CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 and 2014
|
|
Common Stock
|
|
Preferred
Series A Stock
|
|
Preferred
Series B Stock
|
|
Preferred
Series C Stock
|
|
Preferred
Series D Stock
|
|
Additional Paid-In
|
|
Accumulated
|
|
Treasury Stock
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
97,325
|
|
$
|
10
|
|
39,442
|
|
$
|
4
|
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
-
|
|
$
|
-
|
|
$
|
4,165,890
|
|
$
|
(6,904,318
|
)
|
(4
|
)
|
$
|
-
|
|
$
|
(2,738,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common and preferred stock
|
|
33,333
|
|
|
3
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
26,667
|
|
|
3
|
|
|
|
|
|
|
|
(6
|
)
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued for fees and commissions for financing
|
|
600
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Deferred costs related to February 14, 2014 offering
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(260,696
|
)
|
|
-
|
|
-
|
|
|
-
|
|
|
(260,696
|
)
|
Exercise of Series A Preferred Stock
|
|
27,778
|
|
|
3
|
|
(27,778
|
)
|
|
(2
|
)
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Donation of common stock
|
|
500
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
65,000
|
|
|
-
|
|
-
|
|
|
-
|
|
|
65,000
|
|
Cashless exercise of warrants for 91,333
shares issued and or issuable
|
|
74,131
|
|
|
8
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
12,379,760
|
|
|
-
|
|
-
|
|
|
-
|
|
|
12,379,768
|
|
Conversion of Series C Preferred Stock
|
|
6,667
|
|
|
1
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
(6,667
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase of common stock by officers
|
|
8,333
|
|
|
1
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
249,999
|
|
|
-
|
|
-
|
|
|
-
|
|
|
250,000
|
|
Shares issuable for anti-dilution protection
|
|
160,093
|
|
|
16
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
(16
|
)
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issuable to officers as compensation
|
|
16,386
|
|
|
1
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
163,854
|
|
|
-
|
|
-
|
|
|
-
|
|
|
163,855
|
|
Shares issuable for consulting services
|
|
1,330
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
13,300
|
|
|
-
|
|
-
|
|
|
-
|
|
|
13,300
|
|
Additional compensation recorded for Preferred C
onvertible Series B Stock
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
2,166,707
|
|
|
-
|
|
-
|
|
|
-
|
|
|
2,166,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,618,567
|
)
|
-
|
|
|
-
|
|
|
(12,618,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
|
426,476
|
|
$
|
43
|
|
11,664
|
|
$
|
2
|
|
-
|
|
$
|
-
|
|
20,000
|
|
$
|
2
|
|
-
|
|
$
|
-
|
|
$
|
18,943,791
|
|
$
|
(19,522,885
|
)
|
(4
|
)
|
$
|
-
|
|
$
|
(579,047
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of Series B preferred stock and issuance of Preferred Convertible Series D Stock
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
3,000
|
|
|
-
|
|
|
(3,420,804
|
)
|
|
3,420,804
|
|
-
|
|
|
-
|
|
|
-
|
|
Shares issued for due dilligence fee
|
|
64,000
|
|
|
6
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
639,994
|
|
|
-
|
|
-
|
|
|
-
|
|
|
640,000
|
|
Shares issued for consulting services
|
|
160
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
492
|
|
|
-
|
|
-
|
|
|
-
|
|
|
492
|
|
Shares issued for anit-dilution protection
|
|
1,249,611
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,216,844
|
)
|
-
|
|
|
-
|
|
|
(3,216,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
1,740,247
|
|
$
|
174
|
|
11,664
|
|
$
|
2
|
|
-
|
|
$
|
-
|
|
20,000
|
|
$
|
2
|
|
3,000
|
|
$
|
-
|
|
$
|
16,163,348
|
|
$
|
(19,318,925
|
)
|
(4
|
)
|
$
|
-
|
|
$
|
(3,155,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) All periods presented have been retroactively adjusted to reflect the reverse stock split authorized in December 2015.
|
|
|
|
|
|
|
|
|
|
BE ACTIVE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,216,844
|
)
|
|
$
|
(12,618,567
|
)
|
Adjustments to reconcile net loss to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,685
|
|
|
|
4,317
|
|
Amortization of deferred financing costs and debt discount
|
|
|
1,331,663
|
|
|
|
-
|
|
Stock granted for consulting services
|
|
|
492
|
|
|
|
13,300
|
|
Forgiveness of debt income
|
|
|
(25,555
|
)
|
|
|
(247,021
|
)
|
Write-off of website costs
|
|
|
-
|
|
|
|
(10,900
|
)
|
Loss on issuance of convertible debt
|
|
|
-
|
|
|
|
149,963
|
|
Increase in fair value of derivative liability
|
|
|
578,756
|
|
|
|
8,755,391
|
|
Stock issued as charitable contribution
|
|
|
-
|
|
|
|
65,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
2,166,707
|
|
Stock bonus - officers, net of cash paid
|
|
|
-
|
|
|
|
162,217
|
|
Changes in assets and liabilities:
|
|
|
-
|
|
|
|
|
|
Decrease (increase) in escrow account
|
|
|
12,500
|
|
|
|
(12,500
|
)
|
Decrease (increase) in accounts receivable
|
|
|
47,907
|
|
|
|
(44,726
|
)
|
Decrease (increase) in loans receivable
|
|
|
7,262
|
|
|
|
(7,262
|
)
|
Decrease (increase) in inventory
|
|
|
25,591
|
|
|
|
(105,733
|
)
|
Decrease in prepaid expenses and other current assets
|
|
|
2,587
|
|
|
|
91,800
|
|
(Decrease) increase in deferred rent
|
|
|
(644
|
)
|
|
|
797
|
|
Website development cost
|
|
|
-
|
|
|
|
(10,733
|
)
|
Increase in accounts payable and accrued expenses
|
|
|
335,153
|
|
|
|
56,888
|
|
Net cash (used in) operating activities
|
|
|
(894,447
|
)
|
|
|
(1,591,062
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Debt issuance costs paid
|
|
|
-
|
|
|
|
(53,000
|
)
|
Proceeds from private placements
|
|
|
-
|
|
|
|
1,800,000
|
|
Costs of private placements
|
|
|
(30,500
|
)
|
|
|
(260,696
|
)
|
Proceeds from secured convertible notes payable
|
|
|
750,000
|
|
|
|
425,000
|
|
Purchase of common stock by officers
|
|
|
-
|
|
|
|
251,639
|
|
Increase (decrease) in due to officers/stockholders
|
|
|
111,778
|
|
|
|
(73,193
|
)
|
Net cash provided by financing activities
|
|
|
831,278
|
|
|
|
2,089,750
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(63,169
|
)
|
|
|
498,688
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
504,358
|
|
|
|
5,670
|
|
Cash and cash equivalents, end of year
|
|
$
|
441,189
|
|
|
$
|
504,358
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
655
|
|
|
$
|
367
|
|
State minimum taxes and franchise fees paid
|
|
$
|
2,055
|
|
|
$
|
2,350
|
|
Note payable issued as deferred cost
|
|
$
|
75,000
|
|
|
$
|
-
|
|
1. ORGANIZATION AND OPERATIONS
Business Operations
On January 9, 2013, the Company, Be Active Acquisition Corp., the Company’s newly formed, wholly-owned Delaware subsidiary (“Acquisition Sub”) and Be Active Brands, Inc. (“Brands”), an entity incorporated in Delaware on March 10, 2009 and based in New York, entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”). Upon closing of the transaction under the Merger Agreement (the “Merger”), Acquisition Sub merged with and into Brands, with Brands as the surviving corporation, and became a wholly-owned subsidiary of the Company.
The Merger was accounted for as a reverse-merger and recapitalization with Brands as the acquirer for financial reporting purposes and the Company as the acquired company. Consequently, the assets and liabilities and the operations reflected in the historical financial statements prior to the Merger are those of Brands and are recorded at the historical cost basis of Brands and the consolidated financial statements after completion of the Merger include the assets and liabilities of the Company and Brands, and the historical operations of the Company and Brands from the closing date of the Merger.
The Company sells frozen yogurt and fudge bars to retailers with stores in New York, New Jersey, Connecticut, Massachusetts, Rhode Island and Vermont. The Company intends to expand its regional growth to a national level and global presence in sales of premium quality low-fat, low calorie, low-carbohydrate, vitamin and probiotic enriched frozen yogurt and products under the brand name “Jala”.
2. GOING CONCERN
The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established revenues sufficient to cover its operating costs and allow it to continue as a going concern. The Company has incurred significant net losses since inception and at December 31, 2015, has an accumulated deficit of ($19,318,925) and stockholders’ deficit of ($3,155,399). The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating expenses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company through sales of its products in combination with equity and/or debt financing. While as indicated in Note 8, the Company obtained approximately $425,000, $250,000 and $500,000 of gross proceeds from the debt offerings on December 31, 2014, September 21, 2015 and December 31, 2015, respectively, and currently has limited working capital necessary for sales and production, accordingly there can be no assurance that the Company can continue as a going concern.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary and have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated.
The financial statements reflect a 1 per 1,000 reverse stock split of all outstanding common and preferred stock, which was effective immediately prior to the completion of the December 2015 Securities Purchase Agreement (see Note 8). All share and per share data reported and disclosed in the accompanying financial statements have been retroactively adjusted to give effect to the reverse stock split.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Some of the more significant estimates required to be made by management include the fair value of derivatives and other stockholders' equity based transactions.
Financial Instruments
The Company considers the carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses to approximate their fair values because of their relatively short maturities. The fair value of convertible notes payable approximate their face value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 – Unadjusted quoted prices in active markets that are accessible at measurement date for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and less observable from objective sources.
The Company’s derivative liabilities (see Note 9) are valued at each reporting period using level 3 inputs.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at one financial institution. The Company has not experienced any losses in such accounts. Federal legislation provides for FDIC insurance of up to $250,000.
Accounts Receivable
Accounts receivable consist of amounts due from customers. The Company records an allowance for doubtful receivables, if necessary, to allow for any amounts which may be unrecoverable. The allowance is based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2015 and 2014, no allowance for doubtful accounts was required.
Inventory
Inventory consists primarily of packaging, raw materials and finished goods held for distribution. Inventory is stated at the lower of cost (first-in, first-out) or market. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand and the distribution channel, the estimated time to sell such inventory, remaining shelf life and the current expected market conditions. Adjustments to reduce inventory to its net realizable value are charged to cost of goods sold.
Shipping and Handling Costs
The Company classifies shipping and handling costs as part of selling expense. Shipping and handling costs were $18,927 and $ 3,267 for the years ended December 31, 2015 and 2014, respectively.
Debt Issue Cost
Debt issue costs related to costs incurred in connection with the issuance of convertible notes, and are being amortized on the straight-line method (which approximates the effective interest method) over the term of the respective notes payable. Debt issuance costs are shown on the accompanying balance sheet net of accumulated amortization of $9,375 and $0 at December 31, 2015 and 2014, respectively.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method.
Maintenance and repairs are charged to operating expenses as they are incurred. Improvements and betterments, which extend the lives of the assets, are capitalized. The cost and accumulated depreciation of assets retired or otherwise disposed of are removed from the appropriate accounts and any profit or loss on the sale or disposition of such assets is credited or charged to income.
Derivative Liabilities
The Company’s derivative liabilities are related to the ratchet reset provisions of the Company’s warrants and convertible debt. Such ratchet reset provisions prohibit the Company from concluding that the warrants are indexed to our own stock, and thus derivative accounting is appropriate. For derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and is then re-valued at each reporting date, with changes in fair value recognized in operations for each reporting period. The Company uses the Black-Scholes Option-Pricing Model to value the derivative instruments of its’ outstanding stock warrants at inception and subsequent valuation dates and in accordance with Accounting Standards Codification (“ASC”) 815, and a binomial valuation model in connection with its’ convertible debt.
Revenue Recognition
Revenue is recognized, net of discounts, rebates, promotional adjustments, price adjustments, slotting fees and estimated returns, upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations.
Share-Based Compensation
The Company recognizes compensation expense for all share-based payment awards made to employees, directors and others based on the estimated fair values on the date of the grant, as subsequently adjusted for certain contingently issuable shares. Common stock equivalents are valued using the Black-Scholes Option-Pricing Model using the known or equivalent market value of common stock on the date of valuation, an expected dividend yield of zero, the remaining period or maturity date of the common stock equivalent and the expected volatility of common stock. Shares contingently issuable based on the future value of the Company’s stock and the common shares outstanding at a stated future date are periodically revalued at each balance sheet date based on the common shares currently outstanding and the current traded price per share.
Income Taxes
The Company provides for income taxes under FASB ASC 740 –
Income Taxes
, which requires the use of an assets and liabilities approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. A valuation allowance is provided when realization of deferred tax assets is not considered more likely than not.
The Company’s policy is to classify income tax assessments, if any, for interest in interest expense and for penalties in general and administrative expenses.
As of December 31, 2015, management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements.
The Company’s income tax returns since 2012 are subject to examination by the tax authorities.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising was $6,816 and $31,560 for the years ended December 31, 2015 and 2014, respectively.
Recent Accounting Pronouncements
In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is in the process of evaluating the impact of the new pronouncement on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the potential impact this standard may have on the consolidated financial statements and the timing of adoption.
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting guidance, "Revenue from Contracts with Customers." The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The standard will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. Accordingly, the Company will adopt this standard in the first quarter of fiscal year 2018. The Company is currently evaluating the impact this guidance will have on the consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern". This ASU is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. It is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect it to have a material effect on the Company's consolidated financial condition, results of operations, and cash flows.
All other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
4. INVENTORY
Inventory consists of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Materials
|
|
$
|
20,253
|
|
|
$
|
21,629
|
|
Finished product
|
|
|
59,889
|
|
|
|
84,104
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,142
|
|
|
$
|
105,733
|
|
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Furniture and Fixtures
|
|
$
|
6,138
|
|
|
$
|
6,138
|
|
Website
|
|
|
18,000
|
|
|
|
18,000
|
|
Less: Accumulated depreciation
|
|
|
(9,928
|
)
|
|
|
(3,243
|
)
|
Balance
|
|
$
|
14,210
|
|
|
$
|
20,895
|
|
Depreciation and amortization expense for December 31, 2015 and 2014 were $6,685 and $4,317, respectively.
6. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share is computed by dividing the net income or loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted income (loss) per share is computed similar to basic income (loss) per share except that the denominator for fully diluted income per share is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued in order to present their dilutive effect unless the effect of such potential shares would be antidilutive. Potential common shares consist of incremental common shares issuable upon the exercise of warrants, convertible preferred shares and convertible notes payable. In addition, in computing net income (loss) per share on a fully diluted basis, the Company adjusts for the interest expense on convertible debt as if the debt had been converted for all periods presented.
As at December 31, 2015, the number of potential dilutive common shares is comprised of the following:
|
|
2015
|
|
|
2014
|
|
Common share equivalents of Series A Convertible Preferred Stock
|
|
|
11,664
|
|
|
|
11,664
|
|
Common share equivalents of Series B Convertible Preferred Stock
|
|
|
-
|
|
|
|
216,670
|
|
Common share equivalents of Series C Convertible Preferred Stock
|
|
|
2,000,000
|
|
|
|
20,000
|
|
Common share equivalents of Series D Convertible Preferred Stock
|
|
|
3,000
|
|
|
|
-
|
|
Convertible Promissory Notes Payable
|
|
|
4,233,333
|
|
|
|
74,167
|
|
Due Diligence Payable
|
|
|
-
|
|
|
|
64,000
|
|
Warrants
|
|
|
7,900
|
|
|
|
17,084
|
|
Total
|
|
|
6,255,897
|
|
|
|
403,585
|
|
7. DUE TO OFFICERS/STOCKHOLDERS
On February 27, 2014, one stockholder who had resigned in March 2013 agreed to release the Company from its $247,021 loan obligation to him which was recorded as forgiveness of debt income in the accompanying consolidated statements of operations for the year ended December 31, 2014. On February 25, 2015, one stockholder agreed to release the Company from its $25,555 loan obligation to him which was recorded as forgiveness of debt income for the year ended December 31, 2015 (see Note 16).
8. SECURED CONVERTIBLE NOTES PAYABLE
On December 31, 2014, the Company entered into a Securities Purchase Agreement (“2014 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $500,000 of principal amount of notes due December 31, 2015 representing the Purchasers’ subscription amount. The 2014 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The 2014 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable within three years, then the Company will be required to amend the 2014 Agreement to provide such favorable terms to the Purchasers. The Company paid $33,000 in legal and escrow agent fees, a placement agency fee of $20,000 in the form of a note payable, substantially similar to the Purchasers’ notes and issued 64,000, shares of its common stock valued at $640,000 and $20,000 as due diligence fees, all of which have been recorded as debt issuance costs on the accompanying consolidated financial statements and is being charged to operations over the twelve months ended December 31, 2015. The Company recorded amortization expense of $713,000 and $0 on the debt issuance costs during the year ended December 31, 2015 and 2014, respectively. At December 31, 2015 the maturity date of the notes were extended to December 31, 2016.
Under the 2014 Agreement, the Company sold an aggregate of $425,000 in Secured Convertible Notes (“Notes”) and issued an additional $20,000 Note for placement fees. The Company fulfilled its obligations as defined by certain equity requirements; therefore, the Notes will be convertible into shares of the Company’s common stock. Under certain conditions defined in the agreement, the Company has the option to convert the Notes into shares of the Company's common stock. Since the equity obligations were met during 2015 the Notes accrued interest at 10% per annum through June 30, 2015. The original conversion price on the Note was $6.00, and has subsequently reduced to $0.30 at December 31, 2015.
Each Holder of the Notes has been granted a security interest in assets of the Company in accordance with a Security Agreement. The Security Agreement provides the Collateral Agent a security interest in all goods, machinery, equipment, contract rights and intangibles in the event of a default under the Agreement.
In connection with this 2014 Agreement, and under the anti-dilution provisions of the February 2014 private placement, on December 31, 2014, the Company issued an aggregate of 160,093 shares of common stock and 13,333 warrants to purchase common shares at $6.00 per share to existing stockholders holding securities purchased in that offering. This reflects the post-split adjustment to shares issued and price per share. The fair value of the 13,333 warrants issued in 2014 were valued at $122,807 using the Black-Scholes Pricing model and was reflected as a change in the derivative liability in the 2014 statement of operations.
In addition, the pricing of this 2014 Agreement triggered the pricing reset provision in the 3,333 warrants issued in the February 14, 2014 private placement. Such triggering resulted in the exercise price of the previously issued warrants resetting to $6.00 from $30.00 at December 31, 2014. The exercise price was further reduced to $0.30 as a result of additional financing in 2015. At December 31, 2015, using the Black-Scholes Pricing Model, the Company re-valued the remaining February 2014 warrants at $1,591 a decrease in fair value of $28,208 from December 31, 2014 ($29,799) and a decrease in fair value of $569,409 since inception. The decrease in this derivative liability during 2014 amounted to $541,201.
At December 31, 2015, the 13,333 ratchet warrants granted at December 31, 2014 were re-valued using the Black-Scholes Pricing Model at $6,633, a decrease in fair value of $116,174 from December 31, 2014 ($122,807).
The significant assumptions utilized by the Company in the valuation of these warrants at December 31, 2015 and 2014 were as follows:
|
|
2015
|
|
|
2014
|
|
Market Price:
|
|
$
|
0.55
|
|
|
$
|
10.00
|
|
Exercise Price:
|
|
$
|
0.30
|
|
|
$
|
6.00
|
|
Volatility:
|
|
|
149
|
%
|
|
|
144
|
%
|
Dividend Yield:
|
|
zero
|
|
|
zero
|
|
Term in years:
|
|
3.1 and 4.0
|
|
|
4.1 and 5
|
|
Risk Free Rate of Return:
|
|
|
1.76
|
%
|
|
|
0.165
|
%
|
The outstanding warrants for 26,884 common shares at December 31, 2015, held by the January and April 2013 private placement investors do not have a cashless exercise and were not affected by the reset provision. The Company re-valued these warrants at December 31, 2015 using the Black-Scholes Pricing Model at $0, a decrease in fair value of $94,115 at December 31, 2014. The decrease in this derivative liability during 2014 amounted to $874,228.
The significant assumptions utilized by the Company in the valuation of these warrants were as follows:
|
|
2015
|
|
|
2014
|
|
Market Price:
|
|
$
|
0.55
|
|
|
$
|
10.00
|
|
Exercise Price:
|
|
$
|
30.00
|
|
|
$
|
30.00
|
|
Volatility:
|
|
|
149
|
%
|
|
|
144
|
%
|
Dividend Yield:
|
|
zero
|
|
|
zero
|
|
Term in years:
|
|
>1
|
|
|
1.3 and 1.02
|
|
Risk Free Rate of Return:
|
|
|
1.31
|
%
|
|
|
0.25
|
%
|
On September 21, 2015, the Company entered into a Securities Purchase Agreement (“Sept 2015 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $250,000 of principal amount of notes due September 30, 2016, representing the Purchasers’ subscription amount. The new offering is substantially the same terms and conditions as the December 2014 Notes. In connection with the new offering, the Company issued allonges to the December 2014 Notes increasing the principal amount of the Notes ("Allonges") pursuant to the terms of the new offering with such Allonges having a maturity date of September 30, 2016 and a conversion price equal to $1.00 per share (subject to further reduction), at September 21, 2015. The conversion price was reduced to $0.30 at December 31, 2015 as a result of a subsequent financing.
The Sept 2015 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The Sept 2015 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable
within three years, then the Company will be required to amend the Sept 2015 Agreement to provide such favorable terms to the Purchasers. The Company paid $12,500 in legal fees, a placement agency fee of $25,000 in the form of a note payable, substantially similar to the Purchasers’ notes, all of which was recorded as debt issuance costs on the accompanying consolidated financial statements and will be charged to operations over the twelve months ended September 30, 2016 or to the date of conversion, if earlier.
Under the Sept 2015 Agreement, the Company sold an aggregate of $250,000 in Secured Convertible Notes and issued an additional $25,000 Note for placement fees. Once the Company has fulfilled its obligations as defined by certain equity requirements, the Notes will be convertible into shares of the Company’s common stock. Under certain conditions defined in the agreement, the Company has the option to convert the Notes into shares of the Company's common stock. Until the equity obligations are met, the Notes bear interest at 10%, per annum. Interest will be earned at a rate of 10% for the twelve months ending September 30, 2016 or to the date of conversion, whichever is earlier. The conversion price for the Note and accrued interest was equal to $1.00 per share at September 21, 2015 subject to adjustments as stock dividends and stock splits, as defined. At December 31, 2015, the conversion price was reduced to $0.30.
Each Holder of the Notes has been granted a security interest in assets of the Company in accordance with a Security Agreement. The Security Agreement provides the Collateral Agent a security interest in all goods, machinery, equipment, contract rights and intangibles in the event of a default under the Agreement.
On December 31, 2015, the Company entered into a Securities Purchase Agreement (“Dec 2015 Agreement”) with certain accredited investors to sell to the Purchasers an aggregate of up to $500,000 of principal amount of notes due December 31 2016, representing the Purchasers’ subscription amount. The new offering is substantially the same terms and conditions as the December 2014 Notes.
The Dec 2015 Agreement defines certain covenants and provides for a purchase price reset for a period of three years, unless the securities have been assigned, whereby should the Company issue or sell any shares of common stock or any common stock equivalents at a price less than the Purchasers’ conversion price per share, the Company will be required to issue additional shares of common stock to the Purchasers for no additional consideration resulting in a share dilution adjustment, as defined. The Dec 2015 Agreement also provides a Most Favored Nations Provision whereby if the Company issues or sells any common stock at terms more favorable
within three years, then the Company will be required to amend the Dec 2015 Agreement to provide such favorable terms to the Purchasers. The Company paid $18,000 in legal fees and a placement agency fee of $50,000 in the form of a note payable, with substantially similar to the Purchasers’ notes, all of which was recorded as debt issuance costs on the accompanying consolidated financial statements and will be charged to operations over the twelve months ended December 31, 2016 or to the date of conversion, if earlier.
Under the Dec 2015 Agreement, the Company sold an aggregate of $500,000 in Secured Convertible Notes (“Notes”) and issued an additional $50,000 Note for placement fees. Once the Company has fulfilled its obligations as defined by certain equity requirements, the Notes will be convertible into shares of the Company’s common stock. Under certain conditions defined in the agreement, the Company has the option to convert the Notes into shares of the Company's common stock. Until the equity obligations are met, the Notes bear interest at 10%, per annum. Interest will be earned at a rate of 10% for the twelve months ending December 31, 2016 or to the date of conversion, whichever is earlier. The conversion price for the Note and accrued interest is equal to $0.30 per share, subject to adjustments as stock dividends and stock splits, as defined.
Each Holder of the Notes has been granted a security interest in assets of the Company in accordance with a Security Agreement. The Security Agreement provides the Collateral Agent a security interest in all goods, machinery, equipment, contract rights and intangibles in the event of a default under the Agreement.
A summary of the convertible notes are as follows:
|
|
Face Amount
|
|
|
Unamortized Discount
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
$
|
445,000
|
|
|
$
|
(445,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Amortization
|
|
|
|
|
|
|
445,000
|
|
|
$
|
445,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept 2015 Issue
|
|
$
|
275,000
|
|
|
|
(275,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Amortization
|
|
|
|
|
|
|
164,288
|
|
|
|
164,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec 2015 issue
|
|
$
|
550,000
|
|
|
|
(550,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
1,270,000
|
|
|
$
|
(660,712
|
)
|
|
$
|
609,288
|
|
In connection with the Sept 2015 and Dec. 2015 Agreements, and under the anti-dilution provisions of the December 2014 private placement, the Company is required to issue an aggregate of 2,611,003 shares of common stock to existing stockholders holding securities purchased in that offering, of which 1,249,569 were issued as of December 31, 2015.
9. Derivative Liabilities
The Company has determined that the convertible notes issued on December 31, 2014, September 21, 2015 and December 31, 2015 contain provisions that protect holders from future issuances of the Company’s common stock at prices below such convertible notes’ respective conversion price and these provisions result in modification of the conversion price to issue additional common shares based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40 and the conversion feature represents an embedded derivative that requires bifurcation.
The fair values of the Convertible Notes Offering were recognized as derivative instruments at issuance and are measured at fair value at each reporting period. The embedded derivative on the 2014 Agreement was valued at $594,963 using a binomial valuation model at December 31, 2014. In addition during 2015 the Company recognized derivative liabilities aggregating $1,439,432 in connection with the Sept 2015 and Dec 2015 fund raising. At December 31, 2015, the embedded conversion derivative for all three debt financings was revalued to $2,224,362 and the Company recorded an increase in the derivative liability related to its convertible debt of $189,967. The assumptions considered in the valuation model for the December 31, 2014 notes at December 31, 2015 and 2014 were:
|
December 31,
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Trading price of common stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
10.40
|
|
Conversion price
|
|
$
|
0.30
|
|
|
$
|
6.00
|
|
Risk free interest rate
(1)
|
|
|
0.15
|
%
|
|
|
0.25
|
%
|
Conversion notes lives in years
|
<1 year
|
|
1 year
|
|
Expected volatility
(2)
|
|
|
208
|
%
|
|
|
177
|
%
|
Expected dividend yield
(3)
|
|
|
-
|
|
|
|
-
|
|
The assumptions considered in the valuation model for the Sept 2015 and Dec 2015 notes were:
|
|
December 31,
|
|
|
|
2015
|
|
|
|
|
|
Trading price of common stock on measurement date
|
|
$
|
0.55
|
|
Conversion price
|
|
$
|
0.30
|
|
Risk free interest rate
(1)
|
|
|
0.57%- 0.65
|
%
|
Conversion notes lives in years
|
|
<1 year to 1 year
|
|
Expected volatility
(2)
|
|
|
208% - 224
|
%
|
Expected dividend yield
(3)
|
|
|
-
|
|
(1)
|
The risk-free interest rate was determined by management using the 9 and 12 months Treasury Bill as of the respective measurement date.
|
(2)
|
The volatility factor was estimated by using the historical volatilities of the Company’s trading history.
|
(3)
|
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
|
A summary of the derivative liability at December 31, 2015 is summarized as follows:
Balance, December 31, 2014
|
|
$
|
828,830
|
|
|
|
|
|
|
Allocation from September 2015 and December 2014
Convertible debt offerings
|
|
|
1,439,432
|
|
|
|
|
|
|
Change in fair value
|
|
|
(35,676
|
)
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
2,232,586
|
|
The derivative liability at December 31, 2015 consists of debt conversions of $2,224,362 ($594,963 - 2014) and warrants of $8,224 ($233,867 - 2014).
Accounting for Convertible Debt
Under the initial accounting for the December 2014 Offering the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $445,000 face amount of the convertible debt at the issuance date. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. As of December 31, 2014, the Company recorded aggregate debt discounts of $445,000 related to the conversion rights and recorded $149,963 of expense related to the excess value of the derivative over the face amount of the convertible debt.
Under the September 21, 2015
offering
the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $275,000
face amount of the
additional convertible debt at the issuance date.
Under the December 31, 2015
offering
the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the $550,000
face amount of the
additional convertible debt at the issuance date.
As a result, upon issuance of the two 2015 debt offerings, the Company recorded a debt discount of $825,000 and recorded a loss of $614,432 related to the excess value of the $1,439,432 derivative over the $825,000 face amount of the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using an effective interest method. For the year ended December 31, 2015, the Company amortized $609,288 of the debt discount. In addition, amortization of deferred debt issuance costs amounted to $722,375 for the year ended December 31, 2015.
10. CAPITAL STOCK
2014 Financing
On February 14, 2014, the Company sold to certain accredited investors pursuant to a Subscription Agreement, an aggregate of 33,333 shares of its common stock, 26,667 shares of the Series C Preferred Stock and five year warrants to purchase up to an aggregate of 59,999 shares of the Company’s common stock at an exercise price of $30, per share, for gross proceeds of $1,800,000. Until the earlier of (i) three years from the closing of the Offering or (ii) such time as no investor holds any shares of common stock underlying warrants or underlying the Series C Preferred Stock, in the event the Company issues or sells common stock at a per share price equal to less than $30.00 per share, as adjusted, the Company has agreed to issue additional securities such that the aggregate purchase price paid by the investor shall equal the lower price issuance, subject to certain exceptions, as defined. The Company recorded a derivative liability related to the reset feature on the exercise price of the warrants to purchase common stock issued by the Company.
In connection with the Offering, the Company granted the investors “piggy-back” registration rights and the investors are entitled to a right of participation in future financings conducted by the Company for a period of twenty-four months.
In 2014 the Company paid placement agent fees of $144,000 in cash, issued an aggregate of 600 shares of the Company’s common stock and issued a five year warrant to purchase up to 5,399 shares of the Company’s common stock at a price of $30 per share, as commission in connection with the sale of the shares and warrants. In addition, the Company permitted the conversion of an aggregate of $13,500 of unpaid fees owed to a consultant into 450 shares and warrants at the Offering price. In conjunction with the Offering, $100,000 was placed in an escrow account to be used for auditing and legal fees. As of December 31, 2015, the balance of the escrow account was $0 and $12,500 in 2014.
On February 14, 2014, as a component of the Subscription Agreement, the Company issued an aggregate of 66,333 warrants with a fair value of $11,361,278 determined using the Black-Scholes Pricing Model.
Pursuant to the subscription agreement in 2014, certain members of the Company’s management agreed to invest an aggregate of $250,000 in exchange for 8,333 shares of the Company’s common stock within 30 days of the closing, on the same terms of the agreement.
Series B Convertible Preferred Stock
In April 2013, the Company’s Board of Directors authorized four (4) shares of preferred stock, par value $0.0001 per share as Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and issued one share of Series B Preferred Stock to each of the Company’s three senior members of management. Each share of Series B Preferred Stock is entitled such number of votes on all matters submitted to stockholders that is equal to (i) the product of (a) the number of shares of Series B Preferred Stock held by such holder, (b) the number of issued and outstanding shares of the Company’s Common Stock (taking into account the effective outstanding voting rights of the Series B Preferred Stock), as of the record date for the vote and (c) 0.13334 less (ii) the number of shares of Common Stock beneficially held by such holder on such date. Additionally, on the six month anniversary date of issuance of the Series B Preferred Stock, each outstanding share of Series B Preferred Stock was to automatically, and without further action on the part of the holder, convert into such number of fully paid and non-assessable shares of Common Stock as would cause the holder to own, along with any other securities of the Company’s beneficially owned on the conversion date by them 13.334% of the issued and outstanding Common Stock, calculated on the conversion date. On October 25, 2013, the Company amended and restated the Certificate of Designation for Series B Convertible Preferred Stock to extend the date on which the Series B Shares would automatically convert into such number of fully paid and non-assessable shares of common stock, from the date six months from the date of issuance (October 26, 2013) to the twelfth month anniversary of the date of issuance of the shares of Series B Preferred Stock (April 26, 2014) which on April 22, 2014, was further extended to an indefinite date. The Company previously recorded the three shares of Series B Convertible Preferred Stock as stock-based compensation using the then current estimate of the number of shares that would convert to shares of common stock of the Company based on the shares outstanding and current price per share at each balance sheet date. As of December 31, 2014, the Company recalculated the estimated shares issuable to be 216,670 and recorded stock-based compensation of $2,166,707 for the year then ended. The estimate is based on the current common shares outstanding at December 31, 2014, a stock price of $10.00 per share, and is subject to adjustment based on any additional common shares issued.
On March 2, 2015, the Series B Convertible Preferred Stock which was then outstanding was cancelled and as a result, the Company’s obligation to issue any common shares in connection therewith ended. The Company has accounted for the cancellation of the Series B and issuance of the Series D Preferred Stock as an extinguishment. Accordingly, for the year ended December 31, 2015, the Company recorded an aggregate gain of $3,420,804 within stockholders’ deficit equal to the difference between the $667,664 fair value of the Series D preferred stock and the $4,088,468 carrying amount of the Series B preferred stock extinguished. The gain on extinguishment is reflected in the calculation of net income attributable to common stockholders in 2015.
Series C Convertible Preferred Stock
On February 12, 2014, the Company designated and authorized to issue 26,667 shares of Series C Convertible Preferred Stock (“Series C Preferred Stock”), par value $0.0001, per share. Each holder of Series C Preferred Stock shall be entitled to vote all matters submitted to shareholder vote and shall be entitled to the number of votes for each shares of Series C owned at the designated record date. Each holder of Series C Preferred Stock may convert any or all of such shares into fully paid and non-assessable shares of the Company’s common stock in an amount equal to one share of the Company’s common stock for each one shares of Series C Preferred Stock.
On September 21, 2015, in connection with the terms of a ratchet provision for certain warrants issued in 2014, the Company revised the conversion right so that holders of Series C Preferred Stock may, from time to time, convert any or all of such holder's shares of Series C Preferred Stock into fully paid and non-assessable shares of common stock in an amount equal 100 shares of the Company's common stock (the "Common Stock") for each one (1) share of Series C Preferred stock surrendered.
As a result of this modification, the Company recorded a deemed dividend on Series C Preferred Stock in the amount of $1,089,000.
Series D Convertible Preferred Stock
On, March 2, 2015, the Board of Directors of the Company designated and authorized to issue 3,000 shares of the Company’s authorized Preferred Stock, par value $0.0001 per share, as Series D Convertible Preferred Stock. Each holder of the Series D Preferred Stock (“Series D”) shall have the number of votes on all matters submitted to the stockholders that is equal to the greater of one hundred votes for each one share of Series D and such number of votes per share of Series D that when added to the votes per shares of all other shares of Series D shall equal 50.1% of the outstanding voting record. The Series D are convertible into common stock in an amount equal to one share of the Company’s common stock for each one share of Series D. On March 9, 2015, the Company issued 1,000 shares of the Series D to each of three officers of the Company.
Common Stock
On February 4, 2014, the holders representing a majority of the then outstanding shares of capital stock of the Company voted and approved and permitted the Company to increase the number of authorized shares of the Company’s common stock from 400,000,000 to 525,000,000. On March 12, 2015, the holders representing a majority of the then outstanding shares of capital stock of the Company voted and approved and permitted the Company to increase the number of authorized shares of the Company’s common stock from 525,000,000 to 750,000,000.
On September 21, 2015, the holders representing a majority of the then outstanding shares of capital stock of the Company voted and approved and permitted the Company to increase the number of authorized shares of the Company’s common stock from 750,000,000 to 3,000,000,000, which was effective upon filing an amended Certificate of Incorporation with the State of Delaware representing the amendment.
On April 10, 2014, the Company issued 500 shares of its common stock as a charitable donation to a not-for-profit organization valued at $65,000, ($130.00 per share), the price of the Company’s common stock on the day of grant.
In August 2014, 6,667 shares of the Company’s Series C Convertible Preferred Stock were converted to 6,667 shares of common stock of the Company.
Through December 31, 2014, an aggregate of 91,333 warrants to purchase common stock were exercised in a cashless conversions to an aggregate of 74,131 shares of the Company’s common stock.
Through December 31, 2014, an aggregate of 27,778 shares of the Company’s Series A Convertible Preferred Stock was converted to 27,778 shares of common stock of the Company.
As discussed in Note 8, the warrants issued related to these capital raises were deemed to be derivative liabilities and required additional measurement at fair value. Accordingly, the proceeds from these equity financings were first allocated to such fair value instruments (the warrants), with the residual proceeds, if any, being allocated to the instruments not subsequently marked to fair value.
On November 25, 2015 the Board and the majority stockholders authorized a reverse split of the issued and outstanding shares of common and preferred stock on the basis of 1 post consolidation share for each 1,000 pre-consolidation shares (the "Reverse Split") to be effective on December 24, 2015.
Treasury Stock
In March 2, 2013, concurrent with the resignation of the Company’s then chief executive officer, the Company agreed to purchase from the former executive 4 shares of the Company’s common stock for $0.10 per share. These shares are reported at cost as treasury shares.
Warrants
As of December 31, 2015, the Company had warrants to purchase common shares of outstanding as follows:
Date of Grant
|
|
|
Number of Warrants
|
|
|
Expiration Date
|
|
|
Exercise Price
|
|
January 9, 2013
|
|
|
3,903
|
|
|
January 9, 2016
|
|
$
|
30.00
|
|
April 26, 2013
|
|
|
22,981
|
|
|
April 26, 2016
|
|
|
30.00
|
|
February 14, 2014
|
|
|
3,333
|
|
|
February 14, 2019
|
|
|
0.30
|
*
|
December 31, 2014
|
|
|
13,333
|
|
|
December 31, 2019
|
|
|
0.30
|
|
Total
|
|
|
43,550
|
|
|
|
|
|
|
|
*Cashless exercise permitted.
Date of Grant
|
|
|
Number of Warrants
|
|
|
Expiration Date
|
|
|
Exercise Price
|
|
January 9, 2013
|
|
|
3,903
|
|
|
January 9, 2016
|
|
$
|
30.00
|
|
April 26, 2013
|
|
|
22,981
|
|
|
April 26, 2016
|
|
|
30.00
|
|
February 14, 2014
|
|
|
3,333
|
|
|
February 14, 2019
|
|
|
6.00
|
*
|
December 31, 2014
|
|
|
13,333
|
|
|
December 31, 2019
|
|
|
6.00
|
|
Total
|
|
|
43,550
|
|
|
|
|
|
|
|
*Cashless exercise permitted.
11. INCOME TAXES
As of December 31, 2015, management has evaluated and concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements.
As of December 31, 2015 and 2014, the Company has net operating loss carryforwards of approximately $7,810,000 and $5,600,000, respectively, to reduce future Federal and state taxable income through 2033 and $4,800,000 and $4,100,000, respectively of temporary differences in the timing of the deduction for certain stock-based compensation. However, as a result of the recent and potential changes in the share ownership of the Company, future utilization of the net operating losses may be limited pursuant to Section 382 of the Internal Revenue Service. The maximum net operating loss carryforward which could be utilized pursuant to Section 382 for Be Active Brands is $185,000 a year, based on the approximately $2,500,000 losses incurred prior to the 2013 Merger.
Since at present realization of the Company’s related deferred tax assets of $4,800,000 at December 31, 2015 and $3,688,000 at December 31, 2014 is not considered more likely than not, a valuation allowance of $4,800,000 at December 30, 2015 and $3,688,000 at December 31, 2014 have been provided. The valuation allowance increased by $1,112,000 from December 31, 2014. Certain charges for operations for the years ended December 31, 2015 and 2014 related to derivative liabilities resulting from equity and debt issuances have no income tax effect and are not considered above.
12. CONCENTRATIONS
Credit is granted to most customers. The Company performs periodic credit evaluations of customers’ financial condition and generally does not require collateral.
Sales to one customer of the Company accounted for 85% of sales for the year ended December 31, 2015. Sales to one customer of the Company accounted for approximately 50% of sales for the year ended December 31, 2014 and represented 41% of accounts receivable at December 31, 2014.
13. RECONCILIATION OF NET SALES
In accordance with FASB ASC 605-50, the Company classifies the following allowances as reductions of sales for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
Gross sales
|
|
$
|
310,248
|
|
|
$
|
74,856
|
|
Less:
|
|
|
|
|
|
|
|
|
Sales discounts
|
|
|
6,496
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
Trade spending
|
|
|
68,075
|
|
|
|
30,663
|
|
Slotting fees
|
|
|
210,400
|
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
25,277
|
|
|
$
|
(128,995
|
)
|
14. RELATED PARTY TRANSACTIONS
An officer and Director of the Company was a partner of a public accounting firm providing non-audit accounting services to the Company through October 30, 2014. Subsequent to October 2014, all non-audit accounting services were performed by the officer/director of the Company in conjunction with an independent consultant. For the years ended December 31, 2015 and 2014, the Company incurred fees of $0 and $66,666, respectively, to the accounting firm for accounting and tax services.
The Company subleases a portion of its office space to an entity owned by a Company officer. Rents received totaled approximately $13,111 and $15,000 were recorded as an offset to rent expense for the year ended December 31, 2015 and 2014, respectively.
15. 2013 EQUITY INCENTIVE PLAN
Effective January 9, 2013, the Company adopted a Stock Option Plan (“Plan”) to provide an incentive to attract, retain and reward persons performing services, including employees, consultants, directors and other persons determined by the Board, through equity awards. The Plan shall continue in effect until its termination by the Board provided that all awards are granted within ten years, as defined.
As of December 31, 2015 and 2014, no awards have been granted under the Plan.
16. COMMITMENTS
Employment Agreements
Effective January 9, 2013, extended and revised October 1, 2014, the Company entered into an employment agreement with its chief financial officer for a term of three years, to be automatically renewed for successive one year periods thereafter unless either party provides written notice of intention not to renew the agreement. The agreement provides for a base annual salary of $135,000, paid in periodic installments in accordance with the Company’s regular payroll practices and includes other Company benefits. The Agreement entitles the officer to future grants under the Company’s 2013 Equity Incentive Plan. In addition, the Company has awarded the Officer a bonus of 6,385 shares of the Company’s common stock at December 31, 2014 which vested immediately and were purchased by the Officer at par value. These shares were issued on January 9, 2015. Total compensation for these shares recorded at December 31, 2014 was $63,216 based on the traded price of the Company’s common stock on that date. There were no bonuses awarded the officer in 2015. Costs incurred pursuant to this agreement for the year ended December 31, 2015 and 2014 were $145,000 and $96,793 respectively.
Effective January 9, 2013, extended and revised October 1, 2014, the Company entered into an employment agreement with its former President for a term of three years, to be automatically renewed for successive one year periods thereafter unless either party provides written notice of intention not to renew the agreement. The agreement provides for a base annual salary of $150,000, paid in periodic installments in accordance with the Company’s regular payroll practices and an annual bonus, subject to claw-back provisions, based on reaching certain financial targets as defined and includes other Company benefits. The Agreement entitles the officer to future grants under the Company’s 2013 Equity Incentive Plan. In addition, the Company had awarded the Officer a bonus of 5,000 shares of the Company’s common stock at December 31, 2014 which vested immediately and were purchased by the Officer at par value. These shares were issued on January 9, 2015. Total compensation for these shares recorded at December 31, 2014 was $49,500 based on the traded price of the Company’s common stock on that date. There were no bonuses awarded the officer in 2015. Costs incurred pursuant to the Officer’s employment agreements for years ended December 31, 2015 and 2014 was $126,154 and $151,731, respectively. On June 19, 2015, the Company re-appointed the former President as a member of the Board of Directors and Vice-President.
Effective January 9, 2013, extended and revised October 1, 2014, the Company entered into an employment agreement with its secretary and current Interim President for a term of three years, to be automatically renewed for successive one year periods thereafter unless either party provides written notice of intention not to renew the agreement. The agreement provides for a base annual
salary of $135,000, paid in periodic installments in accordance with the Company’s regular payroll practices and an annual bonus, subject to claw-back provisions, based on reaching certain financial targets as defined and include other Company benefits. The Agreement entitles the officer to future grants under the Company’s 2013 Equity Incentive Plan. In addition, the Company awarded the Officer a bonus of 5,000 shares of the Company’s common stock at December 31, 2014 which vested immediately and were purchased by the Officer at par value. These shares were issued on January 9, 2015. Total compensation for these shares recorded at December 31, 2014 was $49,500 based on the traded price of the Company’s common stock on that date. There were no bonuses awarded the officer in 2015. Costs incurred pursuant to the Officer’s employment agreements for years ended December 31, 2015 and 2014 was $147,500 and $137,134, respectively.
Lease
On January 1, 2013, the Company entered into a five year and one month lease for space in Great Neck, New York, effective February 17, 2013, with base rent at $39,260, per year, subject to certain increases as defined. The lease agreement requires two months annual rent as a security deposit and the personal guaranty of the President of the Company. The rent is due in monthly installments commencing April 1, 2013; rent expense is being recorded on a straight line basis over the term of
the lease. The difference between the rent payments made and straight line basis has been recorded as deferred rent. Rent expense, net of sublease for the years ended December 31, 2015 and 2014 was $22,408 and $26,518, respectively.
Future minimum payments under the lease are as follows:
Years ending December 31:
|
|
2016
|
|
|
43,275
|
|
2017
|
|
|
44,787
|
|
2018
|
|
|
11,292
|
|
Total
|
|
$
|
99,354
|
|
Investor Relations Consulting Agreement
In August 2013, the Company entered into an Investor Relations Consulting Agreement (Agreement) with an investor relations firm to provide consulting services regarding financial markets and exchanges, competitors, business acquisitions and other aspects of or concerning the Company’s business. The Agreement is for a term of twelve months commencing August 16, 2013, with a one month cancellation option for either party. The Agreement called for a monthly consulting and services fee of $2,000. In addition, the Company agreed to grant to the consultant an aggregate of 3,500 shares of the Company’s restricted stock, valued at $70,000, ($20.00 per share), the price of the stock, reflective of the post-split calculation, at the time of the Agreement. $52,500 of the consulting fee was recognized in 2013, with the remaining $17,500 recognized in 2014.
On September 1, 2014, the Agreement was renewed and amended for a term of twelve months with the monthly service fee reduced to $1,500. During the years ended
December 31, 2015 and 2014, $9,000 and $18,500 in fees was incurred under this agreement.
Merchandising Agreement
On May 5, 2014, the Company entered into an agreement to participate in a merchandising relationship which can be terminated by either party with forty-five days written notification to the other party. In consideration of its participation, the Company agreed to pay a monthly fee to the merchandiser of 4.0% of gross sales of the Company’s product. In accordance with the agreement, all slotting fees are waived on all new items and the merchandiser will review all new items brought into the warehouse six months from the initial distribution date to determine whether the item is selling at an appropriate rate. The Company will provide the merchandising group with competitive promotional allowances as defined. During the years ended
December 31, 2015 $11,989 and $1,500 in fees was incurred under this agreement.
Sales Representative Contract
Effective June 30, 2014, the Company entered into a contract with a sales representative to increase the demand for and promote the products of the Company and to provide marketing services as defined. In exchange for these services, the sales representative is entitled to a commission of 3.0% of net sales, as defined. There is no minimum monthly commission for the initial twelve months
and the representative will also be entitled to an additional performance bonus, as defined. The contract is on a month to month basis and may be terminated by either party with thirty days written notice to the other party. As
of December 31, 2015 and 2014, no fees were incurred under this agreement.
Director Compensation
In connection with the increase in the number of directors on the Board to four and the appointment of a new director to fill the vacancy on June 25, 2014, the Company agreed to grant 2,100 shares of the Company’s common stock to the new director which would vest in three equal installments, as defined. On December 4, 2014, the director resigned from his position on the Board and agreed to accept 1,000, shares of the Company’s common stock as full compensation for his service to the Board valued at $10,000.
Social Media Agreement
In August 2014, the Company entered into an agreement with a contractor to provide social media management services. The agreement continues through completion of the project and is subject to early cancellation with fifteen days’ notice prior to the date of cancellation. Fees for the services are $3,179, per month. For the years ended December 31, 2015 and 2014, the Company incurred expense of $45,600 and $8,019 under the agreement.
Food Broker Agreement
In September 2014, the Company entered into an agreement appointing a food broker as its sole and exclusive representative for one year terms to provide services related to negotiating the sale of the Company’s products within a defined territory. The food broker will receive a guaranteed monthly income of $3,500 for the first seven months of the agreement and a commission of 5% on each sale to be computed on the net invoice price as defined. Until such time as the commissions reach $3,500 per month, the Company will continue to pay the $3,500 monthly income. The agreement will be in effect from year to year and may be terminated by either party with ninety days written notice. All commissions earned will be paid during the ninety day transition period and will continue for an additional ninety days after the termination date. For the years ended December 31, 2015 and 2014, the Company incurred expense of $31,500 and $10,500 under the agreement.
Public Relations Agreement
Effective September 1, 2014, the Company entered into an agreement with a consultant to provide public relations services for a monthly retainer of $4,000 and 240 shares of the Company’s common stock to be issued equally in installments that vest over a twelve month period. The agreement may be terminated in writing with two months’ notice. As of December 31, 2015 and 2014, the Company incurred expense of $32,000 and $16,000 and issued 160 shares and 80 shares, of the Company’s common stock under the agreement recorded at a price of $10.00 per share.
Common Stock to be Issued
Management has estimated that an additional 1,361,434 shares of common stock (see Note 8) are required to be issued under various ratchet provisions. However, the actual amount of shares to be issued could be greater than the amount estimated by management.
Litigation
On May 2, 2014, an action was commenced against the Company and two of its officers in the Supreme Court of the State of New York, County of Nassau. The action relates to restricted shares of the Company acquired by the plaintiff which the plaintiff allegedly sought to sell. The complaint asserts claims under various theories, including conversion, breach of contract, breach of fiduciary duty, fraudulent misrepresentation and unjust enrichment, and seeks damages in excess of five million dollars.
The Company filed its Motion to Dismiss on or about June 30, 2014, plaintiff filed its opposition to the Company’s motion on or about July 29, 2014. On September 2, 2014 the Motion to Dismiss was denied. On October 6, 2014, the Company submitted a verified Answer to the Complaint. On February 25, 2015, the Company attended a mediation session and subsequently settled the claim. The confidential settlement from the above action will be covered by the Company’s director’s and officer’s insurance policy. In connection with the settlement, a loan which was due to the plaintiff for $25,555 was settled and recorded as forgiveness of debt on the accompanying consolidated financial statements (see Note 8).
17. SUBSEQUENT EVENTS
On January 6, 2016 an advance payable to an officer at December 31, 2015, in the amount of $111,000 was repaid.
On January 8, 2016 the company issued an additional 668,433 of common shares due to existing shareholders based on various ratchet provisions of prior capital raises.
On January 13, 2016, the Company issued an aggregate of 150,000 shares of common stock at $0.30 per share to an existing stockholder who converted a part of his note payable in the amount of $45,000.
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