Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity on December 31, 2018 held by non-affiliates of the registrant (based on the stock’s not having traded through that date) was 71,443,367. Shares of common stock held by each officer of the Company (or of its wholly owned subsidiaries) and director and by each person who owns 10% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive dete rmination for other purposes. Without acknowledging that any individual director of registrant is an affiliate, all directors have been included as affiliates with respect to shares owned by them.
At September 24, 2019, there were 74,023,310 shares outstanding of the issuer’s common stock, par value $0.001 per share.
In addition to historical information, this Annual Report on Form 10-K contains certain statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. These statements include the plans and objectives of management for future operations, including plans and objectives relating to future growth of our business and availability of funds. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “might,” “plan,” “believe,” “anticipate,” “estimate,” “could,” “would” “continue,” “pursue,” or “should” or the negative thereof or other variations or similar words or phrases. The forward-looking statements expressed or implied herein are based on current expectations that involve numerous risks and uncertainties identified in this Annual Report on Form 10-K, including, without limitation, the risks identified under the caption “Item 1A-Risk Factors.” Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements expressed or implied in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements expressed or implied herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We do not undertake to update them to reflect changes that occur after the date they are made, except to the extent required by applicable securities laws.
Item 1 - Business
As used in this annual report, the terms “we”, “us”, “our”, “Gen Next”, and the “Company” means Generation NEXT Franchise Brands, Inc., a Nevada corporation, its wholly-owned subsidiaries Fresh Healthy Vending LLC, a California limited liability company, Fresh and Healthy Vending Corporation, a California corporation, Reis & Irvy’s, Inc., a Nevada corporation, 19 Degrees, Inc., a Nevada corporation, Generation Next Vending Robots, Inc., a Nevada corporation, or their management . Also as used in this annual report, the term “Gen Next” refers to Generation NEXT Franchise Brands, Inc., “FHV LLC” refers to Fresh Healthy Vending LLC, “R&I” refers to Reis & Irvy’s, Inc., “19 Degrees” refers to 19 Degrees, Inc., “Fresh and Healthy” refers to Fresh and Healthy Vending Corporation, and “GNVR” refers to Generation Next Vending Robots.
Business
Generation Next Franchise Brands Inc. primarily develops and operates unattended retail platforms and related technology through franchise, licensing, wholesale, and corporate owned business models. Generally, the franchise business model allows other individuals or companies (franchisees) to own and operate businesses using the trademarks, intellectual property, expertise, ideas, and processes that are owned and developed by Generation Next or one of its subsidiaries, such as Reis & Irvy’s Inc., a franchise concept involving robotic soft serve vending robots. The Company’s segments are Reis & Irvy’s, Print Mates, Inc., and 19 Degrees, Inc.
Not all of the Company’s business opportunities will strictly involve a franchise business model. In some instances, the Company may seek to license the rights to its unattended retail technology or seek revenue from a combination of the license and sale of unattended retail technology. To date, the Company has not yet received royalties from such agreement. In other instances, the Company may license the rights to another company to become the franchisor of the Company’s franchise concepts.
Previous to our focus on the current segments, we were a franchisor of vending machines and operator of Company-owned vending machines and micro markets that made healthy eating more convenient through access to high quality healthy foods at high foot traffic destinations. By March 2016, we began to wind down the marketing our healthy vending franchises, although we continued to support our ongoing franchisees. As of September 28, 2018, FHV LLC has executed an Assignment for the Benefit of Creditors under California law, whereby all of the assets of FHV LLC have been assigned to a third-party fiduciary who will liquidate such assets and distribute the proceeds thereof to FHV LLC’s creditors pursuant to the priorities established and permitted by law.
We anticipate cultivating and growing other concepts that complement our existing portfolio.
History
We are a public company traded on the OTC Markets under the symbol “VEND.” We were incorporated in the State of Nevada on June 8, 2011 as Green 4 Media, Inc. Prior to July 19, 2013, we were an eco-marketing and advertising company (“GEEM Business”). On July 22, 2013, we entered into the Indemnity Agreement and in connection with that agreement we transferred the GEEM Business to our former Chief Executive Officer. Effective August 8, 2013, we changed the name of our Company from Green 4 Media, Inc. to Fresh Healthy Vending International, Inc., and in March 2016, we changed the name of our Company to Generation NEXT Franchise Brands, Inc. In August 2019, shareholders approved a shortened name, Generation Next, to reflect the multiple go-to-market channels used by the Company.
FHV LLC was formed as a limited liability company in California in 2010, as a franchisor of healthy drinks and snack vending machines. Including the operating history of YoNaturals, whose assets were contributed to FHV LLC in August 2010, we have a combined nine-year operating history in vending machines providing food and beverages. Because it was determined the assets of FHV LLC are currently insufficient to satisfy FHV LLC’s obligations to creditors, as of September 28, 2018, FHV LLC has executed an Assignment for the Benefit of Creditors under California law, whereby all of the assets of FHV LLC have been assigned to a third party fiduciary who will expeditiously liquidate such assets and distribute the proceeds thereof to FHV LLC’s creditors pursuant to the priorities established and permitted by law.
On July 19, 2013 (the “Closing Date”) our wholly-owned subsidiary, FHV Acquisition Corp., completed a Reorganization and Asset Acquisition Agreement (the “Acquisition Agreement”) with FHV Holdings Corp, a California corporation (“FHV Cal”) (the “FHV Acquisition”). Pursuant to the terms of the Acquisition Agreement, we issued 15,648,298 shares of our Company’s common stock (as adjusted for the Stock Split) to FHV Cal, in exchange for all FHV Cal’s assets as of the Closing Date. FHV Cal’s principal asset consisted of the operations and assets of Fresh Healthy Vending LLC, a California limited liability company. At the closing, FHV Cal distributed the Company’s common stock to the sole shareholder of FHV Cal, a trust affiliated with Nicholas Yates.
On July 19, 2013, we also completed the sale of 2,235,951 shares of our common stock to 18 investors (“Stock Sale”) in exchange for gross proceeds totaling $1,000,000 (approximately $996,000 net of estimated related costs in connection with the transaction). In addition, on July 19, 2013, we converted $210,000 of convertible notes payable into 552,418 shares of common stock. For accounting purposes, the transaction was determined to be and accounted for as a reverse merger.
In connection with the Acquisition Agreement, we entered into a Business Transfer and Indemnity Agreement dated July 22, 2013 (the “Indemnity Agreement”) with our former Chief Executive Officer Daniel Duval providing for:
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The sale to Mr. Duval of our business existing on the date of the Indemnity Agreement (the “GEEM Business ”);
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The assumption by Mr. Duval of all liabilities of our Company and the indemnification by Mr. Duval holding our Company harmless for any and all liabilities arising at or before the date of the Indemnity Agreement;
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The payment to Mr. Duval of $191,000 in cash; and
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The surrender by Mr. Duval of 11,671,713 shares of our Company’s common stock (all of which shares were cancelled by our Company).
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Reis & Irvy’s Robotic Soft Serve Vending Robot
On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt and ice cream vending robots, using RFI's trademarked name of Reis & Irvy's (the “Acquisition”). The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was a purchase of an asset. As a result, the estimated fair of the assets acquired were capitalized. The intent of the purchase was to combine robotics and artificial intelligence platforms to facilitate the manufacture of an unattended robot in order to disrupt traditional frozen yogurt and ice cream retail establishments and, on a larger scale, establish ourselves as an industry leader in the emerging and fast-growing space of unattended retail. Since acquisition, we have developed a state-of-the art robotic soft serve vending robot that is a completely unique vending machine and entertainment experience. The robot accepts cash and credit cards. A proprietary software platform is utilized that allows us to readily monitor the sales of our franchisees’ and our corporate-owned machines, which assists our franchisees and us in facilitating the management and maintenance of the vending robot. In order to protect the Company’s rights, several patents have been approved and granted. Our vending standards are UL (“Underwriters Laboratories”) (approval in process), NSF (“National Sanitation Foundation”) recognized (approved in August 2018), and National Automated Merchandising Association (“NAMA”) certified (approved in September 2018), which we believe are among the highest standards in the industry. NAMA estimates that 100 million Americans will use one of seven million vending machines each day. This ensures food temperature compliance, which includes auto-contingency processes should electrical or hardware malfunction; it also ensures that ambient air stays within specified parameters at all times. Our third-party cashless payment technology provides the highest level of data and network security compliance while ensuring complete transparency. As a result, our robotic soft serve vending robots will contain minimal amounts of cash. All transactions are managed by third parties to facilitate financial compliance with local and national laws and regulations. Funds from all electronic transactions are collected by Reis & Irvy’s and remitted to the franchisee within ten days of the subsequent month.
Reis & Irvy’s sells franchise rights, generally a 10-year term, for the use of its trademarks and technology, robotic soft serve vending robots, and secures locations for franchisee robots. Potential franchisees are interviewed by salespeople and complete a questionnaire. Those who meet certain financial criteria and deemed a good fit are provided franchising information based on their respective state’s franchise regulations, generally a Franchise Disclosure Document. After the cooling off period, approximately 14 calendar days, Reis & Irvy’s and the franchisee enter into a franchise agreement, which contains the term, sales price, location of the franchise, and each party’s rights and obligations. Reis & Irvy’s offers franchises in every state in the Unites States with the exception of South Dakota. Master franchises are offered for certain large geographic locations. To date, the Company has entered into master franchise agreements in Australia, Canada, Israel, and Oman.
As of the date of this report, the Company sold 1,296 units representing approximately $58 million in vending machine sales and franchise fees. For the year ended June 30, 2019, the Company had recognized revenue on 426 kiosks equating to revenues of approximately $16.3 million from the sale of vending robots and $1.4 million in franchise fees, respectively. No non-franchise royalty revenues from licenses were earned or recognized. Further, the Company has contractual commitments for approximately 2,342 units representing approximately $92 million in potential revenue.
In order to assist franchisees with support and pay for certain administrative costs (e.g. merchant fees, software fees, etc.) Reis & Irvy’s charges a monthly royalty fee of 12% of gross receipts. For the year ended June 30, 2019, the company recognized approximately $315,000 in franchise royalty revenue.
Franchisees are responsible for obtaining all Federal, state and local health department licenses and certifications. Further, franchisees are responsible for all routine repairs and maintenance. However, a 1-year warranty for all parts is provided, and extended warranties are available for purchase from Reis & Irvy’s.
Frozen Yogurt and Ice Cream Products
The Company has set up distribution partners to carry the consumable products required for the frozen yogurt and ice cream robots. Franchisees order consumable products directly from the distribution partners and are responsible for
those costs. If consumable products became unavailable from the Company’s distribution partners, the Company believes a replacement would be readily available due to the homogeneous nature of the product.
Competition
The vending industry is large and highly fragmented but consolidating. We have laid the foundation for a robust network of vending robots for our franchisees by implementing a strong business model that offers the following competitive advantages:
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Partnering with national food service management companies such as Compass Group USA, and other large multi-site operators to provide host locations for our vending Robots.
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Completing a three-year research and development cycle culminating in validated component suppliers, assembly know how, quality control procedures, and operating support systems.
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Procuring components of the vending robot from trusted vendors with a history of high-quality products.
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Securing distribution of the highest quality consumable product from recognized industry leaders, such as Dannon.
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Issuance of U.S. patents.
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Our Principal Suppliers
The Company currently outsources contract manufacturing services for the assembly of the robotic soft serve vending kiosks. The components used in the assembly are sourced from multiple domestic and international suppliers. The use of extended payment terms and interruptions in purchasing patterns due to cash flow constraints have strained supplier relationships; however, we expect all component supplier relationships to continue. Nonetheless, we maintain contact with alternative sources to both stay attuned to economic and technical advantages we may bring into the kiosk. We are transitioning contract manufacturers after a planned exit from Flex in August 2019. We have prepared to mitigate disruptions from this change by accumulating 140 finished goods by the end of August which will be used to fill demand while the transition is completed.
The Company has also entered into an agreement with Dannon YoCream, for Dannon YoCream to be a primary supplier of all frozen desserts available within the Reis & Irvy’s Froyo Robots, including a wide assortment of frozen yogurts, sorbets and gelatos.
Governmental Regulation
We are required to comply with regulations governing the sale of franchises – the primary component of our business. Fifteen states directly regulate franchising and fourteen require pre-sale registration of a Franchise Disclosure Document (“FDD”), or offering prospectus, by the franchisor, normally with the state agency that oversees the sale of securities in that state, and pre-sale delivery of an FDD to a franchise candidate by a franchisor before the signing of a binding agreement or the payment of any money to the franchisor. Franchise sales in the remaining 35 states are generally subject to the Franchise Rule promulgated by the Federal Trade Commission (“FTC”), which requires the pre-sale delivery of an FDD to a franchise candidate before the signing of a binding agreement or the payment of any money to the franchisor. A franchisor that fails to properly register and maintain the registration of its FDD and disclose its franchisee candidates in the 15 registration states, unless exempt from registration under a few narrowly drawn exceptions to the registration requirements, is subject to legal action by its franchisees for damages and, under certain circumstances, for rescission of the franchise agreements, and to administrative, civil and criminal penalties that may be imposed as well. The FTC’s Franchise Rule does not require registration of an FDD with the FTC. Reis & Irvy’s offers franchises in each state within the United States, with the exception of South Dakota.
Reis & Irvy’s and franchisees are required to comply with all Federal, state and location regulations related to food handling.
Available Information
We file various reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which are available through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) by accessing the SEC’s home page (http://www.sec.gov). The documents are also available to be read or copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C., 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Our Employees
We had approximately 49 full-time employees as of June 30, 2019. None of our employees are subject to collective bargaining agreements.
Seasonality
We do not expect that our business will experience significant seasonality due to the number and location of the frozen yogurt and ice cream robots.
Item 1A – Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Current Report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special Notes Regarding Forward-Looking Statements” for a discussion of what types of statements are forward-looking statements as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
Reis & Irvy’s
Risks Related to Competition, Evolving Technologies and Consumer Preferences in Our Industry
The termination, non-renewal or renegotiation on materially adverse terms of our contracts or relationships with a significant collection of franchisees, or retail locations could seriously harm our business, financial condition and results of operations. The success of our business depends in large part on our, and our franchisees’ ability to maintain contractual relationships with the providers of profitable locations in which vending robots are placed, including hospitals, entertainment venues, retail stores, shopping centers and the like. Certain contract provisions with these providers vary, including product and service offerings, the service fees we, and our franchisees’, are committed to pay, and the ability to cancel the contract upon notice. We typically enter into vending robot installation agreements that give the retailer rights of termination. We strive to provide direct and indirect benefits to our location partners that are superior to, or competitive with, other providers or systems or alternative uses of the floor space that our Robots occupy. If we are unable to provide them with adequate benefits, we may be unable to maintain or renew our contractual relationships on acceptable terms, causing our business, financial condition and results of operations to suffer. The locations in which vending robots are placed may choose to replace our or our franchisees’ vending robots with competitor machines or not provide space for such machines at all deciding that floor space could be used for other purposes.
Competitive pressures could seriously harm our business, financial condition and results of operations. Our Reis & Irvy’s business faces competition from other providers of frozen confections and other desert options, including some that may have more experience, better financing, and better relationships with preferred high traffic locations. We also face general competition from supermarkets, frozen yogurt stores, ice cream parlors/shops and other retail locations that provide ice cream, frozen yogurt and other frozen treats. We could also face competition from other newly created forms of similar or replacement kiosks/vending machines offering frozen treats. In addition, other ice cream/frozen yogurt retailers, some of which have significantly more resources than we do, may decide to enter the market, or expand their current market share.
If we cannot execute on our strategy and offer new automated retail products and services, our business could suffer. Our strategy is based upon leveraging our core competencies in the automated retail space to provide the consumer with convenience and value and to help retailers drive incremental traffic and revenue. To be competitive, we need to offer new product and service offerings that are accepted by the market and establish third-party relationships necessary to develop and commercialize such product and service offerings. We are exploring new businesses to enter, and new products and services to offer; however, the complexities and structures of these new businesses and products could create conflicting priorities, constrain limited resources, and negatively impact our core businesses. We may use our financial resources and management’s time and focus to invest in other companies offering automated retail services, such as our acquisition of the Reis & Irvy’s intellectual property, or we may seek to offer new products or services on our current Robots. We may enter into joint ventures through which we may expand our product offerings. Any new business opportunity also may have its own unique risks related to operations, finances, intellectual property, technology, legal and regulatory issues, corporate governance or other challenges, for which we may have limited or no prior experience. In addition, if we fail to timely establish or maintain relationships with significant retailers and suppliers, we may not be able to provide our consumers with desirable new products and services. Further, to develop and commercialize certain new products and services, we will need to create new Robots or enhance the capabilities of our current robots, as well as adapt our related networks and systems through appropriate technological solutions for an automated retail environment and establish market acceptance of such products or services. We cannot assure you that new products or services that we provide will be successful or profitable.
We depend upon third-party manufacturers, suppliers and service providers for key components and substantial support for our Robots. We conduct no manufacturing operations and depend on outside parties to manufacture and supply key components of our Robots. Any increase in the manufacturing costs, or our inability to lower our current manufacturing costs, could materially adversely impact our operations and financial condition.
We intend to continue to expand our installed base of Robots. Such expansion may be limited by the manufacturing capacity of our third-party manufacturers and suppliers. Third-party manufacturers may not be able to meet our manufacturing needs in a satisfactory and timely manner. Any delays in manufacturing could adversely affect our results. If there is an unanticipated increase in demand for our Robots, or our manufacturing needs are not met in a timely and satisfactory manner, we may be unable to meet demand due to manufacturing limitations.
We may rely on a single manufacturer of the Robots or one or more of the parts used to assemble the Robot. We may be unable to continue to obtain an adequate supply of these components from our suppliers in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components from our current suppliers or locate alternative sources of supply on a timely basis, we may experience delays in installing or maintaining our Robots, either of which could seriously harm our business, financial condition and results of operations.
In addition, we rely on third-party service providers for substantial support and service efforts that we currently do not provide directly. In particular, we contract with third-party providers to arrange for servicing of our Robots. We generally contract with a provider to service a particular region. We do not currently have, nor do we expect to have in the foreseeable future, the internal capability to provide back-up service in the event of a sudden disruption in service. Any failure by us to maintain our existing relationships or to establish new relationships on a timely basis or on acceptable terms could harm our business, financial condition and results of operations.
Defects, failures or security breaches in and inadequate upgrades of, or changes to, our operating systems could harm our business. The operation of our Robots depends on sophisticated software, hardware, and computer networking and communication services that may contain undetected errors or may be subject to failures or complications. These errors, failures or complications may arise particularly when new, changed or enhanced products or services are added. In the past, there have been limited delays and disruptions resulting from upgrading or improving these operating systems. Future upgrades, improvements or changes that may be necessary to expand and maintain our business could result in delays or disruptions or may not be timely or appropriately made, any of which could seriously harm our operations.
Further, certain aspects of the operating systems relating to our business are provided by third parties, including telecommunications. Accordingly, the effectiveness of these operating systems is, to a certain degree, dependent on the actions and decisions of third parties over whom we may have limited control.
We may be unable to adequately protect our intellectual property rights. Our success in business is impacted by maintaining the confidentiality and proprietary nature of our intellectual property rights. Our ability to compete may be damaged, and our revenues may be reduced if we are unable to protect our intellectual property rights adequately. To protect these rights, we rely principally on a combination of:
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contractual arrangements providing for non-disclosure and prohibitions on use;
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patents and pending patent applications;
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trade secret, copyright and trademark laws; and
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certain built-in technical product features.
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Patent, trade secret, copyright and trademark laws provide limited protection. The protections provided by laws governing intellectual property rights do not prevent competitors from developing, independently, products similar or superior to our products and technologies. In addition, effective protection of copyrights, trade secrets, trademarks, and other proprietary rights may be unavailable or limited in certain foreign countries. We may be unaware of certain non-publicly available patent applications, which, if issued as patents, could relate to our services and products as currently designed or as we may modify them in the future. Legal or regulatory proceedings to enforce our patents, trademarks or copyrights could be costly, time consuming, and could divert the attention of management and technical personnel.
Generation Next Franchising Brands
Failure to adequately comply with information security policies or to safeguard against breaches of such policies could adversely affect our operations and could damage our business, reputation, financial position and results of operations. In the process of making sales using consumer credit cards or other cashless options as a method of payment, we may handle and transfer such information as part of our business. These activities are subject to laws and regulations, as well as industry standards, in the United States and other jurisdictions in which our products and services are available. These requirements, which often differ materially and sometimes conflict among the many jurisdictions in which we operate, are designed to protect the privacy of consumers’ personal information and to prevent that information from being inappropriately used or disclosed. We maintain and review technical and operational safeguards designed to protect this information and generally require others with whom we work to do so as well. However, despite those safeguards, it is possible that hackers, employees acting contrary to our policies, third-party agents or others could improperly access relevant systems or improperly obtain or disclose data about our consumers, or that we may be determined not to be in compliance with applicable legal and/or regulatory requirements and industry standards for data security, such as the Payment Card Industry guidelines. A breach or purported breach of relevant security policies that compromises consumer data or determination of non-compliance with applicable legal and/or regulatory requirements and industry standards for data security could expose us to regulatory enforcement actions, card association or other monetary fines or sanctions, or contractual liabilities, limit our ability to provide our products and services, subject us to legal action and related costs and damage our business reputation, financial position, and results of operations.
Litigation, arbitration, mediation, regulatory actions, investigations or other legal proceedings could result in material rulings, decisions, settlements, fines, penalties or publicity that could adversely affect our business, financial condition and results of operations. Our business has in the past been, and may in the future continue to be, party to regulatory actions, investigations, arbitration, mediation and other legal proceedings. The outcome of such proceedings is often difficult to assess or quantify. Plaintiffs, regulatory bodies or other parties may seek very large or indeterminate amounts of money from us or substantial restrictions on our business activities, or delay or inhibit the sale of new franchises and additional vending machines and the results, including the magnitude, of lawsuits, actions, settlements, decisions, and regulatory investigations and delays may remain unknown for substantial periods of time. The cost to defend, settle or otherwise finalize lawsuits, regulatory actions, investigations, arbitrations, mediations or other legal proceedings may be significant and such proceedings may divert our management’s time. In addition, there may be adverse publicity associated with any such developments that could decrease consumer acceptance of our products and services, such as foodborne illness claims related to perishable foods. As a result, litigation, arbitration, mediation, regulatory actions or investigations involving us or our affiliates may adversely affect our business, financial condition and results of operations. For further description of certain material legal proceedings, please see Item 3 “Legal Proceedings” below.
We rely in part on our franchisees, and if our franchisees cannot develop or finance their businesses, our growth and success may be affected. We rely on our franchisees and the manner in which they operate their locations to develop and promote our business. Although we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises in their franchise areas and state franchise laws may limit our ability to terminate or modify these franchise arrangements. Moreover, despite our training, support and monitoring, franchisees may not successfully operate vending machine routes in a manner consistent with our standards and requirements or may not hire and train qualified servicing personnel. The failure of our franchisees to operate their franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition or results of operations.
Franchisees may not have access to the financial or management resources that they need to launch and maintain routes and vending machines contemplated by their agreements with us or be able to find suitable sites on which to develop them, or they may elect to cease development for other reasons. Franchisees may not be able to negotiate or retain acceptable lease terms, including location royalties, for the sites, obtain the necessary permits and government approvals or meet opening schedules. Any of these problems could slow our growth and reduce our franchise revenues.
Additionally, a franchisee bankruptcy could have a substantial negative impact on our ability to collect payments due under such franchisee’s franchise arrangements. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise arrangements pursuant to Section 365 under the United States Bankruptcy Code, in which case there would be no further royalty payments from such franchisee, and there can be no assurance as to the proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.
Changes in economic conditions could materially affect our ability to maintain or increase sales at our existing franchisees or secure new franchisees. Both the vending and the frozen yogurt industries depend on consumer discretionary spending. The United States in general or the specific markets in which we operate may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumers discretionary spending. Economic conditions may remain volatile and may continue to depress consumer confidence and discretionary spending for the near term. Negative economic conditions might cause consumers to make changes to their discretionary spending behavior, including spending currently made in our or our franchisees’ vending machines. If such sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales, and this could materially adversely affect our business, financial condition or results of operations.
A failure to maintain food safety throughout our supply chain and food-borne illness concerns may result in reputational harm and claims of illness or injury that could adversely affect us. Food safety is a top priority for our business. Claims of illness or injury relating to food quality or food handling are common in the food service industry generally, and a number of these claims may exist at any given time. Because food safety issues could be experienced at the source or by food suppliers or distributors, food safety could, in part, be out of our control. Regardless of the source or cause, any report of food-borne illness or other food safety issues such as food tampering or contamination at one of our vending locations could adversely impact our reputation, hindering our ability to renew contracts on favorable terms or to obtain new business, and have a negative impact on our sales. Even instances of food-borne illness, food tampering or contamination at a location served by one of our competitors could result in negative publicity regarding the food service industry generally and could negatively impact our sales. Future food safety issues may also from time to time disrupt our business. In addition, product recalls or health concerns associated with food contamination may also increase our raw materials costs.
Changes in food and supply costs could adversely affect our results of operations. Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Shortages or interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. Any increase in the prices of the food products most critical to our vending machine and micro market offerings could adversely affect our operating results. Although we try to manage the impact that these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations.
If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be adversely affected. Although we enter into contracts for the purchase of food products and supplies, we do not have long-term contracts for the purchase of all of such food products and supplies. As a result, we may not be able to anticipate or react to changing food costs by adjusting our purchasing practices or vending machine pricing, which could cause our operating results to deteriorate. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items in our machines. If that were to happen, affected machines could experience significant reductions in sales during the shortage or thereafter, if customers change their purchasing habits as a result. Our focus on a limited menu would make the consequences of a shortage of a key ingredient more severe. In addition, because we provide moderately priced food, we, or our franchisees, may choose not to, or may be unable to, pass along commodity price increases to consumers. These potential changes in food and supply costs could materially adversely affect our business, financial condition or results of operations.
Failure to receive frequent deliveries of the foods and beverages we offer could harm our operations. Our ability to maintain ours and our franchisees’ machines depends in part on our ability to acquire ingredients that meet our specifications from reliable suppliers. Shortages or interruptions in the supply of ingredients caused by unanticipated demand, problems in production or distribution, food contamination, which is especially significant with regard to perishable product offerings, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition or results of operations could be adversely affected. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time that could increase our expenses and cause shortages of food and other items that are expected to be stocked within our, our or our franchisees’ machines. If that were to happen, affected routes could experience significant reductions in sales during the shortage or thereafter, if customers change their purchasing habits as a result. Our focus on a limited menu of fresh and healthy offerings within machines would make the consequences of a shortage of one or key popular items more severe. Furthermore, certain frozen yogurt consumables may only be available from one manufacturer. This reduction in sales could materially adversely affect our business, financial condition or results of operations.
REGULATORY RISKS
Franchising is a highly regulated industry. Compliance with regulatory procedures or regulatory delays, actions or inaction could delay franchise and machine sales and seriously harm our business, financial condition and results of operations. Fifteen states directly regulate franchising and fourteen require pre-sale registration of a Franchise Disclosure Document (“FDD”), or offering prospectus, by the franchisor, normally with the state agency that oversees the sale of securities in that state, and pre-sale delivery of an FDD to a franchise candidate by a franchisor before the signing of a binding agreement or the payment of any money to the franchisor. Franchise sales in the remaining 35 states are generally subject to the Franchise Rule promulgated by the Federal Trade Commission (FTC), which requires the pre-sale delivery of an FDD to a franchise candidate before the signing of a binding agreement or the payment of any money to the franchisor. A franchisor that fails to properly register and maintain the registration of its FDD and disclose its franchisee candidates in the 15 registration states, unless exempt from registration under a few narrowly drawn exceptions to the registration requirements, is subject to legal action by its franchisees for damages and, under certain circumstances, for rescission of the franchise agreements, and to administrative, civil and criminal penalties that may be imposed as well. The FTC’s Franchise Rule does not require registration of an FDD with the FTC.
Franchising is a highly competitive industry. Competition from other franchisors could impact franchise and machine sales and seriously harm our business, financial condition and results of operations. We strive to provide direct and indirect benefits to our franchisees that are superior to, or competitive with, other franchisors. In addition, we rely on our franchisees and the manner in which they operate their locations to develop future franchise and machine sales. If we are unable to provide our franchisees with adequate benefits, or if any significant number of our franchisees are not successful, we may be unable to sell franchises and machines to new franchisees or maintain or renew our contractual relationships with existing franchisees, causing our business, financial condition and results of operations to suffer.
As a franchisor, we are subject to federal and state regulations in the various jurisdictions in which we desire to sell franchises and have existing franchisees. We are required to register a Franchise Disclosure Document (FDD), or offering prospectus, in 14 states, normally with the state agency that oversees the sale of securities in that state, and provide detailed and complete pre-sale disclosures in our FDD to our franchisee candidates with whom we propose to enter into franchise agreements before we can sell our franchises and vending machines.
We have limited control over our franchisees and our franchisees could take actions that could harm our business. Franchisees are independent and are not our employees. We do not exercise control over their day-to-day operations. We provide training and support to franchisees, but the success and efficiency of operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate routes in a manner consistent with our standards and requirements, with practices spelled out by regulations of the jurisdictions in which they operate or may not hire and train qualified personnel. If franchisees do not meet our standards and requirements, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our and their rights and obligations under franchise and development agreements. This may lead to disputes with our franchisees in the future. These disputes may divert the attention of our management and our franchisees from operating routes and affect our image and reputation and our ability to attract franchisees in the future, which could materially adversely affect our business, financial condition or results of operations.
New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits that could adversely affect our results of operations. Regulations and consumer eating habits may change as a result of new information or attitudes regarding diet and health. Such changes may include federal, state and local regulations that impact the ingredients and nutritional content of the food and beverages we offer or impact the manner or types of perishable products we can offer. The success of our, and our franchisees’, vending operations is dependent, in part, upon our ability to effectively respond to changes in any consumer health regulations and our ability to adapt our food and beverage offerings to trends in food consumption. If consumer health regulations or consumer eating habits change significantly, we may choose or be required to modify or delete certain offered items, which may adversely affect the attractiveness of our food and beverage offerings to customers on those routes. To the extent we are unwilling or unable to respond with appropriate changes to our food and beverage offerings, it could materially affect consumer demand and have an adverse impact on our business, financial condition or results of operations.
Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain foods and the ingredients within them. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted, and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. An unfavorable report on, or reaction to, the freshness, taste, quality and perceived health promoting ingredients of our food and beverage offerings, or their nutritional content could negatively influence the demand for our offerings.
We have been under the scrutiny of state regulators overseeing franchising and could be subject to sanctions, costly litigation and requirements to refund amounts received for franchises sold in the past. In June 2014, we received an inquiry from the California Department of Business Oversight (“DBO”) related to the sale of 15 franchises that occurred between March 2014 and May 2014. On November 7, 2014, the DBO issued a Stop Order and Citation (“Stop Order”), which prohibited us from selling franchises in the state of California until November 7, 2016. The DBO found that we engaged in offers and sales of franchises in California without registration with respect to the three franchise sales we made in August and September 2012, that the sale of 15 franchises that occurred outside the state of California between March 2014 and May 2014 were made pursuant to a franchise disclosure document that contained omissions of material facts by failing to disclose the DBO’s prior stop order and the statement of charges and notice of intent to enter an order to cease and desist issued by the state of Washington, and that our prior management failed to exercise due diligence with regard to our registration and disclosure obligations and exposed prospective franchisees to unreasonable risk. The DBO also denied our registration application filed in California on October 3, 2013, imposed administrative penalties against us of $37,500, required us to pay attorneys’ fees of $18,200 and required us to again offer rescission and restitution to the 15 franchisees who purchased franchises between March 2014 and May 2014. Nine of the 15 franchisees accepted our offer of rescission and six either denied rescission or failed to respond. The total rescission payments, aggregating $934,500, were completed by July 2015. The independent monitor has issued his final compliance report, and the Stop Order has ended.
As required by the Stop Order, we developed and implemented a compliance program and engaged an independent monitor for the duration of the Stop Order to review and report to the DBO our compliance activities, including compliance with the Stop Order.
If we are required to refund amounts in excess of those that we have forecast, suffer substantial non-forecasted fines or other franchise offering restrictions from state regulators, are subject to expensive litigation or agree to enter into costly settlement agreements in order to discharge liabilities as a result of past business practices, we may be unable to marshal the resources to satisfy such obligations. This would adversely affect our business, financial condition and results of operations and an investor could suffer the loss of a substantial portion or all of his investment.
Periodically, we are contacted by other state franchise regulatory authorities and in some cases have been required to respond to inquiries or make changes to our franchise disclosure documents or franchise offer and sale practices. Management believes these communications from state regulators and corresponding changes in our franchise disclosure documents and practices are administrative in nature and do not indicate the presence of a loss or probable potential loss.
FINANCIAL RISKS
If we cannot achieve profitable operations, we will need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment. We incurred a net loss for the years ended June 30, 2019, 2018, 2017, 2016, 2015 and 2014. Returning to profitability will require us to increase our revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in reestablishing profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. Additional funds, if needed, may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability and we cannot obtain additional funds on commercially reasonable terms, or at all, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.
Our financial statements have been prepared assuming that the Company will continue as a going concern. We suffered a net loss for the years ended June 30, 2019, 2018, 2017, 2016, 2015 and 2014 and we had limited working capital on hand. Should we continue to experience net losses while lacking sufficient working capital, this could raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan and an investor could suffer the loss of a significant portion or all of his investment in our Company.
Should we be successful in growing our revenues according to our operating plans, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure, liquidity and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth, critical shortages of cash and a failure to achieve or sustain profitability.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit, or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Currently, we are not aware of any agreement or contract that limits or restricts the payment of dividends. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
Our net operating loss (“NOL”) carryforward is limited. We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carryforwards generated in the past and the future expiration of our NOL. This gives rise to uncertainty as to whether the net deferred tax asset is realizable. Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, it is likely that given our acquisition of FHV Cal, and current losses, future utilization of the NOL will be severely limited. Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.
CORPORATE AND OTHER RISKS
Our executive officers, directors and principal stockholders beneficially own or control over 25% of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our directors and executive officers. Accordingly, our principal stockholder together with our directors, executive officers and insider shareholders would have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Our Chief Executive Officer and Chief Financial Officer have limited experience as an Officer of a public company. To serve in the role of a Chief Executive Officer for a public company, an individual needs to be aware of responsibilities in addition to those shouldered by the leader of a private company. Among such additional responsibilities, the Chief Executive Officer must be able to communicate fairly and effectively with the stakeholders of a public company, be aware of the controls required to be maintained by a public company and act in accordance with the legal requirements incumbent upon such a leader. Our Chief Executive Officer’s lack of such experience could increase the danger that we fail to carry out these additional responsibilities effectively and thus materially prejudice our Company and shareholders’ financial interests.
We appointed one new independent Director to our Board of Directors effective September 2019, and we have Audit and Compensation Committees. We have three inside directors and two independent members of our Board of Directors. Independent directors can act as a check on management and can advise and guide management on corporate actions and in good corporate governance practices. Without a majority of independent Directors, our management could make subjective decisions without the benefit of more measured independent guidance. An independent Audit Committee can assure procedural and administrative adherence to internal controls over transactions, financial reporting and the audit process. Among its functions, independent Audit Committees review the financial reporting, internal controls safeguarding Company assets, interact with auditors, may oversee material financial decisions and provide a sounding board for individuals who may question a company’s accounting policies and procedures.
Issuances of our authorized preferred stock may make it more difficult for a third party to affect a change-of-control. Our articles of incorporation authorizes the Board of Directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
We are dependent for our success on a few key employees and consultants. Our inability to retain these individuals and attract additional people that we will need to maintain and grow our business would impede our business plan and growth strategies. This would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our management team. Each of those individuals may voluntarily terminate his employment with our Company at any time. Were we to lose one or more of these key individuals, we could be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our employees or consultants.
We incur increased costs of being a public company. Investors should recognize that we incur significant legal, accounting and other expenses as a result of being a public company. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated and to be promulgated thereunder (the “Dodd-Frank Act”), as well as under the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) have created uncertainty for public companies and increased costs and time that boards of directors and management must devote to complying with these rules and regulations, including those promulgated by the U.S. Securities and Exchange Commission, or SEC, and the Nasdaq Global Select Market regulate corporate governance practices of public companies. We expect compliance with these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and attention from revenue generating activities. For example, we are required to adopt internal controls and disclosure controls and procedures. In addition, we incur additional expenses associated with our SEC reporting requirements.
Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are not an “accelerated filer” under SEC rules. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC as a public company, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, under the recently enacted Dodd-Frank Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer a “smaller reporting company” And not an “accelerated filer” within the meaning of the SEC rules.
CAPITAL MARKET RISKS
We have issued a substantial amount of equity and may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our stockholders. In the future, we may raise additional capital for our business operations by issuing equity securities, resulting in the further dilution of the ownership interests of our present stockholders. Any future issuance of our equity securities may dilute then-current stockholders’ ownership percentages and could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding equity. We may need to raise additional capital through public or private offerings of our common stock or other securities that are convertible into or exercisable for our common or preferred stock. We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our equity incentive plans), as payment to providers of goods and services, in connection with future acquisitions or for other business purposes. Such issuances may have a further dilutive effect. Also, the future issuance of any such additional shares of common stock or other securities may create downward pressure on the trading price of our common stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then traded.
Trading on the OTCQB tier of the OTC Markets may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares. Since October 24, 2016, our common stock has been quoted on the OTCQB tier of the electronic quotation system operated by OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities on a stock exchange like the Nasdaq or American. Accordingly, shareholders may have difficulty reselling any of their shares and the lack of liquidity may negatively impact our ability to pursue strategic alternatives.
Penny stock rules will limit the ability of our stockholders to sell their stock. The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a shareholder’s ability to buy and sell our stock. In addition to the penny stock rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for its shares.
Volatility of the market price of our common stock could adversely affect our shareholders and us. The market price of our common stock has been subject to fluctuations in the past and may be subject to wide fluctuations in response to numerous factors, including the following:
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Actual or anticipated variations in our quarterly operating results of those of our competitors;
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Announcements by us or our competitors of new and enhanced products;
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Developments or disputes regarding proprietary rights;
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Introduction and adoption of new industry standards;
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Market conditions or trends in our industry;
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Announcements by us or our competitors of significant acquisitions;
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Entry by us or our competitors into joint ventures or partnerships with our competitors;
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Additions or departures of key personnel;
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Political or economic conditions, such as a recession or interest rate or currency rate fluctuations or political events; and
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Other events or factors in any of the countries in which we do business, including war, incidents of terrorism, natural disasters, or responses to such events.
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In addition, in recent years the stock market has been highly volatile. Many of these factors are beyond our control and may materially adversely affect the market price of our ordinary shares, regardless of our performance. In the past, following periods of market volatility, shareholders have often instituted securities class action litigation relating to the stock trading and price volatility of the company in question. If we were involved in any securities litigation, it could result in substantial cost to us to defend and divert resources and the attention of management from our business.
We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on the Nasdaq Stock Market or on the NYSE American stock market, in the future, we cannot assure you that we will be able to meet the initial qualitative or quantitative listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on a national securities exchange, our common stock will continue to trade on OTC Markets or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
We do not intend to pay cash dividends. Our policy is to retain earnings, if any, for use in our business and, for this reason, we do not intend to pay cash dividends on our shares of common stock in the foreseeable future.
Item 1B – Unresolved staff comments
None
Item 2 – Properties
The Company leases corporate and warehouse facilities (the “Facility Leases”) in San Diego aggregating 8,654, square feet. Our corporate offices are located at 2620 Financial Court, Suite 100, San Diego, California 92117. This Facility Lease commenced in August 2015 and is for a term of 84 months. The current monthly rental payment, net of utilities and operating expenses for the Facility Lease, is approximately $13,433.
Item 3 – Legal Proceedings
During fiscal year 2018, the Company began a voluntary internal investigation into payments made with respect to the Company’s primary stock sales and whether the payments complied with Section 15 of the Securities Exchange Act of 1934. The Company paid a bonus to certain members of its franchise sales staff and to the Company’s Chairman for any shares of the Company’s stock that potential franchisees purchased. In this regard, the Company paid approximately $332,000 to its franchise sales staff and a matching bonus of approximately $332,000 to its Chairman for the time period July 2017 to April 2018. The Company also paid an outside service provider pursuant to a written contract for franchise reengagement leads. The Company has determined that the outside service provider had some involvement in generating reengagement leads of potential franchisees who also may have had an interest in purchasing stock. These payments are in relation to the $16.4 million (net of offering costs) raised by the Company during the fiscal year. Under oversight of the Board Audit Committee, the Company engaged outside counsel, ceased making further payments with regard to the Company’s stock sales, and took remedial measures (including oversight and education).
The Company is also subject to normal and routine litigation and other legal actions by current or former franchisees, employees, and vendors. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate loss may differ from these estimates. Although we currently believe that the ultimate outcome of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company, it is possible they could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies.
Item 4 – Mine Safety Disclosures
Not applicable.
We have audited the accompanying consolidated balance sheets of Generation Next Franchise Brands, Inc. and subsidiaries (the “Company”) as of June 30, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
See accompanying notes to the audited condensed consolidated financial statements.
See accompanying notes to the audited condensed consolidated financial statements.
See accompanying notes to the audited condensed consolidated financial statements.
Notes to Consolidated Financial Statements
1. Organization and description of business
Generation NEXT Franchise Brands, Inc. (referred to herein collectively with its subsidiaries as “we”, the “Company”, “our Company”, or “GNext”) operates as a franchisor, owner, managing member, and direct seller of unattended retail kiosks that feature cashless payment devices and remote monitoring software through its wholly-owned subsidiaries, Reis & Irvy’s, Inc. (“R&I”), 19 Degrees, Inc. and Generation Next Vending Robots, Inc. The Company uses in-house location specialists that are responsible for securing locations for its kiosks; additionally, the Company has negotiated discounts with certain of its consumable manufacturers and distributors.
On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt and ice cream vending robots, using RFI’s trademarked name of Reis & Irvy’s (the “Acquisition”). The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was a purchase of an asset. As a result, the estimated fair of the assets acquired were capitalized. The intent of the purchase was to combine robotics and artificial intelligence platforms to facilitate the manufacture of an unattended robot in order to disrupt traditional frozen yogurt and ice cream retail establishments and, on a larger scale, establish ourselves as an industry leader in the emerging and fast-growing space of unattended retail. Since acquisition, we have developed a state-of-the art robotic soft serve vending robot that is a completely unique vending machine and entertainment experience. The robot accepts cash and credit cards. A proprietary software platform is utilized that allows us to readily monitor the sales of kiosks, which assists our franchisees and us in facilitating the management and maintenance of the vending robot. In order to protect the Company’s rights, several U.S. and international patents have been approved and granted. Our vending standards are UL (“Underwriters Laboratories”) (approval in process), NSF (“National Sanitation Foundation”) recognized, and National Automated Merchandising Association (“NAMA”) certified, which we believe are among the highest standards in the industry. This ensures food temperature compliance, which includes auto-contingency processes should electrical or hardware malfunction; it also ensures that ambient air stays within specified parameters at all times. Our third-party cashless payment technology provides the highest level of data and network security compliance while ensuring complete transparency. As a result, our robotic soft serve vending kiosks will contain minimal amounts of cash. All transactions are managed by third parties to facilitate financial compliance with local and national laws and regulations. Funds from all electronic transactions are collected by Reis & Irvy’s and remitted to the franchisee within ten days of the subsequent month.
During fiscal year 2017, we obtained the exclusive rights to sell a new frozen yogurt vending robot, branded Reis & Irvy’s. As of the date of this report, we have received approval to sell franchises in all U.S. states, other than South Dakota. Through franchise agreements or contracts, we sell robots, franchise fees, and location fees. All contracts require a deposit and contracts which include exclusive territory clauses will also contain a minimum robot and franchise fee commitment. We refer to units associated with a deposit as a “booking” and units associated with exclusive territory minimums as “commitments”. At June 30, 2019, the Company had a backlog of 866 bookings with a future revenue value of approximately $40 million and further commitments for 2,342 robots aggregating $92.3 million of future revenue.
The subsidiary 19 Degrees, Inc. is also the managing member of 19 Degrees Corporate Service, LLC, a robot investment fund (the “Fund”) that will allow accredited investors (i.e. franchisees and other direct purchase investors) to contribute kiosks to the Fund and receive quarterly distributions of net proceeds from operating the robots.
In January 2019, the Company announced the launch of 19 Degrees Corporate Service, LLC as a corporate operated Robot Investment Fund (“the Fund”). This advantages kiosk owners through the switch from active to passive income; more even distribution of revenue; faster installation of kiosks; a “no hassle” maintenance program provided by CSA Server Solutions; a nationwide on-site flavor promotion plan managed by Dannon, access to a newly designed back-office portal that will allow members of the fund to remotely access each kiosk’s sales performance in “real time” as well as a plethora of software features used to guide the fund’s performance. Member ownership units in the LLC will be issued under the registration exemption Rule 506(c) of Regulation D of the Securities Act of 1933 and will be available only to accredited investors. Under Rule 506(c), general solicitation of offerings is permitted, however, purchasers in a Rule 506(c) offering must be “accredited investors.” The SEC defines the term "accredited investor" in Rule 501(a). Generally, individuals are considered accredited investors if they have a net worth greater than $1 million (excluding their primary residence) or incomes in excess of $200,000 in the last two years with the expectation of the same in the current year (or $300,000 with a spouse).
On March 28, 2019, the Company entered into an Asset Purchase Agreement with Print Mates, LLC (“Print Mates”), (see Note 2 Acquisitions). The agreement provides for the purchase of all of Print Mates rights, title, and interest to all assets of the Print Mates business, including intellectual property. The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was an asset acquisition. As a result, the estimated fair value of the assets acquired, and amount of liabilities assumed are included in the accompanying balance sheet as of March 31, 2019. Print Mates kiosks offer instant high-resolution printing of photographs from touchscreen kiosks. Print Mates kiosks are operated with a proprietary software interface that takes advantage of the kiosk’s large touch-sensitive screen, allowing customers to swipe and scroll through various menus as well as edit and crop their images before printing. The Company intends to own and operate the kiosks, collecting 100% of the revenues generated, and will sell kiosks and license software to business owners.
In September 2018 it was determined the assets of the Company’s wholly owned subsidiary, Fresh Healthy Vending LLC ("FHV LLC"), were insufficient to satisfy FHV LLC’s obligations to creditors. As such, on FHV LLC executed an Assignment for the Benefit of Creditors under California law, whereby all of its assets were assigned to a third-party fiduciary who will liquidate such assets and distribute the proceeds to FHV LLC’s creditors pursuant to the priorities established and permitted by law.
2. Summary of significant accounting policies
This summary of significant accounting policies is presented to assist the reader in understanding and evaluating the Company’s financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
Liquidity and Capital Resources
For the year ended June 30, 2019 we had a net loss totaling approximately $19 million with negative cash flows from operations totaling approximately $13.5 million. Our unrestricted cash balance at June 30, 2019 was approximately $517,000. Through June 30, 2019 our production and installation of kiosks have been slower than anticipated, due to delays caused by engineering and manufacturing deficiencies, which have since been corrected. The impacts of production delays were decreased revenue recognition and less accounts receivable collections. Also, we used cash on hand to retire liabilities associated with the franchise rescissions, for research, development and engineering expenditures related to our robotic soft serve vending kiosks, for warranty expenses and for the purchase of robot inventory. The combined result of these events was a substantial decrease in our cash balances and an increase in our outstanding liabilities. In order to ensure sufficient liquidity for our continuing operations, the Company is actively pursuing additional capital in the form of either debt or equity financing (or a combination thereof). We anticipate generating a portion of our required capital resources from deposits on sales of new franchises, unit sales of kiosks for the Fund, royalties from existing and future franchise installs, and revenue from management fees earned under the Management Services Agreement with 19 Degrees Corporate Service, LLC. Management believes the additional funding required can be obtained on terms acceptable to the Company, although there can be no assurance that we will be successful. If the Company is unsuccessful raising the required capital, then we are likely to pursue potentially transformative transactions which may include going private, change of control, merger, sale of assets, or further balance sheet restructuring to enable the Company to remain viable.
Basis of Accounting
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of consolidation
The condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Reis & Irvy’s, Inc., FHV LLC (recorded as discontinued operations), 19 Degrees, Inc., Generation Next Vending Robots, The Fresh and Healthy Vending Corporation, and FHV Acquisition, Corp. All significant intercompany accounts and transactions are eliminated.
Reclassification
Certain amounts in the 2018 financial statements have been reclassed to conform with the 2019 presentation.
Use of estimates
The preparation of our Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ significantly from those estimates. Significant estimates include our provisions for bad debts, franchisee rescissions and refunds, legal estimates, stock-based compensation, derivative liability and the valuation allowance on deferred income tax assets. It is at least reasonably possible that a change in the estimates will occur in the near term.
Cash and cash equivalents (including restricted cash)
All investments with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value. We had no cash equivalents at June 30, 2019 and 2018. We may maintain our cash and cash equivalents in amounts that may, at times, exceed federally insured limits. At June 30, 2019, bank balances, per our bank, exceeding federally insured limits totaled approximately $267,000. We have not experienced any losses with respect to cash, and we believe our Company is not exposed to any significant credit risk with respect to our cash.
Certain states require the Company to maintain customer deposits in escrow accounts until the Company has substantially performed its obligations. Furthermore, certain franchisees have elected to pay their remaining balance due directly to an escrow account for the beneficiary of the Company’s contract manufacturer and inventory suppliers. These funds are presented in the accompanying financial statements as restricted cash. The release of funds from escrow (restricted cash) requires customers approving the release to the escrow agent.
Accounts receivable, net
Accounts receivable arise primarily from royalties and are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customers (located throughout North America, the Bahamas and Puerto Rico) deemed credit worthy. Ongoing credit evaluations are performed, and potential credit losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts.
Inventory
Inventory is carried at the lower of cost or net realizable value, with cost determined using the average cost method.
Property and equipment
Property and equipment are carried at cost and depreciated using the straight-line method over their estimated useful lives of the individual assets, generally five to seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful life of the asset. Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.
Intangible assets
Intangible assets consist primarily of patents, trademarks and trade names. Amortization of intangible assets is recorded as amortization expense in the consolidated statements of operations and amortized over the respective useful lives using the straight-line method.
Impairment of long-lived assets
Impairment losses are recognized on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the estimated fair value of the assets. There were no impairments of long-lived assets for the years ended June 30, 2019 and 2018, respectively.
Derivative Liability
In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for many convertible instruments with provisions that protect holders from a decline in the stock price. Each reporting period, the Company evaluates whether convertible debt to acquire stock of the Company contains provisions that protect holders from declines in the stock price or otherwise could result in modification of the conversion price under the respective convertible debt agreements. The Company determined that the conversion feature in the convertible notes issued contained such provisions and recorded such instruments as derivative liabilities.
The fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in fair value are recorded in the consolidated statements of operations under other income (expenses).
The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as a non-operating, non-cash income or expense for each reporting period at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instruments are initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Sholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Deferred rent
The Company entered into an operating lease for our corporate offices in San Diego, California that contains provisions for future rent increases, leasehold improvement allowances and rent abatements. We record monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between the rent expense recorded and the amount paid is credited or charged to deferred rent, which is reflected as a separate line item in the accompanying consolidated balance sheet.
Acquisition
On March 28, 2019, the Company entered into an Asset Purchase Agreement with Print Mates, LLC (“Print Mates”), (see Note 2 Acquisitions). The agreement provides for the purchase of all of Print Mates rights, title, and interest to all assets of the Print Mates business, including intellectual property. The Company considered the guidance in ASC 805, Business Combinations, and determined the transaction was an asset acquisition. As a result, the estimated fair value of the assets acquired, and amount of liabilities assumed are included in the accompanying balance sheet as of June 30, 2019.
The condensed consolidated financial statements include the results of Print Mates from the date of acquisition. The purchase price has been allocated based on estimated fair values as of the acquisition date. The purchase price was allocated as follows:
|
|
|
March 28,
2019
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|
|
|
|
|
|
|
Cash
|
|
$
|
15,505
|
|
|
Intangible assets patents, trademark and software
|
|
|
757,535
|
|
|
Prepaid inventory
|
|
|
94,383
|
|
|
Customer deposits
|
|
|
(261,254
|
)
|
|
Accounts payable and accrued expenses
|
|
|
(443,474
|
)
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
162,695
|
|
|
|
|
|
|
|
|
Advances outstanding from Print Mates (due from)
|
|
|
162,695
|
|
During the three months ended March 31, 2019, the Company had accumulated cash advances of $162,695 to Print Mates. The advances to Print Mates in the amount of $162,695 on March 28, 2019 was used as an asset purchase transaction.
The purchase price allocation has been prepared on a preliminary basis based on the information that was available to the Company at the time the condensed consolidated financial statements were prepared, and revisions to the preliminary purchase price allocation may result as additional information becomes available.
In determining the purchase price allocation, management will consider, among other factors, the Company’s intention to use the acquired assets. The intangible assets will be amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized, with no expected residual value.
Revenue, contract liabilities – franchisees advances and deferred revenue, and contract assets – due from franchisees
The Company relies upon ASC 606, Revenue from Contracts with Customers, to recognize revenue, contract liabilities-deposits from franchisees and contract assets-due from franchisees.
Reis & Irvy’s, Inc
The primary revenue sources consisted of the following:
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|
·
|
Robotic soft serve vending kiosks
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|
|
·
|
Franchise fees
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|
|
·
|
Royalties
|
Revenues from robotic soft serve vending kiosks and franchise fees are recognized when the Company has substantially performed or satisfied all material services or conditions relating to the franchise agreement. Substantial performance has occurred when: 1) no remaining obligations are unfulfilled under the franchise agreement; 2) there is no intent to refund any cash received or to forgive any unpaid amounts due from franchisees; 3) all of the initial services in the franchise agreement have been performed; and 4) all other material conditions or obligations have been met. All performance obligations detailed in the franchise agreement relating to vending machine sales and franchise fees are considered met at the time of kiosk shipment.
Upon the execution of a franchise agreement, a deposit from the franchisee is required, and generally consists of 40% - 50% of the sales price of the frozen yogurt and ice cream robots, 50% - 100% of the initial franchise fees, and 40% - 50% of location fees. In accordance with ASC 606, the Company recognizes the contract as a contract liability – customer deposits and deferred revenue when the Company receives consideration or is due consideration.
The Company recognizes contract assets – due from franchisees when the Company has an unconditional right to consideration.
Fresh Healthy Vending, LLC
During the quarter ended September 30, 2018 it was determined the assets of FHV LLC were insufficient to satisfy FHV LLC’s obligations to creditors. As such, on September 28, 2018, FHV LLC executed an Assignment for the Benefit of Creditors under California law, whereby all of its assets were assigned to a third-party fiduciary who will liquidate such assets and distribute the proceeds to FHV LLC’s creditors pursuant to the priorities established and permitted by law. Consequently, the Company has accounted for FHV LLC as a discontinued operation in the accompanying financial statements.
19 Degrees, Inc.
The Company recognizes revenue from the sale of products from company-owned robotic soft serve vending kiosks when products are purchased.
The Company recognizes the value of company-owned machines as inventory when purchased. Subsequent to installation, the purchased cost is recognized in fixed assets and depreciated over its estimated useful life.
During year ended June 30, 2019, 19 Degrees Inc entered into a management agreement with 19 Degrees Corporate Service (the “Fund). 19 Degrees, Inc. charges a monthly fund management fee of 1.5% off gross sales, which is recognized as revenue in the period fund management services are rendered.
Print Mates, Inc.
Revenues from the sale of printing kiosks are recognized when the Company has substantially performed or satisfied all material services or conditions relating to the purchase agreement. Substantial performance has occurred when: 1) no remaining obligations are unfulfilled under the purchase agreement; 2) there is no intent to refund any cash received or to forgive any unpaid amounts due from customers; and 3) all other material conditions or obligations have been met. All performance obligations detailed in the purchase agreement relating to kiosk sales are considered met at the time of kiosk shipment.
Upon the execution of a purchase agreement, a 50% deposit from the customer is typically required. In accordance with ASC 606, the Company recognizes the contract as a contract liability – customer deposits and deferred revenue when the Company receives consideration or is due consideration.
Marketing and advertising
Marketing and advertising costs are expensed as incurred. There are no existing arrangements under which the Company provides or receives marketing and advertising services from others for any consideration other than cash.
Research and Development Costs
Research and development costs are expensed as incurred.
Discontinued Operations
Pursuant to ASC 205-20 Discontinued Operations, in determining whether a group of assets that is disposed (or to be disposed) should be presented as a discontinued operation, we analyze whether the group of assets being disposed represents a component of the Company; that is, whether it had historic operations and cash flows that were clearly distinguished, both operationally and for financial reporting purposes. In addition, we consider whether the disposal represents a strategic shift that has or will have a major effect on our operations and financial results. The results of discontinued operations, as well as any gain or loss on the disposal, if applicable, are aggregated and separately presented in our consolidated statements of operations, net of income taxes. The historical financial position of discontinued operations is aggregated and separately presented in our accompanying condensed consolidated balance sheets.
Reclassifications
Certain amounts in previously issued financial statements have been reclassified to conform to the presentation following the Assignment for the Benefit of Creditors, which includes the reclassification of the combined financial position and results of operations of FHV LLC as discontinued operations (see Note 15) for all periods presented.
Income taxes
The Company provides for income taxes utilizing the liability method. Under the liability method, current income tax expense or benefit is the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credits. Tax rate changes are reflected in the computation of the income tax provision during the period such changes are enacted.
Deferred tax assets are reduced by a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company’s valuation allowance is based on available evidence, including its current year operating loss, evaluation of positive and negative evidence with respect to certain specific deferred tax assets including evaluation sources of future taxable income to support the realization of the deferred tax assets. The Company has established a full valuation allowance on the deferred tax assets as of June 30, 2019 and 2018, and therefore has not recognized any income tax benefit or expense (other than the state minimum income tax) for the periods presented.
ASC 740, Income Taxes (“ASC 740”), clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from uncertain tax positions may be recognized when it is more-likely-than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or penalties for income taxes on the balance sheets as of June 30, 2019 and 2018, and the Company has not recognized interest and/or penalties in the consolidated statements of operations for the years ended June 30, 2019 and 2018.
Valuation of options and warrants to purchase common stock and share grants
Warrants to purchase common stock are separately valued when issued in connection with notes payable using a binomial quantitative valuation method. The value of such warrants is recognized as a discount from the related notes payable and credited to additional paid-in capital at the time of the issuance of the related notes payable. The value of the discount is applied to the note payable and amortized over the expected term of the note payable using the interest method with the related accretion charged to interest expense.
Share-based compensation to employees is recognized in accordance with ASC 718, using a binomial quantitative valuation method. The resulting compensation expense is recognized in the financial statements on a straight-line basis over the vesting period from the date of grant.
Share-based compensation to non-employees is recognized in accordance with ASC 505, at the estimated fair value until the options or warrants have vested. The resulting compensation expense is recognized on a straight-line basis over the vesting period from the date of grant.
Share grants are measured using a fair value method with the resulting compensation cost recognized in the financial statements. Compensation expense is recognized on a straight-line basis over the service period for the stock awards.
Concentration of credit risk
The Company is subject to credit risk because its accounts receivable primarily consists of amounts due from franchisees for completed installations, royalty income, and other products. The financial condition of these franchisees is largely dependent upon the underlying business trends of our brands and market conditions within the vending industry. This concentration of credit risk is mitigated, in part, by the large number of franchisees spread over a large geographical area and the short-term nature of the receivables.
Concentration of manufacturers
Kiosks are supplied by a single manufacturer. Although there are a limited number of manufacturers of kiosks and related components, we believe that other suppliers could provide similar machines on comparable terms. A change in suppliers, however, could cause a delay in deliveries and a possible loss of sales, which could adversely affect the Company’s operating results. Additionally, robotic soft serve vending kiosks are manufactured by one supplier; a change in suppliers could cause a delay in deliveries and possible loss of sales, which could adversely affect the Company’s operating results.
Frozen yogurt is supplied by one national manufacturer. Although there are a limited number of product suppliers with the product selection and distribution capabilities required by the franchise network, other manufacturers could provide similar products on comparable terms. A change in suppliers, however, could cause a delay in deliveries and a possible loss of revenue from both current and prospective franchisees, which could adversely affect the Company’s operating results.
See Note 14 for purchase commitments from our manufacturers for inventory.
Fair value of financial instruments
The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:
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Fair Value Measurements Using
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|
|
|
|
Level 1
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|
|
Level 2
|
|
|
Level 3
|
|
|
Balance June 30, 2018
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|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Additions to fair value of derivative liability
|
|
|
-
|
|
|
$
|
695,989
|
|
|
|
-
|
|
|
Change in fair value of derivative liability
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Balance June 30, 2019
|
|
|
-
|
|
|
|
695,989
|
|
|
|
-
|
|
Net loss per share
The Company calculates basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents. Common stock equivalents are only included in the calculation of diluted EPS when their effect is dilutive.
Segment Information
The Company relies upon ASC 280, Segment Reporting, to determine and disclose reportable operating segments, and is organized such that each subsidiary represents a different operating purpose. As a result, the Company analyzed each subsidiary to determine reportable operating segments. In its management of operations, the chief operating decision maker, the Chief Executive Office, Nicholas Yates and Chief Financial Officer, Arthur Budman, reviews subsidiary balance sheets and income statements prepared on a basis consistent with U.S. GAAP.
For the periods presented, the Company determined that Reis and Irvy’s, Inc., 19 Degrees, Inc., Generation Next Vending Robots, Inc,, and FHV, LLC (see Note 15 – Discontinued operations) were reportable operating segments; Generation Next Franchise Brands, Inc., , The Fresh and Healthy Vending Corporation, and FHV Acquisition, Corp. were not material segments and therefore have not been reported as such. Reis & Irvy’s, Inc. represents the sale of frozen yogurt and ice cream robots, franchise fees, royalties, location fees, and product rebates. 19 Degrees, Inc. is primarily a management company for 19 Degrees Corporate Service, LLC. Generation Next Vending Robots, Inc. will earn revenues from the sale of the newly acquired Print Mates brand photograph kiosks. FHV, LLC represents the sale of fresh and healthy vending machines, franchise fees, royalties and product rebates.
Franchise information
Franchise statistics for the years ended June 30, 2019 and 2018 are as follows:
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Reis
|
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|
|
|
|
|
and Irvy's
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|
|
FHV
|
|
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|
|
|
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Number of franchises at June 30, 2017
|
|
|
179
|
|
|
|
228
|
|
|
New franchises
|
|
|
123
|
|
|
|
-
|
|
|
Terminated franchises
|
|
|
(12
|
)
|
|
|
(151
|
)
|
|
Number of franchises at June 30, 2018
|
|
|
290
|
|
|
|
77
|
|
|
New franchises
|
|
|
91
|
|
|
|
-
|
|
|
Terminated franchises
|
|
|
(56
|
)
|
|
|
(77
|
)
|
|
Number of franchises at June 30, 2019
|
|
|
325
|
|
|
|
-
|
|
Franchise agreements generally also provide for continuing royalty fees that are based on monthly gross revenues of each machine. The royalty fee (generally 6% - 12% of gross revenues) compensates our Company for various advisory services and certain merchant fees that we provide to the franchisee on an on-going basis.
New franchisees are generally required to purchase a minimum of three robotic soft serve vending kiosks, or ten vending machines or micro markets. Initial franchise fees are primarily intended to compensate our Company for granting the right to use our Company’s trademark and tradenames and patents and to offset the costs of finding locations for vending machines, developing training programs and the operating manual. The term of the initial franchise agreement is generally five to ten years. Options to renew the franchise for additional terms are available for an additional fee.
Related Party Transactions
The Company has been involved in transactions with related parties. A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management, and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Recent accounting standards
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued new guidance for goodwill impairment which requires only a single-step quantitative test to identify and measure impairment and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The option to perform a qualitative assessment first for a reporting unit to determine if a quantitative impairment test is necessary does not change under the new guidance. This guidance is effective for the Company beginning in fiscal year 2020 with early adoption permitted. The Company adopted this guidance in fiscal year 2017. The adoption of this guidance will have no impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows, and transfers between cash and cash equivalents and restricted cash are no longer presented within the statement of cash flows. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU 2016-18 for the reporting period ended December 31, 2017 and the standard was applied retrospectively for all periods presented which had no material impact on prior years. As a result of the adoption of ASU 2016-18, the Company no longer presents the change within restricted cash in the consolidated statement of cash flows.
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance for employee share-based compensation which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, forfeiture estimates, statutory tax withholding requirements, and classification in the statements of cash flows. Under the new guidance any future excess tax benefits or deficiencies are recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. During the fiscal years ended June 30, 2019 and 2018, no excess tax benefits were recorded to additional paid-in capital that would have been recorded as a reduction to the provision for income taxes.
In February 2016, the FASB issued new guidance for lease accounting, which replaces existing lease guidance. The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This guidance is effective for the Company in fiscal year 2020 with early adoption permitted, and modified retrospective application is required. The Company expects to adopt this new guidance in fiscal year 2020 and is currently evaluating the impact the adoption of this new guidance will have on the Company’s consolidated financial statements and related disclosures. The Company expects that substantially all of its operating lease commitments (see Note 12) will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the 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 and services. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. The New Revenue Standard provides for a single comprehensive principles-based standard for the recognition of revenue across all industries through the application of the following five-step process:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
This five-step process will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year. Early adoption is permitted but not before the original effective date. The Company’s adoption of ASU 2014-09 will not change the timing of the recognition of initial franchise fees as all performance obligations detailed in the franchise agreement relating to franchise fees are considered met at the time of kiosk shipment.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. In July 2018, the FASB issued ASU 2018-10 “Codification Improvements of Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” ASU 2018-11 provides companies another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The consideration in the contract is allocated to the lease and non-lease components on a relative standalone price basis (for lessees) or in accordance with the allocation guidance in the new revenue standard (for lessors). ASU 2018-11 also provides lessees with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component. If a lessee makes that accounting policy election, it is required to account for the nonlease components together with the associated lease component as a single lease component and to provide certain disclosures. Lessors are not afforded a similar practical expedient. The Company is evaluating the effect ASU 2016-02, 2018-10 and 2018-11 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.
Effective January 2017, FASB issued ASU No. 2016-15 “Statement of Cash Flows” (Topic 230). This guidance clarifies diversity in practice on where in the Statement of Cash Flows to recognize certain transactions, including the classification of payment of contingent consideration for acquisitions between Financing and Operating activities. We are currently evaluating the impact that this amendment will have on our consolidated financial statements.
On January 5, 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (Topic ASC 805), guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace the missing elements. This ASU is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation” (Topic 718) - Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This ASU is effective prospectively for the annual period ending December 31, 2018 and interim periods within that annual period. We are currently evaluating the impact that this amendment will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”, which adds disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company is evaluating the provisions of this ASU and plans to adopt this ASU effective July 1, 2020.
3. Inventory
As of June 30, inventory consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
Inventory on-hand:
|
|
|
|
|
|
|
|
Raw material and work in process
|
|
$
|
5,385,478
|
|
|
$
|
2,804,764
|
|
|
Finished goods
|
|
|
3,765,254
|
|
|
|
506,720
|
|
|
|
|
|
9,150,732
|
|
|
|
3,311,484
|
|
|
Allowance for obsolete inventory
|
|
|
(2,201,699
|
)
|
|
|
(300,000
|
)
|
|
|
|
$
|
6,949,033
|
|
|
$
|
3,011,484
|
|
The Company is transferring inventory between contract manufacturing companies. We have estimated that 20% of the raw materials and work in process may be deemed obsolete at the conclusion of the transfer process because of changes made to components during the initial rollout of alpha units during 2018. Finished goods inventory contains units that have been recalled from the field due to real or perceived mechanical failures. We estimate 25% of these units may not be recoverable during our inspection and reclamation process.
$1,484,438 and $5,152,897 prepaid inventory represents payments for raw material that has not been received by the Company as of June 30, 2019 and 2018, respectively.
See Note 14 for purchase commitments from our manufacturers for inventory.
4. Property and Equipment
As of June 30, 2019, property and equipment consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
44,065
|
|
|
$
|
44,065
|
|
|
Office equipment
|
|
|
32,516
|
|
|
|
32,517
|
|
|
Tenant improvements
|
|
|
61,414
|
|
|
|
61,414
|
|
|
Frozen yogurt robots
|
|
|
22,685
|
|
|
|
177,684
|
|
|
|
|
|
160,680
|
|
|
|
315,680
|
|
|
Accumulated depreciation
|
|
|
(97,987
|
)
|
|
|
(115,889
|
)
|
|
|
|
$
|
62,693
|
|
|
$
|
199,791
|
|
5. Intangible property
As of June 30, intangible property consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,440,000
|
|
|
$
|
2,440,000
|
|
|
Computer software
|
|
|
116,176
|
|
|
|
116,176
|
|
|
Print Mates patents, trademark and software
|
|
|
757,535
|
|
|
|
-
|
|
|
|
|
|
3,313,711
|
|
|
|
2,556,176
|
|
|
Accumulated amortization
|
|
|
(1,075,666
|
)
|
|
|
(686,052
|
)
|
|
|
|
$
|
2,238,045
|
|
|
$
|
1,870,124
|
|
Patents
On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt vending kiosks/cubes, using RFI's trademarked name of Reis & Irvy's (the “Acquisition”). Pursuant to the Agreement, the Company provided RFI, and its designees, a cash payment of $440,000, The Company also issued to RFI a three-year, $2 million note and a five-year common stock purchase warrant for 1,520,000 shares with a strike price of $0.50 per share. Furthermore, certain RFI Officers, Directors and Shareholders will be subject to a five-year, non-compete agreement. Also, the Agreement provides for indemnification and set off of up to $1 million, under certain circumstances.
Prior to the Company purchasing assets from RFI, the Company had been granted an exclusive license to market RFI's frozen yogurt vending kiosks/cubes, using RFI's trademarked name of Reis & Irvy's, in the United States and its territories (excluding Puerto Rico) and Canada. The assets acquired pursuant to the Agreement, are substantially all of the assets previously licensed to the Company.
Computer software
Computer software represents capitalized costs of the customer relationship management software utilized by the Company.
6. Contract liabilities - customer advances and deferred revenues
The Company receives deposits on the sale of kiosks to new or existing franchise owners. Contract liabilities – customer advances and deferred revenues reflects the amount of deposits paid to the Company. This liability is increased by new kiosk sales and decreased by the recognition of revenue for delivered kiosks and the termination or amendment of franchise agreements.
The balances of this liability are $23,805,074 and $37,221,943 as of June 30, 2019 and 2018, respectively.
7. Provision for franchisee rescissions and refunds
In certain instances, franchise owners may elect to amend or terminate their franchise relationship. Termination may include the cessation of operating installed kiosks. If appropriate, the Company will enter into a rescission agreement with such franchise owners. These agreements states the terms and conditions for refunding amounts paid to the Company. This liability is increased by refund requests and is decreased by the payment of refunds to franchise owners. Most of the refund requests incurred by the Company to date are the result of production delays experienced by the Company.
The balances of this liability are $7,856,340 and $1,924,121 as of June 30, 2019 and 2018, respectively.
8. Notes payable
As of June 30, 2019, notes payable consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Promissory Notes, bearing interest at 12% per annum, payable monthly. The Senior Secured Notes mature on December 31, 2018 and have conversion rights at $.16 per share.
|
|
$
|
-
|
|
|
$
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Robofusion note payable, bearing interest at 3.25% per annum. Principal and interest is due quarterly through September 2020, net of discount of $49,710 and $99,426, respectively.
|
|
|
1,092,021
|
|
|
|
1,342,132
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory Note, non interest bearing. Principal is due monthly, over an 18 month period, net of discount of $21,000 and $0 respectively.
|
|
|
259,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,351,021
|
|
|
|
1,365,132
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,314,021
|
)
|
|
|
(629,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,000
|
|
|
$
|
736,115
|
|
Maturities of the notes payable, are as follows:
|
2020
|
|
$
|
1,314,021
|
|
|
2021
|
|
$
|
37,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,351,021
|
|
Senior secured promissory notes
On February 25, 2014, we issued Senior Secured Promissory Notes (the "Initial Notes") to three investors in exchange for cash totaling $501,000. The Initial Notes were set to mature on February 24, 2015 and bear simple interest at a rate of 12% paid monthly over the term of the loan. The Initial Notes also provide that our Company can raise up to $1.5 million in proceeds from the issuance of additional notes (the "Additional Notes") which would have the same seniority and security rights. The Initial Notes are secured by substantially all assets of the Company. On September 23, 2014, the holders of the Company's Initial Notes extended the maturity date from February 24, 2015 to March 15, 2016, and on March 15, 2016, the Notes were further extended to September 30, 2016. The notes aggregating $334,000 have been further extended to December 31, 2018 and $167,000 of the notes, plus accrued interest, were converted to common stock at $.16 per share on January 20, 2017. The remaining outstanding notes, aggregating $334,000, have been granted conversion rights at $.16 per share. The conversion right granted was fixed at the closing trading price of the stock. As a result, the Company determined that the conversion right was not a derivative in accordance with ASC 815, Derivatives and Hedges, the host instrument was conventional convertible, and that no beneficial conversion feature was present. The modification of the debt terms was not deemed substantive and therefore, was not accounted for as an extinguishment of debt with the recognition of a gain or loss.
As of June 30, 2019, and 2018, the outstanding balance was $0 and $23,000, respectively.
For the year ended June 30, 2019, approximately $23,000 of principal and $6,000 of accrued interest was converted into approximately 179,000 shares of common stock.
As of June 30, 2019, and 2018, accrued interest was approximately $0 and $6,000, respectively.
For the years ended June 30, 2019 and 2018, interest expense was approximately $0and $31,000, respectively.
Robofusion note payable
On December 29, 2016, the Company entered into an Asset Purchase Agreement (the “Agreement”) with Robofusion, Inc. (“RFI”), whereby the Company acquired the intellectual property assets of RFI, a developer of robotic-kiosk vending technology, primarily frozen yogurt vending kiosks/cubes, using RFI's trademarked name of Reis & Irvy's (the “Acquisition”). Pursuant to the Agreement, the Company provided RFI, and its designees, a cash payment of $440,000. The Company also issued to RFI a three-year, $2 million note.
In connection with the issuance of the note payable, the Company issued a five-year common stock purchase warrant for 1,520,000 shares with a strike price of $0.50 per share. At inception, the estimated fair value of the warrant was approximately $174,000 and was recognized as a debt discount. For the years ended June 30, 2019 and As of June 30, 2019 and 2018, approximately $50,000 and $50,000 was accreted to accretion of discount on note payable in the accompanying statement of operations.
As of June 30, 2019, and 2018, the outstanding balance was approximately $1,142,000 and $1,441,000 respectively. During 2019, principal and indemnification payments were approximately $300,000.
As of June 30, 2019, and 2018, accrued interest was approximately $53,000 and $15,000, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
For the years ended June 30, 2019 and 2018, interest expense was approximately $40,000 and $60,000, respectively.
Promissory note
On February 13, 2019 the Company issued a $360,000 promissory note (the “Note”) in relation to a franchisee rescission agreement. The Note is non-interest bearing and principal payments of $20,000 are due monthly over an 18-month period beginning in April 2019. Given the non-interest-bearing nature of the Note, the Company estimated assigned a debt discount of $27,000 based on an estimated internal cost of capital rate of 10%.
For the years ended June 30, 2019 and As of June 30, 2019 and 2018, approximately $6,000 and $0 was accreted to accretion of discount on note payable in the accompanying statement of operations.
As of June 30, 2019, and 2018, the outstanding balance was approximately $280,000 and $0 respectively. During 2019, principal payments were approximately $80,000.
As of June 30, 2019, and 2018, accrued interest was approximately $0 and $0, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
For the years ended June 30, 2019 and 2018, interest expense was approximately $0 and $0, respectively.
9. Convertible notes payable
Financing and security agreement
On September 23, 2014, the Company entered into a Financing and Security Agreement (the "Financing Agreement") whereby the Company may be able to borrow up to $1.5 million through the issuance of convertible secured debt. The principal terms of the Financing Agreement are as follows:
|
|
·
|
The Company may borrow up to $1.5 million in tranches of up to $150,000 each.
|
|
|
|
|
|
|
·
|
The first tranche of $150,000 was issued at the closing of the transaction and was used to acquire and put into service Company-owned micro markets. An additional amount of $100,000 was issued during the quarter ended December 31, 2014.
|
|
|
|
|
|
|
·
|
All subsequent tranches shall be in the amount of up to $150,000, shall be due and funded by the lender within seven days of notice, and shall be contingent upon the Company placing an additional 20 micro markets into service.
|
|
|
|
|
|
|
·
|
The notes payable issued under the terms of the Financing Agreement are due in full 24 months from the funding of each tranche. The Company may, at its discretion, extend the due date for each tranche for an additional 12 months.
|
|
|
|
|
|
|
·
|
Interest on the borrowings accrues at a rate of 10% per annum and is payable quarterly. In the event the Company elects to extend the maturity date of a tranche, the interest rate will increase to 12% per annum on that tranche.
|
|
|
|
|
|
|
·
|
The lender may at its discretion convert any outstanding principal under any of the tranches into shares of the Company's common stock. The conversion price is 85% of the average closing prices for the 15 trading days prior to the notice of conversion, but in no event at a conversion price lower than $1.28 per share.
|
|
|
|
|
|
|
·
|
On the due date, or the extended due date, the Company may at its discretion convert up to one-half of the outstanding principal into shares of common stock. The conversion price is 85% of the average closing prices for the 15 trading days prior to the due date or extended due date, whichever may be applicable.
|
|
|
|
|
|
|
·
|
Borrowings are secured by the Company-owned micro markets.
|
At June 30, 2018, there was $250,000 outstanding under the Financing Agreement, of which $150,000 originally matured on September 23, 2016 and $100,000 originally matured on December 15, 2016. On January 20, 2017, the Company extended both tranches until December 31, 2018. As part of the extension, the holder was granted conversion rights at $.16 per share. The conversion right granted was fixed at the closing trading price of the stock. As a result, the Company determined that the conversion right was not a derivative in accordance with ASC 815, Derivatives and Hedges, the host instrument was conventional convertible, and that no beneficial conversion feature was present. The modification of the debt terms was not deemed substantive and therefore, was not accounted for as an extinguishment of debt with the recognition of a gain or loss. No penalties or higher rates are effective upon default.
The lender of the Financing Agreement has informed the Company that he does not intend to lend additional amounts under the Financing Agreement.
As of June 30, 2019, and 2018, the outstanding balance was approximately $125,000 and $250,000, respectively.
As of June 30, 2019, and 2018, accrued interest was approximately $53,000 and $81,000, respectively.
For the years ended June 30, 2019 and 2018, interest expense was approximately $22,000 and $25,000, respectively.
For the year ended June 30, 2019, approximately $125,000 of principal and $50,000 of accrued interest was converted into approximately 1,095,000 shares of common stock.
Convertible unsecured promissory note
On April 8, 2019, the Company issued a $500,000 convertible unsecured promissory note (the “Note”) in exchange for cash proceeds of $500,000. The Note matures on April 8, 2020 and bears interest at a rate of 15% annum, payable every six months. The Note principal has conversion rights at $0.50 per share. Interest accrued on the Note is not convertible. A 2% penalty applies to missed interest payments.
As of June 30, 2019, and 2018, the outstanding balance was approximately $500,000 and $0 respectively. During 2019, principal payments were approximately $0.
As of June 30, 2019, and 2018, accrued interest was approximately $17,000 and $0, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
For the years ended June 30, 2019 and 2018, interest expense was approximately $17,000 and $0, respectively.
Convertible unsecured promissory notes
Between April and June 2019 the Company issued approximately nineteen promissory notes (the “Notes”) totaling $1,385,000 in exchange for cash proceeds of $1,385,000. The Notes mature twenty-four months from their effective date and have maturity dates between April and June 2021 and have conversion rights at $0.50 per share. The Notes bear interest at a rate of 15% annum, payable every six months.
As of June 30, 2019, and 2018, the outstanding balance was approximately $1,385,000 and $0 respectively. During 2019, principal payments were approximately $0.
As of June 30, 2019, and 2018, accrued interest was approximately $34,000 and $0, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
For the years ended June 30, 2019 and 2018, interest expense was approximately $34,000 and $0, respectively.
Convertible unsecured redeemable note
On June 4, 2019, the Company issued a $750,000 convertible redeemable promissory note (the “Note”) in exchange for cash proceeds of $735,000 as $15,000 was deducted by the Note holder for legal fees. The Note matures on June 4, 2020 and bears interest at a rate of 6% annum, payable paid annually. The note has conversion rights at $0.70 per share if converted within the first 180 days of issuance, after which the holder has the right to convert the Note at 65% of the lowest closing bid price of the common stock for fifteen prior trading days including the day upon which the notice of conversion is received by the Company. The Company determined that the conversion right is a derivative in accordance with ASC 815, Derivatives and Hedges, and at the time of issuance a debt discount of $695,989 was recorded and will be amortized on a straight-line basis over the life of the note to accretion of discount on notes payable in the accompanying statement of operations.
As additional consideration for the purchase of the Note, the company issued to the buyer 62,500 shares of restricted common stock.
During the first six months the Note is in effect, the Company may redeem this Note by paying to the holder an amount as follows:
|
Date
|
|
Amont
|
|
0-30 days
|
|
105%*(P+I)
|
|
31-60 days
|
|
110%*(P+I)
|
|
61-90 days
|
|
115%*(P+I)
|
|
91-120 days
|
|
120%*(P+I)
|
|
121-150 days
|
|
125%*(P+I)
|
|
151-180 days
|
|
130%*(P+I)
|
The Note may not be redeemed after 180 days in effect.
As of June 30, 2019, and 2018, the outstanding balance was approximately $750,000 and $0 respectively. For the year ended June 30, 2019, principal payments were approximately $0.
As of June 30, 2019, and 2018, accrued interest was approximately $3,000 and $0, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
As of June 30, 2019, and 2018, the debt discount associated with the derivative liability was approximately $638,000 and $0, respectively. For the year ended June 30, 2019, approximately $58,000 was accreted to accretion of discount on notes payable.
For the years ended June 30, 2019 and 2018, interest expense was approximately $3,000 and $0, respectively.
Convertible unsecured promissory note
On June 6, 2019, the Company issued a $250,000 convertible unsecured promissory note (the “Note”) in exchange for cash proceeds of $250,000. The Note matures on June 6, 2022 and bears interest at a rate of 10% annum, payable every six months. The note has conversion rights at $0.50 per share.
As of June 30, 2019, and 2018, the outstanding balance was approximately $250,000 and $0 respectively. For the year ended June 30, 2019, principal payments were approximately $0.
As of June 30, 2019, and 2018, accrued interest was approximately $2,000 and $0, respectively. For the year ended June 30, 2019, interest payments were approximately $0.
For the years ended June 30, 2019 and 2018, interest expense was approximately $2,000 and $0, respectively.
As of June 30, 2019, convertible notes payable consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible secured debt, bearing interest at 10% per annum, payable quarterly. The convertible secured debt matures on December 31, 2018 and has conversion rights at $.16 per share.
|
|
|
125,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Unsecured Promissory Note, bearing interest at 15% annum, payable every six months. The note matures on April 8, 2020 and has conversion rights at $.50 per share.
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Unsecured Promissory Notes issued between April and June 2019, bearing interest at 15% annum, payable every six months. These 24 month notes mature between April and June 2021 and have conversion rights at $.50 per share.
|
|
|
1,385,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Unsecured Redeemable Note, interest bearing and payable at 6% annum. The note matures on June 4, 2020 and has conversion rights at $.70 per share if converted within the first 180 days of issuance (June 4, 2019), after which the holder has the right to convert each share at 65% of the lowest closing bid price on date of conversion. Net of derivative liability discount of $637,990 and $0 respectively
|
|
|
750,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Unsecured Promissory Note, bearing interest at 10% annum, payable every six months. The note matures on June 6, 2022 and has conversion rights at $.50 per share.
|
|
|
250,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable
|
|
|
3,010,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less discounts
|
|
|
(637,990
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable net of discounts
|
|
|
2,372,010
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,375,000
|
)
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, current portion
|
|
$
|
997,010
|
|
|
$
|
-
|
|
Maturities of the convertible notes payable, are as follows:
|
2020
|
|
$
|
1,375,000
|
|
|
2021
|
|
$
|
1,635,000
|
|
|
|
|
|
|
|
|
|
|
$
|
3,010,000
|
|
10. Derivative Liabilities
Derivative liabilities consisted of the following:
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
June 2019 Convertible Debt - $750,000
|
|
|
695,989
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities
|
|
|
695,989
|
|
|
$
|
-
|
|
The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments, which contain terms that protect holders from declines in the stock price, may not be exempt from derivative accounting treatment. As a result, embedded conversion options (whose exercise price is not fixed and determinable) in convertible debt (which is not conventionally convertible due to the exercise price not being fixed and determinable) are initially recorded as a liability and are revalued at fair value at each reporting date using the Black Sholes Model.
June 2019 Convertible Debt - $750,000
In June 2019, the Company entered into a $750,000 convertible note with variable conversion pricing. The following inputs were used within the Black Sholes Model to determine the initial relative fair values of the $750,000 convertible note with expected term of 1 year with interest bearing and payable at 6% annum. The note matures on June 4, 2020 and has conversion rights at $.70 per share if converted within the first 180 days of issuance (June 4, 2019), after which the holder has the right to convert each share at 65% of the lowest closing bid price on date of conversion.
|
|
|
Balance at 6/30/2018
|
|
|
Additions
|
|
|
Changes
|
|
|
Balance at 6/30/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2019 Convertible Debt - $750,000
|
|
|
-
|
|
|
|
695,989
|
|
|
|
-
|
|
|
|
695,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
695,989
|
|
|
|
-
|
|
|
|
695,989
|
|
The Company revalues these derivatives each quarter using the Black Sholes Model. The change in valuation is accounted for as a gain or loss in derivative liability. The following table describes the derivative liability as of June 30, 2018 and June 30, 2019.
11. Stockholders’ deficit
For the year ended June 30, 2019, the Company issued or recognized:
|
|
·
|
Approximately 1,707,000 shares of common stock for gross proceeds of approximately $1,678,000.
|
|
|
·
|
Approximately 1,449,000 shares of common stock for the conversion of approximately $232,000 of convertible debt and accrued interest.
|
|
|
·
|
Approximately 265,000 shares of common stock for approximately $137,000 of services.
|
|
|
·
|
Approximately 622,000 shares of common stock for the cashless exercise of options under the 2013 Equity Incentive Plan. (See Note 11).
|
|
|
·
|
Approximately $2,947,000 in stock-based compensation related to options issued inside and outside the 2013 Equity Incentive Plan
|
|
|
·
|
Approximately $27,000 in discounts relating to notes payable.
|
For the year ended June 30, 2018, the Company issued or recognized:
|
|
·
|
Approximately 30,303,000 shares of common stock for gross proceeds of approximately $16,362,000, net of approximately $2,082,000 in issuance costs.
|
|
|
·
|
200,000 shares of common stock representing $300,000 of stock subscription receivable. Proceeds were received subsequent to June 30, 2018.
|
|
|
·
|
Approximately 2,768,000 shares of common stock for the conversion of approximately $311,000 of convertible debt and $132,000 of accrued interest.
|
|
|
·
|
150,000 shares of common stock in connection with a legal settlement. The estimated fair value based on the closing price on the date of the settlement was approximately $144,000 and was a reduction of the provision for franchisee rescissions and refunds. In connection with the settlement, the Company guaranteed the shareholder would receive proceeds of $200,000 from the sale of the shares. See Note 15.
|
|
|
·
|
Approximately 502,000 shares of common stock for approximately $1,161,000 of marketing and other services.
|
|
|
·
|
Approximately 628,000 shares of common stock for the cashless exercise of options under the 2013 Equity Incentive Plan. (See Note 11).
|
|
|
·
|
Approximately $1,636,000 in stock-based compensation related to options issued inside and outside the 2013 Equity Incentive Plan
|
|
|
·
|
Approximately $780,000 in derivative liability.
|
12. Stock-based compensation
2013 Equity Incentive Plan
On August 14, 2013, our Board of Directors approved the adoption of the 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan was approved by a majority of our shareholders (as determined by shareholdings) on September 4, 2013. The 2013 Plan provides for granting of stock-based awards including: incentive stock options, non-statutory stock options, stock bonuses and rights to acquire restricted stock. The total number of shares of common stock that may be issued pursuant to stock awards under the 2013 Plan were initially not to exceed in the aggregate 2,600,000 shares of the common stock of our Company. On July 13, 2015, the Company increased the total number of shares that may be issued under the 2013 Plan to 4,000,000. Furthermore, in April 2016, the Company further increased the total number of shares that may be issued under the Plan to 6,000,000.
During the years ended June 30, 2019 and 2018, the Company granted stock options under its 2013 Plan. Stock- based compensation related to these awards is recognized on a straight-line basis over the applicable vesting period and is included in operating expense in the accompanying consolidated statement of operations for the years ended June 30, 2019 and 2018. During the years ended June 30, 2019 and 2018, options issued were valued using a binomial valuation method assuming the following:
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
232.16% - 234.30
|
%
|
|
133% - 234.30
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
2.33% - 2.44
|
%
|
|
1.59% - 2.44
|
%
|
|
Expected life in years
|
|
|
3.5
|
|
|
|
3.5
|
|
The expected volatility was estimated based on the volatility of a set of companies that management believes are comparable to the Company. The risk-free rate was based on the U.S. Treasury note rate over the expected life of the options. The expected life was determined using the simplified method as we have no historical experience. We recorded stock-based compensation expense of $253,000 and $293,000 for the years ended June 30, 2019, and 2018, respectively.
The following table summarizes the stock option activity:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Per
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Share
|
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
4,120,074
|
|
|
|
0.25
|
|
|
|
5.67
|
|
|
|
2,397,883
|
|
|
Granted
|
|
|
332,500
|
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(719,448
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(591,250
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
3,141,876
|
|
|
$
|
0.21
|
|
|
|
5.23
|
|
|
|
6,168,665
|
|
|
Granted
|
|
|
750,000
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(449,500
|
)
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(610,750
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
2,831,626
|
|
|
|
0.34
|
|
|
|
4.38
|
|
|
|
804,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested options
|
|
|
2,732,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining options expected to vest
|
|
|
544,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2019, the total estimated unrecognized compensation cost related to options totaled approximately $260,000.
As of June 30, 2018, there were 3,520,000 warrants outstanding, of which 2,000,000 have an exercise price of $.30 per share and 1,520,000 have an exercise price of $.50 per share. The warrants expire five years from the date of grant.
As of June 30, 2019, there were 3,270,000 warrants outstanding, of which 2,000,000 have an exercise price of $.30 per share and 1,270,000 have an exercise price of $.50 per share. The warrants expire five years from the date of grant.
Non-Qualified Stock Options
For the year ended June 30, 2017, the Company granted non-qualified stock options (outside of the 2013 Plan) aggregating 5,000,000 and 500,000, respectively to its Chairman and CEO. The options vest 50% upon the delivery of 400 robotic soft serve vending kiosks or achieving cumulative revenue of $15 million and 50% upon the delivery of 800 robotic soft serve vending kiosks or achieving cumulative revenue of $30 million.
The estimated fair value of the options was approximately $698,000. Stock-based compensation related to these awards is recognized on a straight-line basis over the expected vesting period (24 months) and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The options issued were valued using a binomial method assuming the following:
|
Expected volatility
|
|
|
134.81
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
|
1.50
|
%
|
|
Expected life in years
|
|
|
3.5
|
|
For the years ended June 30, 2019 and 2018, the Company recognized approximately $191,000 and $279,000, respectively. Remaining stock-based compensation to be recognized is approximately $303,000. The chairman vested 2,500,000 during year ending June 30,2019, with 2,000,000 remaining shares expected to vest. None of the CEO’s shares will vest as he stepped down from his position prior to any performance obligations being met.
For the year ended June 30, 2018, the Company granted non-qualified stock options (outside of the 2013 Plan) to the following:
|
|
·
|
The Company granted a potential of 1,175,000 options to employees. The options vest based on objective criteria consisting of sales and overall Company goals.
|
|
|
|
|
|
|
·
|
Furthermore, we granted a potential of 6,375,000 options to the Chairman, CEO and management employees with an exercise price of $0.87 per share. The options vest 50% upon 1,200 units installed or $45 million in cumulative revenue; and 50% upon 2,000 units installed or $75 million in cumulative revenue.
|
The estimated fair value of the options was approximately $6,464,000. Stock-based compensation related to these awards is recognized on a straight-line basis over the expected vesting period (24 months) and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The options issued were valued using a binomial method assuming the following:
|
Expected volatility
|
|
232.16% - 233.60
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
2.37% - 2.67
|
%
|
|
Expected life in years
|
|
|
3.5
|
|
For the years ended June 30, 2019 and 2018, the Company recognized approximately $2,089,000 and $1,067,000, respectively. Remaining stock-based compensation to be recognized is approximately $3,327,000. No options have vested, and the remaining options expected to vest is 4,424,000. The average forfeiture rate used for the 2019 calculation was 22.4%. A specific rate is used for each employee grant line item is used in the calculation based on managements’ estimate of the likely amount to be forfeited for each employee grant.
Director Options
In September 2018, the Company granted 660,000 non-qualified stock options with a weighted average exercise price of $1.78 per share to two new Board members.
The estimated fair value of the options was approximately $1,144,000. Stock-based compensation related to these awards is recognized on a straight-line basis over the expected vesting period (36 months) and is included in Stock Compensation expense in the accompanying condensed consolidated statements of operations for the twelve months ended June 30, 2019. The options issued were valued using a binomial method assuming the following:
|
Expected volatility
|
|
|
232.16
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
Risk-free interest rate
|
|
|
2.39
|
%
|
|
Expected life in years
|
|
|
3.5
|
|
During the twelve months ended June 30, 2019, the Company recognized stock-based compensation expense of approximately $351,000. Remaining stock-based compensation to be recognized is approximately $793,000. Approximately 165,000 options have vested, and the remaining number of options expected to vest is approximately 396,000.
13. Leases
On August 1, 2015, the Company moved its corporate and warehouse facilities to a single location aggregating 8,654 feet at 2620 Financial Court, Suite 100, San Diego California 92117. The new lease is for a term of 84 months. The current monthly rental payment, net of utilities for the facility, is $15,995. Future minimum lease payments under the Company’s Facility Lease is as follows:
2019: $98,477; 2020: $202,554; 2021: $208,377; 2022: $214,403: Thereafter: $17,909. Rent expense totaled $329,956 and $185,000 for the years ended June 30, 2019 and 2018, respectively.
|
|
|
|
|
|
2019
|
|
$
|
98,477
|
|
|
2020
|
|
|
202,554
|
|
|
2021
|
|
|
208,377
|
|
|
2022
|
|
|
214,403
|
|
|
|
|
$
|
723,811
|
|
14. Income Taxes
The Company uses the asset and liability method of accounting for income taxes, in accordance with ASC 740-10, which requires that the Company recognize deferred tax liabilities for taxable temporary differences and deferred tax assets for deductible temporary differences and operating loss carry-forwards using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit or expense is recognized as a result of changes in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all of any deferred tax assets will not be realized. As of June 30, 2019, and 2018, the Company had a full valuation allowance on its deferred tax assets.
The following table presents the current and deferred income tax provision (benefit) for federal, state and foreign income taxes:
|
|
|
|
|
|
Continuing Ops
|
|
|
Discontinued Ops
|
|
|
|
|
|
|
|
Jun-19
|
|
|
Jun-19
|
|
|
Jun-19
|
|
|
Jun-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
9,600
|
|
|
|
6,400
|
|
|
|
3,200
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,600
|
|
|
|
6,400
|
|
|
|
3,200
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes:
|
|
|
9,600
|
|
|
|
6,400
|
|
|
|
3,200
|
|
|
|
5,600
|
|
Significant components of deferred tax assets and liabilities are shown below:
|
|
|
|
|
|
Continuing Ops
|
|
|
Discontinued Ops
|
|
|
|
|
|
|
|
06/30/19
|
|
|
06/30/19
|
|
|
06/30/19
|
|
|
06/30/18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
|
8,961,738
|
|
|
|
5,372,120
|
|
|
|
3,589,618
|
|
|
|
8,912,582
|
|
|
Accruals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,330
|
|
|
Compensation
|
|
|
833,361
|
|
|
|
744,812
|
|
|
|
88,549
|
|
|
|
449,380
|
|
|
Inventory
|
|
|
469,197
|
|
|
|
469,197
|
|
|
|
-
|
|
|
|
102,661
|
|
|
State Tax
|
|
|
1,176
|
|
|
|
840
|
|
|
|
336
|
|
|
|
1,176
|
|
|
Bad Debt Reserve
|
|
|
273,072
|
|
|
|
273,072
|
|
|
|
-
|
|
|
|
44,660
|
|
|
Revenue
|
|
|
2,422,261
|
|
|
|
2,422,261
|
|
|
|
-
|
|
|
|
579,856
|
|
|
Contributions
|
|
|
17,885
|
|
|
|
12,456
|
|
|
|
5,429
|
|
|
|
16,689
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
12,978,690
|
|
|
|
9,294,758
|
|
|
|
3,683,932
|
|
|
|
10,158,334
|
|
|
Valuation allowance
|
|
|
(13,020,902
|
)
|
|
|
(9,336,970
|
)
|
|
|
(3,683,932
|
)
|
|
|
(10,225,893
|
)
|
|
Net deferred tax assets
|
|
|
(42,212
|
)
|
|
|
(42,212
|
)
|
|
|
-
|
|
|
|
(67,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
|
47,753
|
|
|
|
47,753
|
|
|
|
-
|
|
|
|
80,374
|
|
|
Debt Discount
|
|
|
(5,541
|
)
|
|
|
(5,541
|
)
|
|
|
-
|
|
|
|
(12,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
In assessing the realizability of deferred tax assets of $12,978,690 at June 30, 2019 management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
A reconciliation of income taxes computed by applying the federal statutory income tax rate of 21% to income (loss) before income taxes to the recognized income tax (benefit) provision reported in the accompanying consolidated statements of operations is as follows for the years ended June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
Continuing Ops
|
|
|
Discontinued Ops
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,042,474.22
|
)
|
|
|
|
|
|
(18,183,975.97
|
)
|
|
|
|
|
|
141,501.75
|
|
|
|
|
|
|
(20,194,382.00
|
)
|
|
|
|
06/30/19
|
|
|
06/30/19
|
|
|
06/30/19
|
|
|
06/30/18
|
|
|
Expected tax at 21%
|
|
|
(3,788,920
|
)
|
|
|
21.00
|
%
|
|
|
(3,818,635
|
)
|
|
|
21.00
|
%
|
|
|
29,715
|
|
|
|
21.00
|
%
|
|
|
(6,866,090
|
)
|
|
|
34.00
|
%
|
|
State income tax, net of federal tax
|
|
|
(46,988
|
)
|
|
|
0.26
|
%
|
|
|
(175,583
|
)
|
|
|
0.97
|
%
|
|
|
128,595
|
|
|
|
90.88
|
%
|
|
|
(395,011
|
)
|
|
|
1.96
|
%
|
|
Permanent Items
|
|
|
43,306
|
|
|
|
-0.24%
|
|
|
|
43,306
|
|
|
|
-0.24%
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
686,153
|
|
|
|
-3.40%
|
|
|
Results of Change in Federal Tax Rates
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
4,731,271
|
|
|
|
-23.43%
|
|
|
Change in valuation allowance
|
|
|
3,596,320
|
|
|
|
-19.93%
|
|
|
|
3,715,783
|
|
|
|
-20.43%
|
|
|
|
(119,463
|
)
|
|
|
-84.43%
|
|
|
|
1,967,446
|
|
|
|
-9.74%
|
|
|
Research Credits
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
State Rate True Up
|
|
|
278,926
|
|
|
|
-1.55%
|
|
|
|
278,926
|
|
|
|
-1.53%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other / True-up
|
|
|
(73,044
|
)
|
|
|
0.40
|
%
|
|
|
(37,396
|
)
|
|
|
0.21
|
%
|
|
|
(35,648
|
)
|
|
|
-25.19%
|
|
|
|
(118,169
|
)
|
|
|
0.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (Benefit) for income taxes
|
|
|
9,600
|
|
|
|
-0.05%
|
|
|
|
6,400
|
|
|
|
-0.04%
|
|
|
|
3,200
|
|
|
|
2.26
|
%
|
|
|
5,600
|
|
|
|
-0.03%
|
|
During the years ended June 30, 2019 and 2018, the valuation allowance increased by $3,596,000 and $1,967,000, respectively. At June 30, 2019, the Company had federal and state net operating carryforwards of approximately $36,903,000 and 17,621,000 respectively. The federal and state loss carryforwards begin to expire in 2031 unless previously utilized. Our tax returns for the years 2014 - 2018 are open for examination by the taxing authorities.
Utilization of the NOL carryforwards may be subject to an annual limitation due to ownership change limitations that may have occurred or could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). These ownership changes may limit the amount of the NOL carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 5 percentage points of the outstanding stock of a company by certain shareholders.
On December 22, 2017, new tax reform legislation in the U.S., known as the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. As a result of the lower enacted corporate tax rate, the Company has remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The provisional amount recorded related to the remeasurement of our deferred tax balance was $4.8 million that is fully offset by a corresponding decrease to our valuation allowance.
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition at the effective date to be recognized. As of June 30, 2019, we do not have any unrecognized tax benefits. We do not anticipate a significant change in the unrecognized tax benefits within the next 12 months.
15. Commitments and contingencies
During fiscal year 2018, the Company began a voluntary internal review into payments made with respect to primary stock sales. The Company has engaged outside counsel, has ceased selling the stocks, and will not make further payments with regard to stock sales, will take remedial measures (including oversight and education), and, as deemed appropriate, will take steps to recapture the value of those payments previously made. The Audit Committee is overseeing the internal review and remediation efforts.
The Company provides a one-year parts warranty on its robotic soft serve vending kiosks. However, the soft-serve component carries a five-year parts and two-year labor warranty. The robotic arm manufacturer offers no warranty to the company on this component as currently configured. Re-engineering and testing of the robotic arm are underway and the resulting component will be warranted by the supplier.
The Company currently sources the components for all of its vending robots from various vendors, and has contracted with Flex Ltd., for the assembly and manufacture of the robotic soft serve vending kiosks. Additionally, there are a number of suppliers who provide various subcomponents of the robotic kiosks. We believe that our relationships with our suppliers are excellent, and likely to continue. The Company announced an interim agreement with Stoelting Foodservice to assemble kiosks as a complement to its current contract manufacturer, Flex Ltd. In our view, the loss of our relationship with either Flex Ltd. or Stoelting Foodservice, should it occur, may result in short term immaterial, disruptions; however, the allocation of resources required to secure and onboard new manufacturers would likely have a material impact on operations.
Our frozen yogurt consumables will be supplied by several distributors, based on geographical location. However, there may be only one supplier in each geographic location. A change in suppliers, however, could cause a delay in deliveries and a possible loss of revenue from both current and prospective franchisees, which could adversely affect our operating results.
On May 19, 2018, the Company entered into an 18-month consulting contract with a franchisee. Consideration is a total of 300,000 shares of common stock. 50,000 shares of common stock vest every three months during the term of the contract. If the consultant resigns or is terminated, the Company has the option to repurchase the vested shares at the lesser of the fair market value of the shares at the time the repurchase option is exercised and the purchase price The Company accounted for the shares in accordance with ASC 505-50, Equity-Equity Based Payments to Non-Employees.
On June 2018, the Company entered into an agreement with two investors in connection with the Company’s private placement memorandum. The investors have the right to purchase:
|
|
·
|
From June 6 through June 30, 2018, 300,000 shares of common stock at $1.00 per share. As of June 30, 2018, the investors purchased 300,000 shares of common stock.
|
|
|
|
|
|
|
·
|
From July 1 through September 30, 2018, 1,000,000 shares of common stock at $1.00 per share. As of September 30, 2018, no shares were purchased.
|
|
|
|
|
|
|
·
|
From October 1 through December 31, 2018, 1,333,333 shares of common stock at $1.50 per share. No shares were purchased under this provision.
|
From time to time, we may become involved in litigation and other legal actions, including disagreements with to any pending litigation or franchise agreement rescissions where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Estimated legal costs expected to be incurred to resolve legal matters are recorded to the consolidated balance sheet and statements of operations. We have the following ongoing and potential legal matters associated to franchisee refunds all of which are provided for in the Provision for franchisee rescissions and refunds line item on our balance sheet:
|
·
|
Robotreats v. Ries & Irvy’s, Inc.
|
|
|
|
|
·
|
Szostack Froyo Franchising, LLC v. Reis & Irvy’s, Inc.
|
|
|
|
|
·
|
Robot Vending, LLC v. Reis & Irvy’s Inc.
|
|
|
|
|
·
|
Lindstrom et al. v. Generation Next Franchise Brands, Inc.
|
|
|
|
|
·
|
Draw 27 Holding, LLC v. Reis & Irvy’s, Inc.
|
Additionally, our Company is subject to certain state reviews of our Franchise Disclosure Documents. Such state reviews could lead to our Company being fined or prohibited from entering into franchising agreements with the reviewing state.
Periodically, we are contacted by other state franchise regulatory authorities and in some cases have been required to respond to inquiries or make changes to our franchise disclosure documents or franchise offer and sale practices. Management believes these communications from state regulators and corresponding changes in our franchise disclosure documents and practices are administrative in nature and do not indicate the presence of a loss or probable potential loss.
16. Related party transactions
Related party debt consisted of the following:
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Secured Promissory Notes
|
|
$
|
296,779
|
|
|
$
|
296,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Promissory Note
|
|
|
-
|
|
|
|
240,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,779
|
|
|
|
536,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(296,779
|
)
|
|
|
(536,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes Payable to Socially Responsible Brands
On October 27, 2015, the Company obtained secured loans in the aggregate amount of $500,000 from Socially Responsible Brands, Inc. The Company’s Chairman, Nicholas Yates, is a 20% owner of Socially Responsible Brands, Inc.
The Company issued two Secured Promissory Notes and a related Security Agreement, each dated October 27, 2015 (the “Notes” and “Security Agreement”). Certain current lien holders of the Company also executed and delivered a Subordination Agreement in connection with the issuance of the Notes and Security Agreement (the “Subordination Agreement”, and together with the Notes and Security Agreement, the “Transaction Documents”).
The Notes are each in the principal amount of $250,000, and have terms of eighteen months and one year, respectively. The first Note is secured by the Company’s fifty (50) corporate-owned micro-markets and the Note principal and interest is repaid according to a schedule based on sale of such micro-markets. The second Note is secured by the Company's franchise royalties and principal and interest is repaid on a schedule based on receipt of combo machine sales, with guaranteed payments of at least $75,000 per quarter during the term of the Note. During the year ended 2019, the Company paid $0 of principal and interest, respectively, under the Notes. During the year ended 2018, the Company paid $0 of principal and interest, respectively, under the Notes.
On January 20, 2017, Socially Responsible Brands agreed to extend the maturity date on their notes until December 31, 2017. In connection with the loan extension, the holder may convert their Notes into shares of the Company’s stock at $.16 per share. Furthermore, on September 18, 2017, the Notes were amended whereby the interest rate was modified to a rate of 20% per annum effective October 1, 2016. Additionally, the Notes were further extended until December 31, 2018.
On June 19, 2019, The Company issued one Unsecured Promissory Note with a principal amount of $234,000, in exchange for cash proceeds of $221,519. The note had a maturity date of June 26, 2019. The Company paid the principal amount on the note in full during year ended June 30, 2019.
Notes Payable to Nick Yates
On January 13, 2015, the Company's Chairman, Nicholas Yates, agreed to loan the Company up to $200,000 (the "Loan"), each incremental borrowing under the Loan to be evidenced by a promissory note. Mr. Yates further agreed to loan the Company up to $550,000. Amounts borrowed under the Loan bear interest at 10% per annum and are due on December 31, 2016. The Loan also provides for conversion to common stock, at the option of the holder, at a price equal to the Company’s next round of funding. In connection with the beneficial conversion option, the Company has recorded $300,000 as a discount on the Loan and charged $0 and $0, to operations during the years ended June 30, 2019 and 2018, respectively. During the year ended June 30, 2019 the company paid $240,000 and $14,000 of principal and interest, respectively. As of June 30, 2019, and 2018, $0 and $240,000, respectively were outstanding under the Loan.
Other Transactions
The Company paid a bonus to the Chairman for shares of the Company’s stock that potential franchisees purchased. In this regard, the Company paid approximately $332,000 to its Chairman for the time period July 2017 to April 2018. The Company will take steps to recapture the value of these payments previously made to its Chairman.
In July 2017, the Company issued 150,000 shares of common stock in connection with settlement of a former franchisee (see Note 11). Terms of the agreement state that Nick Yates will receive 50% of the proceeds in excess of $200,000.
The spouse of the Company’s Chairman was employed by the Company during 2017 and through May 31, 2018. The Company charged approximately $0 and $38,000 to operations for her compensation in 2019 and 2018, respectively.
The Company determined that there may be a material weakness related to the identification of transactions that could be deemed violations of Section 13(k) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 402 of the Sarbanes-Oxley Act of 2002.
As of June 30, 2019, and 2018, prepaid expenses and other current assets in the accompanying balance sheet included approximately $5,500 and $28,000, respectively, of short-term advances to Nick Yates, an officer of the Company.
17. Discontinued Operations
Because it was determined the assets of FHV LLC were insufficient to satisfy FHV LLC’s obligations to creditors, as of September 28, 2018, FHV LLC executed an Assignment for the Benefit of Creditors under California law, whereby all of the assets of FHV LLC have been assigned to a third party fiduciary who will liquidate such assets and distribute the proceeds to FHV LLC’s creditors pursuant to the priorities established and permitted by law.
Discontinued operations for the twelve months ended June 30, 2019 and 2018 consist of the operations from the FHV LLC subsidiary.
|
Gain (Loss) from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twelve months ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Vending machine sales, net
|
|
$
|
-
|
|
|
$
|
178,110
|
|
|
Franchise fees
|
|
|
-
|
|
|
|
15,475
|
|
|
Company owned machine sales
|
|
|
-
|
|
|
|
-
|
|
|
Royalties
|
|
|
8,041
|
|
|
|
296,422
|
|
|
Other
|
|
|
2,050
|
|
|
|
59,159
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
|
10,091
|
|
|
|
549,166
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
5,237
|
|
|
|
182,286
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
4,854
|
|
|
|
366,880
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
-
|
|
|
|
987,805
|
|
|
Marketing
|
|
|
-
|
|
|
|
28,981
|
|
|
Professional fees
|
|
|
26,451
|
|
|
|
6,927
|
|
|
Insurance
|
|
|
-
|
|
|
|
48,589
|
|
|
Rent
|
|
|
6,199
|
|
|
|
45,235
|
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
11,624
|
|
|
Stock compensation
|
|
|
-
|
|
|
|
155,953
|
|
|
Research and development
|
|
|
-
|
|
|
|
3,000
|
|
|
Provision for legal settlement
|
|
|
-
|
|
|
|
446,894
|
|
|
Other
|
|
|
6
|
|
|
|
151,432
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32,656
|
|
|
|
1,886,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(27,802
|
)
|
|
|
(1,519,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(154,660
|
)
|
|
Derivative liability income (expense)
|
|
|
-
|
|
|
|
(220,003
|
)
|
|
Loss before provision for income taxes
|
|
|
(27,802
|
)
|
|
|
(1,894,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27,802
|
)
|
|
|
(1,894,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain from disposition of operations
|
|
|
169,304
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss)
|
|
$
|
141,502
|
|
|
$
|
(1,894,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the audited condensed consolidated financial statements.
|
The following table lists the assets of discontinued operations and liabilities of discontinued operations as of June 30, 2019 and 2018 for FHV LLC.
Assets and Liabilities of Discontinued Operations
|
|
|
June 30,
2019
(unaudited)
|
|
|
June 30,
2018
(audited)
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
26,417
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
1,500
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $174,011
|
|
|
-
|
|
|
|
18,451
|
|
|
Inventory on-hand, net of allowance for obsolete inventory of $100,000
|
|
|
-
|
|
|
|
246,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets held for disposition
|
|
$
|
-
|
|
|
$
|
292,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
-
|
|
|
$
|
280,159
|
|
|
Contract liabilities - customer advances and deferred revenues
|
|
|
-
|
|
|
|
515,517
|
|
|
Provision for franchisee rescissions and refunds
|
|
|
-
|
|
|
|
496,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
-
|
|
|
$
|
1,291,676
|
|
18. Subsequent Events
On various dates subsequent to July 1, 2018 through the date of this report, the Company issued 115,385 shares of common stock, aggregating approximately $75,000.
On various dates subsequent to July 1, 2018 through the date of this report, the Company issued 446,352 shares of common stock, through cashless exercise of employee stock options.
On July 5, 2019, a note holder converted their $25,000 Note that had a conversion price of $0.50 per share into 50,000 shares of common stock.
On various dates subsequent to July 1, 2018 and through the date of this report, the Company entered into termination agreements with franchisees for refunds aggregating approximately $808,000. The Company considered the guidance in ASC 855, Subsequent Events, and determined that an accrual was required as of June 30, 2018. The accrual was accounted for as a provision for franchisee rescissions and refunds in the accompany consolidated financial statements.
On September 1, the company appointed Thomas McChesney as an independent members to its Board of Directors. McChesney, 73, spent his entire career working with emerging growth companies. He began as an OTC trader with both local and national brokerage firms and joined Paulson Investment Company in the OTC trading department. During the 1980’s, Paulson Investment began an investment banking arm of which Mr. McChesney became a part. From 1980 to 1995 when he resigned from the firm, he had a series of promotions from sales manager to Senior Vice President and eventually was named President in 1993. While at Paulson, Mr. McChesney also served on the Board of Directors for the NASDAQ listed holding company. After retiring from Paulson, Tom formed his own investment banking division of a small Portland firm where he consulted and helped companies raise capital for 8 years.
Mr. McChesney has served on the boards of numerous companies over the years and has consulted with many others. In 1995 he joined the Board of a small temporary staffing company, Labor Ready, where he led a $2 million equity financing for the bulletin board listed company. He remained on the board of Labor Ready for 21 years until retiring in March 2017. He chaired the compensation committee for a number those years. Today, Labor Ready is known as TrueBlue and is a $3 billion revenue company listed on the NYSE. From 2014 to 2018 Mr. McChesney was chairman of the consulting and investment firm Whitestone Investment, LLC, and from 2016 to 2018 he was an independent director of ImpactFlow, an online fundraising platform. Mr. McChesney also worked with Veana Therapeutics, Inc., a private biotechnology company, as a consultant from 2017 to 2019.
On September 1, 2019, Nick Yates resigned as Chief Executive Officer and assumed the role of Vice President, Sales and Marketing. Ryan Polk, current Chief Financial Officer, was assigned the responsibilities of interim-CEO. Following the appointment of a third independent member to the Board, the Board will name a permanent CEO. On October 4, Nick Yates resigned as Chairman of the Board and rescinded 9,500,000 performance based options granted to him during 2017 and 2018 including 2,500,000 of vested shares.