TONR Tonner One World Holdings Inc (PK)

Notes to Condensed Consolidated Financial Statements

Six Months Ended June 30, 2016

(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION

Organization, Nature of Business

Tonner-One World Holdings, Inc. (the "Company"), a Nevada Corporation, is a Houston-based company focused on doll design and marketing.  Substantially all of the Company's operations are conducted through its wholly owned subsidiary, The One World Doll Project, Inc. (a Texas Corporation - "OWDPI"). OWDPI began operations on October 1, 2010.  On January 20, 2016, the Company created Tonner-One World, Inc. ("TOW"), another wholly owned subsidiary, for the purpose of taking initial steps to begin production of dolls under the combined Tonner-One World name.  Effective April 8, 2016, the name of the Company was changed from One World Holdings, Inc. to Tonner-One World Holdings, Inc.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, OWDPI, TOW and National Fuel and Energy, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Information

The interim financial information of the Company as of June 30, 2016 and for the three months and six months ended June 30, 2016 and 2015 is unaudited, and the balance sheet as of December 31, 2015 is derived from audited financial statements.  The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements.  Accordingly, they omit or condense notes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles.  The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 2 to the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.  In the opinion of management, all adjustments necessary for a fair presentation of the financial information for the interim periods reported have been made.  All such adjustments are of a normal recurring nature.  The results of operations for any interim period are not necessarily indicative of the results that can be expected for a full fiscal year.  The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Certain amounts in the condensed consolidated financial statements for the three months and six months ended June 30, 2015 have been reclassified to conform to the current year presentation.

NOTE 2 – GOING CONCERN

The Company has incurred operating losses since inception, has limited financial resources and a working capital deficit of $12,438,272 at June 30, 2016. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company's condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  In addition, the Company had an accumulated deficit of $25,143,068, and a total stockholders' deficit of $12,605,513 at June 30, 2016.  The working capital deficit, accumulated deficit and total stockholders' deficit were negatively impacted by a significant derivative liability and debt recorded through June 30, 2016.  The Company's ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and, ultimately, achieve profitable operations.  Management's plans to address the Company's continuing existence include obtaining debt or equity funding from private or institutional sources or obtaining loans from financial institutions and individuals, where possible.  The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value.  As of June 30, 2016 and December 31, 2015, we believe the amounts reported for cash, accounts payable and accrued expenses, accrued interest and penalties payable, notes payable and stockholder advances approximate fair value because of the short-term nature of these financial instruments.

We adopted ASC Topic 820 (originally issued as SFAS 157, "Fair Value Measurements") for financial instruments measured as fair value on a recurring basis.  ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.

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.  ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).  These tiers include:

·

Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;

·

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

·

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.

Liabilities measured at fair value on a recurring basis were as follows at June 30, 2016:

NOTE 4 – INCOME (LOSS) PER SHARE

The computation of basic income (loss) per common share is based on the weighted average number of shares outstanding during each period.

The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding and conversion of debt, using the treasury stock method and the average market price per share during the period.  Common stock equivalents are not included in the diluted loss per share calculation when their effect is anti-dilutive.

The common shares used in the computation of our basic and diluted net income (loss) per share are reconciled as follows:

NOTE 5 – CONVERTIBLE DEBENTURES

Through June 30, 2016, we have financed our operations primarily through the issuance of various convertible debentures.  For the six months ended June 30, 2016, we received cash proceeds of $375,000 from the issuance of new convertible debentures.  Convertible debentures, net of discount, included in current liabilities totaled $2,760,088 and $2,387,981 as of June 30, 2016 and December 31, 2015, respectively.

The following is a schedule of short-term convertible debentures outstanding as of June 30, 2016:

 

 

 

 

 

 

The following is a schedule of long-term convertible debentures outstanding as of June 30, 2016:

The convertible debentures are generally unsecured and bear interest ranging from 5% to 22% per annum, with maturities ranging from six months to two years.  The outstanding principal and accrued interest of the debentures are convertible into shares of the Company's common stock at a fixed conversion price ranging from $0.00025 to $30.00 per share or variable discounted pricing based on the market price of the Company's common stock as defined in the debt agreement.

We evaluated the convertible debentures in accordance with ASC Topic 815, "Derivatives and Hedging," and determined that the conversion feature of the convertible promissory notes with variable conversion prices were not afforded the exemption for conventional convertible instruments due to their variable conversion rates.  The notes have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. We elected to recognize the notes under paragraph 815-15-25-4, whereby there would be a separation into a host contract and derivative instrument. We elected to initially and subsequently measure the notes in their entirety at fair value, with changes in fair value recognized in earnings.  We recorded a derivative liability and debt discount representing the imputed interest associated with the embedded derivative.

For those convertible debentures with fixed conversion prices, we recorded a beneficial conversion feature at the inception of the debt to additional paid-in capital and to debt discount where the conversion price was less that the market price of the stock.

At June 30, 2016, the convertible debentures and related accrued interest payable were convertible into approximately 6,698,670,000 shares of our common stock.  Based on the assumptions used to estimate the fair value of the derivative liability at June 30, 2016 and assuming all lenders convert the notes payable at the June 30, 2016 conversion prices, the Company would have insufficient authorized shares of common stock to complete the debt conversions.

As of June 30, 2016, $2,062,129 of the convertible debentures were delinquent.  We believe we have good relationships with the holders of the delinquent debentures, and we continue to have discussions with them regarding the extension of maturity dates or settlement of amounts due.  Several of the convertible debentures have default interest rates that apply when the debentures are delinquent, and we have accrued default interest where applicable.  In addition, we have been unable to complete certain conversions of convertible debentures during the year ended December 31, 2015, pending an increase in the number of authorized shares of our common stock, and have accrued applicable penalties as of June 30, 2016 and December 31, 2015.

Accrued interest payable for the convertible debentures, including accrued default interest and penalties, where applicable, totaled $1,982,955 and $1,141,478 as of June 30, 2016 and December 31, 2015, respectively.

NOTE 6 – DERIVATIVE LIABILITY

As discussed in Note 5 above, we have recorded a derivative liability and a debt discount representing the imputed interest associated with the embedded derivative associated with our convertible debentures.  In addition, we have recorded a derivative liability for the variable conversion feature of certain outstanding warrants to purchase shares of our common stock.

The debt discount is amortized over the life of the note and recognized as interest expense. For the three months ended June 30, 2016 and 2015, we amortized debt discount of $270,128 and $327,955 to interest expense, respectively.  For the six months ended June, 2016 and 2015, we amortized debt discount of $580,171 and $808,293 to interest expense, respectively.  The derivative liability is adjusted at each reporting date according to stock price fluctuations and other inputs and was $4,394,475 and $10,852,906 at June 30, 2016 and December 31, 2015, respectively.

 

At June 30, 2016, the convertible debentures and related accrued interest payable were convertible into approximately 6,698,670,000 shares of our common stock.  Based on the assumptions used to estimate the fair value of the derivative liability at June 30, 2016, and assuming all lenders converted the notes payable at the June 30, 2016 conversion prices, the Company would have had insufficient authorized shares of common stock to complete the debt conversions.

During the six months ended June 30, 2016, the Company had the following activity in its derivative liability:

For purpose of determining the fair market value of the derivative liability, we used the Black Scholes option valuation model.  The significant assumptions used in the Black Scholes valuation of the derivative liability at June 30, 2016 are as follows:

These assumptions are subject to significant changes and market fluctuations from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material.

 

NOTE 7 – NOTES PAYABLE

We had short-term notes payable to certain individuals and companies totaling $540,328 and $459,801 as of June 30, 2016 and December 31, 2015, respectively.  As of June 30, 2016, the notes are unsecured and bear interest at rates ranging from 0% to 18%.  As of June 30, 2016, several of the notes payable were delinquent.  We believe we have good relationships with the note holders, and we continue to have discussions with them regarding the extension of maturity dates or settlement of amounts due.  Several of the convertible debentures have default interest rates that apply when the debentures are delinquent.

Accrued interest payable for the short-term notes payable, including accrued default interest where applicable, was $116,231 and $82,144 as of June 30, 2016 and December 31, 2015, respectively.

 

NOTE 8 – STOCKHOLDER ADVANCES

Since the inception of the Company, we have relied on cash advances from certain stockholders to fund our operations.  These advances generally have no specified repayment terms and no stated rate of interest.  All advances are considered by us to be due on demand until such time as the advances are converted into notes payable, issuances of shares of our common stock or other formal repayment arrangements.  At June 30, 2016 and December 31, 2015, stockholder advances totalled  $505,548 and $456,376, respectively.

 The long-term note payable is an unsecured note payable of $30,000 to an individual due July 30, 2016, with interest at 14% per annum.  Payment terms for the note payable are $350 per month for six months and $698 per month for sixty months, including interest. We are in default on the note payable at June 30, 2016 due to our failure to make timely payments in accordance with the terms of the note agreement.

Accrued interest payable for long-term debt was $43,742 and $41,648 as of June 30, 2016 and December 31, 2015, respectively.

NOTE 10 – STOCKHOLDERS' DEFICIT

As of June 30, 2016, we had 10,000,000 shares of $0.001 par value preferred stock authorized and 2,000,000,000 shares of $0.0025 par value common stock authorized, retroactively restated for the increase in authorized shares.

On March 3, 2016, the holders with the power to vote more than a majority of the outstanding common stock of the Company approved an amendment to the Company's Articles of Incorporation to effect an authorized share increase in our common stock from 500,000,000 shares to 2,000,000,000 shares of common stock.  The amendment became effective on April 8, 2016.

We have authorized the issuance of up to 1,000,000 shares of Series AA Preferred Stock.  Among other things, the Series AA Preferred Stock allows holders thereof enhanced voting rights based on ten thousand (10,000) votes per share of the Company's common stock held by such holders of Series AA Preferred Stock.  The Series AA Preferred Stock is not convertible into common stock, does not pay dividends, and does not include a liquidation preference.  In June 2014, 20,000 shares of Series AA Preferred Stock were issued to each of the four members of the Company's Board of Directors and valued at par value of $80.  On January 29, 2016, Robert Hines resigned from the Board of Directors, effective December 31, 2015, at which time he returned the 20,000 shares of Series AA Preferred Stock, which were valued at par value of $20 and canceled.

We have also authorized the issuance of up to 1,000,000 shares of Series BB Preferred Stock.  Among other things, the Series BB Preferred Stock allows holders thereof voting rights equal to holders of common stock as a single class with respect to all matters submitted to holders of common stock, quarterly dividends payable in arrears in either cash or in kind, liquidation preferences, and is convertible at the option of the holder into 50 shares of common stock of the Company. As of June 30, 2016, 186,000 shares of Series BB Preferred Stock were issued and outstanding.

During the six months ended June 30, 2016, we issued a total of 65,628,005 shares of our common stock with a total value of $182,917 for conversion of debt.

During the six months ended June 30, 2015, we issued a total of 167,395,050 shares of our common stock with a total value of $711,522 for conversion of debt.

As of June 30, 2016, we had several convertible debentures and related accrued interest payable that were convertible into approximately 6,698,670,000 shares of our common stock.  We have 2,000,000,000 common shares authorized and we will be required to again increase the number of authorized shares of common stock in the event all convertible debt is converted into shares of our common stock.

As of June 30, 2016, we had certain penalties on delinquent convertible debentures and pending debenture conversions that are payable in shares of our common stock.  We record these obligations at the current market value of our common stock, marking the obligations to market at each reporting date.  We recognize the change in the market value as gain or loss on debt payable in shares in other income (expense) in our consolidated statements of operations.  For the three months and six months ended June 30, 2016, we recognized a gain on debt payable in shares of $222,416 and $577,265, respectively.

In May 2014, the Board of Directors of the Company adopted and approved the One World Holdings Inc. 2014 Stock Option and Stock Award Plan (the "Plan").  Also, the holders of a majority of the Company's outstanding common stock voted to approve and authorize adoption of the Plan.  A total of 2,000,000 shares of our common stock are available for issuance under the Plan.  Under the Plan, we may issue options, including incentive stock options and non-statutory stock options, restricted stock grants, or stock appreciation rights.  Awards under the Plan may be granted to employees, consultants, directors and individuals who meet the requirements defined in the Plan.

NOTE 12 – CONSULTING AGREEMENTS

We have entered into various consulting agreements for financial and business development services to the Company.  Certain of these consulting agreements provide for cash compensation to the consultants; however, several are based on issuances of shares of our common stock in exchange for services.

 

Under the consulting agreements that provide for share issuances, shares were generally issued at the inception of the agreements for services provided.  There generally are no specified performance requirements and no provision in the agreements for return of the shares.  Compensation expense is calculated based on the market price of the stock on the effective date of agreement and amortized over the period over which the services are provided to the Company.  During the three months ended June 30, 2016 and 2015, total compensation expense included in selling, general and administrative expense was $0 and $22,500, respectively.  During the six months ended June 30, 2016 and 2015, total compensation expense included in selling, general and administrative expense was $22,500 and $48,442, respectively.  As of June 30, 2016, we had no unamortized compensation paid in common shares.

NOTE 13 – RELATED PARTY TRANSACTIONS

NOTE 14 – SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION

During the six months ended June 30, 2016 and 2015, we made no cash payments for income taxes.

During the six months ended June 30, 2016 and 2015, we made cash payments for interest totaling $17,480 and $78,552.

During the six months ended June 30, 2016, we had the following non-cash financing and investing activities:

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Increased debt discount and derivative liability by $375,000.

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Decreased accrued interest payable by $3,095, decreased convertible debentures by $68,289, decreased debt discount by $19,176, decreased derivative liability by $138,540, increased common stock by $164,070 and increased additional paid-in capital by $18,847 for common shares issued in conversion of debt.

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Increased stockholder advances and decreased notes payable by $4,973.

·

Decreased Series AA preferred stock and increased additional paid-in capital by $20.

During the six months ended June 30, 2015, we had the following non-cash financing and investing activities:

·

Increased additional paid-in capital and debt discount by $71,760 for beneficial conversion feature of convertible notes payable.

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Increased debt discount and derivative liability by $812,321.

·

Decreased stockholder advances and increased convertible debentures by $128,460.

·

Decreased accrued interest payable by $11,547, decreased convertible debentures by $127,085, decreased debt discount by $47,839, decreased derivative liability by $630,184, increased common stock by $418,487 and increased additional paid-in capital by $293,035 for common shares issued in conversion of debt.

·

Decreased accrued interest payable by $1,947 and increased convertible debentures by $1,947.

NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". The amendments in this ASU revise the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018 and are to be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently unable to determine the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.

In March 2016, the FASB issued ASU No. 2016-09, "Stock Compensation (Topic 718)", which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax impacts, the classification on the statement of cash flows, and forfeitures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods. We are currently unable to determine the impact on our consolidated financial statements of the adoption of this new accounting pronouncement.

 

In April 2015, the FASB issued ASU No. 2015-03, "Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs." To simplify presentation of debt issuance costs, the amendments in this Update require 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 recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public companies, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We adopted the new guidance effective January 1, 2016. Our prior period consolidated financial statements were not impacted by the adoption of this Update.

Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position or results of operations.

NOTE 16 – CONTINGENCIES

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business.  Management, along with the assistance of counsel, will determine the ultimate disposition and potential impact of these matters on our financial condition, liquidity or results of operations.

On November 4, 2014, we were named as a defendant in a civil lawsuit filed by Darling Capital, LLC, ("Darling") a creditor of the Company, in the New York Supreme Court, County of New York.  The plaintiff filed a Motion For Summary Judgment in Lieu of Complaint the same day. The plaintiff alleges, among other things, that we defaulted on our obligations under a Convertible Promissory Note held by Darling. The complaint sought, among other relief, judgment against us in the amount of $57,627.  A settlement was reached on September 3, 2015 for the sum of $70,000 consisting of four payments with the final payment due on November 20, 2015.  The first payment of $10,000 was made on September 9, 2015.  No other payments have been made.

On December 3, 2014, WHC Capital, LLC filed a complaint against the Company, demanding $416,000 and alleging the Company's breach of contract and failure to deliver 22,545,900 shares of common stock pursuant to requested conversions of two promissory notes totaling $65,403.  On September 9, 2015, both parties agreed to a settlement of $130,000 in the form of seven payments.  There are currently two remaining payments due under the agreement.