Notes
to Condensed Consolidated Financial Statements
September
30, 2019
(Unaudited)
Note
1. Summary of Significant Accounting Policies
Barfresh
Food Group Inc., (“we,” “us,” “our,” and the “Company”) was incorporated on February
25, 2010 in the State of Delaware. We are engaged in the manufacturing and distribution of ready to blend beverages, particularly,
smoothies, shakes and frappes.
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
Basis
of Consolidation
The
consolidated financial statements include the financial statements of the Company and our wholly owned subsidiaries, Barfresh
Inc. and Barfresh Corporation Inc. (formerly known as Smoothie, Inc.). All inter-company balances and transactions among the companies
have been eliminated upon consolidation.
Use
of Estimates
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
Concentration
of Credit Risk
The
amount of cash on deposit with financial institutions exceeds the $250,000 federally insured limit at September 30, 2019 and December
31, 2018. However, we believe that cash on deposit that exceeds $250,000 in the financial institutions is financially sound and
the risk of loss is minimal.
Fair
Value Measurement
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value
Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands
disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and
establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active
markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy
as follows:
Level
1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed
on the New York Stock Exchange.
Level
2 - Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported
date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts
or priced with models using highly observable inputs.
Level
3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included
in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models
and forecasts used to determine the fair value.
Our
financial instruments consist of cash, accounts receivable, accounts payable, derivative liabilities, and convertible notes. The
carrying value of our financial instruments approximates their fair value, except for the derivative liability in which carrying
value is fair value.
Accounts
Receivable
Accounts
receivable are typically unsecured. Our credit policy calls for payment generally within 30 days. The credit worthiness of a customer
is evaluated prior to a sale. As of September 30, 2019 and December 31, 2018, the company’s allowance for doubtful accounts
was $61,788 and $61,788, respectively. The allowance was estimated based on evaluation of collectability of outstanding accounts
receivable.
Inventory
Inventory
consists of finished goods and is carried at the lower of cost or realizable value on a first in first out basis. The company
monitors the remaining useful life of its inventory and establishes a reserve of obsolescence where appropriate. As of September
30, 2019 and December 31, 2018, the Company’s inventory reserve was $54,592 and $31,237, respectively.
Intangible
Assets
Intangible
assets are comprised of patents, net of amortization and trademarks. The patent costs are being amortized over the life of the
patent, which is twenty years from the date of filing the patent application. In accordance with ASC Topic 350 Intangibles
- Goodwill and Other (“ASC 350”), the costs of internally developing other intangible assets, such as patents,
are expensed as incurred. However, as allowed by ASC 350, costs associated with the acquisition of patents from third parties,
legal fees and similar costs relating to patents have been capitalized.
In
accordance with ASC 350 legal costs related to trademarks have been capitalized. We have determined that trademarks have an indeterminable
life and therefore are not being amortized.
Long-Lived
Assets and Other Acquired Intangible Assets
We
evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events
or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability
of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected
to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment charges during the
years presented.
Property,
Plant, and Equipment
Property,
plant, and equipment is stated at cost less accumulated depreciation and accumulated impairment loss, if any. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are being amortized
over the shorter of the useful life of the asset or the lease term that includes any expected renewal periods that are deemed
to be reasonably assured. The estimated useful lives used for financial statement purposes are:
Furniture
and fixtures: 5 years
Manufacturing
equipment and customer equipment: 3 years to 7 years
Vehicles:
5 years
Revenue
Recognition
In
accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when a customer obtains ownership of promised
goods. The Company adopted this standard at the beginning of fiscal year 2018, with no significant impact to its financial position
or results of operations, using the modified retrospective method. The amount of revenue recognized reflects the consideration
to which the Company expects to be entitled to receive in exchange for these goods. The Company applies the following five steps:
|
1)
|
Identify
the contract with a customer
|
|
|
|
|
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract
with a customer that defines each party’s rights, (ii) the contract has commercial
substance and, (iii) the Company determines that collection of substantially all consideration
for goods or services that are transferred is probable. For the Company, the contract
is the approved sales order, which may also be supplemented by other agreements that
formalize various terms and conditions with customers.
|
|
2)
|
Identify
the performance obligation in the contract
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|
|
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|
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer.
For the Company, this consists of the delivery of frozen beverages, which provide immediate benefit to the customer.
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|
|
|
|
3)
|
Determine
the transaction price
|
|
|
|
|
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
goods, and is generally stated on the approved sales order. Variable consideration, which typically includes volume-based
rebates or discounts, are estimated utilizing the most likely amount method.
|
|
|
|
|
4)
|
Allocate
the transaction price to performance obligations in the contract
Since
our contracts contain a single performance obligation, delivery of frozen beverages, the transaction price is allocated
to that single performance obligation.
|
|
|
|
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5)
|
Recognize
Revenue when or as the Company satisfies a performance obligation
|
|
|
|
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|
The
Company recognizes revenue from the sale of frozen beverages when title and risk of loss passes and the customer accepts the
goods, which generally occurs at delivery. Customer sales incentives such as volume-based rebates or discounts are treated
as a reduction of sales at the time the sale is recognized. Shipping and handling costs are treated as fulfillment costs and
presented in distribution, selling and administrative costs.
|
|
|
|
|
|
The
company evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from
a single product, frozen beverages.
|
Research
and Development
Expenditures
for research activities relating to product development and improvement are charged to general and administrative and are expensed
as incurred. We incurred $127,123 and $150,299, in research and development expenses for the three-months ended September 30,
2019 and 2018, respectively. For the nine-month periods ended September 30, 2019 and 2018, research and development costs totaled
$400,108 and $493,969, respectively.
Shipping
and Handling Costs
Shipping
and handling costs are included in general and administrative expenses. For the three-month periods ended September 30, 2019 and
2018, shipping and handling costs totaled $248,291 and $246,766, respectively. For the nine-month periods ended September 30,
2019 and 2018, shipping and handling costs totaled $501,685 and $681,188, respectively.
Income
Taxes
The
provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes
(“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements,
uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized
in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant
facts.
ASC
740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of evidence, it is more
than likely than not that some portion or all of the deferred tax assets will not be recognized.
For
the three-months and nine-months ended September 30, 2019 and 2018 we did not have any interest and penalties or any significant
unrecognized uncertain tax positions.
Derivative
Liability
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of any derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operations as gain/loss from derivative liability. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
We analyzed the derivative financial instruments in accordance with ASC 815. The objective is to provide guidance for determining
whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope
exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative
instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s
own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must
be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed
to an entity’s own stock. First, the instrument’s contingent exercise provisions, if any, must be evaluated, followed
by an evaluation of the instrument’s settlement provisions. The Company utilized the fair value standard set forth by the
Financial Accounting Standards Board, defined as the amount at which the asset (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
Earnings
per Share
We
calculate net loss per share in accordance with ASC Topic 260, Earnings per Share. Basic net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding for the period, and diluted earnings
per share is computed by including common stock equivalents outstanding for the period in the denominator. At September 30, 2019
and 2018 any equivalents would have been anti-dilutive as we had losses for the periods then ended.
Stock
Based Compensation
We
calculate stock compensation in accordance with ASC Topic 718, Compensation-Stock Based Compensation (“ASC 718”).
ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements and
establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities
to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity
instruments held by employee stock ownership plans.
Reclassifications
Certain
reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain
consistency between periods presented. The reclassifications had no impact on net loss or stockholder’s equity.
Recent
pronouncements
From
time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact
of recently issued standards that are not yet effective may have an impact on our results of operations and financial position.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases”, to improve financial reporting about leasing transactions.
This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use
asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation
to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s
right to use, or control use of, a specified asset for the lease term. The amendments in this ASU leaves the accounting for the
organization that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements
to align it with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers”.
The
Company has evaluated the effect of the standard on our financial statements. Based on our evaluation, we have one material lease
subject to adoption of this standard, effective January 1, 2019. As disclosed in Note 7, we entered into a new office space lease
that took effect on April 1, 2019 and recorded a right-of-use asset and corresponding liability for amounts that approximate our
future commitments of $241,555.
Note
2. Property Plant and Equipment
Major
classes of property and equipment at September 30, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Furniture
and fixtures
|
|
$
|
1,524
|
|
|
$
|
1,524
|
|
Manufacturing Equipment
and customer equipment
|
|
|
3,495,404
|
|
|
|
3,118,391
|
|
Leasehold Improvements
|
|
|
4,886
|
|
|
|
4,886
|
|
Vehicles
|
|
|
29,696
|
|
|
|
29,696
|
|
|
|
|
3,531,510
|
|
|
|
3,154,497
|
|
Less: accumulated depreciation
|
|
|
(1,647,310
|
)
|
|
|
(1,190,846
|
)
|
|
|
|
1,884,200
|
|
|
|
1,963,651
|
|
Equipment not yet placed
in service
|
|
|
636,489
|
|
|
|
536,605
|
|
Property and equipment,
net of depreciation
|
|
$
|
2,520,689
|
|
|
$
|
2,500,254
|
|
We
recorded depreciation expense related to these assets of $135,652 and $148,700 for the three-months ended September 30, 2019 and
2018, respectively and $460,898 and $378,985 for the nine months ended September 30, 2019 and 2018, respectively. Depreciation
expense in Cost of Goods Sold was $29,905 and $18,175 for three-months ended September 30, 2019 and 2018 respectively and $61,385
and $48,511 for the nine months ended September 30, 2019 and 2018 respectively.
Note
3. Intangible Assets
As
of September 30, 2019, intangible assets consist of patent costs of $764,891, trademarks of $104,194 and accumulated amortization
of $378,118.
As
of December 31, 2018, intangible assets consist of patent costs of $764,891, trademarks of $103,309 and accumulated amortization
of $330,411.
The
amounts carried on the balance sheet represent cost to acquire, legal fees and similar costs relating to the patents incurred
by the Company. Amortization is calculated through the expiration date of the patents, which is December 2025. The amount charged
to amortization was $15,902 and $15,902 for the three-months ended September 30, 2019 and 2018, respectively and $47,707 and $47,707
for the nine months ended September 30, 2019 and 2018 respectively.
Estimated
future amortization expense related to patents as of September 30, 2019, is as follows:
|
|
Total
Amortization
|
|
Years
ending December 31,
|
|
|
|
|
2019
(three months remaining)
|
|
$
|
15,903
|
|
2020
|
|
|
63,610
|
|
2021
|
|
|
63,610
|
|
2022
|
|
|
63,610
|
|
2023
|
|
|
63,610
|
|
Later
years
|
|
|
116,430
|
|
|
|
$
|
386,773
|
|
Note
4. Related Parties
As
disclosed below in Note 5, members of management and directors invested in the company’s convertible notes; and in Note
8, members of management and directors have received shares of stock and options in exchange for services.
Note
5. Convertible Notes (Related and Unrelated Party)
In
March 2018, we closed an offering of $2,527,500 in convertible notes, Series CN Note 1 of 2, of which, management, directors and
significant shareholders have invested $840,000. The convertible notes bear 10% interest per annum and are due and payable on
March 14, 2020. The notes are convertible at any time prior to the due date into our common stock at a conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 1,331,583 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.17 per share ($220,548 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility (based on
a comparable company)
|
|
|
54.82
|
%
|
Risk Free interest
rate
|
|
|
2.41
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
The
value of $220,548 was recorded as a debt discount related to the issuance of the warrants.
In
April 2018, we offered investors in our March 2018 Convertible Note (“Series CN Notes”) the opportunity to accelerate
the issuance of certain warrants associated with the CN Notes. Pursuant to the acceleration offer, Series CN Notes investors who
invested an additional 10% to 20% of the Series CN Note amount, immediately received an additional 25% warrant coverage on their
initial CN Note investment, which would otherwise have been issued after one year. During April 2018, we closed the CN Note acceleration
offer in the amount of $177,300 in convertible notes, of which, management, directors and significant shareholders have invested
$30,000. The CN Note acceleration offer convertible notes bear 10% interest per annum and are due and payable on March 14, 2020.
The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88 per share or 85%
of the average closing price of the common stock over the twenty consecutive trading days immediately preceding the date of note
holders’ election; but in no events lower than $0.60 per share. In addition, the interest is convertible at any time prior
to the due dates into our common stock at conversion price of 85% of the average closing price of the common stock over the twenty
consecutive trading days immediately preceding the date of note holders’ election; but in no event lower than $0.60 per
share. There were 937,373 warrants issued in conjunction with the Series CN Note acceleration offer convertible note offering.
The
fair value of the warrants, $0.25 per share ($235,519 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility (based on
a comparable company)
|
|
|
55.49
|
%
|
Risk Free interest
rate
|
|
|
2.45
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
The
value of $105,199 was recorded as a debt discount related to the issuance of the warrants as using the fair value would cause
the debt discount to exceed the gross proceeds received.
In
November and December 2018, three investors elected to convert their convertible note issued on March 14, 2018 into stock. The
total debt converted was $453,000 and $30,459 accrued interest into 804,396 shares of stock.
In
March 2019, an investor elected to exercise I-Warrants by using part of the investor’s convertible note. The total debt
settled was $350,634 of principal and $33,929 of accrued interest.
The
convertible notes consist of the following components as of September 30, 2019 and December 31, 2018:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Convertible
notes
|
|
$
|
2,704,800
|
|
|
$
|
2,704,800
|
|
Less: Debt discount
(warrant value)
|
|
|
(325,747
|
)
|
|
|
(325,747
|
)
|
Less: Debt discount
(derivative value)(Note 6)
|
|
|
(638,988
|
)
|
|
|
(638,988
|
)
|
Less: Debt discount
(issuance costs paid)
|
|
|
(27,000
|
)
|
|
|
(27,000
|
)
|
Less: Note conversion/settlements
|
|
|
(803,634
|
)
|
|
|
(453,000
|
)
|
Add: Debt discount
amortization
|
|
|
813,505
|
|
|
|
481,042
|
|
|
|
$
|
1,722,936
|
|
|
$
|
1,741,107
|
|
The
total shown in the above table of $1,722,936 at September 30, 2019, ties to the total shown in the balance sheet of Current Liabilities:
Convertible Note – related party net of discount, of $761,252, and Convertible Note – net of Discount of $961,684.
The total in the above table of $1,741,107 at December 31, 2018, plus the total from the table below of $468,216 ($2,209,323)
ties to the total shown in the balance sheet of Long Term Liabilities: Convertible note – related party, net of discount
of $841,836, and Convertible Note, net of discount, of $1,367,487.
In
December 2018, we closed an offering of $1,363,200 in convertible notes, Series CN 2 of 2, of which, management, directors and
significant shareholders have invested $560,000. The convertible notes bear 10% interest per annum and are due and payable on
November 30, 2020. The notes are convertible at any time prior to the due date into our common stock at conversion price of $0.88
per share or 85% of the average closing price of the common stock over the twenty consecutive trading days immediately preceding
the date of note holders’ election; but in no event lower than $0.60 per share. In addition, the interest is convertible
at any time prior to the due dates into our common stock at a conversion price of 85% of the average closing price of the common
stock over the twenty consecutive trading days immediately preceding the date of note holders’ election; but in no event
lower than $0.60 per share. There were 678,864 warrants issued, in conjunction with the convertible note offering.
The
fair value of the warrants, $0.31 per share ($212,763 in the aggregate), was calculated using the Black-Scholes option pricing
model using the following assumptions:
Expected
life (in years)
|
|
|
3
|
|
Volatility (based on
a comparable company)
|
|
|
59.00
|
%
|
Risk Free interest
rate
|
|
|
2.83
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
The
value of $212,763 was recorded as a debt discount related to the issuance of the warrants.
The
convertible notes consist of the following components as of September 30, 2019 and December 31, 2018:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Convertible
notes
|
|
$
|
1,363,200
|
|
|
$
|
1,363,200
|
|
Less: Debt discount
(warrant value)
|
|
|
(212,763
|
)
|
|
|
(212,763
|
)
|
Less: Debt discount
(derivative value)(Note 6)
|
|
|
(697,186
|
)
|
|
|
(697,186
|
)
|
Less: Debt discount
(issuance costs paid)
|
|
|
(23,700
|
)
|
|
|
(23,700
|
)
|
Add: Debt discount
amortization
|
|
|
386,646
|
|
|
|
38,665
|
|
|
|
$
|
816,197
|
|
|
$
|
468,216
|
|
The
total shown in the above table of $816,197 at September 30, 2019, ties to the total shown in the balance sheet of Long-term Liabilities:
Convertible Note – related party net of discount, of $335,292, and Convertible Note – net of Discount of $480,905.
The total in the first table above of $1,741,107 at December 31, 2018, plus the total from the second table above of $468,216
($2,209,323) ties to the total shown in the balance sheet of Long Term Liabilities: Convertible note – related party, net
of discount of $841,836, and Convertible Note, net of discount, of $1,367,487.
As
of September 30, 2019, the outstanding balances due of the Series CN Notes, net of all related debt discount, total $2,539,133.
The related party convertible notes (net) and unrelated party convertible notes (net) represent $1,096,544 and $1,442,589, respectively
as of September 30, 2019.
Future
maturity of convertible notes at face value before effect of all discount, are as follow:
|
|
Total
Convertible Notes
|
|
Years ending December 31,
|
|
|
|
|
2019
|
|
$
|
-
|
|
2020
|
|
|
3,264,366
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
|
|
$
|
3,264,366
|
|
Note
6. Derivative Liabilities
As
discussed in Note 5, Convertible Notes, the Company issued Series CN Note acceleration offer convertible notes payable that provide
variable conversion provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the
future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price
of the Company’s common stock, therefore the number of shares of common stock issuable upon conversion of the promissory
note is indeterminate.
The
fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent
reporting date. The Company recognized a derivative liability and debt discount of $569,588 at March 14, 2018 related to the Series
CN Convertible notes 1 of 2; $69,400 at April 11, 2018 related to the Series CN Notes Warrant Acceleration; and $697,186 at November
30, 2018 related to the Series CN Convertible note 2 of 2. The derivative liability was revalued at September 30, 2019 with a
value of $228,121. The Company recorded a gain of $704,798 and a loss of ($5,911) for the three-months ended September 30, 2019
and 2018, respectively, and $1,097,532 and a loss of ($253,807) for the nine-months ended September 30, 2019 and 2018, respectively,
related to the derivative liability.
The
fair value of the derivative liability for CN Convertible Note 1 of 2 and CN Note Warrant Acceleration was calculated using the
Black-Scholes model using the following assumptions.
|
|
30-Sept-19
|
|
|
31-Dec-18
|
|
Expected
life
|
|
|
0.46
|
|
|
|
1.20
|
|
Volatility (based on
comparable company)
|
|
|
84.78
|
%
|
|
|
72.03
|
%
|
Risk Free interest
rate
|
|
|
1.63
|
%
|
|
|
2.48
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
|
|
-
|
|
The
fair value of the derivative liability for CN Convertible Note 2 of 2 was calculated using the Black-Scholes model using the following
assumptions.
|
|
30-Sept-19
|
|
|
31-Dec-18
|
|
Expected
life
|
|
|
1.18
|
|
|
|
1.92
|
|
Volatility (based on
comparable company)
|
|
|
104.10
|
%
|
|
|
63.70
|
%
|
Risk Free interest
rate
|
|
|
1.63
|
%
|
|
|
2.48
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
|
|
-
|
|
Reconciliation
of the derivative liability measured at fair value on a recurring basis with the use of significant unobservable inputs (level
3) from December 31, 2018 to September 30, 2019:
December 31, 2018
|
|
$
|
1,325,653
|
|
Loss from change in
value
|
|
|
(1,097,532
|
)
|
For the period ended September 30, 2019
|
|
$
|
228,121
|
|
The
following table presents the Company’s fair value hierarchy for applicable assets and liabilities measured at fair value
as of December 31, 2019 and September 30, 2018.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative Liability September
30, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
228,121
|
|
|
$
|
228,121
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative Liability December
31, 2018
|
|
$
|
-
|
|
|
|
-
|
|
|
|
1,325,653
|
|
|
$
|
1,325,653
|
|
Note
7. Commitments and Contingencies
We
lease office space under non-cancelable operating lease which expires on March 31, 2023. Our periodic lease cost and operating
cash flows was $46,614 and $19,610 for the three months ended September 30, 2018 and 2019, respectively and $147,197 and $70,422
for the nine months ended September 30, 2018 and 2019, respectively. As of September 30, 2019, our right of use asset and related
liability was $216,273 and $228,777.
In
determining the present value of our operating lease right-of-use asset and liability, we used a 10% discount rate (which approximates
our borrowing rate). The remaining term on the lease is 3.50 years.
The
following table presents the future operating lease payment as of September 30, 2019.
2019 (three months remaining)
|
|
$
|
18,520
|
|
2020
|
|
|
75,748
|
|
2021
|
|
|
78,021
|
|
2022
|
|
|
80,361
|
|
2023
|
|
|
20,238
|
|
Total Lease payments
|
|
|
272,888
|
|
Less: imputed interest
|
|
|
(44,111
|
)
|
Total lease liability
|
|
$
|
228,777
|
|
Note
8. Stockholders’ Equity
During
the nine-months ended September 30, 2019, we issued 995,210 options to purchase our common stock to employees. The exercise price
of the options ranged from $0.45 to $0.73 per share, vest after 3 years, and are exercisable for a period of 8 years.
The
fair value of the options issued ($337,474, in the aggregate) was calculated using the Black-Sholes option pricing model, based
on the criteria shown below.
Expected
life (in years)
|
|
|
5.5
to 8
|
|
Volatility (based on
a comparable company)
|
|
|
70.29%-77.19
|
%
|
Risk Free interest
rate
|
|
|
1.79%-2.78
|
%
|
Dividend yield (on
common stock)
|
|
|
-
|
|
The
shares of our common stock were valued at the trading price on the date of grant, $0.45 and $0.73 per share
During
the same period, we cancelled 402,333 options to purchase our common stock.
The
total amount of equity-based compensation included in additional paid in capital was $67,185 and $209,082 for the three-months
ended September 30, 2019 and 2018, respectively, and was $338,683 and $686,027 for the nine-months ended September 30, 2019 and
2018 respectively.
The
following is a summary of outstanding stock options issued to employees and directors as of September 30, 2019:
|
|
Number
of Options
|
|
|
Exercise
price per share $
|
|
|
Average
remaining term
in years
|
|
|
Aggregate
intrinsic value
at date of
grant $
|
|
Outstanding January 1, 2019
|
|
|
7,428,014
|
|
|
|
.40
- .87
|
|
|
|
5.48
|
|
|
|
-
|
|
Issued
|
|
|
995,210
|
|
|
|
.45
- .73
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(402,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2019
|
|
|
8,020,891
|
|
|
|
.40
- .87
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30 2019
|
|
|
3,706,606
|
|
|
|
.40
- .87
|
|
|
|
3.70
|
|
|
|
-
|
|
The
following is Changes in Stockholders’ Equity as of September 30, 2018 and September 30, 2019:
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
paid
in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2018
|
|
|
118,690,527
|
|
|
$
|
119
|
|
|
$
|
37,992,799
|
|
|
$
|
(33,830,997
|
)
|
|
$
|
4,161,921
|
|
Exercise of warrants
|
|
|
1,100,000
|
|
|
|
1
|
|
|
|
549,999
|
|
|
|
-
|
|
|
|
550,000
|
|
Cashless exercise of options
|
|
|
107,821
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of stock for
services
|
|
|
183,240
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Equity based compensation
|
|
|
675,000
|
|
|
|
1
|
|
|
|
500,025
|
|
|
|
-
|
|
|
|
500,026
|
|
Discount on convertible
notes (warrants)
|
|
|
-
|
|
|
|
-
|
|
|
|
325,747
|
|
|
|
-
|
|
|
|
325,747
|
|
Warrant Modification
|
|
|
-
|
|
|
|
-
|
|
|
|
290,300
|
|
|
|
-
|
|
|
|
290,300
|
|
Net (loss) for the
year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,052,507
|
)
|
|
|
(6,052,507
|
)
|
Balance September 30, 2018
|
|
|
120,756,588
|
|
|
$
|
121
|
|
|
$
|
39,858,870
|
|
|
$
|
(39,883,504
|
)
|
|
$
|
(24,513
|
)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
paid
in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2019
|
|
|
122,770,960
|
|
|
$
|
123
|
|
|
$
|
41,118,649
|
|
|
$
|
(41,153,820
|
)
|
|
$
|
(35,048
|
)
|
Exercise of warrants
|
|
|
3,196,180
|
|
|
|
3
|
|
|
|
1,884,869
|
|
|
|
|
|
|
|
1,884,872
|
|
Issuance of stock for
services
|
|
|
374,597
|
|
|
|
-
|
|
|
|
321,914
|
|
|
|
-
|
|
|
|
321,914
|
|
Equity based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
338,732
|
|
|
|
-
|
|
|
|
338,732
|
|
Warrants issued to
Management
|
|
|
-
|
|
|
|
-
|
|
|
|
758,754
|
|
|
|
-
|
|
|
|
758,754
|
|
Issuance of stock for
capital raise
|
|
|
4,000,000
|
|
|
|
4
|
|
|
|
2,399,996
|
|
|
|
-
|
|
|
|
2,400,000
|
|
Warrant modification
|
|
|
-
|
|
|
|
-
|
|
|
|
307,460
|
|
|
|
-
|
|
|
|
307,460
|
|
Net (loss) for the
year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,949,878
|
)
|
|
|
(3,949,878
|
)
|
Balance September 30, 2019
|
|
|
130,341,737
|
|
|
$
|
130
|
|
|
$
|
47,130,374
|
|
|
$
|
(45,103,698
|
)
|
|
$
|
2,026,806
|
|
Note
9. Outstanding Warrants
The
following is a summary of all outstanding warrants as of September 30, 2019:
|
|
Number
of
warrants
|
|
|
price
per share
|
|
|
remaining
term
in years
|
|
|
intrinsic
value
at date of grant
|
|
Warrants
issued in connection with private placements of common stock
|
|
|
17,902,957
|
|
|
$
|
0.53
- $1.00
|
|
|
|
1.48
|
|
|
$
|
-
|
|
Warrants issued in
connection with private placement of notes
|
|
|
1,335,000
|
|
|
$
|
1.00
|
|
|
|
1.25
|
|
|
$
|
-
|
|
Warrants issued in
connection with convertible note
|
|
|
2,4680,259
|
|
|
$
|
0.70
|
|
|
|
1.65
|
|
|
$
|
-
|
|
Warrants issued in
connection with settlement of deferred compensation
|
|
|
1,595,611
|
|
|
$
|
0.70
|
|
|
|
4.50
|
|
|
$
|
-
|
|
Note
10. Income Taxes
The
provision for income taxes is determined in accordance with the provisions of ASC Topic 740, Accounting for Income Taxes (“ASC
740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. ASC 740 requires a valuation allowance to reduce
the deferred tax assets reported if, based on the weight of evidence, it is more than likely than not that some portion or all
of the deferred tax assets will not be recognized. Accordingly, at this time the Company has placed a valuation allowance on all
tax assets. As of September 30, 2019, the estimated effective tax rate for the year will be zero.
There
are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit our tax returns from 2009
through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the
statement of operations. There have been no income tax related interest or penalties assessed or recorded.
ASC
740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
For
the nine-month periods ended September 30, 2019 and 2018, we did not have any interest and penalties associated with tax positions.
As of September 30, 2019, we did not have any significant unrecognized uncertain tax positions.
Note
11. Liquidity
During
the nine months ended September 30, 2019, we used cash for operations of $3,191,642, and purchased equipment for $418,456. We
raised cash from the issuance of stock in the amount of $2,400,000, and we received cash for the exercise of warrants in the amount
of $1,500,309. During the nine months ended September 30, 2018, we used $3,536,246 of cash for operations, $912,102 for the purchase
of equipment, received $37,968 from the sale of equipment, and used $6,322 for trademarks. We raised cash in the amount of $2,677,800
from the issuance of convertible notes, net of issuance costs, $250,000 from the issuance of short-term notes, and $550,000 from
the exercise of warrants.
We
have a history of operating losses and negative cash flow. As our operations grow, we expect to experience significant increases
in our working capital requirements. These conditions raise substantial doubt over the Company’s ability to continue as
a going concern within one year after the date the financial statements are issued. Management has evaluated these conditions,
and concluded that the mitigating actions discussed in this footnote are probable of occurring and mitigating the substantial
doubt raised by our historical operating results, and satisfying our liquidity needs twelve months from the issuance of the financial
statements. However, the Company cannot predict, with certainty, the outcome of its actions to preserve liquidity, including the
accuracy of its financial forecast, the ability to sustain the current trend of cost cutting, or the ability to extend the maturity
date of the debt that is maturing in March of 2020.
As
of September 30, 2019, we had $1,318,114 of cash on the balance sheet. We have continued to significantly reduce core operating
expenses, reducing total General and Administrative Expense in the first nine months of 2019 by $1,012,467, or 16%, as compared
with the first nine months of 2018. The Company’s forecast for the next twelve months reflects a continuation of the improvement
in cash flow from operations as the Company continues to reduce operating expenses and increase contracts with school locations,
and military bases, and anticipates the roll-out of a National Account with over 2,500 locations. The Company has implemented
numerous cost reduction measures which will reduce cash expenses over the next twelve months, including relocation of its headquarters
office, as well as entering into a new contract for personnel related services. These two measures alone will yield $200,000 per
year in cash savings, and the Company continues to pursue additional measures to reduce cash expenses. In addition, the Company
has implemented new logistics arrangements which have already yielded substantial savings in the first nine months of 2019, which
is expected to continue and accelerate over the next twelve months.
The
Company has $1.9 million of convertible short term debt coming due in March of 2020. Approximately half of this debt is held by
insiders. The Company expects that if available cash upon maturity of this debt is not adequate to repay the convertible short
term debt, it will be able to extend the maturity date of that debt, in particular the portion held by insiders.
Management
has evaluated these conditions, and concluded that there is substantial doubt over the Company’s ability to continue as
a going concern. The actions discussed in this footnote could mitigate the substantial doubt raised by our historical operating
results, and satisfying our liquidity needs twelve months from the issuance of the financial statements. However, the Company
cannot predict, with certainty, the outcome of its actions to preserve liquidity, including the accuracy of its financial forecast,
the ability to sustain the current trend of cost cutting, or the ability to extend the maturity date of the debt that is maturing
in March of 2020.
Note
12. Subsequent Events
Management
has evaluated all activity and concluded that no subsequent events have occurred that would require recognition in the financial
statements or disclosure in the notes to the financial statements.