for cash proceeds of $1,005,000 of which $100,000 was received at December 31, 2014. On May 27, 2015
, we sold 750,000 Units at $0.10 per Unit for cash proceeds of $45,000, debt settlement of $30,000. Each Unit consisted of one share of restricted common stock and one-half of a warrant. Each whole warrant allowed the holder to purchase one additional share at a price of $0.20 per share at any time between March 10, 2016 and May 27, 2016. These shares expired, unexercised.
|
|
b)
|
During 2015
, we issued a total of 96,165 common shares, having an aggregate fair value of $13,025 to three employees for services rendered.
|
|
c)
|
On November 6, 2015
, we issued 3,000,000 restricted common shares. See Note 7 (c)
.
|
|
d)
|
On December 31, 2015
, we issued 275,000 restricted common shares, having a fair value of $22,000, pursuant to an employment contract with a director.
|
At December 31, 2016, we had 3,548,330 common stock purchases warrants outstanding having an average exercise price of $0.45 per common share and having an average expiration date of .19 years. During the year warrants to acquire 17,531,750 common shares expired unexercised. Subsequent to December 31, 2016 a further 2,850,553 common share purchase warrants expired unexercised.
There are 1,000,000 shares of preferred stock, par value $0.001, issuable in series with rights, preferences and limitations to be determined by the Board of Directors from time to time. On December 9, 2016, our Board of Directors created a series of Preferred Shares, $0.001 par value per share, designated as Series “A” Preferred Shares. The number of shares constituting Series “A” Preferred Shares is 300,000. Each Series “A” Preferred Share entitles the holder to 1,000 votes on all matters submitted to a vote of our shareholders. On December 9, 2016, we issued 100,000 Series “A” Preferred Shares to our Chief Executive Officer for $400.
13.
|
Stock Options and Stock-based Compensation
|
On July 29, 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan") under which were authorized to grant up to 4,500,000 shares of common stock. On December 31, 2015, we approved an increase in the number of shares authorized to be issued pursuant to the plan, to 20,000,000 shares.
In 2012, we granted stock options under the 2011 Plan to certain officers, directors, employees and consultants to purchase 3,075,000 common shares at $0.50 per common share. On December 31, 2015, we cancelled 675,000 stock options to certain employees and consultants due to the expiry or cancellation of a contract. We also cancelled 1,950,000 stock options granted to two directors and a consultant per agreement to issue new stock options.
On December 31, 2015, we granted stock options under the Amended 2011 Plan to certain officers, directors, employees and consultants to purchase 12,700,000 common shares at $0.10 per common share. During 2016, a director resigned and 2,500,000 stock options were cancelled.
The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model. During the years ended December 31, 2016 and 2015, we recorded stock-based compensation of $3,939 and $606,556, respectively.
The weighted average assumptions used for each of the years ended December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
-
|
|
|
|
1.71
|
%
|
Expected volatility
|
|
|
-
|
|
|
|
103
|
%
|
Expected option life (in years)
|
|
|
-
|
|
|
|
5
|
|
The following table summarizes the continuity of our stock options:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
|
|
3,075,000
|
|
|
$
|
0.50
|
|
|
|
3.34
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,700,000
|
|
|
|
0.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(2,625,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
13,150,000
|
|
|
|
0.50
|
|
|
|
3.34
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
(2,500,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2016
|
|
|
10,650,000
|
|
|
$
|
0.10
|
|
|
|
3.99
|
|
|
$
|
-
|
|
Exercisable, December 31, 2016
|
|
|
10,650,000
|
|
|
$
|
0.10
|
|
|
|
3.99
|
|
|
$
|
-
|
|
A summary of the status of our non-vested stock options outstanding as of December 31, 2016, and changes during the years ended December 31, 2016 and 2015 is presented below:
Non-vested stock options
|
|
Number of
Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
12,700,000
|
|
|
|
0.06
|
|
Vested
|
|
|
(10,375,000
|
)
|
|
|
0.06
|
|
Non-vested at December 31, 2015
|
|
|
2,325,000
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
(2,325,000
|
)
|
|
|
(0.06
|
)
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Non-vested at December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
The following table summarizes information about stock options outstanding and exercisable under our stock incentive plan at December 31, 2016:
|
|
Number
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
|
|
10,200,000
|
|
|
|
4.00
|
|
|
$
|
0.10
|
|
$0.50
|
|
|
450,000
|
|
|
|
.33
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,650,000
|
|
|
|
3.99
|
|
|
$
|
0.10
|
|
Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.
At December 31, 2016, we had no unrecognized compensation expense related to unvested stock options.
14. Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The significant components of deferred tax assets and liabilities are as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
4,894,757
|
|
|
$
|
4,074,383
|
|
Stock-based compensation
|
|
|
860,652
|
|
|
|
859,192
|
|
Intangible assets
|
|
|
9,244
|
|
|
|
-
|
|
Other reserves
|
|
|
2,441
|
|
|
|
52,899
|
|
Total deferred tax assets
|
|
|
5,767,094
|
|
|
|
4,986,475
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, Plant & Equipment
|
|
|
(33,948
|
)
|
|
|
(59,022
|
)
|
Intangible assets
|
|
|
-
|
|
|
|
(354,507
|
)
|
Net deferred tax assets
|
|
|
5,733,146
|
|
|
|
4,572,946
|
|
Less: Valuation allowance
|
|
|
(5,733,146
|
)
|
|
|
(4,572,946
|
)
|
Deferred tax asset, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The net change in the valuation allowance for the year ended December 31, 2016 was $1,160,200.
We have a net operating loss carryover of $13,209,151 available to offset future income for income tax reporting purposes, which will expire in various years through 2036, if not previously utilized. However, our ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the years ended December 31, 2016 and 2015, there was no income tax or related interest and penalty items in the income statement, or liabilities on the balance sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years beginning January 1, 2011 or state income tax examination by tax authorities for years beginning January 1, 2010. We are not currently involved in any income tax examinations.
15.
|
Fair Value Measurements
|
There were no financial instruments that were measured at fair value on a recurring basis as of December 31, 2016 and 2015
.
The carrying amounts of our financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of December 31, 2016 and 2015 approximate fair value because of the short maturity of these instruments. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of the notes payable approximates fair value.
There were no changes in valuation technique from prior periods.
Operating Leases
We lease office and warehouse space, under operating leases that expire at various dates through the year ending December 31, 2017. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. Certain leases require that we pay for insurance, taxes and maintenance applicable to the leased property.
Minimum aggregate future lease payments under non-cancelable operating leases as of December 31, 2016 are $37,739 for the year ended December 31, 2017.
Rent expense under all operating leases, including short-term rentals as well as cancelable and non-cancelable operating leases, gross, was $80,191 and $65,278 for the years ended December 31, 2016 and 2015, respectively.
Legal Proceedings
We are or may be involved from time to time in various claims and legal actions arising in the ordinary course of business, including proceedings involving employee claims, contract disputes, product liability and other general liability claims, as well as trademark, copyright, and related claims and legal actions. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
17.
|
Loss from Discontinued Operations
|
During February 2016, we began a Southern California distributorship, Natural Cabana Distribution Inc. Through this subsidiary, we began selling our products to existing accounts while we searched for a suitable independent large distributorship in the area to replace our former distributor. We made this strategic decision to maintain existing regional retail accounts in the area. On May 31, 2016, we discontinued this temporary operation and moved our ongoing business to a large independent distributor.
During the period ended May 31, 2016 we received $73,740 of net revenue and cost of sales was $59,627 for a gross profit of $14,113. We incurred expenses of $94,724 and recorded bad debt expense of $23,069. Our net loss from discontinued operations was $103,680 which also represents negative operating cash flow from discontinued operations.
Subsequent to December 31, 2016 we have entered into the following debt and equity transactions:
|
a)
|
On January 11, 2017, we borrowed $43,000 from Power Up Lending Group, Ltd (Power Up). The loan is evidenced by a promissory note which bears interest at 8% per year
, due on October 17, 2017. On July 10, 2017 Power Up may convert the promissory note into our common shares. On March 10, 2017, we borrowed an additional $30,000 from Power Up. This additional loan is evidenced by a promissory note which bears interest at 8% per year
, due on December 30, 2017. On July 10, 2017 Power Up may convert the $43,000 promissory note into our common shares and on September 6, 2017 Power Up may convert the $30,000 promissory note into our common shares. The conversion price of these loans is 61% of the average of the three lowest trading prices of our common shares during the 15-day trading period ending on the last trading day prior to the date of conversion. We have reserved 40,000,000 common shares for future issuances pursuant to a Reservation Letter dated March 10, 2017.
|
|
b)
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On January 25, 2017, we entered into a Settlement Agreement with certain creditors whereby Rockwell Capital Inc. purchased debts from our creditors totaling $250,738 (the “Claim Amount”). In return Rockwell Capital Inc. can convert the Claim Amount into free-trading common shares pursuant to Section 3(a) (10) of the Securities Act at a 40% discount of the 3 lowest traded prices over the prior 10 days. To date a total of $250,738 has been settled and converted into 78,459,168 common shares. In connection with the Settlement Agreement we issued 625,000 common shares having a fair market value of $6,425 for a registered broker dealer to act on our behalf. The Claim Amount has been fully extinguished as at March 28, 2017;
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c)
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On January 26, 2017, we entered into a Debt Purchase Agreement (“DPA”) with Old Main Capital, LLC (“Old Main”) to assign up to $1,727,484 of principal owed to TCA Global Credit Master Fund LP (“TCA”) in exchange for up to $1,722,484 pursuant to terms of the DPA. To evidence this DPA we entered into a 10% Senior Replacement Convertible Promissory Note for any purchases made from TCA by Old Main. To date Old Main has purchased $170,000 of such debt by paying TCA a total of $163,000 and paying legal fees of $7,000 to legal counsel for Old Main and TCA. Old Main has the right to convert this amount into our common shares at a 35% discount of the average of the two lowest traded prices in the prior 30 days. To date a total of $144,089 has been converted into 46,153,843 common shares.
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d)
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On February 22, 2017, we entered into a Revenue Based Factoring Agreement with Strategic Funding whereby we received $44,500 for future receipts purchased totaling $61,098. We are repaying this Factoring Agreement at a daily rate of $332 over a 184-business day period.
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e)
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On March 13, 2017, we issued 700,000 shares of common stock having a fair market value of $7,000 pursuant to two service contracts.
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f)
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On April 3, 2017, we entered a financing arrangement with Old Main Capital, LLC, (“Old Main”), and delivered an installment Convertible Promissory Note (the “Note”) to Old Main. Under the terms of the Note, Old Main loaned us $200,000 on April 4, 2017. An additional $50,000 to be loaned after we file to increase our authorized common stock to at least 1,000,000,000. Each loan under the Note is due nine months from date of advance and bears interest at 10% per annum. In addition, pursuant to an original issue discount provision, the principle of the Note was increased above the $250,000 received by us to $294,117, which provides additional consideration to the Lender. In addition, the principle and accrued interest on the Note is convertible in whole or in part at the option of Old Main into our common shares at a conversion price per share equal to 65% of the average of the two lowest traded prices for our common shares in the 30 days preceding conversion. We have reserved 120,000,000 common shares for future issuances pursuant to a Reservation Letter dated April 7, 2017.
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