The accompanying notes are an integral part of the Consolidated Financial Statements
The accompanying notes are an integral part of the Consolidated Financial Statements
The accompanying notes are an integral part of the Consolidated Financial Statements
The accompanying notes are an integral part of the Consolidated Financial Statements
The accompanying notes are an integral part of the Consolidated Financial Statements
The accompanying notes are an integral part of the Consolidated Financial Statements
Notes To Consolidated Financial Statements
(Unaudited)
Note 1 Description of Business
True Nature Holding, Inc. is executing on a business plan to acquire a series of businesses which specialize in compounding pharmacy activities, largely direct to consumers, doctors and veterinary professionals.
True Nature Holding, Inc. (the Company), previously known as Trunity Holdings, Inc., became a publicly-traded company through a reverse merger with Brain Tree International, Inc., a Utah corporation (BTI). Trunity Holdings, Inc. was the parent company of the prior educational business, named Trunity, Inc., which was formed on July 28, 2009 through the acquisition of certain intellectual property by its three founders. On December 31, 2015, the Company completed the restructuring and spin-out of the educational business.
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
- The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, with the instructions to Form 10-Q and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Companys financial position at September 30, 2016, the results of operations for the three months and nine months ended September 30, 2016 and 2015, and cash flows for the three months and nine months ended September 30, 2016 and 2015. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Companys audited consolidated financial statements and managements discussion and analysis included in the Companys annual report on Form 10-K for the year ended December 31, 2015. In addition, refer to Note 5 regarding the spin-out of the educational business and related discontinued operations classification pertaining to the fiscal 2015 period. Common stock share and per share amounts in these financial statements have been retroactively adjusted for the effects of a 1 for 101 reverse stock split that occurred in January 2016.
Use of Estimates -
The preparation of these financial statements requires our management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.
Per Share Data
- Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to warrants, options and convertible instruments.
The Company has excluded all common equivalent shares outstanding for warrants, options and convertible instruments to purchase common stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. As of September 30, 2016, the Company had 142,652 warrants, 1,067,879 options, 135,037 potential shares which may be issued resulting from the provisions of convertible notes, respectively. As of June 30, 2015, the Company had 77,640 warrants, 67,483 options, 316,721 potential shares which may be issued resulting from the provisions of convertible notes, respectively.
Accounts Receivable -
The accounts receivable balance primarily includes amounts due from customers the Company has invoiced or from third-party providers (e.g., insurance companies and governmental agencies), but for which payment has not been received. Accounts receivable are stated at the invoiced amount and are unsecured and require no collateral. Charges to bad debt are based on both historical write-offs and specifically identified receivables.
7
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 2 Summary of Significant Accounting Policies- Continued
Inventories -
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company evaluates the carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets compared with historical cost. In addition, the Company also regularly evaluates its inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products and active pharmaceutical ingredients on hand. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories.
Property and Equipment, net -
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally on a straight-line basis over the estimated useful lives of the assets. The cost of leasehold improvements are amortized either over the life of the improvement or the lease term, whichever is shorter. Significant improvements are capitalized and disposed or replaced property is written off. Maintenance and repairs are charged to expense in the period they are incurred. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in earnings.
Business Combinations -
The Company accounts for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values on the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions, especially with respect to intangible assets, estimated contingent consideration payments and pre-acquisition contingencies. Examples of critical estimates in valuing certain of the intangible assets the Company has acquired or may acquire in the future include but are not limited to future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts; and discount rates utilized in valuation estimates.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimates of relevant revenue or other targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have a material effect on the consolidated financial position, statements of operations or cash flows in the period of the change in the estimate.
Goodwill and Intangible Assets -
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill and intangibles under ASC Topic 350, Intangibles Goodwill and Other, which does not permit amortization, but requires the Company to test goodwill and other indefinite-lived assets for impairment annually or whenever events or circumstances indicate impairment may exist.
Recently Issued Accounting Standards
-In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
. This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 until December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating which transition method it will adopt and the expected impact of the updated guidance, but does not believe the adoption of the updated guidance will have a significant impact on its consolidated financial statements.
8
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 2 Summary of Significant Accounting Policies-Continued
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, requiring that inventory be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual periods beginning on or after December 15, 2016, including interim periods within those annual periods. The Company is currently evaluating the impact, if any, that the adoption of this guidance will have on its financial position, results of operations, cash flows and/or disclosures.
In August 2014, the FASB issued new accounting guidance which defines managements responsibility to assess an entitys ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. This guidance will be effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 to have a material effect on the Companys consolidated balance sheets and results of operations due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect ASU 2016-02 to have a material effect on the Companys cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which addresses certain aspects of accounting for share-based payment award transactions. This guidance will be effective in the first quarter of fiscal year 2017 and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
Note 3 Recent Developments
On April 4, 2016 the Company entered into a non-binding letter of intent to acquire Cherokee Compounding Pharmacy in Holly Springs, Georgia, and has subsequently determined it is not suitable for the Company at this time, and therefore we have abandoned this transaction. On May 20, 2016 the Company entered into a non-binding letter of intent to acquire Innovation Compounding, Inc. (Innovation) in Kennesaw, Georgia. The Company incurred $30,000 of expenses related to a fee for a no-shop provision, in addition to other customary expenses associated with the due diligence process. Management has determined not to pursue this acquisition further at this time.
On April 29, 2016, subject to approval by the Georgia Board of Pharmacy, the Company entered into definitive documents to acquire P3 Compounding of Georgia, LLC, (P3). P3 received Georgia Board of Pharmacy approval for the transaction at the end of June 2016 and the transaction closed effective June 30, 2016. We determined after 90 days of operation that its financial needs did not meet the Companys objectives, and it was unlikely to be able to contribute to the financial success of the Company in the near term. On September 30, 2016 we entered into an agreement with the former owners to spin out the operations and most of the liabilities into a newly formed LLC, owned by the former owners.
9
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 4 Financial Condition and Going Concern
As of September 30, 2016, the Company had cash on hand of $0 and current liabilities of $1,224,057 and has incurred a loss from operations. True Nature Holdings principal operations is the acquisition of compounding pharmacy companies. The Companys activities are subject to significant risks and uncertainties, including failing to secure additional funding to execute its business plan.
As a result of these factors, there is substantial doubt about the ability of the Company to continue as a going concern. The Companys continuance is dependent on raising capital and generating revenues sufficient to sustain operations. The Company believes that the necessary capital will be raised and has entered into discussions to do so with certain individuals and companies. However, as of the date of these consolidated financial statements, no formal agreement exists.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
Note 5 Spin-Out and Discontinued Operations
On December 31, 2015, the Company completed the restructuring and spin-out of its software educational business, resulting in True Nature Holding, Inc. becoming purely focused on acquiring a series of compounding pharmacy businesses, largely direct to consumers, doctors and veterinary professionals. The results of the operations associated with the spin-out company and Trunity Holdings, Inc., qualifies as discontinued operations as of and for the three and six month periods ended June 30, 2015.
The results of operations associated with discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
Net Sales
|
|
$
|
66,458
|
|
|
$
|
185,137
|
|
Cost of sales
|
|
|
27,894
|
|
|
|
90,023
|
|
Gross Profit
|
|
|
38,564
|
|
|
|
95,114
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
186,950
|
|
|
|
381,649
|
|
Selling, general and administrative
|
|
|
232,596
|
|
|
|
484,862
|
|
Total operating expenses
|
|
|
419,546
|
|
|
|
866,511
|
|
|
|
|
|
|
|
|
|
|
Operating Loss from Discontinued Operations
|
|
|
(380,982
|
)
|
|
|
(771,397
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(318,747
|
)
|
|
|
(550,802
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss from Discontinued Operations
|
|
$
|
(699,729
|
)
|
|
|
(1,322,199
|
)
|
Other Comprehensive Loss Net of Tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
14,082
|
|
|
|
12,807
|
|
Comprehensive Loss from Discontinued Operations
|
|
$
|
(685,647
|
)
|
|
$
|
(1,309,392
|
)
|
10
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 5 Spin-Out and Discontinued Operations (continued)
Our educational business was fully disposed of in December 2015. As a result, there were no assets or liabilities of discontinued operations as of December 31, 2015 or in subsequent periods.
Note 6 - Acquisition and Subsequent Spin-out
On April 29, 2016, subject to approval by the Georgia Board of Pharmacy, the Company entered into definitive documents to acquire P3 Compounding of Georgia, LLC, (P3). P3 received Georgia Board of Pharmacy approval for the transaction at the end of June 2016 and the transaction closed effective June 30, 2016. We determined after 90 days of operation that its financial needs did not meet the Companys objectives, and it was unlikely to be able to contribute to the financial success of the Company in the near term. On September 30, 2016 we entered into an agreement with the former owners to spin-out the operations and most of the liabilities into a newly formed LLC, owned by the former owners.
As a result of the acquisition, P3 is now a wholly owned subsidiary of the Company, and even through the operations and most of the liabilities have been transferred to a newly formed LLC controlled by the former owners of P3, the Company still owns the subsidiary which held the operations. The acquisition transaction was accounted for as a business combination and recorded as of June 30, 2016. All revenues recorded during the quarter ended September 30, 2016 were attributable to the P3 operations.
The fair value of the consideration paid pertaining to the acquisition of P3 was $851,150. Consideration for the transaction was structured as follows:
|
|
|
|
1)
|
An interest-free note for $150,000 with no interest to be paid in full via wire transfer on the maturity date of August 16, 2016.
This note had not been satisfied at the time of the spin-out, and was cancelled in conjunction with the spin-out;
|
|
|
|
|
2)
|
$425,000 convertible note with a term of 12 months and a 6% interest rate, with the first installment due June 1, 2016, and convertible into common stock of True Nature at a rate of $1.25 per share (which is 340,000 shares of common stock), less a short-term financing for $14,350 that the Company provided to Integrity for working capital purposes.
This note was converted into 340,000 shares of restricted common stock on September 23, 2016, and subsequently another 25,000 shares of common stock was added to this conversion in consideration of other expenses. These shares remain the property of the holders.
|
|
|
|
|
3)
|
A $425,000 convertible note with no interest, which automatically converted 340,000 shares of common stock with a fair value of $261,800 based on the closing price of the True Natures common stock on June 30, 2016. This note was cancelled as part of the spin out transaction
|
The notes issued in conjunction with the purchase and the intellectual properties were to be converted into restricted common stock at a rate of $1.25 per share. The purchase includes all payables, receivables, cash on hand, inventory and all assets used in the operation of the business.
In addition, Mr. Casey Gaetano, a former owner of P3, received an employment contract with True Nature for 3 years as VP of Corporate Development, at an annual salary of $125,000, plus normal benefits commensurate with other executives in the Company of equal stature. He also received in second quarter 2016, 125,000 shares of restricted at a value of $3.48 per share in exchange for becoming the Companys VP of Corporate Development. No consideration was paid under this agreement, and it was fully cancelled without further obligation as a part of the spin-out transaction. The shares issued will remain the property of Mr. Gaetano.
Allocation of Consideration Transferred
The identifiable assets acquired and liabilities assumed were recognized and measured as of the acquisition date based on their estimated fair values as of June 30, 2016. The excess of the acquisition date fair value of consideration transferred over the estimated fair value of the net tangible assets and intangible assets acquired was recorded as goodwill.
11
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 6 - Acquisition and Subsequent Spin-out (continued)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date based on a fair value acquisition price of $851,150 pertaining to the consideration provided.
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,201
|
|
Accounts receivable
|
|
|
26,000
|
|
Inventories
|
|
|
111,668
|
|
Other current assets
|
|
|
20,706
|
|
Furniture and equipment
|
|
|
5,294
|
|
Customer list
|
|
|
151,273
|
|
Total identifiable assets acquired
|
|
|
325,142
|
|
Accounts payable and accrued expenses
|
|
|
35,422
|
|
Total liabilities assumed
|
|
|
35,422
|
|
Total identifiable assets less liabilities assumed
|
|
|
289,720
|
|
Goodwill
|
|
|
561,430
|
|
Net assets acquired
|
|
$
|
851,150
|
|
The fair value of the transaction and related purchase price allocation was based on a third-party valuation obtained by the Company.
The Company has transferred all of these assets to the newly formed entity which is controlled by the former owners of P3, and it no longer owns any of these assets. The Company is responsible for payment of the following liabilities associated with the operation of P3: A) an obligation to SunTrust Bank in the amount of $17,000, B) an obligation to a lender who provided a short term loan in the amount of $75,000 and C) various payables to be reimbursed which total approximately $3,000.
Intangible Assets-Customer Relationships
In determining the fair value of the intangible assets, the Company considered, among other factors, the best use of the acquired assets, analyses of historical financial performance of P3 and estimates of future performance of P3. The fair values of the identified intangible assets related to P3s customer relationships. Customer relationships were calculated using the income approach. The following table sets forth the components of identified intangible assets associated with the P3 Acquisition and their estimated useful lives.
|
|
|
|
|
|
|
|
Fair Value
|
|
Useful Life
|
Customer relationships
|
|
$
|
151,273
|
|
7 years
|
|
|
$
|
151,273
|
|
|
The Company determined the useful lives of intangible assets based on the expected future cash flows and contractual life associated with the respective assets. Customer relationships represent the expected future benefit from contracts and relationships which, at the date of acquisition, were reasonably anticipated to continue given the history and operating practices of P3.
Goodwill
Of the total estimated purchase price for the P3 Acquisition, $561,430 was allocated to goodwill. Goodwill represents the excess of the purchase price of the acquired business over the fair value of the underlying net tangible and intangible assets acquired. The goodwill recorded resulting from the acquisition is expected to be deductible for income tax purposes.
12
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 7 Related Party Transactions
On September 27, 2016 the Company accepted the resignations of Stephen Keaveney, Chairman & CFO, and James Driscoll, CEO. Stephen Keaveney had a consulting agreement in the amount of $10,000 per month for professional fees and was paid $10,000 and $26,000, respectively during the three and six months ending June 30, 2016. The Companys CEO, James Driscoll had an employment agreement effective June 7, 2016 that would have paid him a monthly salary in the amount of $12,500 per month for remainder of 2016, $17,500 per month for the calendar year of 2017, $22,500 per month for the calendar year of 2018 and $25,000 per month for the calendar year of 2019. No payments have been made to James Driscoll during the three and six months ending June 30, 2016. Both of these agreements were fully cancelled and the Company has no further obligation to either going forward. Further, Mr. Keaveney has agreed to return for cancellation 2,000,000 of his shares of restricted common stock, and to use 100,000 shares to settle an obligation to a former employee. Mr. Driscoll had been awarded options for the purchase of 1,000,000 shares of restricted common stock, which were all cancelled in conjunction with his resignation.
On January 25, 2016 board member William L. Ross and Jeffrey Cosman were each awarded 100,000 of shares of the Company in exchange for their services as board members.
On April 25, 2016 board member James Driscoll was awarded 100,000 of shares of the Company in exchange for his services on the board and 1,000,000 non-qualified stock options for his position as CEO. The warrants were subsequently cancelled in conjunction with his resignation on September 23, 2016, and 100,000 shares of restricted common stock were issued in conjunction with the cancellation of all amounts owed as of the date of his resignation.
On May 25, 2016, board member Phillip Crone was awarded 100,000 of shares the Company in exchange for his services on the board. On September 23, 2016, the Company appointed three (3) new directors to the Board of Directors, and each received 100,000 shares of restricted common stock in conjunction with their appointment.
In addition, a shareholder of the Company has a consulting agreement in the amount of $10,000 per month for professional fees and was paid $1,395 and $18,645 during the three and six months ended June 30, 2016, respectively. As of December 31, 2015, $17,000 was classified as a prepaid asset in the consolidated balance sheets related to the prepayment of consulting fees. No amounts were prepaid as of June 30, 2016. (I AM ASSUMING THIS IS THE FOUNDATION?) The shareholder and the Company have agreed to terminate their agreement with the Company as of September 30, 2016. In consideration of all amounts owed the Company has issued a total of 966, 666 shares of restricted common stock, and the consultant has cancelled $290,000 in amounts owed. The amounts owed consist of a) $80,000 in advances to the Company, or obligations paid to the Company, b) $120,000 in consulting fees owed and c) reimbursement of $90,000 of costs related to the formation of Newco4pharmacy, LLC, which was acquired by the Company in December 2015.
Any amount owed for services performed through June 30, 2016 and remain unpaid are recorded as accrued liabilities on the consolidated balance sheets.
Note 8 Debt
Convertible Promissory Notes
On March 18, 2016, the Company issued a 12% Convertible Promissory Note (the Convertible Note A) in the principal amount of $60,000 to the Lender. Pursuant to the terms of the Convertible Note A, on the date thereof, the Company issued the Convertible Note A to the Lender and, as consideration therefor, the Lender paid the Company in cash the full principal amount of the Convertible Note A. Upon issuance the lender was awarded 15,000 restricted common shares as an origination fee which have certain registration rights. The Company issued an additional 15,000 shares of restricted common stock to the Lender on September 30, 2016 in conjunction with the renewal and extension of the note.
Pursuant to the terms of the Convertible Note A, the Company is obligated to pay monthly installments of not less than $1,000 the first of each month commencing the month following the execution of this note until its full maturity on September 16, 2016 at which time the Company is obligated to repay the full principal amount of the Convertible Note A. The Convertible Note A is convertible by the holder at any time into shares of the Companys common stock at an effective conversion price of $1.00 and throughout the duration of this Convertible Note the holder has the right to participate in any and other financing the Company may engage in with the same terms and option as all other investors. The Company allocated the face value of the Convertible Note A to the shares and the note based on relative fair values, and the amount allocated to the shares of $16,364 was recorded as a discount against the note, with an offsetting entry to additional paid-in capital.
13
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 8 Debt-Continued
The beneficial conversion feature of $16,364 was recorded as a debt discount with an offsetting entry to additional paid-in capital decreasing the note payable and increasing debt discount. The debt discount is being amortized to interest expense over the term of the debt. As of June 30, 2016, the carrying value of this Convertible Note A was $45,872 and accrued interest expense of $1,080. For the three and six months ended June 30, 2016, debt discount amortization related to the Convertible Note A was $16,274 and $18,599, respectively and its related interest expense was $1,820 and $2,080, respectively.
On May 19, 2016, the Company issued a 10% Convertible Promissory Note (the Convertible Note B) in the principal amount of $100,000 to the Lender. Pursuant to the terms of the Convertible Note B, on the date thereof, the Company issued the Convertible Note B to the Lender and, as consideration therefor, the Lender paid the Company in cash the full principal amount of the Convertible Note B. Upon issuance the lender was awarded 66,666 warrants to purchase common stock of the Company at an exercise price of $2.50 for a term of twenty-four month. This obligation, including all warrants, penalties and interest due was cancelled as of September 30, 2016 in consideration of the issuance of 400,000 shares of restricted common stock.
Short-term Loan
As a result of the acquisition of P3 Compounding of Georgia, LLC the Company had a short-term loan with a loan agency for a principal amount of $52,000 for the purchase of future sales and credit card receivables of P3. Under the terms of the receivable purchase agreement, the Company purchased an advance of $50,000 plus $2,000 for origination costs with a 10.5% daily interest rate to be repaid over 160 days at a repayment amount of $451.75 per day. Upon maturity of the loan the total repayment amount will be $72,280. As of June 30, 2016, the carrying value of this short term loan was $44,350. For the three and six months ended June 30, 2016, no interest expense related to this loan was recorded in the Companys consolidated financial statements as the effective date of acquisition was the last day of the quarter. At September 30, 2016 the amounts owed under these agreements were a total $75,000. The Company is in discussions with the lender for the cancellation of this debt and a resolution is expected during the fourth quarter of 2016.
August 2014 Convertible Debentures (Series C)
In fiscal 2015, all debentures issued by Trunity Holdings, Inc. to fund the former educational business were eligible to participate in a debt conversion; however, one debenture holder that was issued a Series C Convertible Debenture (the Series C Debenture) in August 2014 with an aggregate face value of $100,000 in exchange for the cancellation of Series B Convertible Debentures with a carrying value of $110,833 did not convert. The Series C Debenture accrues interest at an annual rate of 10%, matured on October 31, 2015, and is convertible into the Companys common stock at a conversion rate of $20.20 per share. The holders of the Series C Debenture also received warrants to acquire 4,950 shares post-split of common stock for an exercise price of $20.20 per share, exercisable over five years. The former educational business in fiscal 2014 allocated the face value of the Series C Debenture to the warrants and the debentures based on its relative fair values, and allocated to the warrants, which was recorded as a discount against the Series C Debenture, with an offsetting entry to additional paid-in capital. The discount was fully expensed in fiscal 2014 upon execution of the new debentures. As of June 30, 2016, the carrying value of this Series C Debenture was $110,833 and accrued interest expense of $19,950. For the three and six months ended June 30, 2016, interest expense related to the Debenture was $3,325 and $6,613, respectively.
14
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 8 Debt-Continued
November 2014 Convertible Debentures (Series D)
In fiscal 2015, all debentures issued by Trunity Holdings, Inc. to fund the former educational business were eligible to participate in a debt conversion however one debenture holder that was issued a Series D Convertible Debenture (the Series D Debenture) in November 2014 with an aggregate face value of $10,000 in exchange for the cancellation of Series B Convertible Debenture with a carrying value of $11,334 that did not participate in the debt conversion restructuring. The Series D Debenture accrues interest at an annual rate of 12%, matured on October 31, 2015, and is convertible into the Companys common stock at a conversion rate of $16.67 per share. The holders of the Series D Debenture also received warrants to acquire 495 shares post-split of common stock for an exercise price of $20.20 per share, exercisable over five years. The former educational business in fiscal 2014 allocated the face value of the Series D Debenture to the warrants and the debentures based on their relative fair values, and allocated to the warrants, which was recorded as a discount against the Series D Debenture, with an offsetting entry to additional paid-in capital. The discount was fully expensed in fiscal 2014 upon execution of the new debentures. As of June 30, 2016, the carrying value of the Series D Debenture was $11,334 and accrued interest expense of $2,267. For the three and six months ended June 30, 2016, interest expense related to the Debenture was $340 and $686, respectively.
Note 9 Stockholders Deficit
Sale of Common Stock
During the six months ended June 30, 2016, the Company raised gross proceeds of $60,000 through the sale of 120,000 shares of common stock to accredited investors in private placement transactions at a price of $0.50 per share. The Company incurred $9,000 of securities issuance costs representing commissions paid to broker-dealers who assisted with these transactions.
Shares for Consulting Services and Board Members
During the six months ended June 30, 2016, in connection with services rendered, the Company issued 410,000 restricted shares of the Companys common stock at values of $2.90, $1.45 and $0.90 per share in exchange for financial consulting and legal services conducted on behalf of the Company. In addition, in connection with services rendered for board members, the Company issued 400,000 restricted shares of the Companys common stock at values of $1.45, $2.02 and $2.35 per share in exchange for their services conducted on behalf of the Company. The issuance of these shares were recorded at the fair value of the shares at the date of issuance.
Shares for Employee
During the six months ended June 30, 2016, in connection with employment contract, the Company issued 125,000 restricted shares of the Companys common stock at a value of $3.48 per share in exchange for Casey Gaetano becoming the Companys VP of Corporate Development. While Mr. Gaetano has been terminated as of September 30, 2016, he will be allowed to retain the shares previously issued.
Shares issued for convertible note payable
As discussed in Note 8, during the six months ended June 30, 2016, in connection with conversion of a six-month convertible promissory note, the Company issued 15,000 shares of the Companys common stock with a fair value of $16,363 that was allocated based on the relative fair value of the note and associated shares. An additional 15,000 share were issued to this holder as consideration for an extension of lending agreement as of September 30, 2016.
Debt beneficial conversion feature for convertible note payable
During the six months ended June 30, 2016, the Company raised gross proceeds of $160,000 pursuant to two Convertible Notes Payable (Notes) that allocated the face value of the Note to the shares and debt based on their relative fair values and, resulted in the recording of beneficial conversion features totaling $108,804 as a discount against the Notes, with an offsetting entry to additional paid-in capital. The discount is being amortized into interest expense over the term of the Notes.
15
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 9 Stockholders Deficit- Continued
Shares issued for convertible note payable of acquisition of P3 Compounding of Georgia, LLC
- As part of the consideration for the acquisition of P3 a convertible note in the amount of $425,000 was converted into common stock of the Company at price per share of $1.25 resulting in the issuance of 340,000 shares of common stock.
Note 10 Stock-Based Compensation
The Company has two Employee, Director and Consultant Stock Option Plans that were not terminated as a result of the fiscal 2015 restructuring of the Company and spin-out and have continued as part of the operations as detailed below.
In fiscal 2015, the option pool pertaining to the 2009 Employee, Director and Consultant Stock Option Plan (the 2009 Plan) was adjusted for a 1 for 101 stock split due to the spin-out and restructuring plan, resulting in an authorized option pool of 18,152. Stock options typically vest over a three-year period and have a life of ten years from the date granted. As of June 30, 2016 there were 3,610 shares available for future awards under this plan.
In fiscal 2015, the option pool pertaining to the 2012 Employee, Director and Consultant Stock Option Plan (the 2012 Plan) was adjusted for a 1 for 101 stock split due to the spin-out and restructuring plan, resulting in an authorized options pool of 74,257. Stock options typically vest over a three year period and have a life of ten years from the date granted. As of June 30, 2016, there were 45,673 shares available for future awards under this plan.
In addition, there are approximately 24,753 in options outstanding that were issued to a former CEO of spin-out Company in fiscal 2014. These options issued are outside of the 2009 and 2012 Plans.
On June 1, 2016 Jim Driscoll was granted for his position as Chief Executive Officer (CEO) of the Company options to purchase up to 1,000,000 shares of Common Stock outside of the Companys 2009 and 2012 stock option plans (the Option Agreement). These options covered 250,000 shares at an exercise price of $1.00 per share to be granted immediately and three additional tranches of 250,000 shares each at an exercise price of $1.50, $2.00 and $2.50 per share, respectively. The remaining three tranches will vest equally over the next three years with the first fully vesting on May 31, 2017 through May 31, 2019. The term of the options will be for a period of five years and may be exercised at any time as to the vested shares. These options were fully cancelled in conjunction with his resignation as of September 27, 2016.
During the three and six months ended June 30, 2016, the Company recorded stock compensation expense related to the options granted to Mr. Driscoll of $496,668 and has unrecognized stock expense of $1,040,793 to be recorded over the vesting period. The grant-date fair value of options was estimated using the Black-Scholes option pricing model. The per share weighted average fair value of stock options granted for Mr. Driscoll was a range of $1.35-$1.76 and was determined using the following assumptions: expected price volatility is 80.39%, risk-free interest rate of 1.39%, zero expected dividend yield, and 4.0 years expected life of options. The expected term of options granted is based on the simplified method in accordance with Securities and Exchange Commission Staff Accounting Bulletin 107, and represents the period of time that options granted are expected to be outstanding. The Company makes assumptions with respect to expected stock price volatility based on the average historical volatility of peers with similar attributes. In addition, the Company determines the risk free rate by selecting the U.S. Treasury with maturities similar to the expected terms of grants, quoted on an investment basis in effect at the time of grant for that business day. As a result of the cancellation of these warrants, the Company has recovered $496,668 as resulted of the elimination of this reserve.
As of September 30, 2016, unrecognized stock compensation expense related to unvested stock options under all Plans was $1,041, 377. This expense is expected to be recognized over the remaining weighted average vesting periods of the outstanding options of 1.92 years. Total stock compensation expense recorded to selling, general and administrative expenses on the consolidated statements of operations and comprehensive for the nine month period ending September 30, 2016 related to the all Plans and options that vested during the period was $508,634.
16
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 10 Stock-Based Compensation-Continued
A summary of options issued, exercised and cancelled are as follows:
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Shares
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Weighted- Average Exercise Price
($)
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Weighted- Average Remaining Contractual Term
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Aggregate Intrinsic Value
($)
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Outstanding at December 31, 2015
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67,879
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$
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21.40
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7.17
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Granted
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1,000,000
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1.75
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5.00
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Cancelled
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Outstanding at September 30, 2016
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1,067,879
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$
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3.00
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5.22
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Exercisable at September 30, 2016
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354,911
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$
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4.99
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4.95
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Note 11 Warrants to Purchase Common Stock
Subsequent to the restructuring of the Company and the spin-out, the Company had warrants to purchase common stock outstanding that were not terminated and have continued as part of the operations as detailed below. The warrants were adjusted for a 1 for 101 stock split due to the spin-out and restructuring plan as authorized. All warrants outstanding as of September 30, 2016 are scheduled to expire at various dates through 2019. A summary of warrants issued, exercised and expired are as follows:
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Shares
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Weighted- Average Exercise Price
($)
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Weighted-
Average Remaining Contractual Term
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Outstanding at December 31, 2015
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78,462
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$
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29.55
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3.43
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Granted
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66,666
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2.50
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2.00
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Expired
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(2,475
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50.50
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Outstanding at September 30, 2016
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142,653
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$
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17.42
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2.50
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Exercisable at September 30, 2016
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142,653
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$
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17.42
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2.50
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17
TRUE NATURE HOLDING, INC.
Notes To Consolidated Financial Statements
(Unaudited)
Note 12 Commitments and Contingencies
Legal
National Council for Science and the Environment, Inc. v. Trunity Holdings, Inc., Case No. 2015 CA 009726 B, Superior Court for the District of Columbia, Civil Division.
This action was filed on December 16, 2015 by the National Council for Science and the Environment, Inc. (NCSE) in the state court in the District of Columbia against Trunity Holdings, Inc. (Trunity) and alleges claims for Breach of Contract. Acknowledgement of Indebtedness and Settlement Agreement and Quantum Meruit arising out of an agreement entered into between NCSE and Trunity in 2014. The Complaint seeks damages in the amount of $177,270, inclusive of attorneys fees, costs and accrued interest, continuing interest in the amount of 12% per annum and attorneys fees and costs of collection relating to the case. The Company in its answer on January 27, 2016, denied the material allegations made by NCSE, asserted a number of affirmative defenses and filed a counterclaim alleging claims for fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract and unjust enrichment. In its counterclaim, the Company will seek actual and compensatory damages against NCSE that it believes exceed the amount sought by NCSE on its claims, pre-judgment interest, punitive damages and all costs and expenses, including attorneys fees, incurred by the Company in bringing its claims against NCSE.
On September 23, 2016 the Company settled this obligation with an agreement to pay $48,500 to NCSE if paid by November 4, 2016, and $75,000 if paid later. The Company has not paid the amounts as of the date of this filing, and has recorded the obligation at $75,000. This amount, plus any related costs, including legal fees, shall be reimbursed by the spin-out company, Trunity, Inc., a Florida company.
Note 13 Subsequent Events
On July 6, 2016, the Company appointed Gary Meyer to the newly created position of Director of Compliance. Mr. Meyer was terminated as of September 26, 2016. The Company is in the process of negotiating a settlement to his employment contract, and has taken a reserve of $280,000 in conjunction with this potential obligation.
On August 2, 2016, the Board of Directors approved the consulting agreement with Acorn Management for market awareness, which calls for monthly payments starting at $7,500 per month and restricted common shares to be valued at $50,000 per month to be converted at fair value at month-end. This agreement was terminated as of September 30, 2016, and the Company agreed to issue 100,000 shares of restricted common stock in full settlement of all outstanding obligations.
18
ITEM 2.