The unaudited financial statements for the quarter ended February 29, 2020 immediately follow.
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Trident Brands Incorporated (“we”, “our”, “the Company”) was incorporated under the laws of the State of Nevada on November 5, 2007. The Company was formed to engage in the acquisition, exploration and development of natural resource properties.
The Company is now focused on the development of high growth branded and private label consumer products and ingredients within the nutritional supplement, life sciences and food and beverage categories. The Company is in its early growth stage and has transitioned out of its shell status with the Super-8 filing at the end of August, 2014. Activities to date have focused on capital formation, organizational development and execution of its branded and private label consumer products and ingredients business plan.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K filed with SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2019 as reported in the Form 10-K have been omitted.
Customer Concentration
The Company had six major customers that accounted for approximately 54.8% of sales for the three month period ended February 29, 2020 and 69.0% of the accounts receivable compared to four major customers that accounted for 79.2% of sales and 54.0% of the accounts receivable for the 12 month period ended November 30, 2019.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with the requirements of FASB ASC 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
TRIDENT BRANDS INCORPORATED
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and note payable. The fair value of the Company’s long-term debt is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value. As of February 29, 2020 the Company did not have any financial assets or liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, except for a derivative liability, related to the embedded conversion option on the “2016” and “2018” convertible notes, with a fair value as of February 29, 2020 of $11,379,413. The derivative liability was fair valued using Level 3 inputs.
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:
Balance at November 30, 2019
|
|
$
|
5,825,480
|
|
APIC reclassified to derivative liability
|
|
|
3,981,220
|
|
Unrealized derivative loss included in other expense
|
|
|
1,572,713
|
|
Balance at February 29, 2020
|
|
$
|
11,379,413
|
|
During the quarter ended February 29, 2020, the embedded conversion option on the 2016 convertible notes qualified for derivative accounting. The beneficial conversion feature that was recorded to additional paid in capital (APIC) when the convertible notes were first issued amounting to $3,981,220 were reclassified to derivative liability when the conversion price on the notes were amended to a variable conversion rate (see Note 5). The fair value of the derivative liabilities are calculated at the time of issuance and the Company records a derivative liability for the calculated value. Changes in the fair value of the derivative liabilities are recorded in other income (expense) in the consolidated statements of operations.
TRIDENT BRANDS INCORPORATED
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
The following are the assumptions used for derivative instruments valued using the Black Scholes option pricing model as of February 29, 2020:
Market value of stock on measurement date
|
|
$0.30
|
Risk-fee interest rate
|
|
1.96%
|
Dividend yield
|
|
0%
|
Volatility factor
|
|
140.60% to 126.74%
|
Term
|
|
0.25 yr and 1.76 yr
|
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements through the date the financial statements were issued and filed with the Securities and Exchange Commission and believe that there are none that will have a material impact on the Company’s financial statements.
NOTE 3. GOING CONCERN
The accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued. In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued.
As of February 29, 2020, the Company had $230,682 in cash and a working capital deficit of $25,495,824. The Company also has generated losses and has an accumulated deficit as of February 29, 2020. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The Company completed additional long-term financing with the non-US institutional investor, receiving proceeds of $3,400,780 on November 30, 2018, $2,804,187 on April 13, 2019 and $3,795,033 (less $936,168 withheld for interest payments up to and including June 30, 2020) on November 6, 2019 through the issuance of secured convertible promissory notes. However, unless management is able to obtain additional financing, the Company may not be able to meet its funding requirements during the next 12 months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
TRIDENT BRANDS INCORPORATED
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
NOTE 4. WARRANTS AND OPTIONS
The following table represents stock option activity for the period ended February 29, 2020:
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|
Number of
Options
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|
|
Weighted
Average
Exercise Price
|
|
|
Contractual
Life in Years
|
|
|
Intrinsic
Value
|
|
Outstanding - November 30, 2019
|
|
|
3,215,000
|
|
|
$
|
0.40
|
|
|
|
2.42
|
|
|
|
|
Exercisable - November 30, 2019
|
|
|
3,215,000
|
|
|
$
|
0.40
|
|
|
|
2.42
|
|
|
$
|
-0-
|
|
Granted
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised or Vested
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - February 29, 2020
|
|
|
3,215,000
|
|
|
$
|
0.40
|
|
|
|
2.17
|
|
|
|
|
|
Exercisable - February 29, 2020
|
|
|
3,215,000
|
|
|
$
|
0.40
|
|
|
|
2.17
|
|
|
$
|
-0-
|
|
As of February 29, 2020, the Company has no outstanding warrants. All the outstanding warrants have expired.
NOTE 5. CONVERTIBLE DEBT
On January 29, 2015, the Company entered into a securities purchase agreement with a non-US institutional investor whereby it agreed to sell an aggregate principal amount of $2,300,000 of senior secured convertible debentures, convertible into shares of the company’s common stock.
The Company received $1,800,000 of the funds from the transaction on February 5, 2015. The balance of $500,000 was received on May 14, 2015. These convertible notes were subsequently acquired by Fengate on April 28, 2017.
The convertible debentures are convertible into shares of the Company’s common stock at an initial conversion price of $0.71 per share, for an aggregate of up to 3,239,437 shares. The debentures originally accrued interest at 6% per annum. On September 26, 2016 the Company entered into an amendment agreement related to these convertible debentures whereby the applicable interest rate was increased from 6% to 8% and provisions added to allow the investor to transfer, sell or hypothecate the convertible notes subject to applicable securities laws. The maturity date of the notes was also extended through September 30, 2019. We considered ASC Topic 470-50, Debt Modifications and Extinguishments, and determined that the modification was not deemed substantial.
On September 26, 2016, the Company entered into a securities purchase agreement with a non-US institutional investor, pursuant to which, in consideration for proceeds of $4,100,000, the Company issued a secured convertible promissory note in the amount of $4,100,000. Pursuant to the securities purchase agreement, the investor had agreed, from time to time after January 1, 2017, to make additional investments at the Company’s request of up to $5,900,000 ($10,000,000 in the aggregate) in one or more tranches of not less than one tranche during any 60 day period.
TRIDENT BRANDS INCORPORATED
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
On May 9, 2017, the Company received the second tranche of funding with proceeds of $4,400,000 and on May 16, 2018 the third tranche of $1,500,000 for a total investment by the investor of $10,000,000.
The Company used the proceeds of the secured convertible note for general working capital purposes including settlement of accounts payable and repayment of mature loans.
In consideration of each advance made by the investor pursuant to the securities purchase agreement, the Company issued to the investor a convertible promissory note of equal value, maturing on September 30, 2019, and bearing interest at the rate of 8% per annum. Each note is secured in first priority against the present and after acquired assets of the Company and is convertible in whole or in part at the option of the holder into common shares of the Company at a conversion price of $0.60 per share, for an aggregate of up to 16,666,667 shares. These convertible notes were subsequently acquired by Fengate on April 28, 2017.
Due to the notes being convertible to common shares of the Company, a beneficial conversion feature analysis was performed. The intrinsic value of the conversion feature of the notes amounted to $3,333,334 and was recognized as a debt discount. As of February 29, 2020, $3,164,924 of the debt discount was amortized to interest of which $166,578 was amortized during the current three month period compared to $352,591 for the three month period in the prior year. The unamortized discount as of February 29, 2020 is $168,410.
On November 30, 2018 the Company and Fengate Trident LP (“Fengate”) entered into a Securities Purchase Amendment Agreement pursuant to which the Company has agreed to issue to Fengate an additional convertible promissory note (the “2018 Convertible Note”) of up to $10,000,000, subject to certain terms and conditions. Each portion of the principal amount advanced pursuant to the 2018 Convertible Note will bear interest at the rate of twelve percent (12%) per annum and will be payable monthly in arrears to Fengate. Outstanding principal and interest will continue to be secured by the general security agreement dated September 26, 2016, which forms a part of the Agreement. The holder of the note may also elect from time to time to convert all or a portion of the outstanding principal and interest into common shares of the Company at a 25% discount to the average closing price of the common shares during the 10 trading days immediately prior to the applicable conversion date.
On November 30, 2018 the Company received the first tranche of funding with proceeds of $3,400,780. The 2nd tranche of $2,804,187 was received on April 13, 2019. The 3rd tranche of $3,795,033 less $936,168 withheld for interest payments up to and including June 30, 2020 was received on November 6, 2019. The withheld interest was recorded as debt discount. As of February 29, 2020, $529,501 was amortized and $406,667 is unamortized. On January 9, 2020 the 2018 Convertible Notes were extended and will mature on December 1, 2021.
The Company analysed the embedded conversion option on the convertible notes for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion option on the 2018 Convertible Note qualified for derivative accounting. The Company used the Black-Scholes model to value the embedded conversion option at $892,000 on the issuance date of November 30, 2018, $1,911,256 on the issuance date of April 13, 2019 and $1,696,933 on the issuance date of November 6, 2019. The assumptions used were a discount rate of 2.80%, 1.96% and 1.96%; volatility rate of 79.57%, 104.70% and 107.3%; and a term of 1.50, 1.13 and 0.57 years respectively. The Company used the Black-Scholes model to re-value the embedded conversion options at $7,005,678 as of February 29, 2020. The change of $1,180,198 was recorded as derivative loss expense. The assumptions used were a discount rate of 1.96%, volatility of 126.74% and a term of 1.76 year. The fair value of the embedded conversion options were recorded as debt discount and will be amortized over the term of the 2018 Convertible Notes. The amortization recognized in the current period was 729,886 compared to $157,412 for the three month period in the prior year. The unamortized discount as of February 29, 2020 was $1,913,008.
TRIDENT BRANDS INCORPORATED
Notes to Consolidated Financial Statements
February 29, 2020
(Unaudited)
On January 9, 2020 the Company and Fengate entered into an Amendment to Convertible Promissory Notes Agreement to amend the terms of certain convertible promissory notes issued pursuant to a Securities Purchase Agreement by and between the Company and the Purchaser dated September 26, 2016 and previously amended on November 30, 2018 and March 11, 2019. The Amendment affects the convertible notes issued February 5, 2015 (US$1,800,000), May 14, 2015 (US$500,000), September 26, 2016 (US$4,100,000), May 9, 2017 (US$4,400,000) and May 16, 2018 (US$1,500,000), respectively (collectively the “2016 Notes”). Pursuant to the Amendment, Fengate has agreed to convert all of the 2016 Notes on or before the earlier to occur of (i) the maturity date of the 2016 Convertible Notes and (ii) the Company raising new equity investment of not less than US$2,000,000, on terms mutually acceptable to Fengate and the Company (subject to Fengate’s regulatory considerations). Conversion of the 2016 Notes will occur in a single conversion transaction at a price that is equal to a 25% discount to the average closing price of the Company’s common stock for the 10 trading days immediately prior to the conversion date, with the exact structure of the conversion to be determined by the parties.
The Amendment also amends the outstanding 2018 Convertible Note issued to Fengate on November 30, 2018 (US$3,400,780), April 13, 2019 (US$2,804,187) and November 6, 2019 (US$3,795,033). Maturity of the 2018 Convertible Note has been deferred to December 1, 2021.
The Company analysed the embedded conversion option on the amended “2016 Notes” for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion option qualified for derivative accounting. On January 9, 2020 the Company used the Black-Scholes model to value the embedded conversion options at $7,965,083. The assumptions used were a discount rate of 1.96%, volatility rate of 148.8%; and a term of 0.39 years respectively. The modification resulted in $3,981,220 of APIC previously recorded for beneficial conversion feature of these convertible notes being reclassified as derivative liability, and $3,983,863 was recorded as derivative loss expense. The Company used the Black-Scholes model to re-value the embedded conversion options at $4,373,735 as of February 29, 2020. The change of $3,591,348 was recorded as a reduction in derivative loss expense. The assumptions used were a discount rate of 1.96%, volatility of 140.60% and a term of 0.25 year.
NOTE 6. SUBSEQUENT EVENTS
On March 5, 2020, the 2018 Convertible Note was amended to increase the amount of the 3rd tranche by $936,168 representing the amount previously withheld as interest payment. The payment was received on March 12, 2020.