NOTE 2 - GOING CONCERN AND MANAGEMENT PLANS
The accompanying
condensed CFS were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations,
realization of assets, and liquidation of liabilities in the normal course of business.
The Company incurred losses from operations
of $1,843,139 for the nine months ended September 30, 2018 and $4,269,673 for the year ended December 31, 2017, and had an
accumulated deficit of $13,155,170 at September 30, 2018. In addition, the Company used cash in operating activities of $500,646
for the nine months ended September 30, 2018. The Company will continue to incur costs that are necessary for it to remain an active
public company. As of September 30, 2018, the Company has approximately $8,000 in cash.
These factors raise substantial doubt about the Company's
ability to continue as a going concern.
While
the Company is attempting to establish an ongoing source of revenues sufficient to cover its operating costs and allow it to continue
as a going concern, the Company's cash position may not be adequate to support the Company's daily operations. Management intends
to raise additional funds by seeking equity and/or debt financing; however there can be no assurances that it will be successful
in those efforts. The ability of the Company to continue as a going concern is dependent upon the Company's ability to obtain
financing, further implement its business plan, and generate revenues.
There are significant risks and uncertainties
which could negatively affect the Company's operations. These are principally related to (i) the absence of a distribution
network for the Company's products, (ii) the absence of any significant commitments or firm orders for the Company's products.
The Company's limited sales to date for the Company's products make it impossible to identify any trends in the Company's business
prospects. Accordingly, there can be no assurance that we will be able to pay obligations which we may incur in the future. Furthermore,
if our current indebtedness is not restructured or converted into equity, which is at the debt holder’s discretion, our current
operations do not generate sufficient cash to pay interest and principal on these obligations when they become due. Accordingly,
there can be no assurance that we will be able to pay these or other obligations which we may incur in the future. In the event
we are unable to restructure or convert into equity the balance of our outstanding indebtedness, the holders may obtain judgments
against us and seek to enforce such judgments against our assets, in which event we will be required to cease our business activities
and the equity of our stockholders will be effectively wiped out,
The Company's only sources of additional funds
to meet continuing operating expenses, fund additional development and fund additional working capital are through the sale of
securities and/or debt instruments. We are actively seeking additional debt or equity financing, but no assurances can be given
that such financing will be obtained or what the terms thereof will be. The Company may need to discontinue a portion or all of
our operations if the Company is unsuccessful in generating positive cash flow or financing for the Company's operations through
the issuance of securities.
An event of default exists under our April Note, July Note,
July Note #2 ,September Notes #1 and #2 and the Promissory Note.
The Company was unable to repay amounts due for the April Note,
July Note, July Note #2 and September Notes #1 and #2 In addition, the Company did not make two of the progress payments due under
the Promissory Note. The inability to repay represents an event of default. The holders of the notes have not declared a default.
If they were to do so, however, they would be entitled to immediate payment of amounts far in excess of our ability to pay. Under
the worst scenario, a declaration of default by the holders of the April Note, July Note and July Note #2 could result in a liquidation
of the Company and elimination of any value in our common stock.
The condensed CFS do not include any adjustments
related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3 – Intangible Assets
The following are the details of intangible
assets at September 30, 2018 and December 31, 2017:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
License
|
|
$
|
996,346
|
|
|
$
|
996,346
|
|
Trademarks
|
|
|
12,480
|
|
|
|
10,530
|
|
|
|
|
1,008,826
|
|
|
|
1,006,876
|
|
Less accumulated amortization
|
|
|
(326,253
|
)
|
|
|
(251,194
|
)
|
|
|
$
|
682,573
|
|
|
$
|
755,682
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the nine months ended
September 30, 2018 and 2017 was $75,059 and $74,726, respectively.
The following summarizes estimated future amortization
expense as of September 30, 2018 related to intangible assets:
Year Ending December 31,
|
|
|
|
2018
|
|
|
$
|
25,220
|
|
|
2019
|
|
|
|
100,783
|
|
|
2020
|
|
|
|
100,783
|
|
|
2021
|
|
|
|
100,783
|
|
|
2022
|
|
|
|
100,783
|
|
|
Thereafter
|
|
|
|
254,221
|
|
|
|
|
|
$
|
682,573
|
|
NOTE 4 – Due from Related Parties/Due
to Related Parties
The Company has balances outstanding due from
and payable to affiliated companies and related parties. These amounts are payable upon demand and are non-interest bearing.
At September 30, 2018 and December 31, 2017, the amounts due from related parties were $32,390 and $11,890, respectively.
At September 30, 2018 and December 31, 2017, the amounts due to related parties were $536,028 and $392,037, respectively.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 5 - Note Payable
The Company entered into a merchant agreement
on May 21, 2018. Total payments for the note payable is $40,470, which included $28,500 principal payment and $11,970 interest
payment. The note payable requires daily payments of $165, is due on May 21, 2019. The outstanding balance was $18,184 and $0 at
September 30, 2018 and December 31, 2017, respectively. The loan is secured by the assets of the Company as defined by Article
9 of the Uniformed Commercial Code and a personal guaranty. The interest rate is 42% per annum.
The Company entered into a 90 day Secured Convertible
Note with Bridgepoint Capital, LLC on August 10, 2018 in the principal amount of $50,000, with no interest accruing. The note is
secured by a guaranty from an unrelated individual. At any time, the principal amount of the note may be converted into any funding
or other agreement contemplated at a near future date between the note holder and the Company. The Convertible Note contained an
original issue discount of $2,500. For the nine months ended, $1,417 was amortized.
On July 10, 2018, the Company entered into
a one year Unsecured Promissory Note in the principal amount of $50,000, with an interest rate of 30% per annum. Five progress
payments of $5,000 was due beginning on August 10, 2018. The Company did not make the progress payments due on August 10, 2018
and September 10, 2018. As such, this Promissory Note is in default. However, the Holder of the Promissory Note has not declared
a default.
NOTE 6 - Fair Value Measurement
Financial Accounting Standards Board ("FASB")
ASC Topic 820,
Fair Value Measurements and Disclosures
, requires disclosure of the fair value ("FV") of financial
instruments held by the Company. FASB ASC Topic 825,
Financial Instruments
, defines FV, and establishes a three-level valuation
hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported
in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate
of their FVs because of the short period of time between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
·
|
Level 1 inputs to the valuation methodology are quoted prices for
identical assets or liabilities in active markets.
|
|
·
|
Level 2 inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
·
|
Level 3 inputs to the valuation methodology us one or more unobservable
inputs which are significant to the FV measurement.
|
The Company analyzes all financial instruments
with features of both liabilities and equity under FASB ASC Topic 480,
Distinguishing Liabilities from Equity
, and FASB
ASC Topic 815,
Derivatives and Hedging
.
The Company uses Level 2 inputs for its valuation
methodology for its derivative liability as its FV was determined by using the Black-Scholes-Merton pricing model based on various
assumptions. The Company's derivative liability is adjusted to reflect FV at each period end, with any increase or decrease in
the FV being recorded in results of operations as adjustments to FV of derivatives.
The Company held certain financial instruments
that are measured at fair value on a recurring basis. These consisted of convertible debt totaling $784,091 and $1,288,138 at September
30, 2018 and December 31, 2017 respectively, with a derivative liability totaling $2,265,750 and $897,968 at September 30, 2018
and December 31, 2017, respectively, which are categorized as Level 3.
The related loss on change in fair value of derivatives totaled
$3,028,388 for the nine months ended September 30, 2018 and a related gain on the change in fair value of derivatives of $112,416
for the nine months ended September 30, 2017.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 7 - Derivative liabilities
During the nine months ended September 30,
2018, the Company identified conversion features embedded within its convertible debt.
The Company determined the conversion feature
of the convertible note represents an embedded derivative since the convertible debt is convertible into a variable number of shares
upon conversion. Accordingly, the convertible debt is not considered to be conventional debt and the embedded conversion feature
must be bifurcated from the debt host and accounted for as a derivative liability.
Therefore, the FV of the derivative instruments
was recorded as liabilities on the balance sheet with the corresponding amount recorded as discounts to the notes. Such discounts
will be accreted from the issuance date to the maturity date of the notes. The change in the FV of the derivative liabilities will
be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative
liabilities on the balance sheet. The FV of the embedded derivative liabilities on the convertible notes were determined using
the Black-Scholes valuation model on the issuance dates with the assumptions in the table below.
The FV of the derivative liabilities was calculated
using a Black-Scholes valuation model.
The FV of the Company's derivative liabilities at and during the
nine months ended September 30, 2018 is as follows:
|
|
|
Derivative liability balance, December 31, 2017
|
|
$
|
897,968
|
|
Debt Discount
|
|
|
320,000
|
|
Derivative liability related to debt converted into common shares
|
|
|
(1,980,606
|
)
|
Change in derivative liability
|
|
|
3,028,388
|
|
Derivative liability balance, September 30, 2018
|
|
$
|
2,265,750
|
|
|
|
|
|
|
The FV's at the commitment dates and re-measurement
dates for the convertible debt and warrants treated as derivative liabilities are based upon the following estimates and assumptions
made by management for the nine months ended September 30, 2018:
Risk free rate
|
1.96% - 2.38%
|
Volatility
|
289%
|
Conversion/Exercise Price
|
$0.0016 - $.0093
|
Dividend rate
|
0%
|
Term (Years)
|
0.06 - 0.52
|
The carrying amounts of the Company's
cash, accounts payable and accrued expenses approximate their estimated FVs due to the short term maturities of those financial
instruments. The Company believes the carrying amount of its promissory note, net of discount approximates its FV based on rates
and other terms currently available to the Company for similar debt instruments
.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 8 - Financing Agreement and Convertible
Debentures
8% Promissory Note
On July 5, 2017, the Company
issued an 8% unsecured Promissory Note ("July Note") in the amount of $220,000, with an Original Issue Discount of $20,000
and Debt Issuance Costs of $20,000 to an accredited investor. This promissory note was originally due and payable on January 6,
2018, plus the one-time interest charge of on the principal of 8%. The holder has the right to convert all or any part of the outstanding
amount due under this Note into fully paid and non-assessable shares of Common Stock upon an event of default. The Company was
assessed a penalty of $37,520 under Section 2(b) of the July Note where upon the occurrence of any event of default, the outstanding
balance shall immediately and automatically increase to 120% of the outstanding balance immediately prior to the occurrence of
the event of default. In addition, the Company was assessed a penalty of $10,000 under section 3(b)(iv) of the July Note where
a penalty is assessed when the price of common stock is less than $0.01.
In connection with the July Note, the
Company granted 85,000 shares of Common Stock to the investor as inducement shares. These shares were issued on February 5, 2018.
These Common Stock were valued at the market share price of $0.739 per share and recorded interest expense of $62,815.
On January 17, 2018, the Company
entered into an agreement with the holder to amend terms of the July Note. The due date of the July Note was amended to February
6, 2018 from the original due date of January 6, 2018, In exchange for the amendment the Company delivered 300,000 shares of Common
Stock. These Common Stock were valued at the market share price of $0.085 per share and recorded interest expense of $25,500. If,
on the date that is the six-month anniversary of the date of the second amendment ("True-Up Date"), the volume weighted
average price of the Common Stock on the day immediately preceding the True-Up Date as reported on the Company's Principal Market
is less than the closing price of the Common Stock on the date of the second amendment, the Company shall, within three trading
days of the holder's provision of written notice, issue and deliver an additional number of duly and validly issued, fully paid
and non-assessable shares of Common Stock equal to the quotient of $25,000 divided by the subsequent share price multiplied by
1.5, less the extension shares. As of July 31, 2018 (six month anniversary), the estimated number of shares to be issued is approximately
1,074,000 with a fair value of approximately $7,500 using the stock price on July 31, 2018.
On January 31, 2018, the Company
entered into an agreement with the holder to further amend terms of the July Note. The due date of the July Note was extended to
March 6, 2018 from the original due date of January 6, 2018. In exchange for the amendment the holder converted $50,000 of the
outstanding balance of the July Note.
12 % Convertible Promissory Note
#1
On February 8, 2018, the Company
issued a 12% unsecured Convertible Promissory Note #1 of $103,000 ("2018 Note #1"), with debt issuance costs of $3,000
to an accredited investor. Net of debt issuance costs, the Company received $100,000. This 2018 Note #1 note is due and payable
on November 20, 2018. The holder has the right from time to time, and at any time during the period beginning on the date which
is 180 days following the date of the note and ending on the later of: (i) the maturity date and (ii) the date of payment of the
default amount, each in respect of the remaining outstanding principal amount of this Note to convert all or any amount of the
outstanding and unpaid principal amount of the 2018 Note #1 into fully paid and non-assessable shares of common stock.
Due to the potential adjustment
in the conversion price associated with this 2018 Note #1convertible note payable based on the Company's stock price, the Company
determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated
to be $227,338 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as
a debt discount to the 2018 Note #1 payable up to the face amount of the 2018 Note #1 Note convertible note with the excess of
$127,338 being recorded as a change in fair value of derivative liability. The debt discount of $100,000 is being amortized over
the term of the convertible note.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
12 % Convertible Promissory Note
#2
On March 5, 2018, the Company
issued a 12% unsecured Convertible Promissory Note #2 of $103,000 ("2018 Note #2), with debt issuance costs of $3,000 to an
accredited investor. Net of the debt issuance costs, the Company received $100,000. This 2018 Note #2 is due and payable on December
15, 2018. The holder has the right from time to time, and at any time during the period beginning on the date which is 180 days
following the date of the note and ending on the later of: (i) the maturity date and (ii) the date of payment of the default amount,
each in respect of the remaining outstanding principal amount of this 2018 Note #2 to convert all or any amount of the outstanding
and unpaid principal amount of the 2018 Note #2 into fully paid and non-assessable shares of Common Stock. The conversion price
is 61% of the average of the lowest two trading prices for the Common Stock during the ten trading day period ending on the latest
complete trading day prior to the conversion date.
Due to the potential
adjustment in the conversion price associated with this 2018 Note #2 payable based on the Company's stock price, the Company
determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially
calculated to be $114,305 which is recorded as a derivative liability as of the date of issuance. The derivative liability
was recorded as a debt discount to the 2018 Note #2 payable up to the face amount of the 2018 Note #2 with the excess of
$14,305 being recorded as a change in fair value of derivative liabilities. The debt discount of $100,000 is being amortized
over the term of the convertible note.
8 % Convertible Redeemable
Note
On March 6, 2018, the Company
issued a 8% unsecured Convertible Redeemable Note of $126,000 ("2018 Note #3"), with debt issuance costs of $6,000 to
an accredited investor. Net of debt issuance costs, the Company received $120,000. This 2018 Note #3 is due and payable on March
6, 2019. The holder is entitled, at its option, at any time, to convert all or any amount of the principal face amount of this
Note then outstanding into shares of Common Stock. The conversion price is 60% of the lowest trading prices for the common stock
during the 20 trading day period ending on the latest complete trading day prior to the conversion date.
Due to the potential adjustment
in the conversion price associated with this 2018 Note #3 payable based on the Company's stock price, the Company determined the
conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $149,491
which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount
to the 2018 Note #3 payable up to the face amount of the 2018 Note #3 with the excess of $29,491 being recorded as a change in
fair value of derivative liabilities. The debt discount of 120,000 is being amortized over the term of the 2018 Note #3.
Other
The Company was unable to repay amounts due for the April Note,
July Note, July Note #2 and September Notes #1 and #2 that were issued during the year ended December 31, 2017 . The inability
to repay represents an event of default. The holders of the notes have not declared a default.
The Holder of the September Note #2 assessed a $12,000 penalty under
Section 1.2(c) of the September Note #2 where the Company is assessed a penalty of $1,000 per day if delivery of Common Stock is
not delivered within three business days after receipt of conversion notice.
During the quarter ended September 30, 2018
seven Note Holders converted their unsecured convertible notes payable into common stock. The conversion prices range from 50%
to 75% multiplied by the:
|
·
|
Average of the two lowest trading prices of the common stock during
the 10 trading day period;
|
|
·
|
Average of the lowest trading price of the common stock for the 20
prior trading days;
|
|
·
|
Lowest trading price of the common stock for the 20 prior trading
days;
|
|
·
|
Lowest trading price of the common stock for the 15 prior trading
days;
|
|
·
|
Average of the 3 lowest bids of the common stock for the 5 prior
trading days;
|
|
·
|
Lowest sales price for the common stock for the 20 prior trading
days;
|
|
·
|
Average of the three lowest closing bids in the five days immediately
preceding the conversion date.
|
The balance of the convertible notes, net of discounts was
$725,069 and $781,901 at September 30, 2018 and December 31, 2017, respectively. Amortization of debt discount was $780,632 for
the nine months ended September 30, 2018.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 9 - Equity
Common Stock
During the nine months ended September 30,
2018 the Company issued;
|
·
|
257,012,037 shares of Common Stock, to settle
conversions of $895,567 of principal amounts of convertible notes, $16,344 in accrued interest and $7,350 in fees.
|
|
·
|
300,000 shares valued at $25,500 for extension
of due date for the July Note;
|
|
·
|
83,333 shares for $5,000 cash;
|
|
·
|
200,000 shares valued at $32,400 for employment agreement
|
Stock Options
For the nine months ended September 30, 2018,
1,000,000 options were granted, none were exercised or forfeited. The Company's outstanding and exercisable options as of September
30, 2018 are presented below:
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractural Life
|
|
Aggregate Intrinsic Value
|
Outstanding. December 31, 2017
|
|
|
7,193,750
|
|
|
$
|
0.001
|
|
|
|
4.58
|
|
|
$
|
-
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.001
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding. September 30, 2018
|
|
|
8,193,750
|
|
|
$
|
0.001
|
|
|
|
3.92
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciable and vested at September 30, 2018
|
|
|
2,291,250
|
|
|
$
|
0.001
|
|
|
|
3.81
|
|
|
$
|
18,700
|
|
As part of the employment agreement with Daniel
Kryger, the Compensation Committee of the Board of Directors has granted Mr. Kryger on February 1, 2018 ("Effective
Date"), 1,000,000 stock options at a purchase price of $.001 per share with a vesting schedule as follows: (1) 25% of the
options shall vest immediately upon the effective date, (2) 25% of the options shall vest upon the Company reaching $1,000,000
in aggregate total sales revenue earned after the effective date, (3) 25% of the options shall vest upon the Company reaching $2,000,000
in aggregate total sales revenue earned after the effective date, and the remaining unvested shares shall vest upon the Company
reaching $3,000,000 in sales revenue earned after the effective date. Management believes that the Company will reach the
$1,000,000 aggregate total sales revenue in the year 2020, reach the $2,000,000 aggregate sales revenue in the year 2021 and the
$3,000,000 aggregate sales revenue in 2022.
The FV of the options was calculated using
a Black-Scholes valuation model.
The FV's at the effective date was based upon
the following estimates and assumptions made by management:
Risk free rate
|
|
|
2.26
|
%
|
Volatility
|
|
|
182
|
%
|
Conversion/Exercise Price
|
|
$
|
0.001
|
|
Dividend rate
|
|
|
0
|
%
|
Term (Years)
|
|
|
5
|
|
The total value of the options was $161,701, of which $40,425 was
expensed as payroll costs for the nine months ended September 30, 2018.
The fair value of the stock options is being
amortized to stock option expense over the vesting period. The Company recorded stock option expense of $220,728 and $180,303,
during the nine months ended September 30, 2018 and September 30, 2017, respectively. At September 30, 2018, the unamortized stock
option expense was $180,303 which will be amortized to expense through June 30, 2019.
PURA NATURALS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 10 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved
in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which
the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company's
financial position.
The Company maintains a head office at 23101
Lake Center Drive, Suite 100, Lake Forest, CA 92630. This property is leased until March 31, 2017 at $ 2,636 per month. . Effective
February 21, 2018, the lease was extended to March 31, 2019. The basic rent is abated for April 2018 with rent of $3,494.25 from
May 1, 2018 to March 31, 2019.
The following summarizes estimated future lease expense as of September
30, 2018 related to the office:
Years Ending September 30,
|
|
Amount
|
|
2019
|
|
|
$
|
31,448
|
|
|
2020
|
|
|
|
-
|
|
|
2021
|
|
|
|
-
|
|
|
2022
|
|
|
|
-
|
|
|
2023
|
|
|
|
-
|
|
|
Thereafter
|
|
|
|
-
|
|
|
|
|
|
$
|
31,448
|
|
NOTE 11 - CONCENTRATIONS
The Company had certain customers whose accounts
receivable balances individually represented 10% or more of the Company's total accounts receivable, as follows:
As of September 30,
2018 one customers accounted for 24%, one customer accounted for 18% ,one customer accounted for 11% of accounts receivable.
As of December 31, 2017 one customers accounted for 30%, one customer accounted for 14% and one customer accounted for 15%
of accounts receivable.
The Company had certain vendors whose accounts
payable balances individually represented 10% or more of the Company's total accounts payable, as follows:
As of September 30, 2018 one vendor accounted
for 17% of accounts payable. As of December 31, 2017, one vendor accounted for 10% or more of the Company's accounts payable.
NOTE 12 – SUBSEQUENT EVENTS
On October 8, 2018 the Company issued two unsecured
convertible notes payable for $100,000 for cash and $200,000 for advertising services. Interest rates are 8% per annum for the
cash note and 0% per annum for the advertising services note and with a due date of April 8, 2019. The Holders shall have the right,
in their sole and absolute discretion, at any time after the maturity date to convert all or any part of the outstanding amount
due under the Notes into fully paid and nonassessable shares of Common Stock. The conversion prices for two convertible notes is
the lower of 80% multiplied by the lowest trading prices of the common stock during the 5 trading day period on ending on the latest
complete Trading Day prior to the conversion or $0.0065. The conversion price on one note is 90% multiplied by the lowest trading
prices of the common stock during the 5 trading day period on ending on the latest complete Trading Day prior to the conversion
The Company may prepay the any amounts outstanding to the holders on or before the maturity date of the convertible note by making
a cash payment of 125% of the prepayment. The Company may prepay the any amounts outstanding to the holders after the maturity
date of the convertible note by making a cash payment of 140% of the prepayment.
Subsequent to September 30, 2018, Robert Doherty, Robert Switzer,
Derek Duhame and Daniel Kryger converted deferred salary accrued interest in the amount of $187,500 was converted into 50,000,000
shares of the Company’s common stock.
Subsequent to September 30, 2018, convertible
debt in the amount of $172,947 plus accrued interest totaling $3,118 and $750 in fees were converted into 81,742,316 shares of
the Company’s common stock.
Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion should be read
in conjunction with our financial statements and notes thereto included herein. In connection with, and because we desire to take
advantage of, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution
readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other
statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which relate to future operations, strategies, financial results
or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or
on our behalf. We disclaim any obligation to update forward looking statements.
Overview and History
Pura Naturals, Inc., ("we," "our"
or the "Company") was incorporated on December 26, 2005, in the State of Colorado under the name "Yummieflies.com
Inc." In March 2010, we filed an amendment to our Articles of Incorporation changing our name to "Yummy Flies,
Inc." In November 2016, we filed an amendment to our Articles of Incorporation changing our name to "Pura
Naturals, Inc." In September 2010, we effected in a forward split of our issued and outstanding common stock whereby
nine shares of our common stock were issued in exchange for every one share of common stock then issued and outstanding. In
addition, in November 2016, we effected another forward split of our issued and outstanding common stock whereby 3.7 shares of
our common stock were issued in exchange for every one share of common stock then issued and outstanding. All references
to our issued and outstanding common stock in this Report are presented on a post-forward split basis unless otherwise indicated.
Effective July 18, 2016, the Company entered
into a Share Exchange Agreement (the "Share Exchange Agreement") by and among the Company, Pura Naturals, Inc., a Delaware
corporation ("PURA - DE") and certain shareholders of PURA – DE (the "PURA Shareholders").
Pursuant to the Share Exchange Agreement, the Company exchanged the outstanding common and preferred stock of PURA - DE held by
the PURA Shareholders for shares of common stock of the Company. At the closing, Robert Lee, the holder of 30,536,100 shares
of common stock, cancelled such shares. Other than Robert Lee, shareholders of Company's common stock held 7,625,700 shares
of common stock. At closing, the Company issued 23,187,876 shares of common stock to the PURA shareholders. In
addition, shares issuable under outstanding options of PURA – DE will be exercisable into shares of common stock of the Company,
pursuant to the terms of such instruments.
As a result of the Share Exchange Agreement
and the other transactions contemplated there under, PURA – DE became a wholly owned subsidiary of the Company.
The exchange of shares with Pura - DE was accounted
for as a reverse acquisition under the purchase method of accounting since Pura - DE obtained control of the Company. Accordingly,
the merger of Pura - DE into the Company was recorded as a recapitalization of Pura - DE, Pura - DE being treated as the continuing
entity. The historical financial statements presented are the financial statements of Pura - DE. The Share Exchange Agreement was
treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date
of this transaction, the net liabilities of the legal acquirer, Pura - CO, were $20,040.
PURA - DE, a Delaware corporation, was formed
in 2013. PURA – DE partnered with Advanced Innovative Recovery Technology, Inc. ("AIRTech"), to create a revolutionary
and proprietary bio-based foam called BeBetterFoam® that is made from renewable resources instead of petroleum. PURA- DE markets
and sells a line of cleaning products based on the BeBetterFoam® platform for consumer kitchen and bathroom, with additional
products for outdoor hobbies (fishing and boating, spas and pools), pet care, infant care and industrial use currently under development.
The Bath & Body line and household (including kitchen) sponges are Oleophilic which means, among other things, that it absorbs
oil, grease and grime, removes impurities from skin (cleansing and applying/removing make-up), and is latex-free. PURA -
DE products are also non-toxic, contain Plant-Based/renewable resources, have a carbon-negative footprint (removes more carbon
than is created), contain no petroleum by-products, use no adhesives or glues, and are infused with soap that is 100% Natural,
bio-degradable, sustainable, Vegan, gluten-free, contains botanicals and essential oils; SLS-, Sulfate, Paraben-, and BPA- free.
The BeBetterFoam® is hydrophobic, which means it resists and does not support bacteria. PURA - DE believes that the BeBetterFoam®
also is up to 40 times stronger than the leading kitchen sponge brand.
Pura Marine, the Marine Division of Pura Naturals,
offers biologically-based oil-absorbent technologies to the commercial and consumer markets. Working alongside industrial partners,
Pura Marine developed environmentally sustainable oil spill prevention products and solutions targeted towards the marine oil transport,
oil refining and trucking industries. Pura Marine also provides plant-based foam products to the recreational boating and fishing
industries.
BeBetterFoam® is a unique, proprietary
polymer process technology that is protected by a trade secret, completely owned by Pura through an acquisition transaction with
AIRTech in May 2017, and we believe this technology is incapable of being reverse engineered. Previously, those formulations and
been exclusively licensed to from AIRTech to PURA – DE.
The Company has evolved it's marketing strategy
in 2017 to integrate a robust direct to consumer model which will incorporate digital marketing and media to effectively promote
our products directly towards our targeted demographics. This strategy is an ongoing process which could take several years to
complete.
We separated and defined our products by product
line for better market segmentation. In addition, several products in our Home and Health & Beauty lines are being rebranded
to deliver more consumer appeal and benefit. We hope this model will dramatically improve our capacity to best achieve our goals
of telling the Pura story to the right consumers yielding a higher conversion rate with a greatly reduced cost of acquisition.
Furthermore, we have embarked on the support of a few key strategic marketing partners with proven expertise in creating brand
awareness, product positioning and consumer engagement strategies and tactics to reach our near-term growth and profitability objectives.
Our Strategy
Today, the global economy continues to encourage
manufacturers toward adopting an environmentally conscious effort in the development of industrial and consumer products. Countries
like China and the U.S. have taken the lead in this global effort by proposing criteria for businesses to become more "green."
As "going green" is continuing to be a major focal point among the business environment, the demand for earth conscious
products and businesses continue to grow and be more desirable.
In the past, we expanded our earth conscious
strategy throughout all aspects of our business practices. This provided us with a competitive advantage by allowing ourselves
to establish a presence among the environmentally conscious market space. In order to increase our market share regarding the environmentally
conscious market space, we will have to increase our product awareness within the space we have already captured as a means to
gain market expansion.
Our Products
We offer a diverse line of cleaning products
with applications across several sectors, and are increasing our market presence in the eco-conscious cleaning product market.
We operate in four business segments: Health & Beauty, Household and Kitchen, Marine, and Oil Spill Prevention.
The Bath & Body line and household (including
kitchen) sponges are Oleophilic which means, among other things, that it absorbs oil, grease and grime, removes impurities from
skin (cleansing and applying/removing make- up), is latex-free. PURA products are also non-toxic, contain Plant-Based/renewable
resources, have a carbon-negative footprint (removes more carbon than is created), contain no petroleum by-products, use no adhesives
or glues, and are infused with soap that is 100% natural, bio-degradable, sustainable, vegan, glutenfree, contains botanicals and
essential oils; SLS-, Sulfate, Paraben-, and BPA- Free.
Due to the formulation of the foam and product
attributes, its durability, oil absorbing and antibacterial properties, we believe our cleaning sponge technologies surpass the
industry's standard for foam and wood cellulose products. Thus, we plan to introduce new products using our foam technologies that
will target industries in which we have never before held a market share. In this regard, we plan to introduce our infused sponge
products to the outdoor, automobile, equine, and furniture industries to reach new customers and to increase our overall market
share of the cleaning products market during 2018.
In March, 2018, a new line of health and beauty
products with Cannabidiol ("CBD") and hemp seed oils was launched in the expanding industry surrounding the benefits
of CBD oils in topical applications.
|
|
Nine Months Ended,
|
Sales by Product Line:
|
|
September 30, 2018
|
|
September 30, 2017
|
Household and Kitchen
|
|
$
|
101,083
|
|
|
$
|
262,177
|
|
Health and Beauty
|
|
|
189,024
|
|
|
|
113,556
|
|
Marine Products
|
|
|
11,751
|
|
|
|
12,051
|
|
|
|
$
|
301,858
|
|
|
$
|
387,784
|
|
Recent Events
Cicero Consulting Group
Pura Naturals entered into a consulting agreement with Cicero Consulting
Group ("Cicero"), Joe Abrahams and Michael Woloshin. Cicero is
strategic consulting
firm with a deep functional understanding of industries with extensive reach to business leaders. Cicero support companies in important
decisions on strategy, operations, acquisitions, marketing and technology. Joe Abrahams has joined our Advisory Board.
New Products
Pura Naturals is working with a scrubber supplier
on a new scrub pad for the heavy duty and professional product lines. Samples with two versions of a scrubber were made and are
under evaluation. The new scrubbers will be more durable and longer lasting then the current walnut based scrubber.
Distribution
Pura Naturals is in the final stages of qualification with a major
distribution company in the Midwest.
Launch of the Grease Beast Product Line
In May, 2018 a new line of cleaning products
was launched, the Grease Beast Product Line. Pura Naturals launched the Grease Beast product line to highlight the unique grease
attracting and cleaning capability of the BeBetterFoam. A dedicated marketing director and sales staff were brought on board
for the new product line. The line was officially launched at the National Hardware Show in Las Vegas. Since the launch,
the Grease Beast product line has been evaluated and approved by Ace Hardware, True Value, Orgill, Blains, Tractor Supply, and
is on the shelf at Ingles grocery stores. Home Depot has approved the product for sale on homedepot.com.
The Grease Beast line is under evaluation by
a major hardware store chain in New Zealand and a major medical supply company. Additional meetings are scheduled for the fourth
quarter with a large hardware chain for product evaluation and store placement.
Amazon
Pura Naturals increased its on line presence
by expanding the products offered on Amazon from six to eight products. Pura has seen steady growth of sales on Amazon and
expects this to continue. The Grease Beast product line will be available on Amazon by the end of the fourth quarter of 2018.
Medical Supply
Pura Naturals presented and discussed our product
line with a major supplier to the medical industries (hospitals). The nature of our product and the absorbance properties lend
strong attributes to the cleaning of various medical devices and facilities. Private label branding is being discussed.
Pura Marine
Pura Marine attended and displayed / sold products
at the Newport Beach, California Boat show. The show was very successful with over 40 starter kits sold and multiple other
products sold. The Marine division is building a loyal customer base and the Fisherman Cleansing bar is gaining sales momentum
with the Fisherman Cleansing bar placed at over 20 bait and tackle shops. Products are also sold at two major fuel docks
in Los Angeles County. Anglers Chronicles strategic relationship is growing and support continues during airings on cable
television weekly. The fuel bib product is under evaluation by a major trucking company as a method for avoiding fuel spills on
trucks while in transit.
CBD Product Line
A new product line of hemp derived CBD products
was developed and is in the final stage of preparations for launching.. Products include sponge infused face products and
bars of soap. Additionally, a partnership was formed with Noreen Taylor of The Organic Face make-up line and Pura Naturals.
Under a new brand, Pura is launching a new make-up line infused with hemp derived CBD.
Pura Naturals is in negotiations with a major
supplier in the CBD arena on a potential joint venture. The partner company has a major retail and on line presence and is looking
at private labeling our CBD infused products. All sales and marketing will be handled by the partner company with Pura Naturals
providing the manufacturing and technology. Product line expansion conversation are underway.
Private Label Sales and Manufacturing
The Company's private label venture with Permatex
remains steady, with regular reorders. The Company's bio-degreaser private label partnership with Laguna 3P has launched
during the quarter with anticipated sales to police departments across the USA.
We have never been subject to any bankruptcy proceeding.
Our executive offices are located at 23101 Lake Center Drive, Suite
100, Lake Forest, CA 92630, telephone (855) 326-8537.
Results of Operations
Comparison of Results of Operations for
the Three Months Ended September 30, 2018 and September 30, 2017
|
|
Three Months ended September 30,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Dollar Change
|
|
Percentage Change
|
Sales
|
|
$
|
156,486
|
|
|
$
|
221,334
|
|
|
$
|
(64,848
|
)
|
|
$
|
-29.30
|
%
|
Cost of Goods Sold
|
|
|
72,277
|
|
|
|
206,265
|
|
|
|
(133,988
|
)
|
|
|
-64.96
|
%
|
Gross Profit
|
|
|
84,209
|
|
|
|
15,069
|
|
|
|
69,140
|
|
|
|
458.83
|
%
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
154,472
|
|
|
|
15
|
|
|
|
154,457
|
|
|
|
1029712.90
|
%
|
General and administrative
|
|
|
450,362
|
|
|
|
1,084,193
|
|
|
|
(633,831
|
)
|
|
|
-58.46
|
%
|
Total Operating Expenses
|
|
|
604,834
|
|
|
|
1,084,208
|
|
|
|
(479,374
|
)
|
|
|
-44.21
|
%
|
LOSS FROM OPERATIONS
|
|
|
(520,625
|
)
|
|
|
(1,069,139
|
)
|
|
|
548,514
|
|
|
|
-51.30
|
%
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(303,106
|
)
|
|
|
(666,884
|
)
|
|
|
363,778
|
|
|
|
-54.55
|
%
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
(265
|
)
|
|
|
265
|
|
|
|
-100.00
|
%
|
Change in fair value of derivative liabilities
|
|
|
(2,567,099
|
)
|
|
|
41,286
|
|
|
|
(2,608,385
|
)
|
|
|
-6317.84
|
%
|
Net Loss
|
|
$
|
(3,390,830
|
)
|
|
$
|
(1,695,002
|
)
|
|
$
|
(1,695,828
|
)
|
|
$
|
100.05
|
%
|
During the three months ended September 30,
2018, we incurred a net loss of $3,390,830 compared to a net loss of $1,695,002 for the three months ended September 30, 2017.
Sales decreased to $156,486 during the three
months ended September 30, 2018 as compared to $221,334 during the three months ended September 30, 2017.
The decrease in sales was due to a loss of
certain customers, lack of brand awareness and market acceptance of the Company's products, offset by an increase in sales to Amazon.
The changes being implemented involve tactics and strategies to engage consumers and build brand awareness. We continue to reevaluate
our distribution model to focus on a more effective and efficient strategic model to grow sales and increase shareholder value.
We anticipate this strategy will improve sales and free up limited resources to be repurposed towards the integration of more effective
sales channels.
To advance this strategy, the Company also
has retained commission based sales personnel with specific skills to further promote the Company's products.
Cost of goods sold for the three months September
30, 2018 was $72,277 a decrease of $133,988 or 64.96% from $206,265 for the three months ended September 30, 2017 period.
The decrease in cost of goods was due to the decrease in sales, increased efficiency in manufacturing, offset by a write down in
inventory of approximately $37,000. Cost of goods sold as a percentage of sales was 46.18% for the three months ended September
30, 2018 compared to 93.19% for the three months ended September 30, 2017.
Selling expense increase to $154,472 during
the three months ended September 30, 2018, an increase of $154,457 from $15 for the three months ended September 30, 2017. This
increase was due to costs incurred from Amazon Marketplace and the expensing of the value of stock given to three consultants to
strengthen product claims and/or related product literature.
There have been fluctuations in certain expenses
in the three months ended September 30, 2018, as compared to the three months ended September 30, 2017. In the three months ended
September 30, 2018, general and administrative expenses decreased $633,831 for the three months ended September 30, 2018 as compared
to the comparable prior period mainly due to the following changes:
|
|
2018
|
|
2017
|
|
Change
|
Payroll and payroll related expense
|
|
$
|
336,382
|
|
|
$
|
485,809
|
|
|
$
|
(149,427
|
)
|
Overhead allocation
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
-
|
|
Amortization expense
|
|
|
25,224
|
|
|
|
24,908
|
|
|
|
316
|
|
Insurance
|
|
|
15,731
|
|
|
|
9,237
|
|
|
|
6,494
|
|
Printing and Reproduction
|
|
|
3,235
|
|
|
|
8,313
|
|
|
|
(5,078
|
)
|
Professional fees:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accountants
|
|
|
6,000
|
|
|
|
11,005
|
|
|
|
(5,005
|
)
|
Edgar preparation
|
|
|
-
|
|
|
|
32,042
|
|
|
|
(32,042
|
)
|
Media/Website
|
|
|
6,946
|
|
|
|
53,064
|
|
|
|
(46,118
|
)
|
Legal
|
|
|
-
|
|
|
|
15,428
|
|
|
|
(15,428
|
)
|
Investor and public relations
|
|
|
29
|
|
|
|
38,247
|
|
|
|
(38,218
|
)
|
OTC Marketplace
|
|
|
-
|
|
|
|
438
|
|
|
|
(438
|
)
|
Transfer Agent
|
|
|
850
|
|
|
|
13,519
|
|
|
|
(12,669
|
)
|
Business consultants
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
Samples
|
|
|
-
|
|
|
|
6,059
|
|
|
|
(6,059
|
)
|
Other General and administrative expense
|
|
|
25,915
|
|
|
|
356,124
|
|
|
|
(330,209
|
)
|
|
|
$
|
450,362
|
|
|
$
|
1,084,193
|
|
|
$
|
(633,831
|
)
|
Payroll decreased by $149,427 from $485,809
for the three months ended September 30, 2017 to $336,382 for the three months ended September 30, 2018 due to the following:
|
·
|
A reduction in the expensing stock granted
for services;
|
|
|
|
|
·
|
A reduction in the payroll allocation from
a related party.
|
Insurance expense increased by $6,494 from
$9,237 for the three months ended September 30, 2017 to $15,731 for the three months ended September 30, 2018 due to changes in
insurance rates.
The above increases were offset by:
|
·
|
A decrease in printing and reproduction of
$5,078 was due to a reduced need for labels and promotional material;
|
|
|
|
|
·
|
Accounting and auditing expense decreased by
$5,005 due to the retention of additional accounting staff and less time required by the independent auditors in previous period
due to the transition of audit firms.
|
|
|
|
|
·
|
Media/website expense decrease by $46,118 due
to completion of the engagement surrounding the Company's website and digital market place work on the Company's website was completed.
|
|
|
|
|
·
|
Investor and public relations decreased by
$38,218 due to non-renewal of contracts and a reduction in investor and public relations activity due to the lack of funds.
|
Interest expense decreased by $363,778 for
the three months ended September 30, 2018 to $303,106 from $666,884 for the September 30, 2017 due to a reduction in the amortization
of debt discount and interest accrual for the convertible debt.
Loss on the change in fair value of derivative liabilities increased
to $2,567,099 for the three months ended September 30, 2018 as compared to a gain of $41,286 for the comparable prior period due
to the fair value adjustments in connection with the convertible notes.
Comparison of Results of Operations for
the Nine Months Ended September 30, 2018 and September 30, 2017
|
|
Nine Months ended September 30,
|
|
|
|
|
2018
|
|
2017
|
|
Dollar Change
|
|
Percentage Change
|
Sales
|
|
$
|
301,858
|
|
|
$
|
387,784
|
|
|
$
|
(85,926
|
)
|
|
|
-22.16
|
%
|
Cost of Goods Sold
|
|
|
164,959
|
|
|
|
312,822
|
|
|
|
(147,863
|
)
|
|
|
-47.27
|
%
|
Gross Profit
|
|
|
136,899
|
|
|
|
74,962
|
|
|
|
61,937
|
|
|
|
82.63
|
%
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
245,372
|
|
|
|
11,479
|
|
|
|
233,893
|
|
|
|
2037.57
|
%
|
General and administrative
|
|
|
1,734,666
|
|
|
|
2,056,491
|
|
|
|
(321,825
|
)
|
|
|
-15.65
|
%
|
Total Operating Expenses
|
|
|
1,980,038
|
|
|
|
2,067,970
|
|
|
|
(87,932
|
)
|
|
|
-4.25
|
%
|
LOSS FROM OPERATIONS
|
|
|
(1,843,139
|
)
|
|
|
(1,993,008
|
)
|
|
|
149,869
|
|
|
|
-7.52
|
%
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(957,959
|
)
|
|
|
(858,318
|
)
|
|
|
(99,641
|
)
|
|
|
11.61
|
%
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
42,855
|
|
|
|
(42,855
|
)
|
|
|
-100.00
|
%
|
Change in fair value of derivative liabilities
|
|
|
(3,028,388
|
)
|
|
|
112,416
|
|
|
|
(3,140,804
|
)
|
|
|
-2793.91
|
%
|
Net Loss
|
|
$
|
(5,829,486
|
)
|
|
$
|
(2,696,055
|
)
|
|
$
|
(3,133,431
|
)
|
|
|
116.22
|
%
|
During the nine months ended September 30,
2018, we incurred a net loss of $5,829,486 compared to a net loss of $2,696,055 for the nine months ended September 30, 2017.
Sales decreased to $301,858 during the nine
months ended September 30, 2018 as compared to $387,784 during the nine months ended September 30, 2017. The decrease in sales
was due to a loss of certain customers, lack of brand awareness and market acceptance of the Company's products, offset by an increase
in sales to Amazon. The changes being implemented involve tactics and strategies to engage consumers and build brand awareness.
We continue to reevaluate our distribution model to focus on a more effective and efficient strategic model to grow sales and increase
shareholder value. We anticipate this strategy will improve sales and free up limited resources to be repurposed towards
the integration of more effective sales channels.
To advance this strategy, the Company also
has retained commissioned sales personnel with specific skills to further promote the Company's products.
The Company continues to review its sales and
marketing strategies. The sales and gross profit over the last few quarters, resulted from the reliance on an ineffective
sales distribution model defined by inelastic price points and slow brand recognition and engagement. The Company continues
to integrate a direct to consumer model which will incorporate digital marketing and media to effectively promote our products
directly towards our targeted demographics. The Company continues to separate and defined our products by product line for better
market segmentation. In addition, several products in our Home and Health & Beauty lines are being rebranded to deliver more
consumer appeal and benefit. We hope this model will dramatically improve our capacity to best achieve our goals of telling the
Pura story to the right consumers yielding a higher conversion rate with a greatly reduced cost of acquisition. Furthermore,
we have embarked on the support of a few key strategic marketing partners with proven expertise in creating brand awareness, product
positioning and consumer engagement strategies and tactics to reach our near-term growth and profitability objectives.
Cost of goods sold for the nine months ended
September 30, 2018 was $164,959 a decrease of $147,863 or 47.27% from $312,822 for the nine months ended September 30, 2017 period.
The decrease in cost of goods was due to the decrease in sales, increased efficiency in manufacturing, offset by a write down in
inventory of approximately $37,000. Cost of goods sold as a percentage of sales was 54.65% for the nine months ended September
30, 2018 compared to 80.67% for the nine months ended September 30, 2017.
Selling expenses for the nine months ended
September 30, 2018 was $245,372 an increase of $233,893 from $11,479 for the nine months ended September 30, 2017. The increase
was due to the expensing of the value of stock given to two consultants to strengthen product claims and/or related product literature
and expenses incurred for sales to the Amazon Marketplace.
General and administrative expenses for the
nine months ended September 30, 2018 were $1,734,666 a decrease of $321,825 from $2,056,491 for the nine months ended September
30, 2017.
General and administrative expenses decreased
$321,825 for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to the following
changes:
|
|
Nine months ended September 30,
|
|
|
2018
|
|
2017
|
|
Change
|
Payroll and payroll related expense
|
|
$
|
1,101,321
|
|
|
$
|
1,024,058
|
|
|
$
|
77,263
|
|
Overhead allocation
|
|
|
80,000
|
|
|
|
90,000
|
|
|
|
(10,000
|
)
|
Amortization expense
|
|
|
75,060
|
|
|
|
74,726
|
|
|
|
334
|
|
Insurance
|
|
|
44,177
|
|
|
|
33,169
|
|
|
|
11,008
|
|
Printing and Reproduction
|
|
|
13,859
|
|
|
|
21,193
|
|
|
|
(7,334
|
)
|
Professional fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accountants
|
|
|
32,613
|
|
|
|
112,755
|
|
|
|
(80,142
|
)
|
Edgar preparation
|
|
|
3,000
|
|
|
|
33,067
|
|
|
|
(30,067
|
)
|
Media/Website
|
|
|
18,466
|
|
|
|
115,548
|
|
|
|
(97,082
|
)
|
Legal
|
|
|
149,298
|
|
|
|
31,859
|
|
|
|
117,439
|
|
Investor and public relations
|
|
|
47,092
|
|
|
|
82,077
|
|
|
|
(34,985
|
)
|
OTC Marketplace
|
|
|
6,500
|
|
|
|
438
|
|
|
|
6,062
|
|
Transfer Agent
|
|
|
6,510
|
|
|
|
18,557
|
|
|
|
(12,047
|
)
|
Business consultants
|
|
|
3,050
|
|
|
|
8,431
|
|
|
|
(5,381
|
)
|
Samples
|
|
|
20,546
|
|
|
|
9,255
|
|
|
|
11,291
|
|
Other General and administrative expense
|
|
|
133,174
|
|
|
|
401,359
|
|
|
|
(268,185
|
)
|
|
|
$
|
1,734,666
|
|
|
$
|
2,056,492
|
|
|
$
|
(321,826
|
)
|
Payroll increased by $77,263 from $1,024,058
for the nine months ended September 30, 2017 to $1,101,321 for the nine months ended September 30, 2018 due to the following:
|
·
|
Salary accrual, expensing of stock options
and stock awards granted in accordance with the employment agreements to certain management individuals and a member of the Board
of Directors;
|
|
|
·
|
Expensing stock granted for services;
|
These expenses were offset
by a decrease in the payroll allocation from a related party.
The overhead allocation from
AirTech decreased $10,000 from $90,000 for the nine month period ended September 30, 2017 to $80,000 for the nine months ended
September 30, 2018 as the Company is assuming additional responsibilities in-house.
Insurance expense increased $11,008 to $44,177
for the nine months ended September 30, 2018 from $33,169 due to a increase in premiums.
Printing and reproduction expense decreased
by $7,334 during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to the less
printing services required for the Company's new and existing products.
Accounting expenses decreased $80,142 from
$112,755 for the nine months ended September 30, 2017 to $32,613 for the nine months ended September 30, 2018 due to the retention
of additional accounting staff, less time required by the independent auditors due to the transition of audit firms and a reduction
in additional audit services.
Media/website expense decrease $97,082 from
$115,548 for the period ended September 30, 2017 to $18,466 for the period ended September 30, 2018 due to completion of the engagement
surrounding the Company's website and digital market place work on the Company's website was completed.
Legal expenses increased $117,439 from $31,859
for the nine months ended September 30, 2017 to $149,298 for the nine months ended September 30, 2018 due to the application for
and defense of the Company's trademarks and continued activity in the lawsuit with the former CEO.
Business consultant expenses decreased by $5,381
during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to the services being
performed in-house.
Samples expenses increased by $11,291 during
the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to the Company's effort to
increase brand awareness by offering samples of products at trade events.
Interest expense increased to $957,959 for
the nine months ended September 30, 2018 as compared to $858,318 for the nine months ended September 30, 2017 due to interest accrual
and amortization of debt discount for the convertible debt.
Gain on debt extinguishment decreased by $42,855 from $42,855 during
the nine months ended September 30, 2017 to 0 for the nine months ended September 30, 2018. This was due to the settlement of the
related party note payable.
Derivatives loss increased $3,140,804 to $3,028,388
for the nine months ended September 30, 2018 as compared to derivative income of $112,416 for the nine months ended September 30,
2017 due to the fair value adjustments in connection with the convertible notes and in the current three month period.
Liquidity and Capital Resources
As of September 30, 2018, we had $8,010 in
cash as compared to $67,422 at December 31, 2017.
At September 30, 2018, we had current assets
of $249,999 and current liabilities of $5,134,822 resulting in a working capital deficit of $4,884,823 as compared to current assets
of $360,256 and current liabilities of $2,692,237, resulting in a working capital deficit of $2,331,981 at December 31, 2017.
The net cash used on our operations was $500,646
during the nine months ended September 30, 2018, compared to $1,284,725 during the nine months ended September 30, 2017 period.
At September 30, 2018, we had stockholders’ deficit of approximately
$4,202,000 as compared to a deficit of approximately $1,576,000 at December 31,2017.
The net cash used in operating activities was
partially offset by the following non-cash activities:
Amortization of intangible assets
|
|
$
|
75,059
|
|
Amortization of debt discount and original issue discount
|
|
|
780,632
|
|
Change in fair value of derivative instruments
|
|
|
3,028,388
|
|
Fair value of options vested
|
|
|
220,728
|
|
Common stock issued for services
|
|
|
32,400
|
|
Common shares issued for convertible note due date extension
|
|
|
25,500
|
|
Increase in convertible notes due to penalties
|
|
|
59,520
|
|
Prepaid expenses and other current assets
|
|
|
108,696
|
|
Accounts payable
|
|
|
168,891
|
|
Due to related parties
|
|
|
143,991
|
|
Accrued expenses
|
|
|
742,886
|
|
|
|
$
|
5,386,691
|
|
Cash flows used in investing activities
were $1,950 during the nine months ended September 30, 2018 compared to $5,705 for the nine months ended September 30, 2017. The
change is principally due to a decrease in payment for intangible assets.
Cash flows provided by financing activities
were $443,184 and $1,285,894 during the nine months ended September 30, 2018 and the nine months ended September 30, 2017, respectively.
The decrease in cash provided by financing activities is due to a reduction in the sale of common stock, a reduction in the issuance
of convertible debt, offset by the issuance of a note payable..
Convertible Note Payable
On February 8, 2018, the Company issued a 12%
Convertible Promissory Note #1 of $103,000, with debt issuance costs of $3,000 to an accredited investor. This convertible note
is due and payable on November 20, 2018. The holder has the right from time to time, and at any time during the period beginning
on the date which is 180 days following the date of the note and ending on the later of: (i) the maturity date and (ii) the date
of payment of the default amount, each in respect of the remaining outstanding principal amount of this note to convert all or
any amount of the outstanding and unpaid principal amount of the note into fully paid and non-assessable shares of common stock.
The conversion price is 58% of the average of the lowest two trading prices for the common stock during the ten trading day period
ending on the latest complete trading day prior to the conversion date.
On March 5, 2018, the Company issued
a 12% Convertible Promissory Note #2 of $103,000, with debt issuance costs of $3,000 to an accredited investor. This convertible
promissory note #2 is due and payable on December 15, 2018. The holder has the right from time to time, and at any time during
the period beginning on the date which is 180 days following the date of the note and ending on the later of: (i) the maturity
date and (ii) the date of payment of the default amount, each in respect of the remaining outstanding principal amount of this
note to convert all or any amount of the outstanding and unpaid principal amount of the note into fully paid and non-assessable
shares of common stock. The conversion price is 61% of the average of the lowest two trading prices for the common stock during
the ten trading day period ending on the latest complete trading day prior to the conversion date.
On March 6, 2018, the Company issued a 8% Convertible
Redeemable Note of $126,000, with debt issuance costs of $6,000 to an accredited investor. This convertible note is due and payable
on March 6, 2019. The holder is entitled, at its option, at any time after six months, to convert all or any amount of the principal
face amount of this note then outstanding into shares of common stock. The conversion price is 60% of the lowest trading prices
for the common stock during the 20 trading day period ending on the latest complete trading day prior to the conversion date.
Sale of Common Stock
On January 18, 2018, the Company sold $5,000
of common stock to an accredited investor. The total amount of common stock sold was 83,333 shares at $0.06 per share.
Note Payable
The Company entered into a merchant agreement
on May 21, 2018. Total payments for the note payable is $40,470, which included $28,500 principal payment and $11,970 interest
payment. The note payable requires daily payments of $163, is due on May 21, 2019. The loan is secured by the assets of the Company as defined by Article
9 of the Uniformed Commercial Code and a personal guaranty. The interest rate is 42% per annum.
The Company entered into a 90 day Secured
Convertible Note with Bridgepoint Capital, LLC on August 10, 2018 in the principal amount of $50,000, with no interest
accruing. At any time, the principal amount of the note may be converted into any funding or other agreement contemplated at
a near future date between the note holder and the Company. The Convertible Note contained an original issue discount of
$2,500. For the nine months ended, $1,417 was amortized.
On July 10, 2018, the Company entered
into a one year Unsecured Promissory Note in the principal amount of $50,000, with an interest rate of 30% per annum. Five
progress payments of $5,000 was due beginning on August 10, 2018. The Company did not make the progress payments due on
August 10, 2018 and September 10, 2018. As such, this Promissory Note is in default. However, the Holder of the Promissory
Note has not declared a default.
To date, our operations have not generated
any profits. We have funded our operating to date through the sales of common stock and issuance of notes payable and convertible
notes payable. Our ability to continue as a going concern is dependent upon use raising sufficient debt or equity capital
to sustain operations until such time as we can generate a profit from our operations. We are currently working
with investors to provide us with the necessary funding, but there can be no assurances we will obtain such funding in the future. Failure
to obtain this additional financing will have a material negative impact on our ability to generate profits in the future. We
anticipate sales will increase in the fourth quarter of 2018. As such, our anticipated cash needs to fund operations and
pay our notes for the next 12 months is approximately $500,000.
Critical Accounting Policies
The summary of critical accounting policies
below should be read in conjunction with the discussion of the Company’s accounting policies included in the Company’s
Annual Report on Form 10-K/A for the year ended December 31, 2017. We consider the following accounting policy to be the most critical
going forward:
Basis of Presentation
- The Company’s financial statements for the year ended December 31, 2017, have been prepared on a going concern basis which
contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of uncertainties.
Estimates - The preparation
of financial statements required us to make estimates and judgments that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reported periods. We based our estimates and judgments on historical experience and on various other factors
that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. There can be no assurances that actual results
will not differ from those estimates. On an ongoing basis, we will evaluate our accounting policies and disclosure practices as
necessary.
Revenue Recognition - “ASU No. 2014-09,
Revenue from Contracts with Customers ("Topic 606"), became effective for us on January 1, 2018. Our disclosure within
the below sections to this footnote reflects our updated accounting policies that are affected by this new standard. We applied
the "modified retrospective" transition method for open contracts for the implementation of Topic 606. As sales are and
have been primarily through distributors, and we have no significant post delivery obligations, this did not result in a material
recognition of revenue on our accompanying CFS for the cumulative impact of applying this new standard. We made no adjustments
to our previously-reported total revenues, as those periods continue to be presented in accordance with our historical accounting
practices under Topic 605, Revenue Recognition.”
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current
or future effect upon our financial condition or results of operations.