Notes
to Consolidated Financial Statements
For
the years ended December 31, 2017 and 2016
Note
1 – Nature of the Business
BoxScore Brands, Inc. (formerly U-Vend
Inc.) (the “Company”) develops, markets and distributes various self-serve electronic kiosks and mall/airport co-branded
islands throughout North America. The Company seeks to place its kiosks in high-traffic host locations such as big box stores,
restaurants, malls, airports, casinos, universities, and colleges. Currently, the Company leases, owns and operates their kiosks
and intends to also provide the kiosks, through a distributor relationship, to the entrepreneur wanting to own their own business.
On
February 26, 2018 the Company filed a Certificate of Amendment of the Certificate of Incorporation. The Certificate of Amendment
changed the Company’s name to BoxScore Brands, Inc. from U-Vend Inc. to better reflect the nature of the Company’s
current business operations, which has expanded to include relationships with major sports organizations dispensing ice cream
products through vending machines.
The
Company’s vending kiosks incorporate advanced wireless technology, creative concepts, and ease of management. They have
been designed to be tech-savvy and can be managed online 24 hours day/7 days a week, accepting traditional cash input as well
as credit and debit cards. Host locations and suppliers have been drawn to this distribution concept of product vending based
on the advantages of reduced labor and lower product theft as compared to non-kiosk merchandising platforms. The Company takes
a solutions development approach for the marketing of products through a variety of kiosk offerings. The Company’s approach
to the market can include the addition of a digital LCD monitor to most makes and models in a kiosk program. This would allow
the Company to offer digital advertising as a national and/or local loop basis and a corresponding additional revenue stream for
the Company.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The
accompanying consolidated financial statements include the accounts of BoxScore Brands, Inc. and the operations of U-Vend America,
Inc., U-Vend Canada, Inc. and its wholly owned subsidiary, U-Vend USA LLC. All intercompany balances and transactions have been
eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates
and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired,
or as additional information is obtained.
Inventory
Inventory
is stated at the lower of cost or net realizable value and cost is determined by the average cost method. Inventory is made up
of finished goods ice cream. The Company records an inventory reserves for spoilage and product losses. The reserve for spoilage
and product losses was $5,500 as of December 31, 2017 and 2016.
Property
and Equipment
Property
and equipment are stated at cost less depreciation. Depreciation is provided using the straight-line method over the estimated
useful life of the assets. Electronic kiosks, related equipment and delivery vans have estimated useful lives between three and
seven years. Expenditures for repairs and maintenance are charged to expense as incurred.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Acquired
intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite.
For intangible assets acquired in a business combination, the estimated fair values of the assets received are used to establish
their recorded values. Valuation approaches consistent with the market approach, income approach and/or cost approach are used
to measure fair value.
Impairment
of Goodwill and Long-lived Assets
The
Company performs an annual assessment of its goodwill during the fourth quarter of each calendar year or more frequently if indicators
of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that
would indicate it is more likely than not that the fair value of its single reporting unit is less than its carrying value. For
annual impairment testing in 2017, the Company performed a quantitative analysis and determined the carrying value of its single
reporting unit exceeded the fair value. Assessment for possible impairment is based on the Company’s ability to recover
the carrying value of the long-lived asset from the expected future pre-tax cash flows. The expected future pre-tax cash flows
are estimated based on historical experience, knowledge and market data. Estimates of future cash flows require the Company to
make assumptions and to apply judgment, including forecasting future sales, capital investments and expenses and estimating the
useful lives of assets. If the expected future cash flows related to the long-lived assets are less than the assets’ carrying
value, an impairment charge is recognized for the difference between estimated fair value and carrying value. Based on these factors,
the Company determined that the goodwill related to the purchase of U-Vend Canada, Inc. in 2014 was fully impaired and recorded
an impairment charge of $642,340 during the year ended December 31, 2017.
Long-lived
assets, such as property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets
to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be
generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for
the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets
for any periods presented.
Common
Shares Issued and Earnings Per Share
Common
shares issued are recorded based on the value of the shares issued or consideration received, including cash, services rendered
or other non-monetary assets, whichever is more readily determinable. The Company presents basic and diluted earnings per share.
Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings
per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares
had been issued. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
As
of December 31, 2017 and 2016, respectively, there were approximately 113.5 million and 84 million shares potentially issuable
under convertible debt agreements, options, and warrants that could dilute basic earnings per share in the future that were excluded
from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s
losses during the periods presented.
Preferred
Stock Authorized
The
Company has authorization for “blank check” preferred stock, which could be issued with voting, liquidation,
dividend and other rights superior to common stock. As of December 31, 2017, and 2016, there are 10,000,000 shares of preferred
stock authorized, and no shares issued or outstanding.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date The Company estimates and categorizes the fair value of its financial assets
by applying the following hierarchy:
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●
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Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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●
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Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
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●
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Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
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Financial
instruments include cash, accounts receivable, accounts payable, accrued expenses, warrant liability, promissory notes payable,
capital lease obligations, convertible notes payable, and senior convertible notes payable. The senior convertible notes and certain
convertible notes payable are recorded at face value net of any unamortized discounts, based upon the value of the warrants issued
with the notes. Certain convertible notes payable are recorded at fair value at December 31, 2017 and 2016 (see Note 5). The estimated
fair value of the warrant liability includes unobservable inputs and is therefore categorized as a Level 3 measurement. Changes
in unobservable inputs may result in significantly higher or lower fair value measurement. The carrying value of the short-term
instruments approximates their fair values at December 31, 2017 and 2016 due to their short-term nature.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. Certain warrants issued by the Company have a “down round provision” and as a result the
warrants are classified as derivative liabilities for accounting purposes. For derivative financial instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting
date, with changes in fair value reported in the consolidated statement of operations. The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risks.
Warrant Liability
The Company’s common stock warrants
are subject to down round provision. As such, the warrants have been recorded as a liability and are subject to re-measurement
at each balance sheet date, and any change in fair value is recognized as a component of other (income) expense. The warrants are
valued using the Monte Carlo simulation method. The Company will continue to adjust the liability each reporting period for changes
in fair value until the exercise or expiration of the warrants.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based awards granted
to employees and directors to be measured at fair value and recognized as expense. Stock-based compensation expense is recognized
on a straight-line basis over the requisite service period of the award, which is generally equivalent to the vesting period.
The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The measurement date for
the non-forfeitable awards to nonemployees that vest immediately is the date the award is issued.
Revenue
Recognition
The Company has 144 electronic kiosks installed
in the southern California and Las Vegas areas from which it generated revenue during the years ended 2016 and 2017. Revenue is
recognized at the time each vending transaction occurs, the payment method is approved, and the product is disbursed from
the machine. Wholesale revenues, including revenue earned under contracts with major sports organizations, are recognized at the
time the products are delivered to the customer based on the agreement with the customer. No revenue considered to be Wholesale,
including from contracts with major sports organizations, was recognized during the periods ended December 31, 2017 or 2016.
Income
Taxes
The
Company utilizes the asset and liability method for computing its income tax provision, under which deferred tax assets and liabilities
are recognized for the expected future consequences of temporary differences between the financial reporting and tax bases of
assets and liabilities using enacted tax rates. Management makes estimates, assumptions and judgments to determine the Company’s
provision for income taxes, deferred tax assets and liabilities, and any valuation losses recorded against deferred tax assets.
The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent
the Company believes recovery is not likely, establishes a valuation allowance.
The
Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
settlement. Interest and penalties related to unrecognized tax benefits are recognized within income tax expense.
On December 22, 2017, the President of
the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). Further information on the tax impacts of the
TCJA is included in Note 11 of the Company’s consolidated financial statements.
Vendor
Concentration
The
Company procured all its inventory of finished goods ice cream which were dispensed through the vending kiosks from one vendor
during the years ended December 31, 2017 and 2016.
Reclassifications
Certain
prior period amounts in the accompanying consolidated financial statements have been reclassified to current period presentation.
These reclassifications had no effect on the results of operations or cash flows for the periods presented.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis. The Company incurred a loss of $3,183,328
for the year ended December 31, 2017 and has incurred accumulated losses totaling $11,618,211 through December 31, 2017. In addition,
the Company has incurred negative cash flows from operating activities since its inception. The Company has relied on the proceeds
from loans and private sales of its stock from its shareholders, in addition to its revenues, to finance its operations. These
factors, among others, indicate that the Company may be unable to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of these uncertainties.
Until
the Company can generate significant cash from operations, its ability to continue as a going concern is dependent upon obtaining
additional financing. The Company intends to raise additional financing to fund its operations for the next 12 months and allow
the Company to continue the development of its business plans and satisfy its obligations on a timely basis. Should additional
financing not be available, the Company will have to negotiate with its lenders to extend the repayment dates of its indebtedness.
There can be no assurance that the Company will be able to successfully restructure its debt obligations in the event it fails
to obtain additional financing.
Recent
Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.
ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09,
revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects
the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
FASB has issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12,and ASU 2016-20, all of which clarify certain implementation
guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption
is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard
can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively
with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up
transition method). The Company has reviewed ASU 2014-09 and has determined that its adoption will have no impact on its financial
position, results of operations or cash flows. The Company has adopted the provisions of this statement in the first quarter of
fiscal 2018.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months
result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after
December 15, 2018, and early adoption is permitted. The Company has not yet evaluated nor has it determined the effect of the
standard on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies
the treatment of several types of cash receipts and payments for which there was diversity in practice. This update is effective
for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted,
including adoption in an interim period. The Company is evaluating the impact, if any, the adoption of this standard will have
on the consolidated financial statements and related disclosures.
Note
3. Property and Equipment
Property
and equipment consist of the following as of December 31:
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Estimated
useful
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2017
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2016
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|
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|
|
|
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Electronic kiosks and vending
machines
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5 to 7 years
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$
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1,091,345
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$
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1,027,830
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Delivery vans
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3 to 5 years
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21,700
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|
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21,700
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Less: accumulated
depreciation
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|
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(518,809
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)
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(338,025
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)
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$
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594,236
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$
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710,605
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Depreciation
expense amounted to $180,784 and $148,833, respectively for the years ended December 31, 2017 and 2016.
Note
4. Intangible Assets
Intangible
assets consist of the following as of December 31:
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Estimated
useful
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2017
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2016
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Operating agreement
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5 years
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$
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434,000
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$
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434,000
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Less: accumulated
amortization
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(347,199
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)
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(260,399
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)
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$
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86,801
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$
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173,601
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Amortization
expense amounted to $86,801 for each of the years ended December 31, 2017 and 2016. Future amortization expense for the year ending
December 31, 2018 is $86,801.
Note
5. Debt
Senior
Convertible Notes
During
the year ended December 31, 2017, a Senior Convertible Note in the aggregate principal amount of $310,000 and a maturity date
of December 31, 2017 payable to Cobrador Multi-Strategy Partners, LP (“Cobrador 1”), a related party, was extended
until December 31, 2018. The Company also extended the expiration dates of Series A Warrants issued in connection with Cobrador
1 by one year. The fair value of the Series A Warrants did not materially change due to the extension. As of December 31,
2017 and 2016, Cobrador 1 has an aggregate face and carrying value of $310,000 and bears an interest rate of 7% per annum if taken
in cash or 15% per annum if taken in shares.
On June 30, 2016, the Company issued an
additional Senior Convertible Note in the face amount of $108,804 to Cobrador (“Cobrador 2”) in settlement of previously
accrued interest, additional interest, fees and penalties. The additional interest, fees and penalties was $72,734 and this amount
was charged to operations as debt discount amortization during the year ended December 31, 2016. The Senior Convertible Note was
extended during the year ended December 31, 2017 and is due on December 31, 2018. It is convertible into shares of common stock
at a conversion price $.05 per share and bears interest at 7% per annum. The Company determined that Cobrador 2 had a beneficial
conversion feature based on the difference between the conversion price and the market price on the date of issuance and allocated
$87,043 as debt discount representing the beneficial conversion feature which was fully amortized at December 31, 2017. At December
31, 2017 and 2016, Cobrador 2 notes had a carrying value of $108,804 and $50,775, respectively.
During
December 2017, the Company issued a Senior Convertible Note in the amount of $25,000 to Cobrador. The note bears interest at 7%
and is convertible into common shares at a conversion price of $0.05 per share. In addition, in conjunction with this note, the
Company issued 500,000 warrants to purchase common shares at $0.05 with a contractual term of 5 years. The estimated value of
the warrants was determined to be $1,421 and has been recorded as interest expense and warrant liability due to the down round
provision in the note agreement.
Promissory
Notes Payable
During
2014, the Company issued an unsecured promissory note to a former employee of U-Vend Canada. The original amount of this note
was $10,512 has a term of 3 years and accrues interest at 17% per annum. The total principal outstanding on this promissory note
at December 31, 2017 and 2016 was $6,235.
During
the years ended December 31, 2017 and December 31, 2016, the Company borrowed $36,400 and $76,500, respectively, pursuant to a series promissory
notes from the same lender. All of the notes bear interest at a rate of 19% per annum, and are payable together with interest
over a period of six (6) months from the date of borrowing. The Company repaid $44,449 and $63,497 during the years ended December
31, 2017 and 2016, respectively, and the balance outstanding on these notes at December 31, 2017 and 2016 was $16,067 and $24,116,
respectively. Payments made during the year ended December 31, 2016 included the remaining balance of $11,083 which had been borrowed
during the year ended December 31, 2015.
During
the year ended December 31, 2016, the Company issued two unsecured promissory notes and borrowed an aggregate amount of $80,000.
The promissory notes bear interest at 10% per annum, with a provision for an increase in the interest rate upon an event of default
as defined therein and were due at various due dates in May and September 2017. The due dates of both notes were extended to December
31, 2018.
In
December 2017, the Company issued promissory notes in the aggregate principal balance of $28,000 to Cobrador, a related party.
The notes accrue interest at 7% and have a two-year term.
On November 8, 2017, the Company issued
a convertible promissory note (the “Note”) in the principal amount of $50,000 with net proceeds of $47,000. The Note
bears interest at the rate of 12% per annum, has a nine-month maturity, and includes prepayment interest fees increasing based
on the prepayment date from 15-40% of the principal amount if the Note is repaid prior to 181 days following the issuance date. There
is no right to prepay the Note after the 180th day of issuance. The Note becomes convertible 180 days following the issuance date
and the conversion price for the Note is equal to a 39% discount to the average of the two lowest closing bid prices of the Company’s
common stock during the 15-trading day period prior to conversion. Conversion of the Note is restricted in the event the number
of shares of common stock beneficially held by the note holder and its affiliates in the aggregate after such conversion exceeds
4.99% of the then outstanding shares of common stock. As of December 31, 2017, the note had a carrying value of approximately
$47,000. The Company repaid $64,164 including principal and interest on the Note in February 2018.
Perkin Industries, LLC Equipment Financing
In October 2014, January 2015 and October
2015, the Company entered into three (3) separate 24-month equipment financing agreements (the “Agreements”) with Perkin
Industries, LLC (“Perkin”) for equipment in the aggregate amount of $387,750 with an annual interest rate of 15%. The
assets financed consisted of self-service electronic kiosks placed in service in the Company’s Southern California region.
The Company is obligated to make monthly interest only payments in accordance with the Agreements. The Agreements include a put/call
option at the end of year one and the end of year two. Neither of these options were exercised. During 2017 $100,000 was paid down
on the notes, and the carrying value as of December 31, 2017 and 2016 was $287,750 and 387,750, respectively.
Pursuant
to the Agreements Perkins received a warrant to purchase an aggregate of 310,200 shares at an exercise price of $0.35 per share
with a contractual term of three (3) years. The warrant was recorded as a debt discount and a warrant liability in the aggregate
amount of $3,708 due to the down round provision, pursuant which the exercise price of the warrants was revised to $0.26 at December
31, 2016.
In October 2016, the Company and Perkins
agreed to extend the termination date of two of the Agreements to October 17, 2017 and January 5, 2018. In consideration of this
extension, the Company issued an additional 200,000 warrants with an exercise price of $0.05 per share and a five-year contractual
term. The fair value of the warrants was not material and was charged to operations in the accompanying statement of operations
for the year ended December 31, 2016. The Company is in discussions for modifications to these Agreements including an extension
of the maturity dates.
Subsequent
to the year ended December 31, 2017 the Agreements were purchased by an unrelated third party and the terms are unchanged.
Convertible
Notes Payable
2014
Stock Purchase Agreement
In
2014 and 2015 the Company entered into the 2014 Securities Purchase Agreement (the “2014 SPA”) pursuant to which it
issued eight (8) convertible notes in the aggregate face amount of $146,000 due at various dates between August 2015 and March
2016. The principal on these notes is due at the holder’s option in cash or common shares at a conversion rate of $0.30
per share. In connection with these borrowings the Company granted a total of 360,002 warrants with an exercise price of $0.35
per share and a 5 year contractual term. The warrants issued have a down round provision and as a result are classified as a liability
in the accompanying consolidated balance sheets. Pursuant to the down round provision, the exercise price of the warrants was
reduced $0.22 at December 31, 2016. During 2017 the Company repaid one of the notes in the amount of $50,000 resulting in a carrying
amount of $166,000 as of the year ended December 31, 2017.
The Company and Cobrador, an entity controlled
by the Company’s CEO and is therefore a related party, held three of the convertible notes in the aggregate face amount of
$45,000, and agreed to extend the repayment date to November 17, 2020. The Company and Cobrador extended the due date to December
31, 2018 on notes totaling $25,000, and the Company agreed to a revised conversion price of $.05 per share and a revised exercise
price of $0.07 per share. The change in the value of warrants was not material and was charged to operations.
2015 Stock Purchase Agreement
During the year ended December 31, 2015,
the Company issued eleven subordinated convertible notes bearing interest at 9.5% per annum with an aggregate principal balance
of $441,000 pursuant to the 2015 Stock Purchase Agreement (the “2015 SPA”).The notes were due in December 2017 and
are payable at the noteholder’s option in cash or common shares at a conversion rate of $0.30 per share The conversion rate
was later revised to $0.05 due to down round provisions contained in the 2015 SPA, and the due date was extended to November 17,
2020. In connection with these borrowings, the Company issued a warrant to purchase 735,002 shares of the Company’s common
stock at an exercise price of $0.40 per share and a 5 year contractual term. The exercise price was later revised to $0.22 per
share pursuant to the down round provisions in the 2015 SPA. The Company allocated $8,113 of proceeds received to debt discount
based on the computed fair value of the convertible notes and warrants issued. During the year ended December 31, 2016, the noteholder
converted one note in the face amount of $35,000 into 700,000 shares of common stock. As of December 31, 2017 and 2016, the 2015
SPA had a balance of $406,000. The debt discount was fully amortized as of December 31, 2016.
2016
Stock Purchase Agreement
On June 30, 2016, the Company entered into
the 2016 Stock Purchase Agreement (the “2016 SPA”). pursuant to which it issued five convertible notes in the aggregate
principal amount of $761,597. The 2016 SPA notes are due in November 2020 and bear interest at 9.5% per annum. The notes are convertible
into shares of common stock at a conversion price of $0.17 per share. With this note, the Company satisfied its obligations for:
previously issued promissory notes of $549,000, accrued interest of $38,615, lease principal installments of $47,466, previously
accrued registration rights penalties of $22,156, due to a former officer of $81,250, and additional interest, expenses, fine and
penalties of $23,110 through the issuance of 2016 SPAs. The Company charged additional interest, expenses, fines and penalties
$23,110 to operations as amortization of debt discount and deferred financing costs during the year ended December 31, 2016.
In
connection with the 2016 SPA, the Company granted a total of 2,239,990 warrants with an exercise price of $0.30 per share which
was later revised to $0.05 per share due to down round provisions, with a 5 year contractual life. The Company allocated $19,242
to debt discount based on the computed fair value of the convertible notes and warrants issued and classified the debt discount
is as a warrant liability due to the down round provision in the warrants.
As of December 31, 2017 and 2016, the 2016
SPA had a face value of $761,597 and a carrying value of $756,786 and $747,165, respectively.
Other
2016 Financings
During the year ended December 31, 2016,
the Company issued four convertible notes (the “Cobrador 2016 Notes”) in the aggregate principal amount of $115,000.
The Cobrador 2016 Notes have a 2 year term, bear interest at 9.5% per annum, and are convertible into shares of common stock at
a conversion price of $0.17 per share. The conversion price was subsequently revised to $0.05 per the down round provisions and
the maturity date was extended to September 26, 2021. In connection with the Cobrador 2016 Notes, the Company granted a total of
338,235 warrants with an exercise price of $0.30 per share which was subsequently revised to $0.05 per share due to down round
provisions with a 5 year contractual term. The Company allocated $1,994 to debt discount based on the computed fair value of the
convertible notes and warrants issued, and classified the debt discount as a warrant liability due to the down round provision
in the warrants. As of December 31, 2017 the Cobrador 2016 Notes had a carrying value of $114,500, and $113,504 as of December
31, 2016.
During the fourth quarter of 2016, the
Company issued three additional convertible notes in the aggregate principal amount of $250,000. The notes have a 2 year term,
bear interest at 9.5% per annum and are convertible into shares of common stock at a conversion price of $0.05 per share. In connection
with these borrowings, the Company granted warrants to purchase 5,000,000 shares of common stock with an exercise price of $0.07
per share. The Company allocated $27,585 to debt discount based on the computed fair value of the convertible notes and warrants
issued, and the debt discount is classified as a warrant liability due to the down round provision in the warrants. As of December
31, 2017 the carrying value of the note was $238,046, and $224,254 as of December 31, 2016.
2017 Financings
The Company had an unsecured convertible
promissory note in the principal amount of CAD100,000 with a conversion rate of $0.24 per share and an annual interest rate of
18%.
On November 17, 2017, the Company and the lender agreed to extinguish the debt
and all previously accrued interest amounting to $77,592 and $58,913 respectfully in exchange for a secured convertible promissory
note in the face amount of $100,000, which is included in the 2017 convertible note financing below. The new
note is
due in 24 months and bears interest at 9.5% per annum and is convertible into shares of common stock at a conversion price of $0.05
per share. The principal amount outstanding at December 31, 2016 was $74,480.
During the year ended December 31, 2017,
the Company entered into nineteen separate convertible notes agreements (the “2017 Convertible Notes)” in the aggregate
principal amount of $923,882. The 2017 Convertible Notes each have a 2 year term, bear interest at 9.5%, and are convertible into
shares of common stock at a conversion price of $0.05 per share. In connection with the 2017 Convertible Notes, the Company issued
a total of 16,537,926 warrants with an exercise price of $0.07 per share with a 5 year term. The Company allocated $59,403 to a
debt discount based on the computed fair value of the convertible notes and warrants issued, and classified the debt discount as
a warrant liability due to the down round provision in the warrants. During the year ended December 31, 2017, the Company amortized
$13,825 of debt discount resulting in un amortized debt discount of $45,218 and carrying value of $878,668 at December 31, 2017.
Scheduled
maturities of debt as of December 31, 2017 are as follows:
2018
|
|
$
|
1,271,867
|
|
2019
|
|
|
949,282
|
|
2020
|
|
|
1,212,597
|
|
2021
|
|
|
115,000
|
|
|
|
|
3,548,746
|
|
Less: unamortized debt discount, net
|
|
|
(80,043
|
)
|
|
|
$
|
3,468,703
|
|
Note
6. Related Party Debt
Mr. Graber, the Company’s Chief Executive
Officer, is affiliated with Cobrador Multi-Strategy Partners LP (Cobrador), and Cobrador has provided significant financing to
the Company. As of December 31, 2017, the Company had $1,507,591 in aggregate face amount due pursuant to Senior Convertible Notes,
Convertible Notes and Promissory Note, net of unamortized discount of $4,113 with $1,503,478 carrying value. During the year ended
December 31, 2017, the Company incurred approximately $137,000 of interest expense for the borrowing from Cobrador. In addition,
subsequent to the year end, the Company borrowed $10,000 pursuant a Convertible Note.
Note
7. Capital Lease Obligations
The
Company acquired capital assets under capital lease obligations. Pursuant to the agreement with the lessor, the Company makes
quarterly lease payments and will make a guaranteed residual payment at the end of the lease as summarized below. At the end of
the lease, the Company will own the equipment.
In
August 2016, the Company and the lessor agreed to extend the term of the lease until December 31, 2017. As a consideration of
the extension, the Company issued warrants to acquire 150,000 shares of common stock. The warrants have an exercise price of $0.30
per share, a term of three years, and were recorded as a debt discount and warrant liability due to the down round provision and
as such are marked to market each reporting period.
The
following schedule provides minimum future rental payments required as of December 31, 2017, under the current portion of
capital leases. During 2017 the Company refinanced the least obligation with a promissory note in the amount of $100,000. See
Note 5 above.
2017
|
|
$
|
41,877
|
|
Total minimum lease payments
|
|
|
41,877
|
|
Guaranteed residual
value
|
|
|
120,668
|
|
|
|
|
162,645
|
|
Less: Amount
represented interest
|
|
|
(14,310
|
)
|
Present value of minimum lease payments
and guaranteed residual value
|
|
$
|
148,235
|
|
Equipment
held under capital leases at December 31, 2017 had a cost of $465,500 and accumulated depreciation of $267,000. Equipment
held under capital leases at December 31, 2016 had a cost of $465,500 and accumulated depreciation of $201,262.
Note
8. Capital Stock
The
Company has authorized 600,000,000 shares of common stock.
During
the year ended December 31, 2016, the Company issued 550,000 shares of common stock with a fair value of $22,500 to a note holder
to extend the maturity date of the note.
During
the year ended December 31, 2016, the Company issued 1,950,000 shares upon conversion of $97,500 face amount of Senior Convertible
Note and Convertible Note. In addition, the Company issued 2,941,176 shares to settle $500,000 due to three of its officers.
During
the year ended December 31, 2016, the Company issued 1,075,000 shares of common stock with a fair value of $70,405 and warrants
with a fair value of $62,493 to consultants for services rendered.
During
the year ended December 31, 2017, the Company issued 2,550,000 shares of common stock with a fair value of $76,140 for services
rendered.
During
the year ended December 31, 2017, the Company issued 400,000 shares of common stock upon exercise of cashless
warrants.
Note
9. Stock Options and Warrants
Warrants
At
December 31, 2017 the Company had the following warrant securities outstanding:
|
|
Warrants
|
|
|
Exercise
Price
|
|
|
Expiration
|
2011 Private placement warrants
|
|
|
12,500
|
|
|
$
|
30.00
|
|
|
March 2018
|
2013 Series A warrants - Senior Convertible
Notes
|
|
|
3,000,000
|
|
|
$
|
0.05
|
|
|
December 2018
|
2013 Series B warrants - Senior Convertible
Notes
|
|
|
6,000,000
|
|
|
$
|
0.06
|
|
|
June 2018-December 2018
|
2014 Series A warrants - Senior Convertible
Notes
|
|
|
6,000,000
|
|
|
$
|
0.05
|
|
|
January 2018-December 2018
|
2014 Series B warrants - Senior Convertible
Notes
|
|
|
6,000,000
|
|
|
$
|
0.06
|
|
|
January 2019-November 2019
|
2014 Warrants for services
|
|
|
656,364
|
|
|
$
|
0.22
|
|
|
December 2019
|
2014 Warrants for services
|
|
|
1,184,000
|
|
|
$
|
0.06
|
|
|
June 2018-December 2018
|
2014 Warrants - 2014 SPA convertible
debt
|
|
|
208,334
|
|
|
$
|
0.22
|
|
|
August 2019
|
2014 Warrants - 2014 SPA convertible
debt
|
|
|
35,000
|
|
|
$
|
0.05
|
|
|
October 2019-November 2019
|
2015 Warrants - 2014 SPA convertible
debt
|
|
|
116,668
|
|
|
$
|
0.22
|
|
|
January 2020-March 2020
|
2015 Warrants - convertible financing
obligation
|
|
|
110,200
|
|
|
$
|
0.26
|
|
|
January 2018-October 2018
|
2015 Warrants - 2015 SPA convertible
debt
|
|
|
735,002
|
|
|
$
|
0.22
|
|
|
April 2020- November 2020
|
2015 Warrants for services
|
|
|
407,067
|
|
|
$
|
0.22
|
|
|
April 2020-November 2020
|
2015 Warrants issued in exchange for
equipment
|
|
|
318,182
|
|
|
$
|
0.22
|
|
|
January 2020
|
2016 Warrants - 2016 SPA convertible
debt
|
|
|
2,239,990
|
|
|
$
|
0.05
|
|
|
June 2021
|
2016 Warrants for services
|
|
|
850,000
|
|
|
$
|
0.05
|
|
|
June 2021
|
2016 Warrants - lease extension
|
|
|
150,000
|
|
|
$
|
0.05
|
|
|
August 2019
|
2016 Warrants - Convertible notes
|
|
|
338,236
|
|
|
$
|
0.05
|
|
|
August 2021-September 2021
|
2016 Warrants for services
|
|
|
200,000
|
|
|
$
|
0.07
|
|
|
October 2019
|
2016 Warrants - lease extension
|
|
|
200,000
|
|
|
$
|
0.05
|
|
|
October 2021
|
2016 Warrants issued with Convertible
Notes
|
|
|
5,000,000
|
|
|
$
|
0.05
|
|
|
November -December 2021
|
2017 Warrants
– 2017 financing
|
|
|
16,537,926
|
|
|
$
|
0.07
|
|
|
December 2022
|
Total
|
|
|
50,299,469
|
|
|
|
|
|
|
|
During
the year ended December 31, 2016, the Company revised the exercise price of the warrants based the provisions for down-round provided
for in the agreements. The exercise prices indicated in the table above are the revised strike price in effect at December 31,
2016. In addition, the Company issued 354,546 additional warrants pursuant to the down round provisions.
A
summary of all warrants activity for the years ended December 31, 2017 and 2016 is as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Balance outstanding at December 31, 2015
|
|
|
31,311,534
|
|
|
$
|
5.41
|
|
|
|
3.30
|
|
Granted
|
|
|
9,732,772
|
|
|
$
|
0.06
|
|
|
|
5.00
|
|
Expired
|
|
|
(2,452,065
|
)
|
|
$
|
0.14
|
|
|
|
-
|
|
Balance outstanding at December 31,
2016
|
|
|
38,592,241
|
|
|
$
|
0.05
|
|
|
|
2.35
|
|
Granted
|
|
|
16,537,926
|
|
|
$
|
0.05
|
|
|
|
4.56
|
|
Exercised
|
|
|
(400,000
|
)
|
|
$
|
0.05
|
|
|
|
-
|
|
Expired
|
|
|
(4,430,698
|
)
|
|
$
|
0.09
|
|
|
|
-
|
|
Balance outstanding at December 31,
2017
|
|
|
50,299,469
|
|
|
$
|
0.07
|
|
|
|
2.71
|
|
Exercisable at December 31, 2017
|
|
|
50,299,469
|
|
|
$
|
0.07
|
|
|
|
2.71
|
|
The
following table provides a summary of changes in the warrant liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2017 and 2016.
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Balance at beginning of period
|
|
$
|
184,680
|
|
|
$
|
310,960
|
|
Fair value of warrants issued and recorded
as liabilities
|
|
|
59,043
|
|
|
|
51,001
|
|
Gain on fair
value adjustment
|
|
|
(121,863
|
)
|
|
|
(177,281
|
)
|
|
|
$
|
121,860
|
|
|
$
|
184,680
|
|
The
fair value of warrants outstanding at December 31, 2017 and 2016 has been determined based on the consideration of the enterprise
value of the Company, the limited market of the shares issuable under the agreement and modeling of the Monte Carlo simulation
using multiple volatility assumptions. Warrants issued in and prior to 2012 are significantly out of the money and diluted therefore,
management has deemed the fair value of these to be minimal.
Equity
Incentive Plan
On
July 22, 2011, the Board of Directors of the Company approved the Company’s 2011 Equity Incentive Plan (the “Plan”)
and on July 26, 2011, stockholders holding a majority of shares of the Company approved, by written consent, the Plan. The total
number of shares of common stock available for issuance under the Plan is 5,000,000 shares. Awards may be granted to employees,
officers, directors, consultants, agents, advisors and independent contractors of the Company and its related companies. Such
options may be designated at the time of grant as either incentive stock options or nonqualified stock options. Stock-based compensation
includes expense charges related to all stock-based awards. Such awards include options, warrants and stock grants. Generally,
the Company issues stock options that vest over three years and expire in 5 to 10 years.
On November 16, 2017, the Board
of Directors approved an increase of 10,000,000 shares to be made available for issuance under the Plan.
The
Company estimated the expected volatility based on data used by its peer group of public companies. The expected term was
estimated using the simplified method. The risk-free interest rate assumption was determined using the equivalent U.S. Treasury
bonds yield over the expected term. The Company has never paid any cash dividends and does not anticipate paying any cash dividends
in the foreseeable future. Therefore, the Company assumed an expected dividend yield of zero. The Company has elected to recognize
forfeitures as they occur.
The
following shows the significant assumptions used to compute the share-based compensation expense for stock options granted during
the year ended December 31, 2016.
Volatility
|
|
|
65
|
%
|
Expected term
|
|
|
2
- 5 years
|
|
Risk-free interest rate
|
|
|
1.38% - 1.62
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
A
summary of all stock option activity for the years ended December 31, 2017 and 2016 is as follows:
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Contractual Term
|
Outstanding at December 31, 2015
|
|
|
4,640,650
|
|
|
$
|
0.34
|
|
|
|
Granted
|
|
|
20,000
|
|
|
$
|
0.20
|
|
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
$
|
60.0
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,658,150
|
|
|
$
|
0.31
|
|
|
3.4 years
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
|
|
Forfeited
|
|
|
(1,503,050
|
)
|
|
$
|
1.92
|
|
|
|
Outstanding at December 31, 2017
|
|
|
3,155,100
|
|
|
$
|
0.25
|
|
|
2.5 years
|
Exercisable at December 31, 2017
|
|
|
3,142,600
|
|
|
$
|
0.25
|
|
|
2.5 years
|
There
were no options granted during 2017. The weighted average grant date fair value of options granted during the year ended December
31, 2016 was $0.04.
At
December 31, 2017, there was approximately $322 of unrecognized compensation cost related to unvested options. This cost is expected
to be recognized over a weighted average period of approximately one year.
Stock-based
compensation related to vested options totaled $67,913 and $140,852 for the years ended December 31, 2017 and 2016,
respectively. In 2015, the Company granted 500,000 restricted shares with a three-year vesting period to an officer. During
the second quarter of 2017, upon the departure of the officer from the Company, the Board of Directors accelerated his
vesting such that all shares were vested on his departure date. During the years ended December 31, 2017 and 2016, $30,556
and $24,444, respectively, was charged to operations as stock-based compensation costs for the restricted shares
granted.
Note
10. Commitments and Contingencies
National
Hockey League Retail License and Sponsorship Agreement
On
February 27, 2015 BoxScore announced a multi-year, Corporate Marketing Letter Agreement (the “NHL Agreement”) with
the National Hockey League. The NHL Agreement includes the usage of NHL® team branded marks on the Company’s Frozen
Pond Premium Ice Cream™ for the period commencing March 1, 2015 through June 30, 2020 in retail distributions including
mass merchants, specialty shops, convenience stores and in the Company’s specialty kiosks in North America.
The
Company entered into the NHL Agreement with NHL Enterprises, L.P, NHL Enterprises Canada, L.P. and NHL Interactive Cyber Enterprises,
LLC (collectively referred to as the “NHL” and the “Licensors”) and includes a retail license agreement,
a corporate sponsorship and a marketing agreement. In connection with the Agreement, the Company shall pay to the NHL a royalty
payment of five percent (5%) on net sales as well as fees attributable to national advertising, promotion and corporate marketing
and branding events. The Agreement also provides for customary representations, warranties, and indemnification from the parties.
The
Company has not shipped product to date under the license.
The
following schedule provides minimum future payments for each of the periods ending June 30, 2017 through 2020 as defined in the
NHL license and sponsorship agreements as of December 31, 2017 remeasured from Canadian dollars to U. S. dollars at the spot rate
on December 31, 2017:
For
the period
|
|
June
30,
2017
|
|
|
June
30,
2018
|
|
|
June
30,
2019
|
|
|
June
30,
2020
|
|
|
Total
|
|
Sponsorship fee
|
|
$
|
557,991
|
|
|
$
|
677,561
|
|
|
$
|
677,561
|
|
|
$
|
677,561
|
|
|
$
|
2,590,674
|
|
Minimum royalty
|
|
|
398,565
|
|
|
|
478,278
|
|
|
|
557,991
|
|
|
|
717,417
|
|
|
|
2,152,251
|
|
Media commitment
|
|
|
159,426
|
|
|
|
159,426
|
|
|
|
159,426
|
|
|
|
159,426
|
|
|
|
637,704
|
|
Product in kind
|
|
|
1,594
|
|
|
|
1,594
|
|
|
|
1,594
|
|
|
|
1,594
|
|
|
|
6,376
|
|
Total Commitment
|
|
$
|
1,117,576
|
|
|
$
|
1,316,859
|
|
|
$
|
1,396,572
|
|
|
$
|
1,555,998
|
|
|
$
|
5,387,005
|
|
No payments were made to the NHL under
this agreement as of December 31, 2017. The NHL Agreement provides for termination provisions for nonpayment. The Sponsorship and
Minimum royalty payments due to the NHL (in Canadian dollars) are as follows in the initial period: $200,000 on November 15, 2015,
$200,000 on January 15, 2016 and $400,000 on April 15, 2016. The Company has accrued $1,734,204 and $858,754 of this total commitment
as of December 31, 2017 and 2016, respectively. As part of the NHL Agreement, the NHL has commitments to the Company including
a retail royalty fund which partially reduces the total commitment above.
Major
League Baseball Properties, Inc. License Agreement
In March, 2016 the Company entered into
a license agreement beginning April 1, 2016 through December 31, 2018 with Major League Baseball Properties, Inc. (“MLB”
“Licensor”) for the non-exclusive right to certain proprietary intangible property of the Licensor to be used in connection
with the manufacturing, distribution, promotion and advertisement of the Company’s products sold within the U.S., the District
of Columbia and U.S. territories. Under the license agreement, the Company is scheduled to pay the following guaranteed payments;
$150,000 during 2016, $275,000 during 2017, $100,000 during 2018, and $115,000 during 2019. The Company is obligated to pay the
licensor a royalty based on the product sold or advertising sold. The royalty paid will offset all or a portion of the guaranteed
payments. The agreement is subject to customary default and termination clauses. The Company paid $102,000 during the year ended
December 31, 2016 and $51,000 during the year ended December 31, 2017, and has accrued $222,000 at December 31, 2017, and $48.000
as of December 31, 2016., and charged to operations $150,000 and $275,000 of guaranteed payments related to the year ended December
31, 2016 and 2017, respectively.
Subsequent to the year ended December 31,
2017 the Company paid in full all accrued and unpaid obligations to MLB in the amount of $222,000.
Operating
Lease Obligations
As of December 31, 2017, the Company has
two operating lease agreements for office and warehouse space, one in southern California and one in Las Vegas. The lease for the
California warehouse was extended for an additional term of one year until February 2019 with a base rent of $2,830 a month. The
lease for the warehouse in Las Vegas is for a term of 25 months commencing in February 2016 and provides for a base rent of $1,072
with scheduled increases. On March 1 2018, the Company renewed its lease on the property for a period of twelve months for a base
rent of $1,272. The Company also has two vehicle leases for use in product distribution and sales efforts. The vehicle leases expire
in October 2017 and June 2021 and require a monthly payment of $1,063. Rent expense amounted to $47,526 and $58,252 during the
years ended December 31, 2017 and 2016, respectively.
The aggregate rental commitments for the leases at December
31, 2017 is:
2018
|
|
|
48,824
|
|
2019
|
|
|
8,204
|
|
Total
|
|
$
|
57,028
|
|
Note
11. Income Taxes
Loss
from operations before provision (benefit) for income taxes is summarized in the following table.
|
|
Years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
(2,317,624
|
)
|
|
$
|
(2,339,677
|
)
|
Foreign
|
|
|
(865,704
|
)
|
|
|
(268,692
|
)
|
|
|
$
|
(3,183,328
|
)
|
|
$
|
(2,608,369
|
)
|
The
income tax provision (benefit) is summarized in the following table.
|
|
Years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
(908
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total Current
|
|
$
|
-
|
|
|
$
|
(908
|
)
|
|
|
Years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
|
189,247
|
|
|
|
(886,965
|
)
|
State
|
|
|
(192,813
|
)
|
|
|
(127,328
|
)
|
Foreign
|
|
|
(86,536
|
)
|
|
|
(65,963
|
)
|
Total Deferred
|
|
|
(90,102
|
)
|
|
|
(1,080,256
|
)
|
Less increase in allowance
|
|
|
90,102
|
|
|
|
1,080,256
|
|
Net Deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
(908
|
)
|
The
significant components of the deferred tax assets and liabilities are summarized below.
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,719,448
|
|
|
$
|
2,698,856
|
|
Depreciable and amortizable assets
|
|
|
(41,913
|
)
|
|
|
(64,135
|
)
|
Prepaid expense
|
|
|
(167
|
)
|
|
|
(253
|
)
|
Intangible asset
|
|
|
(43,501
|
)
|
|
|
(87,002
|
)
|
Stock based compensation
|
|
|
172,323
|
|
|
|
223,543
|
|
Beneficial conversion feature
|
|
|
-
|
|
|
|
(22,184
|
)
|
Loss reserve
|
|
|
1,891
|
|
|
|
2,736
|
|
Accrued compensation
|
|
|
143,657
|
|
|
|
108,743
|
|
Other
|
|
|
(654
|
)
|
|
|
680
|
|
Total
|
|
|
2,951,084
|
|
|
|
2,860,984
|
|
Less valuation
allowance
|
|
|
(2,951,084
|
)
|
|
|
(2,860,984
|
)
|
Net deferred tax
assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has approximately $8,720,000 and $1,923,000 in federal U.S. and Canadian net operating loss carryforwards (“NOLs”),
respectively, as well as $9,658,000 in U.S. state and $1,923,000 in Canadian provincial NOLs available to reduce future taxable
income. These carryforwards begin to expire in year 2030. Due to the uncertainty as to the Company’s ability to generate
sufficient taxable income in the future and utilize the NOLs before they expire, the Company has recorded a valuation allowance
to fully offset the NOLs, and the total net deferred tax assets, as well.
Internal
Revenue Code Section 382 (“Section 382”) imposes limitations on the availability of a company’s net operating
losses and other corporate tax attributes as certain significant ownership changes occur. As a result of the historical equity
instrument issuances by the Company, a Section 382 ownership change may have occurred and a study will be required to determine
the date of the ownership change, if any. The amount of the Company’s net operating losses and other tax attributes incurred
prior to any ownership change may be limited based on the Company’s value. In addition, as a result of the Company’s
acquisition of the shares of U-Vend Canada, the amount of U-Vend Canada’s NOLs incurred prior to the ownership change and
those of its wholly-owned limited liability company, U-Vend USA LLC may be limited based on the U-Vend Canada’s value at
the date of acquisition. A full valuation allowance has been established for the Company’s deferred tax assets, including
net operating losses and any other corporate tax attributes.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to,
(1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax (AMT)
and changing how existing AMT credits can be realized; (3) changing rules related to usage and limitation of net operating loss
carryforwards created in tax years beginning after December 31, 2017; (4) generally eliminating U.S. federal income taxes on dividends
from foreign subsidiaries for tax years beginning after December 31, 2017; and (5) implementing a territorial tax system and imposing
a transition toll tax on deemed repatriated earnings of foreign subsidiaries.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional
tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its financial statements
for the year ended December 31, 2017. As of December 31, 2017, the Company has completed most of its accounting for the tax effects
of the Act. If revisions are needed as new information becomes available, the final determination of the deemed re- measurement
of the deferred assets and liabilities or other applicable provisions of The Act will be completed as additional information becomes
available, but no later than one year from the enactment of the 2017 Tax Act.
The deferred U.S. income tax expense for
2017 primarily represents a one-time, non-cash expense of approximately $1,189,000 relating to the revaluation of deferred tax
assets offset by a reduction of the valuation allowance in an equal amount. This resulted in a net zero effect on the provision
for income tax.
During the years ended December 31, 2017
and 2016, the Company had no unrecognized uncertain tax positions. The Company’s policy is to recognize interest accrued
and penalties related to unrecognized uncertain tax positions in tax expense.
The
Company files income tax returns in the U.S. and Canada federal jurisdictions, the states of California, Florida, Illinois and
New York, as well as the province of Ontario. The tax years 2014-2017 generally remain open to examination by the U.S. federal
and state taxing authorities. In addition, the 2013 tax year is still open for the state of California, Canadian federal and province
of Ontario taxing authorities.
A
reconciliation of the income tax provision using the statutory U.S. income tax rate compared with the actual income tax provision
reported on the consolidated statements of operations is summarized in the following table.
|
|
Years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory United States
federal rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
United States federal tax on foreign
branch operations
|
|
|
9.25
|
|
|
|
3.31
|
|
State income tax, net of federal benefit
|
|
|
6.03
|
|
|
|
4.94
|
|
Other foreign income tax, net of federal
benefit
|
|
|
2.72
|
|
|
|
1.01
|
|
Change in valuation reserves
|
|
|
(2.83
|
)
|
|
|
(41.41
|
)
|
Permanent differences
|
|
|
0.65
|
|
|
|
(1.41
|
)
|
Goodwill impairment
|
|
|
(6.86
|
)
|
|
|
-
|
|
Tax rate differential between jurisdictions
|
|
|
(5.64
|
)
|
|
|
(2.72
|
)
|
Federal income tax law changes
|
|
|
(37.35
|
)
|
|
|
-
|
|
Other
|
|
|
0.03
|
|
|
|
2.31
|
|
Effective tax rate
benefit (provision)
|
|
|
-%
|
|
|
|
0.03
|
%
|
Note
12. Master Distributor Agreement
During
the year ended December 31, 2016, Mr. Neelin, a former officer of the Company, and the Company entered into a five year exclusive
Master Distributor Agreement to market and sell U-Vend services in Canada and Latin America. All expenses associated with the
marketing, selling and the provisioning of the services will be borne by Mr. Neelin. The Company will earn a royalty fee of 10%
on total gross sales of the services sold through the distribution agreement. Royalties will be paid to the Company on a quarterly
basis. Pursuant to the agreement, Neelin waived an amount of $93,000 due to him from the Company and this amount has been accounted
as other income during the year ended December 31, 2016.
Pursuant
to the terms of the Master Distributor Agreement, the Company received a notice of termination from Mr. Neelin effective June
30, 2017.
Note
13. Subsequent Events
Subsequent
to December 31, 2017, the Company issued 25,000 shares of common stock with a fair value of $1,000 to an employee.
Subsequent
to December 31, 2017, the Company issued 700,000 shares of common stock with a fair value of $24,000 to consultants for services
rendered.
Subsequent
to December 31, 2017, the Company issued 2,472,383 shares of common stock upon exercise of warrants.
Subsequent
to December 31, 2017, the Company entered into ten separate convertible notes agreements (the “2018 Convertible Notes”)
with multiple investors in the aggregate principal amount of $320,000. The 2018 Convertible Notes each have a 2-year term, bear
interest at 9.5%, and are convertible into shares of common stock at a conversion price of $0.05 per share. In connection with
the 2018 Convertible Notes, the Company issued a warrant to purchase a total of 6,400,000 shares of common stock with an exercise
price of $0.07 per share with a 5-year term.
Subsequent to December 31, 2017, BoxScore Brands, Inc. and NHL
Enterprises, L.P., etc. (NHL) agreed to terminate the NHL Agreement forgiving the Company CAD3,450,000 in outstanding obligations
under the Sponsorship Agreement, in return the Company agreed to pay the NHL an amount equal to one percent (1%) of the Company’s
net sales of certain products as defined under the agreement (the ‘Consideration’). The products include several
types of frozen goods that bear the logo or other markings of sports or entertainment brands. This Consideration is to be paid
to the NHL quarterly in arrears through the quarter ended March 31, 2026, or until the Company has paid USD1,600,000 in the
aggregate from the date of the agreement.
The $1,600,000 is a royalty payment due
to the NHL based on future sales.
Subsequent to December 31, 2017, the Company
entered into four capital leases for the purchase of equipment to support the rollout of MLB branded freezers with digital screens,
and MLB branded full service vending machines in the Southern California and Las Vegas markets. The aggregate value of these leases
is approximately $230,000, and the approximate monthly payments are $7,000 for an average of 40 months.
Subsequent to December 31, 2017, the Company
entered into an agreement for a $147,000 working capital line of credit.