See the accompanying notes to the
condensed consolidated financial statements
See the accompanying notes to the condensed
consolidated financial statements
See the accompanying notes to the condensed
consolidated financial statements
Notes
to Condensed Consolidated Financial Statements
March
31, 2020
(Unaudited)
Note
1. Summary of Significant Accounting Policies
Barfresh
Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February
25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly,
smoothies, shakes and frappes.
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh
Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies
have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions can be in excess of the $250,000 federally insured limit. However, we believe
that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and the risk of loss is minimal.
Cash
in Escrow
Cash
in escrow consists of $2,325,000 of deposits from the stock offering on March 20, 2020 that are held in an escrow account for
the benefit of the Company at March 31, 2020.
Restricted
Cash
The
Company adopted FASB ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which
enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and
requires additional disclosures about restricted cash balances. At March 31, 2020, the Company had $70,064 in restricted cash
related to our co-packing agreement with Yarnell Operations, LLC.
Fair
Value Measurement
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value
Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands
disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and
establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy
as follows:
Level
1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types
of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities
listed on the New York Stock Exchange.
Level
2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of
the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities
or contracts or priced with models using highly observable inputs.
Level
3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included
in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models
and forecasts used to determine the fair value.
Our
financial instruments consist of cash, accounts receivable, accounts payable, derivative liabilities, and convertible notes. The
carrying value of our financial instruments approximates their fair value, except for the derivative liability in which carrying
value is fair value.
Accounts
Receivable
Accounts
receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer
is evaluated prior to a sale. As of March 31, 2020 and December 31, 2019, the Company’s allowance for doubtful accounts
was $141,788 and $141,788, respectively. The allowance was estimated based on evaluation of collectability of outstanding accounts
receivable.
Inventory
Inventory
consists of raw materials and finished goods and is carried at the lower of cost or realizable value on a first in first out basis.
The Company monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As
of March 31, 2020 and December 31, 2019, the Company’s inventory reserve was $31,476 and $100,651, respectively.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the
patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles
– Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents,
are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties,
legal fees and similar costs relating to patents have been capitalized.
In
accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable
life and therefore are not being amortized.
Long-Lived
Assets and Other Acquired Intangible Assets
We
evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability
of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair value. We have not recorded any impairment charges during the years presented.
Property,
Plant, and Equipment
Property,
plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized
over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed
to be reasonably assured. The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Manufacturing
equipment and customer equipment: 3 years to 7 years
Vehicles:
5 years
Leases:
We
determine if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an
asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct
how and for what purpose the asset is used.
After
adoption of ASU 2016-02 and related standards, operating lease right-of-use assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. Lease expense is recognized on a straight-line basis over
the lease term. As a lessee, the Company leases office space.
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position
or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration
to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each
party’s rights, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially
all consideration for goods or services that are transferred is probable. For the Company, the contract is the approved sales
order, which may also be supplemented by other agreements that formalize various terms and conditions with customers.
|
|
2)
|
Identify
the performance obligation in the contract
|
|
|
|
|
|
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer.
For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
|
|
|
|
|
3)
|
Determine
the transaction price
|
|
|
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based rebates
or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated
to that single performance obligation.
|
|
|
|
|
5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
|
|
|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at the time of delivery to a customer warehouse. Customer sales incentives such as volume-based
rebates or discounts are treated as a reduction of sales at the time the sale is recognized. Shipping and handling costs are
treated as fulfillment costs and presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
Company evaluated the requirement to disaggregate revenue and concluded that substantially all of its revenue comes from a
single product, frozen beverages.
|
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to general and administrative and are expensed
as incurred. We incurred $85,424 and $156,199, in research and development expenses for the three-months ended March 31, 2020
and 2019, respectively.
Shipping
and Storage Costs
Shipping
and storage costs are included in general and administrative expenses. For the three-month periods ended March 31, 2020 and 2019,
shipping and storage costs totaled $133,108 and $149,646, respectively.
Income
Taxes
The
provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes
(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements,
uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts.
ASC
740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more
than likely than not that some portion or all of the deferred tax assets will not be recognized.
For
the three-months ended March 31, 2020 and 2019, we did not have any interest and penalties or any unrecognized uncertain tax positions.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the asset (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Debt
Extinguishment
The
Company evaluates its convertible instruments in accordance with ASC 470-50, “Debt Modifications and Extinguishments.”
For all extinguishments of debt, ASC 470-50 requires the difference between the reacquisition price (including any premium) and
the net carrying amount of the debt being extinguished (including any deferred debt issuance costs) to be recognized as a gain
or loss when the debt is extinguished. Accordingly, the Company recorded a net $379,200 non-cash gain on extinguishment of debt
in its statements of operations for the quarter ended March 31, 2020.
Earnings
per Share
We
calculate net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings
per share is computed by including common stock equivalents outstanding for the period in the denominator. At March 31, 2020 and
2019 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
Stock
Based Compensation
We
calculate stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”).
ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and
establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities
to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity
instruments held by employee stock ownership plans.
Recent
pronouncements
From
time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact
of recently issued standards that are not yet effective may have an impact on our results of operations and financial position.
On
October 1, 2019, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment (ASU 2017-04) using the prospective approach, which eliminates step two from the goodwill impairment
test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting
unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance was effective beginning
January 1, 2020, with early adoption permitted. The adoption of this new standard did not have a material impact on our consolidated
financial statements.
Note
2. Inventory
Inventory
consists of the following at March 31, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
368,832
|
|
|
$
|
286,027
|
|
Finished goods, net of reserve
|
|
|
302,514
|
|
|
|
348,719
|
|
Inventory, net
|
|
$
|
671,346
|
|
|
$
|
634,746
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at March 31, 2020 and 2019 was
$31,476 and $100,651 respectively.
Note
3. Property Plant and Equipment
Major
classes of property and equipment at March 31, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
Furniture and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Manufacturing Equipment and customer equipment
|
|
|
3,538,712
|
|
|
|
3,521,636
|
|
Leasehold Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
3,574,818
|
|
|
|
3,557,742
|
|
Less: accumulated depreciation
|
|
|
(1,928,602
|
)
|
|
|
(1,787,967
|
)
|
|
|
|
1,646,216
|
|
|
|
1,769,775
|
|
Equipment not yet placed in service
|
|
|
642,430
|
|
|
|
636,542
|
|
Property and equipment, net of depreciation
|
|
$
|
2,288,646
|
|
|
$
|
2,406,317
|
|
We
recorded depreciation expense related to these assets of $134,246 and $186,074 for the three-months ended March 31, 2020 and 2019,
respectively. Depreciation expense in Cost of Goods Sold was $8,447 and $12,106 for three-months ended March 31, 2020 and 2019,
respectively.
Note
4. Intangible Assets
As
of March 31, 2020, intangible assets consist of patent costs of $764,891, trademarks of $110,447 and accumulated amortization
of $409,923.
As
of December 31, 2019, intangible assets consist of patent costs of $764,891, trademarks of $108,632 and accumulated amortization
of $394,020.
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred
by the Company. Amortization is calculated through the expiration date of the patents, which is December 2025. The amount charged
to amortization was $15,902 and $15,902 for the three-months ended March 31, 2020 and 2019, respectively.
Estimated
future amortization expense related to patents as of March 31, 2020, is as follows:
|
|
Total Amortization
|
|
Years ending December 31,
|
|
|
|
2020 (nine months remaining)
|
|
$
|
47,708
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
2023
|
|
|
63,610
|
|
2024
|
|
|
63,610
|
|
Later years
|
|
|
52,280
|
|
|
|
$
|
354,968
|
|
Note
5. Related Parties
As
disclosed below in Note 6, members of management and directors invested in the Company’s convertible notes; and in Note
9, members of management and directors have received shares of stock and options in exchange for services.
Note
6. Convertible Notes (Related and Unrelated Party)
On
March 20, 2020, we completed a Private Placement offering of $3,825,000 of common stock. In connection with the transaction, the
Company offered the Convertible Noteholders of Series CN Note 1 and 2 to participate in the equity offering. A total of $720,000
principal balance of Series CN 1 was converted into common stock [$675,000 from related parties]. The Series CN Note 1 Noteholders
were offered bonus interest equivalent to 20% of their outstanding principal which was converted to common stock. For $1,071,000
of the remaining $1,186,167 Series CN Note 1 Noteholders that chose not to participate in the equity offering, the terms of the
Series CN Note 1 were amended to increase the interest rate to 15% per annum and to extend the maturity of the outstanding principal
balance by 24 months to March 20, 2022. The notes are convertible at any time prior to the maturity into our common stock at a
conversion price of 0.50 per share. If the six month price is less than the 0.50 per share, the principal conversion price will
be automatically reduced to the 0.50 per share, but in no event less than $0.35 per Share, in which case the Company shall issue
to each purchaser, based on such purchaser’s investment, (a) shares in a quantity that equals the difference between the
number of Shares issued to such purchaser at closing and the number of Shares that would have been issued to such purchaser at
closing at the 0.50 per share and (b) warrants in a quantity that equals fifty percent (50%) of the difference between the number
of shares issued to such Purchaser at closing and the number of shares that would have been issued to such purchaser at closing
at the 0.50 per share, with an exercise price that equals the sum of $0.10 per share and the 0.50 per share, but in no event less
than $0.45 per share. The exercise price per share for the Convertible Note Warrants and the Bonus Warrant issued at closing will
automatically adjust as well to the sum of $0.10 per share and the Six Month Price, but in no event less than $0.45 per share.
There were 864,000 O warrants issued to the Series CN Note 1 Noteholders for participating in the common stock offering.
On
March 20, 2020, 1,082,727 of the original L Warrants related to the Series CN Note 1 Noteholders had their terms modified, whereby
the exercise price was reduced from $0.70 to $0.50 per share. In addition, the Series CN Note 1 Noteholders that chose to extend
their notes for 24 months were granted 1,071,000 Series P warrants. The fair value of the warrants, ($92,266 in the aggregate
which consists of the L and P Warrants), were calculated using the Black-Scholes option pricing model using the following assumptions:
Expected life (in years)
|
|
|
1 to 3
|
|
Volatility (based on a comparable company)
|
|
|
76.74- 98.00
|
%
|
Risk Free interest rate
|
|
|
.15 - .41
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
Based
on the relative fair value, we recorded a debt discount of $75,184 related to the issue of P Warrants to CN 1 and CN 2 Noteholders.
The modification of the L Warrants resulted in an incremental increase in fair value of $17,082, which was recorded as a debt
discount.
The
convertible notes consist of the following components as of March 31, 2020 and December 31, 2019:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Convertible notes
|
|
$
|
1,181,167
|
|
|
$
|
2,704,800
|
|
Less: Debt discount (warrant value)
|
|
|
(92,266
|
)
|
|
|
(325,747
|
)
|
Less: Debt discount (derivative value) (Note 7)
|
|
|
-
|
|
|
|
(638,988
|
)
|
Less: Debt discount (issuance costs paid)
|
|
|
(6,004
|
)
|
|
|
(27,000
|
)
|
Less: Note conversion/settlements
|
|
|
-
|
|
|
|
(803,634
|
)
|
Add: Debt discount amortization
|
|
|
1,321
|
|
|
|
898,940
|
|
|
|
$
|
1,084,218
|
|
|
$
|
1,808,371
|
|
On
March 20, 2020, a total of $1,128,000 principal balance of Series CN Note 2 was converted into common stock [$590,000 from related
parties]. The Noteholders were offered bonus interest equivalent to 20% of their outstanding principal and converted their accrued
interest into common stock. For $168,000 of the remaining $235,200 Series CN Note 2 Noteholders that chose not to participate
in the equity offering, the terms of the Series CN Note 2 were amended to extend the maturity of the outstanding principal balance
by 12 months to November 30, 2021. The notes are convertible at any time prior to the maturity into our common stock at a conversion
price of 0.60 per share. There were 1,501,012 O warrants issued to the Series CN Note 2 Noteholders for participating in the common
stock offering.
The
fair value of the modified L warrants, ($4,279 prior to modification, and $6,096 post modification), was calculated
using the Black-Scholes option pricing model using the following assumptions:
Expected
life (in years)
|
|
|
1.71
|
|
Volatility
(based on a comparable company)
|
|
|
88.02
|
%
|
Risk
Free interest rate
|
|
|
0.37
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
The
incremental value of $1,817 was recorded as a debt discount related to the modification of existing L warrants.
The
convertible notes consist of the following components as of March 31, 2020 and December 31, 2019:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Convertible notes
|
|
$
|
235,200
|
|
|
$
|
1,363,200
|
|
Less: Debt discount (warrant value)
|
|
|
(1,817
|
)
|
|
|
(212,763
|
)
|
Less: Debt discount (derivative value) (Note 7)
|
|
|
(13,528
|
)
|
|
|
(697,186
|
)
|
Less: Debt discount (issuance costs paid)
|
|
|
(6,004
|
)
|
|
|
(23,700
|
)
|
Add: Debt discount amortization
|
|
|
327
|
|
|
|
508,639
|
|
|
|
$
|
214,178
|
|
|
$
|
932,190
|
|
The
total of the two tables above, net of discount, equals $1,298,396 which is presented on the balance sheet as $171,360 Convertible
Note, Net of Discount, Current Liabilities, $192,763 Convertible Note, Related Party, Net of Discount, Long-Term Liabilities and
$934,273 Convertible Note, Net of Discount, Long-term Liabilities. The total of $2,740,561 shown in the two tables above at December
31, 2019, are presented in the balance sheet as Long Term Liabilities: Convertible Note – related party net of discount,
of $1,181,942, Convertible Note – net of Discount of $1,407,877, and Current Liabilities: Convertible Note – net of
Discount $150,742.
Future
maturity of convertible notes at face value before effect of all discount, are as follow:
|
|
Total Convertible Notes
|
|
Years ending December 31,
|
|
|
|
|
2020
|
|
$
|
177,366
|
|
2021
|
|
|
168,000
|
|
2022
|
|
|
1,071,000
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
|
|
$
|
1,416,366
|
|
On
March 20, 2020 the Company and the Holders of the Series CN Note 1 and Note 2 mutually agreed to amend its terms to change the
maturity date to March 20, 2022 and November 30, 2021, respectively. The Company accounted for the modification in accordance
with ASC 470-50, Modifications and Extinguishments, which states that for all extinguishments of debt, the difference between
the reacquisition price (including any premium) and the net carrying amount of the debt being extinguished (including any deferred
debt issuance costs) should be recognized as a gain or loss when the debt is extinguished. Accordingly, the Company recorded a
net gain on extinguishment of debt of $379,200 which was comprised of a gain of $437,201, offset by a loss of $58,001. The gain
of $437,201 related to the portion of Convertible Notes that were converted to common stock on March 20, 2020. The loss on extinguishment
of debt of $58,001related to the portion of Convertible Notes that were extended by either 24 for Milestone I, or 12 months for
Milestone II.
Note
7. Derivative Liabilities
As
discussed in Note 6, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide
variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the
future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price
of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory
note is indeterminate.
The
Convertible Noteholders discussed in Note 6 were provided the option of extending their notes by 24 months or 12 months for the
Milestone I March 14, 2020 and Milestone II November 30, 2020 Convertible Note maturities, respectively. Upon completion of the
March 20, 2020 offering for common stock and debt restructuring, a balance of $110,167 of Series CN 1 and $168,000 in CN 2 was
neither converted, nor extended under the terms of the amendments to both maturities. Consequently, the derivative liabilities
referred to above survived outside of debt conversion and modified extension terms and had a value of $10,834 as of March 31,
2020.
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent
reporting date. The Company recognized a debt discount and related derivative liability of $13,528 at March 20, 2020 related to
the Series CN 2 extension. The derivative liability was revalued at March 31, 2020 with a value of $36,280.
The
fair value of the derivative liabilities for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the
following assumptions.
|
|
31-Mar-20
|
|
|
31-Dec-19
|
|
Expected
life
|
|
|
0.68
- 1.68
|
|
|
|
0.93
|
|
Volatility
(based on comparable company)
|
|
|
88.62
-114.49
|
%
|
|
|
104.89
|
%
|
Risk
Free interest rate
|
|
|
0.15
- 0.37
|
%
|
|
|
1.58
|
%
|
Dividend
yield (on common stock)
|
|
|
-
|
|
|
|
-
|
|
Reconciliation
of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2019 to March 31, 2020:
December 31, 2019
|
|
$
|
211,028
|
|
Extinguishment change in derivative from conversion
|
|
|
(23,100
|
)
|
Extinguishment change in derivative from extension
|
|
|
(3,440
|
)
|
Initial derivative value – March 20, 2020
|
|
|
13,528
|
|
Net gain from change in value
|
|
|
(150,902
|
)
|
For the period ended March 31, 2020
|
|
$
|
47,114
|
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of December 31, 2019 and March 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liability December 31, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
211,028
|
|
|
$
|
211,028
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liability March 31, 2020
|
|
$
|
-
|
|
|
|
-
|
|
|
|
47,114
|
|
|
$
|
47,114
|
|
Note
8. Commitments and Contingencies
We
lease office space under non-cancelable operating lease which expires on March 31, 2023. Our periodic lease cost and operating
cash flows was $20,062 and $37,201 for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, our
right of use asset and related liability was $189,975 and $202,636.
In
determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates
our borrowing rate). The remaining term on the lease is 3 years.
The
following table presents the future operating lease payment as of March 31, 2020.
2020 (nine months remaining)
|
|
$
|
57,228
|
|
2021
|
|
|
78,021
|
|
2022
|
|
|
80,361
|
|
2023
|
|
|
20,238
|
|
Total Lease payments
|
|
|
235,848
|
|
Less: imputed interest
|
|
|
(33,212
|
)
|
Total lease liability
|
|
$
|
202,636
|
|
Note
9. Stockholders’ Equity
During
the three months ended March 31, 2020, we issued 550,000 options to purchase our common stock to employees and 96,899 options
to a Board Member. The exercise price of the options were $0.37 per share, with both cliff and graded vesting over 3 years, and
are exercisable for a period of 8 years.
The
fair value of the options issued ($129,600, in the aggregate) was calculated using the Black-Sholes option pricing model, based
on the criteria shown below.
Expected life (in years)
|
|
|
5.5 to 8
|
|
Volatility (based on a comparable company)
|
|
|
70.29%-77.19
|
%
|
Risk Free interest rate
|
|
|
1.61%-2.78
|
%
|
Dividend yield (on common stock)
|
|
|
-
|
|
The
shares of our common stock were valued at the trading price on the date of grant, $0.38 per share
During
the same period, we cancelled 30,000 options to purchase our common stock and 458,667 options expired.
During
the first quarter of 2020, the Company settled certain Executive Deferred Compensation payments with the issuance of 1,573,988
warrants. The fair value of the warrants totaled $251,837. The total executive Deferred Compensation that was settled with the
issuance of the warrants was $167,892. The difference between the fair value of the warrants and the Executive Deferred Compensation
settled of $83,945 was recorded as stock-based compensation during the three months ended March 31, 2020.
The
total amount of equity-based compensation included in additional paid in capital was $138,712 and $136,941 for the three-months
ended March 31, 2020 and 2019, respectively.
The
following is a summary of outstanding stock options issued to employees and directors as of March 31, 2020:
|
|
Number
of Options
|
|
|
Exercise
price per share $
|
|
|
Average
remaining term
in years
|
|
|
Aggregate
intrinsic value
at date of
grant $
|
|
Outstanding January 1, 2020
|
|
|
7,197,024
|
|
|
|
.40 - .87
|
|
|
|
4.55
|
|
|
|
-
|
|
Issued
|
|
|
646,899
|
|
|
|
.37
|
|
|
|
7.77
|
|
|
|
-
|
|
Cancelled/Expired
|
|
|
(488,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2020
|
|
|
7,355,256
|
|
|
|
.37 - .87
|
|
|
|
4.38
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2020
|
|
|
3,831,550
|
|
|
|
.40 - .87
|
|
|
|
3.32
|
|
|
|
-
|
|
The
following is Changes in Stockholders’ Equity as of March 31, 2019 and March 31, 2020:
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2019
|
|
|
122,770,960
|
|
|
$
|
123
|
|
|
$
|
41,118,649
|
|
|
$
|
(41,153,820
|
)
|
|
$
|
(35,048
|
)
|
Exercise of warrants
|
|
|
3,141,454
|
|
|
|
3
|
|
|
|
1,884,869
|
|
|
|
|
|
|
|
1,884,872
|
|
Issuance of stock for services
|
|
|
173,446
|
|
|
|
-
|
|
|
|
181,040
|
|
|
|
-
|
|
|
|
181,040
|
|
Equity based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
136,941
|
|
|
|
-
|
|
|
|
136,941
|
|
Warrants issued to Management
|
|
|
-
|
|
|
|
-
|
|
|
|
758,754
|
|
|
|
-
|
|
|
|
758,754
|
|
Issuance of stock for capital raise
|
|
|
4,000,000
|
|
|
|
4
|
|
|
|
2,399,996
|
|
|
|
-
|
|
|
|
2,400,000
|
|
Warrant modification
|
|
|
-
|
|
|
|
-
|
|
|
|
307,460
|
|
|
|
-
|
|
|
|
307,460
|
|
Net (loss) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,847,262
|
)
|
|
|
(2,847,262
|
)
|
Balance March 31, 2019
|
|
|
130,085,860
|
|
|
$
|
130
|
|
|
$
|
46,787,709
|
|
|
$
|
(44,001,032
|
)
|
|
$
|
2,786,807
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
paid in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2020
|
|
|
130,341,737
|
|
|
$
|
130
|
|
|
$
|
47,030,716
|
|
|
|
(46,747,122
|
)
|
|
$
|
283,724
|
|
Issuance of stock for capital raise, net of offering costs of $27,200
|
|
|
7,650,000
|
|
|
|
8
|
|
|
|
3,797,792
|
|
|
|
-
|
|
|
|
3,797,800
|
|
Conversion of debt
|
|
|
4,623,615
|
|
|
|
5
|
|
|
|
1,313,757
|
|
|
|
-
|
|
|
|
1,313,762
|
|
Interest paid in shares
|
|
|
632,251
|
|
|
|
-
|
|
|
|
379,350
|
|
|
|
-
|
|
|
|
379,350
|
|
Issuance of stock for services
|
|
|
-
|
|
|
|
-
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
Equity based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
138,712
|
|
|
|
-
|
|
|
|
138,712
|
|
Warrants issued to management
|
|
|
-
|
|
|
|
-
|
|
|
|
167,892
|
|
|
|
-
|
|
|
|
167,892
|
|
Warrant Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
18,899
|
|
|
|
-
|
|
|
|
18,899
|
|
Warrant issued for note extension
|
|
|
-
|
|
|
|
-
|
|
|
|
75,184
|
|
|
|
-
|
|
|
|
75,184
|
|
Net (loss) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(743,066
|
)
|
|
|
(743,066
|
)
|
Balance March 31, 2020
|
|
|
143,247,603
|
|
|
$
|
143
|
|
|
$
|
52,934,802
|
|
|
|
(47,490,188
|
)
|
|
$
|
5,444,757
|
|
On
March 20, 2020, the Company completed additional funding, including a Private Placement Offering for common shares priced at $0.50
per share (subject to adjustment) in the amount of $3.825 million and the issuance of 7,650,000 shares. Of the $3.825 million,
$2.35 million is held in escrow and the remaining $1.5 million was due as offering proceeds receivable as of March 31, 2020. The
$3.825 million was received and collected in April 2020. The investors of this Private Placement Offering will be granted O warrants
to be eligible to purchase an additional 0.50 shares for every share issued to each purchaser, exercisable for a period of 3 years
at an exercise price of $0.60 per share (subject to adjustment). If the volume-weighted average trading price for the 20 consecutive
trading days that conclude upon 6 months after the initial closing (the “Six Month Price”) exceeds or equals $0.50
per share (the “Target Price”), the per share purchase price will not be adjusted. If the Six Month Price is less
than the Target Price, the per share purchase price will be automatically reduced to the Six Month Price, but in no event less
than $0.35 per share, in which case the Company shall issue to each investor, pro-rata based on such investor’s investment:
(a) shares in a quantity that equals the difference between the number of shares issued to such purchaser at closing and the number
of shares that would have been issued to such purchaser at closing at the Six Month Price; and (b) a warrant for a number of shares
of common stock equal to 50% of the difference between the number of shares issued to such investor at closing and the number
of shares that would have been issued to such investor at closing at the Six Month Price, with an exercise price equal to the
sum of $0.10 per share and the Six Month Price, but in no eventless than $0.45 per share. The exercise price per share for each
warrant will automatically adjust to the sum of $0.10 per share and the Six-Month Price, but in no event less than $0.45 per share
Note
10. Outstanding Warrants
The
following is a summary of all outstanding warrants as of March 31, 2020:
|
|
Number
of
warrants
|
|
|
price
per share
|
|
|
remaining
term
in years
|
|
|
intrinsic
value
at date of grant
|
|
Warrants
issued in connection with private placements of common stock
|
|
|
19,048,606
|
|
|
$
|
0.53
- $1.00
|
|
|
|
1.96
|
|
|
$
|
-
|
|
Warrants
issued in connection with private placement of notes
|
|
|
3,955,000
|
|
|
$
|
1.00
|
|
|
|
.75
|
|
|
$
|
-
|
|
Warrants
issued in connection with convertible note
|
|
|
3,539,259
|
|
|
$
|
0.70
|
|
|
|
.80
|
|
|
$
|
-
|
|
Warrants
issued in connection with settlement of deferred compensation
|
|
|
3,169,599
|
|
|
$
|
0.27
- 0.70
|
|
|
|
4.50
|
|
|
$
|
-
|
|
Note
11. Income Taxes
The
provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC
740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. ASC 740 requires a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all
of the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all
tax assets. As of March 31, 2020, the estimated effective tax rate for the year will be zero.
There
are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009
through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the
statement of operations. There have been no income tax related interest or penalties assessed or recorded.
ASC
740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
For
the three month periods ended March 31, 2020 and 2019, we did not have any interest and penalties associated with tax positions.
As of March 31, 2020, we did not have any significant unrecognized uncertain tax positions.
Note
12. Liquidity
During
the three months ended March 31, 2020, we used cash for operations of $973,554 and purchased equipment for $16,575. We sold common
stock in the amount of $3,825,000, and converted $2,374,763 of principal and interest from our Convertible Notes into equity.
During the three months ended March 31, 2019, we used $1,873,982 of cash for operations and purchased equipment for $160,590.
We raised cash of $2,400,000 from the issuance of common stock and we raised cash from the exercise of warrants in the amount
of $1,500,310.
We
have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases
in our working capital requirements. Management has evaluated these conditions and concluded substantial doubt was not raised
due to the Company selling common stock as well as restructuring debt. However, the Company cannot predict, with certainty, the
outcome of its actions to preserve liquidity, including the accuracy of its financial forecast, the ability to sustain the current
trend of cost cutting, the ability to raise additional capital or to extend the maturity date of the debt that is maturing in
March of 2022.
As
of March 31, 2020, we had $2,411,198 of cash in escrow, restricted and unrestricted cash on the balance sheet. We have continued
to significantly reduce core operating expenses, reducing total General and Administrative Expense in the first three months of
2020 by $779,019, or 39%, as compared with the first three months of 2019. The Company’s forecast for the next twelve months
reflects a continuation of the improvement in cash flow from operations as the Company continues to reduce operating expenses
and increase contracts with school locations, and military bases, and anticipates the roll-out of a new product launch with the
Twist & Go 8oz bottles. The Company has implemented cost reduction measures which will reduce cash expenses over the next
twelve months, which includes reduced headcount.
Note
13. Subsequent Events
The
impact of COVID-19 on the Company is evolving rapidly with events unfolding on a daily and weekly basis. The direct impact to
our operations has begun to take affect at the close of the first quarter ended March 31, 2020. Specifically, our business has
been impacted by dining bans targeted at restaurants to reduce the size of public gatherings. We have noted restaurant chains
have closed operations and furloughed employees which would preclude our single serve products from being served at those establishments
for a number of weeks. Furthermore, many school districts have closed regular attendance through the remainder of the school year.
This will directly impact the sales of our Bulk Product into that sales channel. Our headquarters, located in Los Angeles, California,
were subject to an executive order issued by the Governor of California on March 19, 2020 to “shelter in place.” On
May 4, 2020, an executive order informed local health jurisdictions and industry sectors that they may gradually reopen under
guidance provided by the State. Our staff resumed a modified schedule in the headquarter office on May 18, 2020. At this point,
we have not experienced a disruption in the supply chain for manufacturing our products. The Company applied for and obtained
a Small Business Administration loan under the Paycheck Protection Program [PPP] of the CARES Act of approximately $568,000. On
June 5, 2020, the President signed a bill which extended the period of loan forgiveness for PPP loans from 8 weeks to 24, which
we believe will enable the loan to be completely forgiven. While several states have commenced the process of reopening various
types of businesses in staged plans, the path to resuming normal activity volumes is unclear. Consequently, the developments surrounding
COVID-19 remain fluid and will require the Company to continue to monitor news headlines from government and health officials,
as well as, the business community.