RTON Right On Brands Inc (PK)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The interim unaudited condensed financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) on the same basis as the annual financial statements; and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended March 31, 2019 filed with the SEC on form 10-K/A on July 29, 2019.

 

Certain amounts in the prior period financial statements regarding inventory impairment have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

Formation and Business Activity

 

Right on Brands, Inc. (“we” or “our” or “the Company” or “Right On Brands”) was incorporated under the laws of the State of Nevada on April 1, 2011, as HealthTalk Live, Inc. On August 10, 2017, the Company amended is articles of incorporation and changed its name to Right On Brands, Inc. On August 31, 2017 the Company common shares commenced trading under the new stock symbol OTC Pink: RTON. Right On Brands is a health and wellness focused company developing and marketing our brands.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is provided by the straight-line method over the useful lives of the related assets, from one to five years.

 

The cost of building the Company’s website has been capitalized and amortized over a period of three years. Expenditures for minor enhancements and maintenance are expensed as incurred.

 

 

During the nine months ended December 31, 2019 and 2018, inventory impairments or $21,137 and $35,387 were recognized due to expired products. These are included in Cost of Goods Sold in the accompanying consolidated statement of operations.

 

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue Recognition

 

We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of hemp products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. The transfer of control of products to our customers is typically based on written sales terms that do not allow for a right of return after 30 days from the date of purchase.

 

Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery, and may allow discounts for early payment. We estimate and reserve for our bad debt exposure based on our experience with past due accounts and collectability, the aging of accounts receivable and our analysis of customer data.

 

Income Taxes

 

The Company is subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with the Financial Accounting Standards Board (FASB) ASC Topic 740, “Income Taxes,” the Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

 

Fair Value of Financial Instruments

 

In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.

 

Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended December 31, 2019 and 2018, except as disclosed.

 

 

From time to time, the Company enters into convertible promissory note agreements (Note 5). These notes are convertible at a fraction of the stock closing price near the conversion date. Additionally, the conversion price, as well as other terms including interest rates, adjust if any future financings have more favorable terms. The conversion features of these notes meet the definition of a derivative which therefore requires bifurcation and are accounted for as a derivative liability.

 

The Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes based on assumptions used in the Black Scholes pricing model. At December 31, 2019 and March 31, 2019, the fair value of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the Company’s common stock of $0.001 and $0.045, respectively; a risk-free interest rate ranging from 1.66% to 2.62%, and expected volatility of the Company’s common stock ranging from 158% to 635%, various estimated exercise prices, and terms under one year.

 

Convertible Instruments

 

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities.

 

 

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

    

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

The Company had no potential additional dilutive securities outstanding at December 31, 2019, except as follows. These were excluded from the earnings per share computation since their effect would be anti-dilutive.

 

 

During the nine months ended December 31, 2019 stock warrants for 11,250,000 shares were issued in connection with financing received. An additional warrant to purchase 500,000 shares was issued with a subscription agreement September 16, 2019. In connection with the appointment of Advisory Board members, warrants for 3,000,000 shares were issued during October 2019.

 

A summary of the status of the Company’s option and warrant grants as of December 31, 2019 and the changes during the fiscal quarter then ended is presented below:

 

 

  

Recent Accounting Pronouncements

 

During the quarter ended December 31, 2019, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.

    

In February 2016, the FASB issued ASU 2016-02, Leases. This is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the term of the lease. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard became effective beginning April 1, 2019 at the inception of the Company’s office and warehouse lease (Note 8). The Company believes adoption of the standard did not have a material impact on our results of operations and financial condition.

 

NOTE 2. GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern, which is dependent upon the Company’s ability to obtain sufficient financing or establish itself as a profitable business. As of December 31, 2019 and 2018, the Company had an accumulated deficit of $11,891,860 and $6,907,339, respectively. For the nine months ended December 31, 2019 and 2018, the Company incurred net losses of $1,705,758 and $2,806,395, respectively.

 

The Company has had minimal revenue earned since inception and a lack of operational history. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. While the Company is attempting to generate greater revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of additional public and/or private offerings of its stock and/or debt and/or convertible debt. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.

 

The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

 

 

 

Depreciation expense for the nine months ended December 31, 2019 and 2018 was $4,739 and $2,822, respectively.

 

The Company also has capitalized intangible assets consisting of trademarks valued at a cost of $1,024 as of December 31, 2019 and March 31, 2019. Amortization expense for the nine months ended December 31, 2019 and 2018 was $410 and $256, respectively.

 

NOTE 4. NONCONTROLLING INTEREST

 

Investments in partnerships, joint ventures and less-than-majority-owned subsidiaries in which we have significant influence are accounted for under the equity method.

 

As of March 31, 2018, the Company’s consolidated financial statements includes a venture for the development of a commercial bottled water operation near Browning, Montana. The new venture is operated through Spring Hill Water Company, LLC, a Nevada limited liability company (“Spring Hill”). Spring Hill is 49% owned by our newly-formed subsidiary corporation, Humble Water Company, and 51% owned by Doore, LLC. Doore, LLC, which serves as the manager of Spring Hill, has contributed the land and water source to be used in the new operation through a Land & Water Lease Agreement under which Spring Hill will have the use of 2 acres of land and no less than 5 acre-feet of water for an initial term of 25 years and at a lease rate of $1 per year. Through Humble Water Company, our initial capital contribution to Spring Hill was approximately $100,000 to be used in commencing operations. In addition, we have committed to provide additional capital to be used for a bottling facility and equipment, in an amount up to $530,000, by January 1, 2020. Should we fail to provide this additional capital, our ownership percentage in Spring Hill will be reduced from 49% to 20%. Although we hold a minority ownership percentage in Spring Hill, we will have voting control over the company with 75% of the voting membership units. Further, 100% of the losses, expenditures, and deductions from Spring Hill will be allocated to our subsidiary, Humble Water Company. The activity of Spring Hill is accounted for under the voting interest method and we consolidate 100% of the business activity and record 25% of noncontrolling interest on the balance sheet and 0% of the net losses based on the terms of the agreement. As of December 31, 2019, the noncontrolling interest was $24,437 in the accompanying consolidated financial statements.

 

As of December 31, 2019, our total investment into Spring Hill to date was $101,470. Since entering into the venture, there have been no significant operations or expenditures in the joint venture except for expensing the remainder of the prepaid lease due to the low likelihood of utilization.

 

 

NOTE 5. CONVERTIBLE DEBT

 

During October 2016, the Company extinguished $129,549 of debt in exchange for 5,000,000 shares of newly issued common stock. The original note had a maturity date of November 11, 2016 and no interest rate. A total of 4,200,000 shares were issued to three of the four noteholders. As of December 31, 2016, the remaining balance of 800,000 shares of common stock was pending issuance to one noteholder, so common stock payable of $474,000 was recorded in the accompanying consolidated statement of stockholders’ equity. As of early 2019 the shares were still pending issuance; accordingly, the Company reclassified the amount due to the noteholder to notes payable at the fair value of the common stock. See Note 9, Subsequent Events.

 

On July 7, 2016, the Company issued a convertible promissory note with an entity for $25,000. The unsecured note bears interest at 6% per annum and is due on January 7, 2017. This note is convertible at $0.10 per share and can be converted on or before the maturity date. The Company and lender mutually agreed to extend the maturity date of the note to March 30, 2020.

 

On November 21, 2017, the Company issued a convertible promissory note with an entity for $20,000. The unsecured note bears interest at 6% per annum and was due on May 21, 2018 but was extended to March 30, 2020. This note is convertible at $0.20 per share and can be converted on or before the maturity date. See note 7.

 

On February 12, 2019, Noteholder 1 submitted a notice of conversion for $125,000 principal and $11,250 accrued interest after the note was in default. The note terms provided a $3,000 daily fee for failure to deliver common stock prior to a deadline of two days after the conversion notice. The shares due under the conversion were not issued until May 8, 2019. Accordingly, an additional note payable of $135,000 was recorded as a penalty at March 31, 2019. An additional $114,000 was accrued as a penalty during the quarter ended June 30, 2019 and remains outstanding.

 

On November 22, 2019, the Company issued a $50,000 promissory note to an individual for a $25,000 cash borrowing. Accordingly, a $25,000 discount was recorded at issuance, $6,164 of which was amortized by December 31, 2019. The non-interest bearing note is due February 20, 2020.

 

At December 31, 2019, the Company’s short-term convertible promissory notes carrying a 12% interest rate and related debt discount and derivative liability are summarized as follows:

 

 

During the nine months ended December 31, 2019, six convertible note holders submitted notices of conversion for a portion of the principal and interest owing to them totaling $865,082. The conversions resulted in the settlement of $1,190,705 of the derivative liability, an $8,693 loss on settlement of interest payable, and the issuance of 354,971,286 shares of common stock.

 

The convertible debt held by noteholders 3 and 6 is in default at December 31, 2019. At the noteholder’s discretion, if notice is given to the Company, additional penalties would be due. During January 2020, the penalties assessed totaled $12,500 and penalties of $5,551 and the remainder of the principal and interest due under the note was settled through the issuance of common stock. See Note 9.

 

These fiscal 2019 note agreements require a certain number of shares be reserved so that they are readily available for note conversion. As of December 31, 2019 and March 31, 2019, we had approximately 5.3 billion shares and 398 million shares, respectively, of our common stock reserved or designated for future issuance upon conversion of outstanding convertible promissory notes. As of December 31, 2019, one note had fewer shares reserved than required under the terms of the note agreements.

 

During the nine months ended December 31, 2019 and 2018, respectively, interest expense was $73,094 and $11,435. During the nine months ended December 31, 2019 and 2018, respectively, amortization of debt discount was $533,592 and $192,704.

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

 

Series A Preferred Stock

 

The Series A Preferred Stock is convertible to common stock at a rate of five shares for every share held and the holder(s) have the right to cast a total of fifty-percent (50%) plus one votes on all matters submitted to a vote of holder of the Company’s common stock. Our Series A Preferred Stock ranks equally, on an as-converted basis, to our common stock with respect to rights upon winding up, dissolution, or liquidation. Our Series A Preferred Stock does not have any special dividend rights.

 

On October 1, 2016, the Company issued 5,000,000 shares of our Series A Preferred Stock to Daniel Crawford in exchange for 10,000,000 shares of Series A Preferred Stock in Humbly Hemp.

 

Common Stock

 

During the nine months ended December 31, 2019, the Company issued a total of 354,971,286 shares of common stock to six noteholders in connection with the settlement of principal and interest totaling $865,082.

 

During the nine months ending December 31, 2019, the Company issued several subscription agreements for the purchase of common stock by various investors at a price ranging from $.0025 to $.03. A total of 24,416,666 shares of common stock were issued during the nine months ended December 31, 2019 for cash proceeds received totaling $125,000.

 

NOTE 7. RELATED PARTY

 

During December 2017, the Company entered into a consulting agreement with Dr. Ashok Patel, our current President, to serve as Director of Product Development. Consideration for services under the agreement provided for the issuance of 700,000 shares of common stock of the Company at the time of execution of the agreement, and the following two anniversaries of the agreement. At December 31, 2018, the first anniversary shares had yet to be issued. Accordingly, they are reported in the accompanying consolidated statement of stockholders’ equity (deficit) as common stock issuable.

 

The trustee of La Dulce Vita Trust (LDVT) is the aunt of Daniel Crawford, the Company’s majority voting holder and the sister of Jerry Grisaffi, the Company’s CEO and Board of Directors Chairman. At December 31, 2019 and March 31, 2019, $474,000 is owed to LDVT reported in notes payable, and $22,000 is included in convertible debt on the accompanying consolidated balance sheets. See Note 9, Subsequent Events.

 

On April 16, 2018, the Company entered into an operating agreement with Centre Manufacturing, Inc. (“Centre”) and formed an LLC owned 51% by the Company and 49% owned by Centre, but all income and losses will be split evenly. The owner of Centre is the President of the Company. On June 19, 2018, the Company formed a majority owned subsidiary, Endo & Centre Venture LLC. No significant activity has occurred during the nine months ended December 31, 2019 and 2018, respectively.

 

During the nine months ended December 31, 2019 and 2018, the Company purchased inventory totaling $12,400 and $76,946 from Centre, respectively. The Company owed Centre $0 and $26,791, respectively, at December 31, 2019 and March 31, 2019 which is included in accounts payable on the accompanying consolidated balance sheets.

 

On October 1, 2019 the Company appointed three members to an advisory board and issued each member a warrant convertible into 1,000,000 shares of common stock at $.01 per share.

 

  

NOTE 8. COMMITMENTS AND CONTINGENCIES

 

On April 1, 2019 the Company entered into a three-year office and warehouse lease of approximately 5,700 square feet in Carrollton, Texas. At the inception of the lease, the Company adopted ASC 842 requiring the recording of assets and liabilities related to leases on the balance sheet. The Company records rent on straight-line basis over the terms of the underlying lease. Rent expense for the nine months ended December 31, 2019 and 2018 was $34,200 and $0, respectively.

 

Aggregate future lease liability expense under ASC 842 are as follows:

 

 

There is a dispute between the Company and the holder of a convertible note regarding the timing of the conversion. As of December 31, 2019, the full amount of the penalty totaling $114,000 has been recorded on the accompanying consolidated balance sheet, and neither side has filed formal legal proceedings against the other side and negotiations are ongoing to resolve the matter.