Notes
to Consolidated Financial Statements
For
the years ended December 31, 2018 and 2017
Note
1 – Nature of the Business
BoxScore Brands, Inc. (formerly U-Vend Inc.) (the “Company”) develops, markets and distributes
various self-serve electronic kiosks and mall/airport co-branded islands throughout North America. The Company seeks to place its
kiosks in high-traffic host locations such as big box stores, restaurants, malls, airports, casinos, universities, and colleges.
Currently, the Company leases, owns and operates its kiosks and intends to also provide the kiosks, through a distributor relationship,
to entrepreneurs wanting to own their own business.
On February 26, 2018, the Company filed a Certificate of Amendment of the Certificate of Incorporation.
The Certificate of Amendment changed the Company’s name to BoxScore Brands, Inc. from U-Vend Inc. to better reflect the nature
of the Company’s current business operations, which has expanded to include relationships with major sports organizations
dispensing ice cream products through vending machines.
The Company’s vending kiosks incorporate advanced wireless technology, creative concepts, and ease
of management. They have been designed to be tech-savvy and can be managed online 24 hours day/7 days a week, accepting traditional
cash input as well as credit and debit cards. Host locations and suppliers have been drawn to this distribution concept of product
vending based on the advantages of reduced labor and lower product theft as compared to non-kiosk merchandising platforms. The
Company takes a solutions development approach for the marketing of products through a variety of kiosk offerings. The Company’s
approach to the market can include the addition of a digital LCD monitor to most makes and models in a kiosk program. This would
allow the Company to offer digital advertising on a national and/or local - loop basis and a corresponding additional revenue stream
for the Company.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP). The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30 and September 30.
The
accompanying consolidated financial statements include the accounts of BoxScore Brands, Inc. and the operations of U-Vend America,
Inc., U-Vend Canada, Inc. and its wholly owned subsidiary, U-Vend USA LLC. All intercompany balances and transactions have been
eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates
and be based on events different from those assumptions. Future events and their effects cannot be predicted with certainty; estimating,
therefore, requires the exercise of judgment. Thus, accounting estimates change as new events occur, as more experience is acquired,
or as additional information is obtained.
Inventory
Inventory
is stated at the lower of cost or net realizable value and cost is determined by the average cost method. Inventory is made up
of finished goods ice cream. The Company records an inventory reserves for spoilage and product losses. The reserve for spoilage
and product losses was $5,500 as of December 31, 2018 and 2017.
Property
and Equipment
Property
and equipment are stated at cost less depreciation. Depreciation is provided using the straight-line method over the estimated
useful life of the assets. Electronic kiosks, related equipment and delivery vans have estimated useful lives between three and
seven years. Expenditures for repairs and maintenance are charged to expense as incurred.
Goodwill
and Other Intangible Assets
Goodwill represented the excess of the purchase
price over the fair value of the net assets acquired in a business combination. Acquired intangible assets other than goodwill
are amortized over their useful lives unless the lives are determined to be indefinite. For intangible assets acquired in a business
combination, the estimated fair values of the assets received are used to establish their recorded values. Valuation approaches
consistent with the market approach, income approach and/or cost approach are used to measure fair value.
Impairment
of Goodwill and Long-lived Assets
The
Company performs an annual assessment of its goodwill during the fourth quarter of each calendar year or more frequently if indicators
of potential impairment exist, such as an adverse change in business climate or a decline in the overall industry demand, that
would indicate it is more likely than not that the fair value of its single reporting unit is less than its carrying value. For
annual impairment testing in 2017, the Company performed a quantitative analysis and determined the carrying value of its single
reporting unit exceeded the fair value. Assessment for possible impairment is based on the Company’s ability to recover
the carrying value of the long-lived asset from the expected future pre-tax cash flows. The expected future pre-tax cash flows
are estimated based on historical experience, knowledge and market data. Estimates of future cash flows require the Company to
make assumptions and to apply judgment, including forecasting future sales, capital investments and expenses and estimating the
useful lives of assets. If the expected future cash flows related to the long-lived assets are less than the assets’ carrying
value, an impairment charge is recognized for the difference between estimated fair value and carrying value. Based on these factors,
the Company determined that the goodwill related to the purchase of U-Vend Canada, Inc. in 2014 was fully impaired and recorded
an impairment charge of $642,340 during the year ended December 31, 2017.
Long-lived
assets, such as property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets
to be held and used is measured by comparing the carrying amount to the estimated future undiscounted cash flows expected to be
generated by the asset group. If it is determined that an asset group is not recoverable, an impairment charge is recognized for
the amount by which the carrying amount of the asset group exceeds its fair value. There was no impairment of long-lived assets
for any periods presented.
Common
Shares Issued and Earnings Per Share
Common
shares issued are recorded based on the value of the shares issued or consideration received, including cash, services rendered
or other non-monetary assets, whichever is more readily determinable. The Company presents basic and diluted earnings per share.
Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period. Diluted earnings
per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares
had been issued. In a loss period, the calculation for basic and diluted earnings per share is considered to be the same, as the
impact of potential common shares is anti-dilutive.
As
of December 31, 2018 and 2017, respectively, there were approximately 153.7 million and 113.5 million shares potentially issuable
under convertible debt agreements, options, and warrants that could dilute basic earnings per share in the future that were excluded
from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive to the Company’s
losses during the periods presented.
Preferred
Stock Authorized
The
Company has authorization for “blank check” preferred stock, which could be issued with voting, liquidation, dividend
and other rights superior to common stock. As of December 31, 2018 and 2017, there are 10,000,000 shares of preferred stock authorized,
and no shares issued or outstanding.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date The Company estimates and categorizes the fair value of its financial assets
by applying the following hierarchy:
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Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
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Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
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●
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Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
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Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, derivative
liabilities, warrant liability, promissory notes payable, capital lease obligations, convertible notes payable, and senior convertible
notes payable. The senior convertible notes and certain convertible notes payable are recorded at face value net of any unamortized
discounts, based upon the value of the warrants issued with the notes. The estimated fair value of the warrant liability includes
unobservable inputs and is therefore categorized as a Level 3 measurement. Changes in unobservable inputs may result in significantly
higher or lower fair value measurement. The carrying value of the short-term instruments approximates their fair values at December
31, 2018 and 2017 due to their short-term nature.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. Certain warrants issued by the Company have a “down round provision” and as a result the
warrants are classified as derivative liabilities for accounting purposes. For derivative financial instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting
date, with changes in fair value reported in the consolidated statement of operations. The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risks.
Warrant
Liability
Certain of the Company’s common stock
warrants are subject to down round provision. As such, the warrants have been recorded as a liability and are subject to re-measurement
at each balance sheet date, and any change in fair value is recognized as a component of other (income) expense. The warrants
are valued using the Black Scholes method. The Company will continue to adjust the liability each reporting period for changes
in fair value until the exercise or expiration of the warrants.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with accounting guidance that requires all stock-based awards granted
to employees and directors to be measured at fair value and recognized as expense. Stock-based compensation expense is recognized
on a straight-line basis over the requisite service period of the award, which is generally equivalent to the vesting period.
The fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The measurement date for
the non-forfeitable awards to nonemployees that vest immediately is the date the award is issued.
Revenue
Recognition
The
Company has 118 and 144 electronic kiosks installed in the southern California and Las Vegas areas from which it generated revenue
during the years ended December 31, 2018 and 2017. Revenue is recognized at the time each vending transaction occurs, the payment
method is approved, and the product is disbursed from the machine. Wholesale revenues, including revenue earned under contracts
with major sports organizations, are recognized at the time the products are delivered to the customer based on the agreement
with the customer.
Income
Taxes
The Company has approximately $16.4 million in U.S. federal and state operating loss carryforwards (“NOLs”)
available to reduce future taxable income, $15.8 million of which will begin to expire in 2030. Due to the uncertainty as to the
Company’s ability to generate sufficient taxable income in the future and utilize the NOLs before they expire, the Company
has maintained a full valuation allowance against its deferred tax assets accordingly.
Vendor
Concentration
The
Company procured all its inventory of finished goods ice cream which were dispensed through the vending kiosks from one vendor
during the years ended December 31, 2018 and 2017.
Reclassifications
Certain
prior period amounts in the accompanying consolidated financial statements have been reclassified to current period presentation.
These reclassifications had no effect on the results of operations or cash flows for the periods presented.
Recent
Accounting Pronouncements
On January 1, 2018, the Company adopted FASB
ASC 606, “Revenue from Contracts with Customers” and all related amendments for all contracts using the modified retrospective
method. There was no impact upon the adoption of ASC 606. The Company has determined that the adoption of this standard did not
require a cumulative effect adjustment. The comparative information has not been restated and continues to be reported under the
accounting standards in effect for those periods. The Company has 118 and 144 electronic kiosks installed in the southern California
and Las Vegas areas from which it generated revenue during the nine month periods ended December 31, 2018 and 2017, respectively.
Revenue is recognized at the time each vending transaction occurs, the payment method is approved, and the product is disbursed
from the machine. Wholesale revenues, including revenue earned under contracts with major sports organizations, are recognized
at the time the products are delivered to the customer based on the agreement with the customer.
In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies
the treatment of several types of cash receipts and payments for which there was diversity in practice. This update is effective
for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted,
including adoption in an interim period. The Company has evaluated the impact of the adoption of this standard had on the consolidated
financial statements and related disclosures and determined the effect was not material.
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which requires that lease arrangements longer than 12 months
result in an entity recognizing an asset and liability. ASU 2016-02 is effective for interim and annual periods beginning after
December 15, 2018, and early adoption is permitted. The Company has adopted ASU 2016-02 and determined that its adoption had no
impact on its financial position, results of operations or cash flows.
In July 2017, the FASB issued ASU 2017-11,
“Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815):
I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with
a Scope Exception, (ASU 2017-11).” Part I of this update addresses the complexity of accounting for certain financial instruments
with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result
in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the
difficulty of navigating
Topic 480, Distinguishing Liabilities from Equity
, because of the existence of extensive pending
content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting
requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable
non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is in the process of evaluating
the impact of the ASU on its consolidated financial statements.
In
August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an
analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate
statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which
a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018 and expected to
be included in the Form 10-Q for the 3 months ended March 31, 2019. The Company is in the process of evaluating the impact of
the final rule on its consolidated financial statements.
Note
3 – Going Concern
The accompanying consolidated financial
statements have been prepared on a going concern basis. The Company reported net loss of $683,780 for the year ended December 31,
2018, and has incurred accumulated losses totaling $12,301,991 through December 31, 2018. In addition, the Company has incurred
negative cash flows from operating activities since its inception. The Company has relied on the proceeds from loans and private
sales of its stock, in addition to its revenues, to finance its operations. These factors, among others, indicate that the Company
may be unable to continue as a going concern. The consolidated financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
Until
the Company can generate significant cash from operations, its ability to continue as a going concern is dependent upon obtaining
additional financing. The Company intends to raise additional financing to fund its operations for the next 12 months and allow
the Company to continue the development of its business plans and satisfy its obligations on a timely basis. Should additional
financing not be available, the Company will have to negotiate with its lenders to extend the repayment dates of its indebtedness.
There can be no assurance that the Company will be able to successfully restructure its debt obligations in the event it fails
to obtain additional financing.
Note
4. Property and Equipment
Property
and equipment consist of the following as of December 31, 2018 and December 31, 2017:
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December 31,
2018
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December 31,
2017
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Electronic kiosks and vending machines
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$
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1,460,255
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$
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1,091,345
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Delivery vans
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32,727
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21,700
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Less: accumulated depreciation
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(730,951
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)
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(518,809
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)
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Total
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$
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762,031
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$
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594,236
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Depreciation
expense amounted to $211,240 and $180,784, respectively for the years ended December 31, 2018 and 2017
Note
5. Intangible Assets
Intangible
assets consist of the following as of December 31, 2018 and December 31, 2017:
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December 31,
2018
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December 31,
2017
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Operating agreement
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$
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434,000
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$
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434,000
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Less: accumulated amortization
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(434,000
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)
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(347,199
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)
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Total
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$
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-
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$
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86,801
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Amortization
expense amounted to $86,801, for the years ended December 31, 2018 and 2017.
Note
6. Debt
Senior
Convertible Notes
During the year ended December 31, 2017, a
Senior Convertible Note in the aggregate principal amount of $310,000 and a maturity date of December 31, 2017 payable to Cobrador
Multi-Strategy Partners, LP (“Cobrador 1”), a related party, was extended until December 31, 2019. The Company also
extended the expiration dates of Series A Warrants issued in connection with Cobrador 1 by one year. The fair value of the Series
A Warrants did not materially change due to the extension. Cobrador, an entity controlled by the Company’s former CEO, is
a related party.
On
June 30, 2016, the Company issued an additional Senior Convertible Note in the face amount of $108,804 to Cobrador (“Cobrador
2”) in settlement of previously accrued interest, additional interest, fees and penalties. The additional interest, fees
and penalties was $72,734 and this amount was charged to operations as debt discount amortization during the year ended December
31, 2016. The Senior Convertible Note was extended during the year ended December 31, 2017 and is due on December 31, 2018. It
is convertible into shares of common stock at a conversion price $.05 per share and bears interest at 7% per annum. The Company
determined that Cobrador 2 had a beneficial conversion feature based on the difference between the conversion price and the market
price on the date of issuance and allocated $87,043 as debt discount representing the beneficial conversion feature which was
fully amortized at December 31, 2017.
During
December 2017, the Company issued a Senior Convertible Note in the amount of $25,000 to Cobrador. The note bears interest at 7%,
is due in December 2019, and is convertible into common shares at a conversion price of $0.05 per share. In addition, in conjunction
with this note, the Company issued 500,000 warrants to purchase common shares at $0.05 with a contractual term of 5 years. The
estimated value of the warrants was determined to be $1,421 and was recorded as interest expense during 2017 and a warrant liability
due to the down round provision in the note agreement.
At
December 31, 2018 and December 31, 2017, the Cobrador notes had a carrying value of $443,804 and $443,804.
Promissory
Notes Payable
During
2014, the Company issued an unsecured promissory note to a former employee of U-Vend Canada. The original amount of this note
was $10,512 has a term of 3 years and accrues interest at 17% per annum. The total principal outstanding on this promissory note
at December 31, 2018 and 2017 was $6,235.
During the years ended December 31, 2018 and
2017, the Company borrowed $143,908 and $36,400, respectively, pursuant to a series of promissory notes from the same lender.
All of the notes bear interest at a rate of 19% per annum, and are payable together with interest over a period of six (6) months
from the date of borrowing. The Company repaid $125,931 and $44,449 during the years ended December 31, 2018 and 2017, respectively,
and the balance outstanding on these notes at December 31, 2018 and December 31, 2017, was $34,044 and $16,067, respectively.
During
the year ended December 31, 2016, the Company issued two unsecured promissory notes and borrowed an aggregate amount of $80,000.
The promissory notes bear interest at 10% per annum, with a provision for an increase in the interest rate upon an event of default
as defined therein and were due at various due dates in May and September 2017. The due dates of both notes were extended to December
31, 2018. As of December 31, 2018 and December 31, 2017, the balance outstanding on these notes was $80,000.
In
December 2017, the Company issued promissory notes in the aggregate principal balance of $28,000 to Cobrador, a related party.
The notes accrue interest at 7% and have a two-year term. As of December 31, 2018 and December 31, 2017, the balance outstanding
on these notes was $28,000.
On
November 8, 2017, the Company issued a convertible promissory note (the “Note”) in the principal amount of $50,000
with net proceeds of $47,000. The Note bears interest at the rate of 12% per annum, has a nine-month maturity, and includes prepayment
interest fees increasing based on the prepayment date from 15-40% of the principal amount if the Note is repaid prior to 181 days
following the issuance date. There is no right to prepay the Note after the 180th day of issuance. The Note becomes convertible
180 days following the issuance date and the conversion price for the Note is equal to a 39% discount to the average of the two
lowest closing bid prices of the Company’s common stock during the 15-trading day period prior to conversion. Conversion
of the Note is restricted in the event the number of shares of common stock beneficially held by the note holder and its affiliates
in the aggregate after such conversion exceeds 4.99% of the then outstanding shares of common stock. As of December 31, 2017,
the note had a carrying value of approximately $47,000, net of discount of $17,164. The Company repaid the note in full for $64,164
including principal and interest in February 2018.
On July 18, 2018, the Company issued a promissory note in the principal amount of $187,500 with net proceeds
of $147,000. The Company agreed to pay $1,143 per business day for 164 days. The Company recorded $40,500 to debt discount. During
the years ended December 31, 2018, the Company repaid $128,050 in principal and amortized $40,500 of debt discount resulting in
an unamortized debt discount of $0 and carrying value of $59,450 at December 31, 2018.
On April 13, 2018, the Company issued a promissory
note in the principal amount of $115,000. This note bears interest at the rate of 7% per annum, due on December 31, 2018. The
Company borrowed an additional $25,000 and repaid $60,000 during the year ended December 31, 2018, and the balance outstanding
on this note at December 31, 2018, was $80,000.
In
October 2014, January 2015 and October 2015, the Company entered into three (3) separate 24-month equipment financing agreements
(the “Agreements”) with Perkins Industries, LLC (“Perkins”) for equipment in the aggregate amount of $387,750
with an annual interest rate of 15%. The assets financed consisted of self-service electronic kiosks placed in service in the
Company’s Southern California region. The Company is obligated to make monthly interest only payments in accordance with
the Agreements. The Agreements include a put/call option at the end of year one and the end of year two. Neither of these options
were exercised. During 2017 $100,000 was paid down on the notes, and the carrying value as of December 31, 2018 and December 31,
2017 was $287,750.
Pursuant
to the Agreements Perkins received a warrant to purchase an aggregate of 310,200 shares at an exercise price of $0.35 per share
with a contractual term of three (3) years. The warrant was recorded as a debt discount and a warrant liability in the aggregate
amount of $3,708 due to the down round provision, pursuant which the exercise price of the warrants was revised to $0.26 at December
31, 2016.
In
October 2016, the Company and Perkins agreed to extend the termination date of two of the Agreements to October 17, 2017 and January
5, 2018. In consideration of this extension, the Company issued an additional 200,000 warrants with an exercise price of $0.05
per share and a five-year contractual term. The fair value of the warrants was not material and was charged to operations in the
accompanying statement of operations for the year ended December 31, 2016.
During the year ended December 31, 2018 the
Agreements were purchased by a third party and the due dates were extended to December 31, 2019.
On November 19, 2018, the Company issued a promissory note in the principal amount of $124,000 with net
proceeds of $112,840. This note matures in 64 weeks. The Company recorded $11,160 to debt discount. During the years ended December
31, 2018, the Company repaid $9,784 in principal and amortized $872 of debt discount resulting in an unamortized debt discount
of $10,288 and carrying value of $103,928 at December 31, 2018.
On December 12, 2018, the Company issued a promissory note in the principal amount of $112,425 with net
proceeds of $64,500. The Company agreed to pay $937 per business day for 120 days. The Company recorded $47,925 to debt discount.
During the years ended December 31, 2018, the Company repaid $9,370 in principal and amortized $3,744 of debt discount resulting
in an unamortized debt discount of $44,181 and carrying value of $58,874 at December 31, 2018.
Convertible
Notes Payable
2014
Stock Purchase Agreement
In
2014 and 2015 the Company entered into the 2014 Securities Purchase Agreement (the “2014 SPA”) pursuant to which it
issued eight (8) convertible notes in the aggregate face amount of $146,000 due at various dates between August 2015 and March
2016. The principal on these notes is due at the holder’s option in cash or common shares at a conversion rate of $0.30
per share. In connection with these borrowings the Company granted a total of 360,002 warrants with an exercise price of $0.35
per share and a 5 year contractual term. The warrants issued have a down round provision and as a result are classified as a liability
in the accompanying consolidated balance sheets. Pursuant to the down round provision, the exercise price of the warrants was
reduced to $0.22 at December 31, 2016. During 2017 the Company repaid one of the notes in the amount of $50,000. On May 1, 2018,
the Company granted 1,000,000 warrants with an exercise price of $0.15 per share and a 5 year contractual term, valued at $2,841,
which was recorded as debt discount. As of December 31, 2018 and December 31, 2017, outstanding balances of these notes were $166,000.
The
Company and Cobrador held three of the convertible notes in the aggregate face amount of $45,000, and agreed to extend the repayment
date to November 17, 2020. The Company and Cobrador extended the due date to December 31, 2018 on notes totaling $25,000, and
the Company agreed to a revised conversion price of $.05 per share and a revised warrant exercise price of $0.07 per share. The
change in the value of warrants was not material and was charged to operations during the year ended December 31, 2017.
2015
Stock Purchase Agreement
During
the year ended December 31, 2015, the Company issued eleven subordinated convertible notes bearing interest at 9.5% per annum
with an aggregate principal balance of $441,000 pursuant to the 2015 Stock Purchase Agreement (the “2015 SPA”).The
notes were due in December 2017 and are payable at the noteholder’s option in cash or common shares at a conversion rate
of $0.30 per share The conversion rate was later revised to $0.05 due to down round provisions contained in the 2015 SPA, and
the due date was extended to November 17, 2020. In connection with these borrowings, the Company issued a warrant to purchase
735,002 shares of the Company’s common stock at an exercise price of $0.40 per share and a 5 year contractual term. The
exercise price was later revised to $0.22 per share pursuant to the down round provisions in the 2015 SPA. The Company allocated
$8,113 of proceeds received to debt discount based on the computed fair value of the convertible notes and warrants issued. During
the year ended December 31, 2016, the noteholder converted one note in the face amount of $35,000 into 700,000 shares of common
stock. As of December 31, 2018 and December 31, 2017, the 2015 SPA had a balance of $406,000. The debt discount was fully amortized
as of December 31, 2016.
2016
Stock Purchase Agreement
On
June 30, 2016, the Company entered into the 2016 Stock Purchase Agreement (the “2016 SPA”) pursuant to which it issued
five convertible notes in the aggregate principal amount of $761,597. The 2016 SPA notes are due in November 2020 and bear interest
at 9.5% per annum. The notes are convertible into shares of common stock at a conversion price of $0.17 per share. With this note,
the Company satisfied its obligations for: previously issued promissory notes of $549,000, accrued interest of $38,615, lease
principal installments of $47,466, previously accrued registration rights penalties of $22,156, due to a former officer of $81,250,
and additional interest, expenses, fine and penalties of $23,110. The Company charged additional interest, expenses, fines and
penalties $23,110 to operations as amortization of debt discount and deferred financing costs during the year ended December 31,
2016.
In
connection with the 2016 SPA, the Company granted a total of 2,239,900 warrants with an exercise price of $0.30 per share which
was later revised to $0.05 per share due to down round provisions, with a 5 year contractual life. The Company allocated $19,242
to debt discount based on the computed fair value of the convertible notes and warrants issued and classified the debt discount
is as a warrant liability due to the down round provision in the warrants.
As
of December 31, 2018 and December 31, 2017, the 2016 SPA had a carrying value of $761,597 and $756,786, respectively.
Other
2016 Financings
During
the year ended December 31, 2016, the Company issued four convertible notes (the “Cobrador 2016 Notes”) in the aggregate
principal amount of $115,000. The Cobrador 2016 Notes, related party, have a 2 year term, bear interest at 9.5% per annum, and
are convertible into shares of common stock at a conversion price of $0.17 per share. The conversion price was subsequently revised
to $0.05 per the down round provisions and the maturity date was extended to September 26, 2021. In connection with the Cobrador
2016 Notes, the Company granted a total of 338,235 warrants with an exercise price of $0.30 per share which was subsequently revised
to $0.05 per share due to down round provisions with a 5 year contractual term. The Company allocated $1,994 to debt discount
based on the computed fair value of the convertible notes and warrants issued, and classified the debt discount as a warrant liability
due to the down round provision in the warrants. As of December 31, 2018 and December 31, 2017, the Cobrador 2016 Notes had a
carrying value of $115,000 and $114,500, respectively.
During
the fourth quarter of 2016, the Company issued three additional convertible notes in the aggregate principal amount of $250,000.
The notes have a 2 year term, bear interest at 9.5% per annum and are convertible into shares of common stock at a conversion
price of $0.05 per share. In connection with these borrowings, the Company granted warrants to purchase 5,000,000 shares of common
stock with an exercise price of $0.07 per share. The Company allocated $27,585 to debt discount based on the computed fair value
of the convertible notes and warrants issued, and the debt discount is classified as a warrant liability due to the down round
provision in the warrants. As of December 31, 2018 the carrying value of the note was $250,000. The carrying value of the notes
at December 31, 2017 was $238,046.
2017
Financings
During
the year ended December 31, 2017, the Company entered into 19 separate convertible notes agreements (the “2017 Convertible
Notes)” in the aggregate principal amount of $923,882. The 2017 Convertible Notes each have a 2 year term, bear interest
at 9.5%, and are convertible into shares of common stock at a conversion price of $0.05 per share. In connection with the 2017
Convertible Notes, the Company issued a total of 16,537,926 warrants with an exercise price of $0.07 per share with a 5 year term.
The Company allocated $59,403 to a debt discount based on the computed fair value of the convertible notes and warrants issued,
and classified the debt discount as a warrant liability due to the down round provision in the warrants. During the year ended
December 31, 2018, the Company amortized $31,940 of debt discount resulting in unamortized debt discount of $13,278 and carrying
value of $910,608 at December 31, 2018. The carrying value of the notes at December 31, 2017 was $878,668.
2018
Financings
During
the year ended December 31, 2018, the Company entered into seventeen separate convertible notes agreements (the “2018 Convertible
Notes)” in the aggregate principal amount of $537,500. The 2018 Convertible Notes each have a 2 year term, bear interest
at 9.5% if paid in cash, 15% if paid in common stock, and are convertible into shares of common stock at a conversion price of
$0.05 per share. In connection with the 2018 Convertible Notes, the Company issued a total of 10,750,000 warrants with an exercise
price of $0.07 per share with a 5 year term. The Company allocated $33,384 to a debt discount based on the computed fair value
of the convertible notes and warrants issued, and classified the debt discount as a warrant liability due to the down round provision
in the warrants. During the year ended December 31, 2018, the Company amortized $12,803 of debt discount resulting in an unamortized
debt discount of $20,581 and carrying value of $516,919 at December 31, 2018.
On
November 20, 2018, two officers converted $436,500 accrued compensation into two convertible note agreements in the principal
amount of $436,500 in exchange . The note has a 2 year term, bear interest at 9.5% if paid in cash, 15% if paid in common stock,
and is convertible into shares of common stock at a conversion price of $0.05 per share.
During
the
year ended December 31, 2018, the Company entered into three convertible notes agreements in the aggregate principal amount
of $240,500 with a net proceed of $214,000. These notes had a 1 year term, and bears interest at 8%-12%. The notes
are convertible into a variable number of common shares as defined in the agreement. The embedded conversion features were
valued at $59,027, which were recorded as debt discount. In addition, the Company also recorded $26,500 as original debt
discount. These notes were in default due to failure to comply with the reporting requirements of the Exchange Act, as the
result, the Company recorded additional $120,250 penalty in principal as of December 31, 2018. During the year ended December
31, 2018, the Company amortized $21,382 of debt discount resulting in unamortized debt discount of $64,145 and carrying value
of $296,605 at December 31, 2018.
Other
2018 Financings
On
January 26, 2018, the Company entered into a convertible note agreement in the amount of $78,750, with original discount of $3,750,
bearing an annual interest rate of 8%. The note is convertible into common stock at a conversion price of $0.07 per share. The
Company repaid $78,750 to repay the note in full in August 2018.
Scheduled
maturities of debt remaining as of December 31, 2018 for each respective fiscal year end are as follows:
2019
|
|
$
|
4,060,183
|
|
2020
|
|
|
1,019,000
|
|
2021
|
|
|
115,000
|
|
|
|
|
5,073,933
|
|
Less: unamortized debt discount
|
|
|
(152,869
|
)
|
|
|
$
|
5,041,314
|
|
Note
7 – Related Party Debt
Mr. Graber, the Company’s Chief Executive
Officer through November 30, 2018, is affiliated with Cobrador Multi-Strategy Partners LP (Cobrador), and Cobrador has provided
significant financing to the Company. As of December 31, 2018, the Company had $1,067,804 in aggregate face amount due pursuant
to Senior Convertible Notes, Convertible Notes and Promissory Note, net of unamortized discount of $284 with $1,067,520 carrying
value. During the year ended December 31, 2018, the Company incurred $89,627 of interest expense for the borrowing from Cobrador.
Note
8 – Capital Lease Obligations
The
Company acquired capital assets under capital lease obligations. Pursuant to the agreement with the lessor, the Company makes
quarterly lease payments and will make a guaranteed residual payment at the end of the lease as summarized below. At the end of
the lease, the Company will own the equipment.
In
August 2016, the Company and the lessor agreed to extend the term of the lease until December 31, 2018. As a consideration of
the extension, the Company issued warrants to acquire 150,000 shares of common stock. The warrants have an exercise price of $0.30
per share, a term of three years, and were recorded as a debt discount and warrant liability due to the down round provision and
as such are marked to market each reporting period.
During
the year ended December 31, 2018 the Company entered into various capital lease agreements. The leases expire at various points
through the year ended December 31, 2023.
The
following schedule provides minimum future rental payments required as of December 31, 2018, under the current portion of capital
leases.
2019
|
|
$
|
125,547
|
|
2020
|
|
|
93,467
|
|
2021
|
|
|
49,788
|
|
2022
|
|
|
30,584
|
|
2023
|
|
|
10,252
|
|
Total minimum lease payments
|
|
|
309,638
|
|
Guaranteed residual value
|
|
|
120,668
|
|
|
|
|
430,306
|
|
Less: Amount represented interest
|
|
|
(59,520
|
)
|
Present value of minimum lease payments and guaranteed residual value
|
|
$
|
370,786
|
|
Note
9 – Capital Stock
The
Company has authorized 600,000,000 shares of common stock.
During
the year ended December 31, 2018, the Company issued 1,375,000 shares of common stock with a fair value of $53,547 for services
rendered.
During
the year ended December 31, 2018, the Company issued 3,186,667 shares of common stock for $278,000 upon exercise of warrants.
During
the year ended December 31, 2017, the Company issued 2,550,000 shares of common stock with a fair value of $76,140 for services
rendered.
During
the year ended December 31, 2017, the Company issued 400,000 shares of common stock upon exercise of cashless warrants.
Note
10 – Stock Options and Warrants
Warrants
At
December 31, 2018 the Company had the following warrant securities outstanding:
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Expiration
|
2013 Series A warrants-Senior Convertible Notes
|
|
|
3,000,000
|
|
|
$
|
0.05
|
|
|
December 2019
|
2013 Series B warrants-Senior Convertible Notes *
|
|
|
7,200,000
|
|
|
$
|
0.06
|
|
|
December 2019
|
2014 Series A warrants -Senior Convertible Notes
|
|
|
6,000,000
|
|
|
$
|
0.05
|
|
|
December 2019
|
2014 Series B warrants -Senior Convertible Notes *
|
|
|
7,200,000
|
|
|
$
|
0.06
|
|
|
January - December 2019
|
2014 Warrants for services
|
|
|
656,364
|
|
|
$
|
0.22
|
|
|
August - December 2019
|
2014 Warrants for services
|
|
|
640,000
|
|
|
$
|
0.06
|
|
|
January - November 2019
|
2014 Warrants- 2014 SPA convertible debt
|
|
|
208,334
|
|
|
$
|
0.22
|
|
|
August 1, 2019
|
2014 Warrants - 2014 SPA convertible debt
|
|
|
35,000
|
|
|
$
|
0.05
|
|
|
October - November 2019
|
2015 Warrants - 2014 SPA convertible debt
|
|
|
116,668
|
|
|
$
|
0.22
|
|
|
January - March 2020
|
2015 Warrants - 2015 SPA convertible debt
|
|
|
735,002
|
|
|
$
|
0.22
|
|
|
April - November 2020
|
2015 Warrants for services
|
|
|
127,067
|
|
|
$
|
0.22
|
|
|
April - November 2020
|
2015 Warrants issued in exchange for equipment
|
|
|
318,182
|
|
|
$
|
0.22
|
|
|
January 2020
|
2016 Warrants - 2016 SPA convertible debt
|
|
|
2,239,900
|
|
|
$
|
0.05
|
|
|
June 2021
|
2016 Warrants for services
|
|
|
850,000
|
|
|
$
|
0.05
|
|
|
June 2021
|
2016 Warrants - lease extension
|
|
|
350,000
|
|
|
$
|
0.05
|
|
|
August 2019
|
2016 Warrants - Convertible notes
|
|
|
338,236
|
|
|
$
|
0.05
|
|
|
August - September 2021
|
2016 Warrants for services
|
|
|
200,000
|
|
|
$
|
0.07
|
|
|
October 2019
|
2016 Warrants issued with Convertible Notes
|
|
|
5,000,000
|
|
|
$
|
0.07
|
|
|
November - December 2021
|
2017 Warrants – 2017 financing
|
|
|
15,109,354
|
|
|
$
|
0.07
|
|
|
December 2022
|
2018 Warrants – 2018 financing
|
|
|
9,991,905
|
|
|
$
|
0.07
|
|
|
January - November 2023
|
2018 Warrants for services
|
|
|
2,250,000
|
|
|
$
|
0.07
|
|
|
October - December 2023
|
Total
|
|
|
62,566,102
|
|
|
|
|
|
|
|
* Includes 1.2 million in warrants issued during 2018
A
summary of all warrants activity for the year ended December 31, 2018 is as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
Balance outstanding at December 31, 2017
|
|
|
50,299,469
|
|
|
$
|
0.07
|
|
|
|
2.71
|
|
Granted
|
|
|
22,400,000
|
|
|
$
|
0.05
|
|
|
|
2.40
|
|
Exercised
|
|
|
(3,186,667
|
)
|
|
$
|
0.09
|
|
|
|
2.40
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(6,000,000
|
)
|
|
$
|
0.07
|
|
|
|
-
|
|
Expired
|
|
|
(946,700
|
)
|
|
$
|
0.53
|
|
|
|
-
|
|
Balance outstanding at December 31, 2018
|
|
|
62,566,102
|
|
|
$
|
0.06
|
|
|
|
2.53
|
|
Exercisable at December 31, 2018
|
|
|
62,566,102
|
|
|
$
|
0.06
|
|
|
|
2.53
|
|
The
following table provides a summary of changes in the warrant liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the years ended December 31, 2018 and 2017.
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Balance at beginning of year
|
|
$
|
121,860
|
|
|
$
|
184,680
|
|
Fair value of warrants issued and recorded as liabilities
|
|
|
33,384
|
|
|
|
59,043
|
|
Gain on fair value adjustment
|
|
|
(25,889
|
)
|
|
|
(121,863
|
)
|
Balance at end of year
|
|
$
|
129,355
|
|
|
$
|
121,860
|
|
The
fair value of warrants outstanding at December 31, 2018 and December 31, 2017 has been determined based on the consideration of
the enterprise value of the Company, the limited market of the shares issuable under the agreement and modeling of the Black Scholes
method using multiple volatility assumptions. Warrants issued in and prior to 2012 are significantly out of the money and diluted
therefore, management has deemed the fair value of these to be minimal.
Equity
Incentive Plan
On
July 22, 2011, the Board of Directors of the Company approved the Company’s 2011 Equity Incentive Plan (the “Plan”)
and on July 26, 2011, stockholders holding a majority of shares of the Company approved, by written consent, the Plan. and the
issuance under the Plan of 5,000,000 shares. On November 16, 2017, the Board of Directors approved an increase of 10,000,000 shares
to be made available for issuance under the Plan. Accordingly, the total number of shares of common stock available for issuance
under the Plan is 15,000,000 shares. Awards may be granted to employees, officers, directors, consultants, agents, advisors and
independent contractors of the Company and its related companies. Such options may be designated at the time of grant as either
incentive stock options or nonqualified stock options. Stock-based compensation includes expense charges related to all stock-based
awards. Such awards include options, warrants and stock grants. Generally, the Company issues stock options that vest over three
years and expire in 5 to 10 years.
A
summary of all stock option activity for the year ended December 31, 2018 is as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
Balance outstanding at December 31, 2017
|
|
|
3,155,100
|
|
|
$
|
0.25
|
|
|
|
2.5
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding at December 31, 2018
|
|
|
3,155,100
|
|
|
$
|
0.25
|
|
|
|
1.5
|
|
Exercisable at December 31, 2018
|
|
|
3,155,100
|
|
|
$
|
0.25
|
|
|
|
1.5
|
|
Stock-based
compensation related to vested options totaled $256 and $67,913 for the years ended December 31, 2018 and 2017, respectively.
At December 31, 2018, there was $64 of unrecognized compensation cost related to unvested options. This cost is expected to be
recognized over a weighted average period of approximately three months.
In
2015, the Company granted 500,000 restricted shares with a three-year vesting period to an officer. During the second quarter
of 2017, upon the departure of the officer from the Company, the Board of Directors accelerated his vesting such that all shares
were vested on his departure date. During the years ended December 31, 2018 and 2017, $18,334 and $30,556, respectively, was charged
to operations as stock-based compensation costs for the restricted shares granted.
Note
11 – Commitments and Contingencies
National
Hockey League Retail License and Sponsorship Agreement
On February 27, 2015, the Company announced
a multi-year, Corporate Marketing Letter Agreement (the “NHL Agreement”) with the National Hockey League. The NHL Agreement
includes the usage of NHL
®
team branded marks on the Company’s Frozen Pond Premium Ice Cream™ for the
period commencing March 1, 2015 through June 30, 2020 in retail distributions including mass merchants, specialty shops, convenience
stores and in the Company’s specialty kiosks in North America.
The
Company entered into the NHL Agreement with NHL Enterprises, L.P, NHL Enterprises Canada, L.P. and NHL Interactive Cyber Enterprises,
LLC (collectively referred to as the “NHL” and the “Licensors”) and includes a retail license agreement,
a corporate sponsorship and a marketing agreement. In connection with the Agreement, the Company shall pay to the NHL a royalty
payment of five percent (5%) on net sales as well as fees attributable to national advertising, promotion and corporate marketing
and branding events. The Agreement also provides for customary representations, warranties, and indemnification from the parties.
The
Company has not shipped product to date under the license.
During the year ended December 31, 2018,
the Company and NHL agreed to terminate the NHL Agreement forgiving the Company CAD3,450,000 in outstanding obligations under the
Sponsorship Agreement, in return the Company agreed to pay the NHL an amount equal to one percent (1%) of the Company’s net
sales of certain products as defined under the agreement (the ‘Consideration’). The products include several types
of frozen goods that bear the logo or other markings of sports or entertainment brands. This Consideration is to be paid to the
NHL quarterly in arrears through the quarter ended June 30, 2026, or until the Company has paid USD$1,600,000 in the aggregate
from the date of the agreement to the extent that the Company has revenue related to sports or entertainment brands. The Company
recorded USD$2,674,419 in gain on settlement of liabilities.
Major
League Baseball Properties, Inc. License Agreement
In March 2016, the Company entered into
a license agreement beginning April 1, 2016 through December 31, 2019 with Major League Baseball Properties, Inc. (“MLB”
“Licensor”) for the non-exclusive right to certain proprietary intangible property of the Licensor to be used in connection
with the manufacturing, distribution, promotion and advertisement of the Company’s products sold within the U.S., the District
of Columbia and U.S. territories. Under the license agreement, the Company is scheduled to pay the following guaranteed payments;
$150,000 during 2016, $275,000 during 2017, $100,000 during 2018, and $115,000 during 2019. The Company is obligated to pay the
licensor a royalty based on the product sold or advertising sold. The royalty paid will offset all or a portion of the guaranteed
payments. The agreement is subject to customary default and termination clauses. The Company paid $322,000 and $101,000 during
the years ended December 31, 2018 and 2017, respectively, and has accrued $0 at December 31, 2018, and $222,000 as of December
31, 2017, and charged to operations $100,000 and $275,000 of guaranteed payments related to the years ended December 31, 2018 and
2017, respectively.
Operating
Lease Obligations
As
of December 31, 2018, the Company has two operating lease agreements for office and warehouse space, one in southern California
and one in Las Vegas. During the year ended December 31, 2018, the lease for the California warehouse was extended for an additional
term of one year until February 2019 with a base rent of $2,830 a month. This lease was extended for an additional two months
and was terminated on March 31, 2019. The lease for the warehouse in Las Vegas is for a term of 25 months commencing in February
2016 and provides for a base rent of $1,072 with scheduled increases. On March 1, 2018, the Company renewed its lease on the property
for a period of twelve months for a base rent of $1,272. In March 2019, the Company renewed the lease for an additional year at
the existing monthly base rent of $1,272. The Company also has two vehicle leases for use in product distribution and sales efforts.
The vehicle leases expire in June 2021 and require a monthly payment of $1,063. Rent expense amounted to $59,619 and $47,526 during
the years ended December 31, 2018 and 2017, respectively.
The
aggregate rental commitments for the office and warehouse leases at December 31, 2018 is:
2019
|
|
$
|
8,204
|
|
Total
|
|
$
|
8,204
|
|
In
addition, the Company entered into a short term operating lease during the year ended December 31, 2018 in Southern California.
The lease is for a term of three months which ended August 2018 at which point the lease became month to month. The Company is
currently paying $845 per month in base rent for this lease.
Note 12 - Income Taxes
Loss
from operations before provision (benefit) for income taxes is summarized in the following table:
|
|
Years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Domestic
|
|
$
|
(301,688
|
)
|
|
$
|
(2,317,624
|
)
|
Foreign
|
|
|
(136,009
|
)
|
|
|
(865,704
|
)
|
|
|
$
|
(437,697
|
)
|
|
$
|
(3,183,328
|
)
|
The income
tax provision (benefit) is summarized in the following table:
|
|
Years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total Current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
157,165
|
|
|
$
|
189,247
|
|
State
|
|
|
(65,543
|
)
|
|
|
(192,813
|
)
|
Foreign
|
|
|
183,571
|
|
|
|
(86,536
|
)
|
Total Deferred
|
|
|
275,193
|
|
|
|
(90,102
|
)
|
Less increase in allowance
|
|
|
(275,193
|
)
|
|
|
90,102
|
|
Net Deferred
|
|
|
-
|
|
|
|
-
|
|
Total income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The significant components of the
deferred tax assets and liabilities are summarized below:
|
|
Years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,418,201
|
|
|
$
|
2,719,448
|
|
Depreciable and amortizable assets
|
|
|
(31,997
|
)
|
|
|
(41,913
|
)
|
Prepaid expense
|
|
|
-
|
|
|
|
(167
|
)
|
Intangible asset
|
|
|
-
|
|
|
|
(43,501
|
)
|
Stock based compensation
|
|
|
203,866
|
|
|
|
172,323
|
|
Loss reserve
|
|
|
1,925
|
|
|
|
1,891
|
|
Accrued compensation
|
|
|
55,463
|
|
|
|
143,657
|
|
Other
|
|
|
28,433
|
|
|
|
(654
|
)
|
Total
|
|
|
2,675,891
|
|
|
|
2,951,084
|
|
Less valuation allowance
|
|
|
(2,675,891
|
)
|
|
|
(2,951,084
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately
$9,977,000 and $6,400,000 in U.S. federal and state net operating loss carryforwards (“NOLs”), respectively, available
to reduce future taxable income. Of these carryforwards, $15,808,000 will begin to expire in 2030. Due to the uncertainty as to
the Company’s ability to generate sufficient taxable income in the future and utilize the NOLs before they expire, the Company
has recorded a valuation allowance to fully offset the NOLs, as well as the total net deferred tax assets.
Internal Revenue Code Section 382
(“Section 382”) imposes limitations on the availability of a company’s net operating losses and other corporate
tax attributes as certain significant ownership changes occur. As a result of the historical equity instrument issuances by the
Company, a Section 382 ownership change may have occurred and a study will be required to determine the date of the ownership change,
if any. The amount of the Company’s net operating losses and other tax attributes incurred prior to any ownership change
may be limited based on the Company’s value. A full valuation allowance has been established for the Company’s deferred
tax assets, including net operating losses and any other corporate tax attributes.
On December 22, 2017, the U.S. government
enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act
makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax
rate from 35% to 21%; (2) eliminating the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be
realized; (3) changing rules related to usage and limitation of net operating loss carryforwards created in tax years beginning
after December 31, 2017; (4) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries for tax years
beginning after December 31, 2017; and (5) implementing a territorial tax system and imposing a transition toll tax on deemed repatriated
earnings of foreign subsidiaries.
On December 22, 2017, the SEC staff
issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have
the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to the revaluation
of deferred tax assets and liabilities and included these amounts in its financial statements for the year ended December 31, 2017.
As of December 31, 2018, the Company has completed its accounting for the tax effects of the Act.
The deferred U.S. income tax expense
for 2017 primarily represents a one-time, non-cash expense of approximately $1,189,000 relating to the revaluation of deferred
tax assets offset by a reduction of the valuation allowance in an equal amount. This resulted in a net zero effect on the provision
for income tax.
During the years ended December
31, 2018 and 2017, the Company had no unrecognized uncertain tax positions. The Company’s policy is to recognize interest
accrued and penalties related to unrecognized uncertain tax positions in tax expense.
The Company files income tax returns
in the U.S. federal jurisdiction, as well as the states of California, Florida, Illinois and New York. The tax years 2015-2018
generally remain open to examination by the U.S. federal and state taxing authorities. In addition, the 2014 tax year is still
open to examination by the state of California.
A reconciliation of the income tax
provision using the statutory U.S. income tax rate compared with the actual income tax provision reported on the consolidated statements
of operations is summarized in the following table:
|
|
Years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Statutory United States federal rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
United States federal tax on foreign branch operations
|
|
|
6.53
|
|
|
|
9.25
|
|
State income tax, net of federal benefit
|
|
|
10.95
|
|
|
|
6.03
|
|
Other foreign income tax, net of federal benefit
|
|
|
1.98
|
|
|
|
2.72
|
|
Change in valuation reserves
|
|
|
62.87
|
|
|
|
(2.83
|
)
|
Permanent differences
|
|
|
4.71
|
|
|
|
0.65
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
(6.86
|
)
|
Tax rate differential between jurisdictions
|
|
|
2.60
|
|
|
|
(5.64
|
)
|
Federal income tax law changes
|
|
|
-
|
|
|
|
(37.35
|
)
|
Other
|
|
|
0.88
|
|
|
|
0.03
|
|
Foreign net operating loss adjustment
|
|
|
(111.52
|
)
|
|
|
-
|
|
Effective tax rate benefit (provision)
|
|
|
-%
|
|
|
|
-%
|
|
Note
13 - Subsequent Events
On
March 3, 2019, Tyler J. Humphrey was appointed to be Interim-Chief Executive Officer and Interim-Chief Financial Officer of the
Company. As part of Mr. Humphrey’s compensation, he received a warrant to purchase 500,000 shares of the Company’s
common stock at a strike price of $.07 per share with a five (5) year maturity. He will receive a base salary of $78,000 per year
with a discretionary bonus at the direction of the Board of Directors. In connection with Mr. Humphrey’s appointment, Michael
T. Carroll resigned as the Company’s President, Chief Executive Officer, and Chief Financial Officer effective February
28, 2019. Additionally, Phillip Jones resigned as a Director of the Company effective March 1, 2019.
On
March 23, 2019, the Board of Directors approved and appointed Michael P. Flanagan as Chief Executive Officer, President and Member
of the Board of Directors of the Company with an effective date of April 1, 2019. Tyler J. Humphrey will continue his role as
interim-Chief Financial Officer, exclusively and will no longer serve as Interim Chief Executive Officer.
On
March 5, the company issued a non-equity linked promissory note for $100,000 to an investor with an annual 10% rate of interest
and a one (1) year maturity. This investor also received a warrant for 500,000 shares at a strike price of $.07 per share with
a five (5) year maturity.
On
March 18, 2019, the Company issued a convertible promissory note for $85,250 to an investor with an 8.0% rate of interest and
a one (1) year maturity. The Company has the option to pre-pay the note (principal and accrued interest) in cash within the 1st 90 days from issuance at a 25% premium, and a 40% premium 91-180 days from the issuance date. Subsequent to 181 days, the Company
shall have no right of prepayment and the holder may convert at a 40% discount to the prevailing market price. The note matures
on December 11, 2019.
Asset
Sale
On March 18, 2019, the Company approved
of an asset sale of certain assets of the legacy MiniMelts business and operation for $350,000 in cash, which was approved by a
majority of stockholders. In 2018, MiniMelts sales accounted for approximately $1,100,000 in revenue. Part of the proceeds from
the sale will be used to retire certain lease obligations as well as for general operating purposes.
The
Company will continue to pursue sales of MLB ice cream under the Major League Baseball license and additionally, leverage its
vending assets to pursue new revenue streams and test concepts for new offerings at retail.
The
Board of Directors has agreed to begin to explore the development of certain products in the cannabis industry with a focus on
non-THC Cannabinoids in frozen desserts as well as other complimentary CBD product offerings though vending as well as online
sales and direct to retail, under a new brand.
On May 30, 2019, the Company issued
a series of convertible notes under a $250,000 revolving Senior Secured credit facility to an investor, for working capital purposes.
As of the date of this filing, the company had drawn $209,550 under the agreement. The notes carry an interest rate of 9.5% and
a two-year term. The notes are convertible into common stock at $0.07 per share and are redeemable after one-year at the company’s
option. The notes also contain a 4.99% limitation of ownership on conversion.
Subsequent to December 31, 2018, the Company issued 3,841,096 shares of its common stock, including 3,441,096
shares for services valued at $99,294, and 400,000 shares in conversion of $50,000 of convertible notes.