NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
Jones Soda Co. develops, produces, markets and distributes premium beverages which it sells and distributes primarily in the United States and Canada through its network of independent distributors and directly to its national and regional retail accounts.
We are a Washington corporation and have two operating subsidiaries, Jones Soda Co. (USA) Inc. and Jones Soda (Canada) Inc. (together, our “Subsidiaries”).
Basis of presentation, consolidation and use of estimates
The accompanying condensed consolidated balance sheet as of December 31, 2019, which has been derived from our audited consolidated financial statements, and unaudited interim condensed consolidated financial statements as of June 30, 2020, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. The condensed consolidated financial statements include our accounts and the accounts of our Subsidiaries. All intercompany transactions between us and our Subsidiaries have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all material adjustments, consisting only of those of a normal and recurring nature, considered necessary for a fair presentation of our financial position, results of operations and cash flows at the dates and for the periods presented. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Significant items subject to such estimates and assumptions include, but are not limited to, inventory valuation, depreciable lives and valuation of capital assets, valuation allowances for receivables, trade promotion liabilities, stock-based compensation expense, valuation allowance for deferred income tax assets, contingencies, and forecasts supporting the going concern assumption and related disclosures. Actual results could differ from those estimates. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Going Concern
As of June 30, 2020, we had cash and cash-equivalents of approximately $4.3 million and working capital of approximately $7.0 million. Net cash used in operations during the six months ended June 30, 2020 totaled approximately $1.8 million compared to $1.5 million used in operations for the same period a year ago.
We have experienced recurring losses from operations and negative cash flows from operating activities. This situation creates uncertainties about our ability to execute our business plan, finance operations, and indicates substantial doubt about our ability to continue as a going concern.
We continue to experience negative cash flows from operations, as well as an ongoing requirement for additional capital to support working capital needs. Therefore, currently, based upon our near-term anticipated level of operations and expenditures, management believes that cash on hand is not sufficient to enable us to fund operations for twelve months from the date the condensed consolidated financial statements included in this Report are issued. These conditions raise substantial doubt as to our ability to continue as a going concern. Our ability to continue operations is dependent upon achieving a profitable level of operations and on our ability to obtain necessary financing to fund ongoing operations. The continued spread of COVID-19 and uncertain market conditions may limit our ability to access capital, may reduce demand for our products, and may negatively impact our supply chain. The condensed consolidated financial statements included in this Report do not give effect to any adjustments which will be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
We will require additional financing to support our working capital needs in the future. The amount of additional capital we may require, the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including our strategic initiatives and operating plans, the performance of our business and the market conditions for available debt or equity financing. Additionally, the amount of capital required will depend on our ability to meet our sales goals and otherwise successfully execute our operating plan. We believe it is imperative that we meet these sales objectives in order to lessen our reliance on external financing in the future. The continued spread of COVID-19 and uncertain market
conditions may limit our ability to access capital, may reduce demand for our products, and may negatively impact our supply chain. We intend to continually monitor and adjust our operating plan as necessary to respond to developments in our business, our markets and the broader economy. Although we believe various debt and equity financing alternatives will be available to us to support our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders. Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary, we may explore strategic transactions that we consider to be in the best interest of our company and our shareholders, which may include, without limitation, public or private offerings of debt or equity securities, a rights offering, and other strategic alternatives; however, these options may not ultimately be available or feasible when needed.
Seasonality and other fluctuations
Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. We historically have generated a greater percentage of our revenues during the warm weather months of April through September. Sales may fluctuate materially on a quarter to quarter basis or an annual basis when we launch a new product or fill the “pipeline” of a new distribution partner or a large retail partner. Sales results may also fluctuate based on the number of SKUs selected or removed by our distributors and retail partners through the normal course of serving consumers in the dynamic, trend-oriented beverage industry. As a result, management believes that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.
Revenue recognition
We recognize revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods and services transferred to the customer. The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with the 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 the company satisfies a performance obligation
See Note 6, Segment Information, for information on revenue disaggregated by geographic area.
Because our agreements have an expected duration of one year or less, we have elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about our remaining performance obligations.
Our performance obligations are satisfied at the point in time when products are received by the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, our contracts have a single performance obligation (delivery of product). We primarily receive fixed consideration for sales of product, subject to adjustment as described below. Shipping and handling amounts paid by customers are primarily for online orders, and are included in revenue, and totaled $22,000 and $13,000 for the three months ended June 30, 2020 and 2019, respectively, and $38,000 and $44,000 for the six months ended June 30, 2020 and 2019, respectively. Sales tax and other similar taxes are excluded from revenue.
Revenue is recorded net of provisions for discounts, slotting fees payable by us to retailers to stock our products and promotion allowances. Discounts, slotting fees and promotional allowances vary the consideration we are entitled to in exchange for the sale of products to distributors. We estimate these discounts, slotting fees and promotional allowances in the same period that the revenue is recognized for products sales to customers. The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue. The liability for promotional allowances is included in accrued expenses on the consolidated balance sheets. Amounts paid for slotting fees are recorded as prepaid expenses on the consolidated balance sheets and amortized over the corresponding term. For the quarters ended June 30, 2020 and 2019, our revenue was reduced by $407,000 and $506,000, respectively, and for the six months ended June 30, 2020 and 2019, by $704,000 and $834,000, respectively, in each case for slotting fees and promotion allowances.
All sales to distributors and customers are generally final. In limited instances we may accept returned product due to quality issues or distributor terminations and in such situations we would have variable consideration. To date, returns have not been material. Our customers generally pay within 30 days from the receipt of a valid invoice. We offer prompt pay discounts of up to 2% to certain customers typically for payments made within 15 days. Prompt pay discounts are estimated in the period of sale based on experience with sales to eligible customers. Early pay discounts are recorded as a deduction to the accounts receivable balance presented on the condensed consolidated balance sheets.
The accounts receivable balance primarily includes balances from trades sales to distributors and retail customers. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in existing accounts receivable. We determine the allowance for doubtful accounts based primarily on historical write-off experience. Account balances that are deemed uncollectible are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Allowances for doubtful accounts of $113,000 and $44,000 as of June 30, 2020 and December 31, 2019, respectively, were netted against accounts receivable. No impairment losses were recognized as of June 30, 2020 and December 31, 2019. Changes in accounts receivable are primarily due to the timing and magnitude of orders for products, the timing of when control of products is transferred to distributors and the timing of cash collections.
As of June 30, 2020, one customer made up 18% of our outstanding accounts receivable. As of December 31, 2019, two customers made up 26% of our outstanding accounts receivable.
Net loss per share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods. Diluted earnings per share is computed by adjusting the weighted average number of common shares by the effective net exercise or conversion of all dilutive securities. Due to the net loss in the quarters ended June 30, 2020 and 2019, outstanding stock options amounting to 3,592,913 and 3,760,885, shares issuable upon the conversion of the Convertible Notes of 5,233,116 and 7,494,378, unvested restricted stock units of 30,304 and 314,390, and stock warrants of 15,000,000 and zero at June 30, 2020 and 2019, respectively, were anti-dilutive.
Deferred financing costs
We defer costs related to the issuance of debt which are included on the accompanying balance sheets as a deduction from the debt liability. Deferred financing costs are amortized over the term of the related loan and are included as a component of interest expense on the accompanying condensed consolidated statements of operations.
Operating leases
At lease commencement, we record a lease liability based on the present value of lease payments over the expected lease term. We calculate the present value of lease payments using the discount rate implicit in the lease, unless that rate cannot be readily determined. In that case, we use our incremental borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term. We record a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.
After lease commencement, we measure our leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement; and (ii) the right-of use lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received and any initial direct costs are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.
Recent accounting pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments: Credit Losses (“ASU 2016-13”), which changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 is effective for us in the first quarter of 2023 and must be adopted using a modified retrospective transition approach. We are currently evaluating the potential impact that the adoption of ASU 2016-13 will have on our consolidated financial statements.
2. Inventory
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Finished goods
|
|
$
|
817
|
|
$
|
1,120
|
Raw materials
|
|
|
806
|
|
|
668
|
|
|
$
|
1,623
|
|
$
|
1,788
|
Finished goods primarily include product ready for shipment, as well as promotional merchandise held for sale. Raw materials primarily include ingredients, concentrate and packaging. For the three months ended June 30, 2020 and 2019, we recorded obsolete inventory expenses of $62,000 and $10,000, respectively. For the six months ended June 30, 2020 and 2019, we recorded obsolete inventory expenses of $71,000 and $26,000, respectively.
3. Lease Obligations
We currently lease approximately 6,500 square feet of retail/office space in Seattle, Washington for our principal executive and administrative offices. The initial term of the five-year lease was set to expire in February 2020. On February 4, 2020, we amended the lease to continue to occupy the same premises for our headquarters through February 28, 2025. As a result of the lease amendment, we recognized a lease liability and right-of-use asset of $556,000 which represents the remaining lease payments discounted at 4%. As of June 30, 2020, this lease had a remaining lease term of 4.67 years.
During the quarters ended June 30, 2020 and 2019, we incurred lease expenses of $42,000 and $32,000, respectively, and during the six months ended June 30, 2020 and 2019, we incurred lease expenses of $79,000 and $65,000, respectively. During the quarters ended June 30, 2020 and 2019, we made cash lease payments of $39,000 and $33,000, respectively, and during the six months ended June 30, 2020 and 2019, we made cash lease payments of $77,000 and $68,000, respectively. Cash payments on our operating lease are presented as operating cash outflows in the condensed consolidated statements of cash flows.
As of June 30, 2020, our scheduled lease payments excluding management fees and other operational expenses for the remainder of the lease term for the years ending December 31 will be as follows (in thousands):
|
|
|
2020
|
$
|
59
|
2021
|
|
119
|
2022
|
|
122
|
2023
|
|
126
|
2024
|
|
130
|
2025
|
|
22
|
Total lease payments
|
|
578
|
Less: imputed interest
|
|
(53)
|
Total remaining lease liability
|
$
|
525
|
4. Convertible Subordinated Notes Payable
On March 23, 2018, and April 18, 2018, we issued and sold an aggregate principal amount of $2,920,000 of convertible subordinated promissory notes (the “Convertible Notes”) to institutional investors, our management team, and other individual accredited investors.
The Convertible Notes have a four-year term from the date of issuance and bear interest at 6% per annum until maturity. The holders can convert the Convertible Notes at any time into the number of shares of our common stock equal to the quotient obtained by dividing (i) the amount of the unpaid principal and interest on such Convertible Note by (ii) $0.32 (the “Conversion Price”). The Conversion Price is subject to anti-dilution adjustment on a broad-based, weighted average basis if we issue shares or equity-linked instruments at a conversion price below $0.32 per share. No payments of principal or interest are due until maturity.
The Convertible Notes are subordinated in right of payment to the prior payment in full of all amounts due in connection with our indebtedness for borrowed money to banks, commercial finance lenders, or other lending institutions regularly engaged in the business of lending money, with certain restrictions.
There were no Convertible Notes converted during the three or six months ended June 30, 2020. During the period from January 1, 2019 through June 30, 2019, Convertible Notes in the aggregate principal amount of $687,500 and related accrued interest were converted into an aggregate of 2,313,976 shares of common stock in accordance with the original terms of the Convertible Notes. As a result, the carrying amount of the converted principal amount of such Convertible Notes, along with the converted accrued interest, in an aggregate amount of $741,000, was credited to common stock and unamortized discounts in an amount equal to $142,000 were recognized as interest expense for the six months ended June 30, 2019.
The fair value of our common stock on March 23, 2018, the initial closing date for the issuance of the Convertible Notes, was $0.36 per share; therefore, the Convertible Notes contained a beneficial conversion feature with an aggregate intrinsic value of $350,000. The fair value of our common stock on April 18, 2018, the second closing date for the issuance of the Convertible Notes, was $0.30 per share, which did not result in an additional beneficial conversion feature. The resulting debt discount for the Convertible Notes issued on March 23, 2018 is presented as a direct deduction from the carrying value of the Convertible Notes and was recorded with an increase to additional paid-in capital. This discount, along with the related closing costs amounting to $137,000, are amortized through interest expense over the term of the Convertible Notes. The balance of notes payable is presented net of unamortized discounts amounting to $115,000 and $141,000 at June 30, 2020 and December 31, 2019, respectively. The principal balance of notes payable to related parties amounted to $120,000 at June 30, 2020 and December 31, 2019.
Principal payment obligations on the Convertible Notes are as follows for the following years ending December 31 (in thousands):
|
|
|
2020
|
$
|
-
|
2021
|
|
-
|
2022
|
|
1,474
|
|
$
|
1,474
|
5. Shareholders’ Equity
Under the terms of our 2011 Incentive Plan (the “Plan”), the number of shares authorized under the Plan may be increased each January 1st by an amount equal to the lesser of (a) 1,300,000 shares, (b) 4.0% of our outstanding common stock as of the end of our immediately preceding fiscal year, and (c) a lesser amount determined by the Board of Directors (the “Board”), provided that the number of shares that may be granted pursuant to awards in a single year may not exceed 10% of our outstanding shares of common stock on a fully diluted basis as of the end of the immediately preceding fiscal year. As of June 30, 2020, the total number of shares of common stock authorized under the Plan was 12,084,032 shares.
Under the terms of the Plan, the Board may grant awards to employees, officers, directors, consultants, agents, advisors and independent contractors. Awards may consist of stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards or other stock or cash-based awards. Stock options are granted with an exercise price equal to the closing price of our stock on the date of grant, and generally have a ten-year term and vest over a period of 48 months with the first 25% of the shares subject to the option vesting one year from the grant date and the remaining 75% of the shares subject to the option vesting in equal monthly increments over the subsequent 36 months. Restricted stock awards generally vest over one year. As of June 30, 2020, there were 7,492,512 shares of unissued common stock authorized and available for future awards under the Plan.
A summary of our stock option activity is as follows:
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balance at January 1, 2020
|
|
3,495,601
|
|
$
|
0.46
|
Options granted
|
|
492,580
|
|
|
0.28
|
Options cancelled/expired
|
|
(395,268)
|
|
|
0.55
|
Balance at June 30, 2020
|
|
3,592,913
|
|
$
|
0.43
|
Exercisable, June 30, 2020
|
|
2,888,455
|
|
$
|
0.44
|
Vested and expected to vest
|
|
3,435,921
|
|
$
|
0.43
|
|
(b)
|
|
Restricted stock awards:
|
Previously, effective as of January 1, 2018, equity compensation for non-employee director service consisted of the grant of an annual restricted stock unit award that vested over one year, with the number of shares underlying such award being determined by dividing $15,000 by the closing share price on the date of grant (which was the first business day in January in each calendar year); when joining the Board each non-employee director received an initial restricted stock unit award that vested over one year, with the number of shares underlying such award being determined by dividing $15,000 by our closing stock price on the date of grant (which was the first trading day following the date on which such director was appointed), prorated based on the date on which such director was appointed.
Effective as of January 1, 2020, equity compensation for non-employee director service consists of the grant of an annual non-qualified stock option award that vests on the first anniversary of the date of grant (subject to the director’s continuing service as of such anniversary date), with the number of shares underlying such award being determined by dividing $25,000 by the closing share price (as quoted on the OTCQB marketplace) on the date of grant (which shall be the first trading day in January in each calendar year), and such stock option award shall have an exercise price equal to our closing share price (as quoted on the OTCQB marketplace) on the date of grant. When joining the Board, each non-employee director shall be granted a non-qualified stock option award that vests on the first anniversary of the date of grant (subject to the director’s continuing service as of such anniversary date), with the number of shares underlying such award being determined by dividing $25,000 by our closing stock price on the first trading day following the date on which such director is appointed), prorated based on the date on which such director is appointed, and which stock option shall be granted as of the first trading day following the date on which such director was appointed, and shall have an exercise price equal to our closing share price (as quoted on the OTCQB marketplace) on the date of grant. The stock option awards described above will be governed by the Plan and standard form of stock option grant notice and agreement. A summary of our restricted stock activity is as follows:
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average Contractual Life
|
Non-vested restricted stock at January 1, 2020
|
|
149,824
|
$
|
0.33
|
|
9.1
|
Vested
|
|
(119,520)
|
|
0.25
|
|
—
|
Non-vested restricted stock at June 30, 2020
|
|
30,304
|
$
|
0.66
|
|
9.1
|
We withheld a total of 17,928 shares as payment for withholding taxes due in connection with the vesting of restricted stock awards during the six months ended June 30, 2020, and the average price paid per share of $0.31 reflects the average market value per share of the shares withheld for tax purposes.
(c)Stock-based compensation expense:
Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee attrition. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.
At June 30, 2020, we had unrecognized compensation expense related to stock options and non-vested restricted stock of $78,000 to be recognized over a weighted-average period of 1.8 years.
The following table summarizes the stock-based compensation expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Type of awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
27
|
|
$
|
23
|
|
$
|
63
|
|
$
|
55
|
Restricted stock
|
|
|
5
|
|
|
3
|
|
|
10
|
|
|
34
|
|
|
$
|
32
|
|
$
|
26
|
|
$
|
73
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income statement account:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
$
|
7
|
|
|
10
|
|
$
|
16
|
|
$
|
25
|
General and administrative
|
|
|
25
|
|
|
16
|
|
|
57
|
|
|
64
|
|
|
$
|
32
|
|
$
|
26
|
|
$
|
73
|
|
$
|
89
|
We employ the following key weighted-average assumptions in determining the fair value of stock options, using the Black-Scholes option pricing model and the simplified method to estimate the expected term of “plain vanilla” options:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
2020
|
|
2019
|
Expected dividend yield
|
|
|
—
|
|
|
|
—
|
|
Expected stock price volatility
|
|
|
73.4
|
%
|
|
|
65.4
|
%
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.6
|
%
|
Expected term (in years)
|
|
|
5.6
|
years
|
|
|
6.0
|
years
|
Weighted-average grant date fair-value
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
The aggregate intrinsic value of stock options outstanding at June 30, 2020 and December 31, 2019 was approximately $1,000 and $9,000, respectively, and for options exercisable was $0 and $6,000, respectively. The intrinsic value of outstanding and exercisable stock options is calculated as the quoted market price of the stock at the balance sheet date less the exercise price of the option. There were no options exercised during the six months ended June 30, 2020. There were 65,445 options exercised with an aggregate intrinsic value of $20,000 during the six months ended June 30, 2019.
6. Segment Information
We have one operating segment with operations primarily in the United States and Canada. Sales are assigned to geographic locations based on the location of customers. Sales by geographic location are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,278
|
|
$
|
2,556
|
|
$
|
4,429
|
|
$
|
4,790
|
Canada
|
|
|
819
|
|
|
917
|
|
|
1,443
|
|
|
1,482
|
Other countries
|
|
|
1
|
|
|
16
|
|
|
18
|
|
|
41
|
Total revenue
|
|
$
|
3,098
|
|
$
|
3,489
|
|
$
|
5,890
|
|
$
|
6,313
|
During the three months ended June 30, 2020 and 2019, two and three of our customers represented an aggregate of approximately 32% and 43% of our revenue, respectively. During the six months ended June 30, 2020 and 2019, one and three of our customers represented an aggregate of approximately 22% and 48% of our revenue, respectively.
7. Paycheck Protection Program
On April 24, 2020, we received loan proceeds of $334,500 (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), provides for loans to qualifying companies in amounts up to 2.5 times their average monthly payroll expenses. The PPP Loan is evidenced by a promissory note, dated as of April 24, 2020 (the “Note”), between us and HomeStreet Bank (the “Lender”). The Note has a two-year term and bears interest at the rate of 1.0% per annum. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).
Under the terms of the CARES Act, the principal and accrued interest under the Note is forgivable after 24 weeks if we use the PPP Loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and otherwise comply with PPP requirements. We must repay any unforgiven principal amount of the Note, with interest, on a monthly basis following the Deferral Period. We intend to use the proceeds of the PPP Loan for eligible purposes and to pursue forgiveness, although actions taken by us in connection with our previously disclosed restructuring or otherwise could cause some or all of the PPP Loan to be ineligible for forgiveness. To the extent not forgiven, we will begin to pay principal and interest payments of approximately $19,000 every month following the Deferral Period. The PPP Loan will be derecognized upon confirmation of forgiveness, or upon repayment of the loan in accordance with the terms.
In addition to the PPP loan previously discussed, the CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We continue to examine the impacts and benefits that the CARES Act may have on our business.
8. Subsequent Events
On July 27, 2020, the Board retroactively approved a Services and Endorsement Agreement (the “Services Agreement”) with Tony Hawk, Inc. (“THI”) pursuant to which Tony Hawk (“Hawk”) shall provide certain marketing services on behalf of the Company. The Services Agreement has a term commencing as of June 1, 2020 and terminating as of January 31, 2021. Pursuant to the Services Agreement, we agreed to pay THI a fee of $100,000 in cash, of which $50,000 was paid upon execution of the Services Agreement in June 2020 and $50,000 will be payable upon delivery of certain promotional content. In addition, pursuant to the Services Agreement, we agreed to issue to THI that number of shares of our Common Stock as is valued at an aggregate of $25,000 as of the date of issuance, and to donate to The Skatepark Project (“TSP”), an affiliate of Hawk, that number of shares of Common Stock as is valued at an aggregate of $25,000 as of the date of issuance. The issuance of the shares to THI and TSP will be made in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act of 1933, as amended.