UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-KT

 


 

(Mark One)

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended:  

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from September 1, 2018 to December 31, 2018 

 

Commission File Number: 333-161943

   

BETTER CHOICE COMPANY INC.

(Exact name of registrant as specified in its charter)

 

Delaware

83-4284557

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

4025 Tampa Rd, Suite 1117, Oldsmar, FL 34677

(Address of principal executive offices) (Zip Code)

 

(646) 846-4280

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

  

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐ Yes   ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☐ Yes   ☒ No

 

(As a voluntary filer, the registrant has not been subject to the filing requirements of Section 13 or 15(d) of the Exchange Act for the past 90 days. The registrant has filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months.)

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      ☐ Yes   ☒ No

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐

Accelerated filer     ☐

Non-accelerated filer     ☒ 

Smaller reporting company    ☒

 

Emerging Growth Company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ☐ Yes   ☒ No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing sale price of $6.35 as reported on the OTC QB: $185,397,432.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 42,220,235 shares of $0.001 par value common stock outstanding as of July 23, 2019.

 

 

 

 

BETTER CHOICE COMPANY INC.

FORM 10-KT

Transition Report for the Period From September 1, 2018 to December 31, 2018

 

TABLE OF CONTENTS

 

 

Page

 

PART I.

 

 

Special Note Regarding Forward-Looking Statements

4

Item 1.

Business

5

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

6

Item 2.

Properties

6

Item 3.

Legal Proceedings

6

Item 4.

Mine Safety Disclosures

6

 

 

PART II.

 

Item 5.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7

Item 6.

Selected Financial Data

10

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 8.

Financial Statements and Supplementary Data

21

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

52

Item 9A.

Controls and Procedures

53

Item 9B.

Other Information

54

 

 

PART III.

 

Item 10.

Directors, Executive Officers and Corporate Governance

55

Item 11.

Executive Compensation

57

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

59

Item 13.

Certain Relationships and Related Transactions, and Director Independence

60

Item 14.

Principal Accountant Fees and Services

62

 

 

PART IV.

 

Item 15.

Exhibits and Financial Statement Schedules

64

Item 16.

Form 10-KT Summary

66

 

 

 

 

SIGNATURES

67

 

 

 

Table of Contents

 

EXPLANATORY NOTE

 

Unless otherwise noted, references in this Form 10-KT to “Better Choice Company,” the “Company,” “we,” “our” or “us” means Better Choice Company Inc.

 

FORWARD-LOOKING STATEMENTS

 

This Transition Report on Form 10-KT contains “forward-looking statements.”  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, plans with regard to acquisitions, liquidity, projections, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, you are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not intend, and undertake no obligation, to update any forward-looking statement.   You should, however, consult further disclosures we make in future filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

  

Although we believe the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. 

 

AVAILABLE INFORMATION

 

We file annual, quarterly and special reports and other information with the United States Securities and Exchange Commission (“SEC”) that are publicly available through the SEC’s website at www.sec.gov.

 

 

4

Table of Contents

 

PART I

   

ITEM 1.          BUSINESS

 

Change in Fiscal Year End

 

Effective May 21, 2019, our board of directors (the “Board”) approved a change in our fiscal year end from August 31 to December 31. The fiscal year change for us is effective beginning with our 2019 fiscal year, which began January 1, 2019 and ends December 31, 2019. As a result of this change, we are filing this Transition Report on Form 10-KT for the four-month transition period ended December 31, 2018 (the “transition period” or the “transition period ended December 31, 2018”). References to any of our previous fiscal years mean the fiscal years ending on August 31.

   

Overview

 

We were incorporated in the State of Nevada in 2001 under the name Cayenne Construction, Inc., and in 2009 changed our name to Sport Endurance, Inc. Effective March 11, 2019, we changed our name to Better Choice Company Inc. after reincorporating in Delaware.

 

The Company previously marketed for sale three sport nutritional products which it suspended in March 2018.  On March 14, 2018, the Company, through its wholly-owned subsidiary Yield Endurance, Inc. (“Yield”), entered into a series of agreements under which Yield borrowed $5 million of bitcoin (“BTC”). The Company simultaneously entered into transactions with Madison Partners LLC and Prism Funding Co. LP to lend the BTC to third parties. On August 21, 2018, the Company entered into a series of restructuring agreements to unwind the BTC transactions thereby exiting the BTC and cryptocurrency markets.

   

Effective March 11, 2019, Sport Endurance, Inc. merged into its wholly-owned subsidiary, Better Choice Company Inc., a Delaware corporation. As a result, the name of Sport Endurance, Inc. was changed to Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E Convertible Preferred Stock (the “Series E”) of Sport Endurance, Inc. converted into one share of Series E Convertible Preferred Stock of Better Choice Company Inc.

 

On March 14, 2019, the Company filed a Certificate of Amendment of Certificate of Incorporation (the “Amendment”) with the Delaware Secretary of State to effect a one-for-26 reverse split of the Company’s outstanding common stock. The Amendment took effect on March 15, 2019. No fractional shares will be issued or distributed as a result of the Amendment. These financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.

 

On December 17, 2018, the Company made a $2,200,000 investment in TruPet LLC, an online seller of pet foods, flea and tick products, pet nutritional products and related pet supplies. On May 6, 2019, the Company completed the acquisition of (i) Bona Vida, Inc., an emerging hemp based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, in accordance with the terms of the Agreement and Plan of Merger, dated as of February 28, 2019, (the “Bona Vida Merger Agreement”) by and among the Company, BCC Merger Sub, Inc. (“Merger Sub”), and Bona Vida, Inc. (“Bona Vida”), as amended by Amendment No. 1 thereto made and entered into as of May 3, 2019 (the “Bona Vida First Amendment”), pursuant to which Merger Sub merged with and into Bona Vida, with Bona Vida surviving as a wholly owned subsidiary of the Company (the “Bona Vida Acquisition”) and (ii) TruPet LLC in accordance with the terms of the Securities Exchange Agreement, dated as of February 2, 2019, (the “TruPet Merger Agreement”) by and between the Company and TruPet LLC (“TruPet”), as amended by Amendment No. 1 thereto made and entered into as of May 6, 2019 (the “TruPet First Amendment”), pursuant to which the Company agreed to acquire 93.3% of the outstanding TruPet membership interests (the “TruPet Acquisition” and, together with the Bona Vida Acquisition, the “Acquisitions”) with TruPet remaining as a wholly owned subsidiary of the Company. Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.

 

5

Table of Contents

 

ITEM 1A.           RISK FACTORS

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is not required to provide the information under this Item. 

 

ITEM 1B.           UNRESOLVED STAFF COMMENTS

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.

 

ITEM 2.          PROPERTIES

 

The principal executive office of Better Choice Company is located at 4025 Tampa Rd, Suite 1117, Oldsmar, FL 34677. Our telephone number is: (646) 846-4280.

 

ITEM 3.          LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

ITEM 4.          MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

6

Table of Contents

 

PART II

 

ITEM 5.          MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

   

Market Information

 

Our common stock trades on the OTCQB under the symbol “BTTR”. The following table sets forth the high and low bid prices for each quarter within the two last fiscal years and the transition period. The quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

 

   

COMMON STOCK MARKET PRICE

 
   

HIGH

   

LOW

 

TRANSITION PERIOD ENDED DECEMBER 31, 2018:

               

September 1, 2018 to December 31, 2018

  $ 13.26     $ 2.60  

 

   

COMMON STOCK MARKET PRICE

 
   

HIGH

   

LOW

 

FISCAL YEAR ENDED AUGUST 31, 2018:

               

First Quarter

  $ 19.76     $ 7.80  

Second Quarter

  $ 15.86     $ 8.58  

Third Quarter

  $ 29.64     $ 13.52  

Fourth Quarter

  $ 28.60     $ 5.33  

 

   

COMMON STOCK MARKET PRICE

 
   

HIGH

   

LOW

 

FISCAL YEAR ENDED AUGUST 31, 2017:

               

First Quarter

  $ 49.40     $ 32.50  

Second Quarter

  $ 51.22     $ 31.20  

Third Quarter

  $ 40.82     $ 5.20  

Fourth Quarter

  $ 27.56     $ 17.368  

 

Holders of Common Stock

 

As of July 23, 2019, we had 42,220,235 shares of common stock issued and outstanding.  As of July 23, 2019, there were 149 record shareholders of the Company’s common stock.  Certain shares are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

 

On December 12, 2018, the Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s common stock and (ii) a warrant to purchase one half of a share of common stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of $2,779,840. Costs associated with the December Offering were $122,741, and net proceeds were $2,657,099. $2,607,099 of the net proceeds were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 common shares, and $50,000 of the net proceeds were received on January 8, 2019 for the sale of 25,641 common shares. The Warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share. The Company entered into a Securities Purchase Agreement, dated as of December 12, 2018 with each investor in the December Offering.

 

Holders of Preferred Stock

 

As of December 31, 2018, we were authorized to issue 20,000,000 shares of preferred stock, $0.001 par value per share. On April 22, 2019, we filed a certificate of amendment of certificate of incorporation with the State of Delaware which reduced the number of authorized shares of preferred stock to 4,000,000. As of July 23, 2019, we had a total of 1,707,920 shares of preferred stock issued and outstanding.  As of July 23, 2019, there were three record shareholders of the Company’s preferred stock.  

 

7

Table of Contents

 

Series A Preferred Stock

Each share of the Company’s Series A Convertible Preferred Stock (the “Series A”) is convertible into three shares of common stock and votes with the holders of the common stock. The Series A does not provide redemption rights and the Series A is treated identically to the common stock for dividend and liquidation purposes. As of July 23, 2019, there were no shares of Series A outstanding.

 

Series B Preferred Stock

On May 30, 2018, the Company authorized 805,000 shares of Series B Convertible Preferred Stock (the “Series B”). The Series B has a stated value of $0.99 per share; is convertible to common stock at a price of $0.78 per share, based upon stated value; and accrues dividends at the rate of 10% per annum on the stated value. The Series B has voting rights equal to those of the underlying common stock. Under certain default condition, the Series B is subject to mandatory redemption at 125%, and the conversion price resets to 75% of the market price of the Company’s common stock.

 

On May 31, 2018, the Company issued 803,969.73 shares of Series B for the conversion of debt. The Company began to accrue dividends on the Series B Convertible Preferred Stock on June 1, 2018. From June 1, 2018 through August 31, 2018, the Company accrued dividends in the amount of $20,280 on the Series B; from September 1, 2018 through October 22, 2018, the Company accrued dividends in the amount of $11,339 on the Series B. On October 22, 2018, all 803,969.73 outstanding shares of the Series B and accrued dividends in the amount of $31,619 were exchanged for shares of the Company’s Series E (as defined below). At July 23, 2019, there were no shares of the Series B outstanding.

 

Series E Convertible Preferred Stock

On October 22, 2018, the Company authorized 2,900,000 shares of its Series E Convertible Preferred Stock (the “Series E”). The Series E has a stated value of $0.99 per share; is convertible to common stock at a price of $0.78 per share, based upon stated value; and accrues dividends at the rate of 10% per annum on the stated value. The Series E has voting rights equal to those of the underlying common stock. Under certain default conditions, the Series E is subject to mandatory redemption at 125%, and the conversion price resets to 75% of the market price of the Company’s common stock.

 

On October 22, 2018, the Company entered into an Exchange Agreement (the “Exchange Agreement”) whereby the following were exchanged for 2,846,355.54 shares of Series E: (i) Convertible debt and accrued interest in the amounts of $1,027,202 and $66,299, respectively; (ii) 803,969.73 shares of Series B; (iii) accrued dividends in the amount $31,619 on the Series B; and (iv) outstanding warrants to purchase 463,631 shares of the Company’s common stock. A derivative liability in the amount of $2,003,390 related to the convertible debt and was also settled pursuant to the Exchange Agreement. The Company valued the 2,846,355.14 shares of Series E at $2,022,766, and recorded a gain in the amount of $472,267 on the Exchange Agreement during the transition period ended December 31, 2018. The Company accrued dividends in the amount of $53,501 on the Series E during the transition period ended December 31, 2018.

 

Subsequent to December 31, 2018, holders of the Series E converted the following:

 

 

On January 18, 2019, 49,155 shares of Series E were converted to 62,389 shares of common stock;

 

On February 6, 2019, 49,523 shares of Series E were converted to 62,856 shares of common stock; and

 

On February 11, 2019, 54,000 shares of Series E were converted to 68,538 shares of common stock.

 

On May 2, 2019 and May 10, 2019, an aggregate of 749,394 shares of Series E were converted to 951,154 shares of common stock.

 

On May 22, 2019, 236,364 shares of Series E were converted to 300,000 shares of common stock.

  

On May 17, 2019, the Company filed an Amended and Restated Certificate of Designations, Preferences and Rights of the Series E Convertible Preferred Stock of Better Choice Company Inc. with the Delaware Secretary of State to increase the limit on beneficial ownership of certain holders of Series E Convertible Preferred Stock.

 

The Company has issued and outstanding 1,707,920 shares of the Series E at July 23, 2019.

 

Dividends

 

Holders of common stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available therefore as well as any distributions to the security holder. The Company has never paid dividends on its common stock. The Company intends to follow a policy of retaining earnings, if any, to finance the growth of the business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of future dividends on the common stock will be at the sole discretion of the Board and will depend on the Company’s profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant.

 

8

Table of Contents

 

The Series B accrued dividends at the rate of 10% per annum on the stated value. During the year ended August 31, 2018, the Company accrued dividends payable in the amount of $20,280 on the Series B. From the period September 1, 2018 to October 22, 2018, the Company accrued an additional $11,339 in dividends payable. At October 22, 2018, the amount of dividends payable on the Series B was $31,619. At October 22, 2018, dividends payable in the amount of $31,619 was outstanding in connection with the Series B; this amount was converted to Series E in connection with the Exchange Agreement described above. The Series E accrued dividends at the rate of 10% per annum on the stated value. During the transition period ended December 31, 2018, the Company accrued dividends in the amount of $64,840 on the Series E.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

 

Weighted average exercise price of outstanding options, warrants and rights

 

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Equity compensation plans approved by holders

 

 

-

 

 

 

N/A

 

 

 

N/A

 

Equity compensation plans not approved by securityholders

 

 

5,840,000

 

 

$

5.01

 

 

 

160,000

 

      Total

 

 

5,840,000

 

 

$

5.01

 

 

 

160,000

 

 

On January 17, 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) which covers the potential issuance of 180,769 shares of common stock. The 2019 Plan was terminated on June 28, 2019, and no additional grants are being made under the 2019 Plan.  As such, the 142,307 securities remaining available under the 2019 Plan have been excluded from the table above.

 

On April 29, 2019, the Company adopted the 2019 Incentive Award Plan (the “New 2019 Plan”), which became effective on such date, subject to the approval of the Company’s stockholders.  The New 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards or a dividend equivalent award (each an “Award”). Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the New 2019 Plan. The New 2019 Plan authorizes the issuance of (i) 6,000,000 shares of common stock plus (ii) an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) 10% of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of common stock as determined by the Board.

 

Subject to certain limitations, shares covered by awards granted under the New 2019 Plan that are forfeited or expire, are converted to shares of another person in connection with a recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other similar event, or such Award is settled for cash (in whole or in part) (including shares of common stock repurchased by the Company at the same price paid by the holder), the shares of common stock subject to such Award will, to the extent of such forfeiture, expiration or cash settlement, again be available for future grants of Awards under the New 2019 Plan. However, in no event will more than 6,000,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2019 Plan during its ten-year term.

 

The New 2019 Plan will be administered by the compensation committee of the Board or any other committee to the extent that the compensation committee of the Board delegates its powers or authority under the 2019 Plan to such committee. The administrator of the New 2019 Plan (the “Administrator”) or its delegatee will have the authority to determine who receive awards and set the terms and conditions applicable to the award within the confines of the New 2019 Plan’s terms. The Administrator will have the authority to make all determinations and interpretations under, and adopt rules and guidelines for the administration of, the New 2019 Plan.

 

The New 2019 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.

 

9

Table of Contents

 

 

The New 2019 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the participant. In addition, the Administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding option or stock appreciation right granted under the 2019 Plan. The New 2019 Plan will expire on April 29, 2029.

 

Recent Sales of Unregistered Securities

 

We have previously disclosed all sales of securities without registration under the Securities Act of 1933, as amended (the “Act”).

 

Repurchase of Securities

 

In November 2018, the Company repurchased 1,048,904 shares of its common stock at par value of the pre-reverse split shares for a total cost of $27,271.

 

In January 2019, the Company repurchased 935,897 shares of its common stock from David Lelong, the Company’s former Chief Executive Officer, in a private transaction. The shares were repurchased by the Company for the par value of the pre-reverse split shares of $0.001 per share or a total of $24,333.

 

ITEM 6.          SELECTED FINANCIAL DATA

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.

 

ITEM 7.          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview and Outlook

 

We were incorporated in the State of Nevada in 2001 under the name Cayenne Construction, Inc. and, in 2009, changed our name to Sport Endurance, Inc. Effective March 11, 2019, we changed our name to Better Choice Company Inc. after reincorporating in Delaware.

 

The Company previously marketed for sale three sport nutritional products which it suspended in March 2018.  On March 14, 2018, the Company, through its wholly-owned subsidiary Yield Endurance, Inc. (“Yield”), entered into a series of agreements under which Yield borrowed $5 million of bitcoin BTC. The Company simultaneously entered into transactions with Madison Partners LLC and Prism Funding Co. LP to lend the BTC to third parties. On August 21, 2018, the Company entered into a series of restructuring agreements to unwind the BTC transactions thereby exiting the BTC and cryptocurrency markets.

 

Effective March 11, 2019, Sport Endurance, Inc. merged into its wholly-owned subsidiary, Better Choice Company Inc., a Delaware corporation. As a result, the name of Sport Endurance, Inc. was changed to Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E of Sport Endurance, Inc. converted into one share of Series E of Better Choice Company Inc.

 

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Table of Contents

 

On December 17, 2018, the Company made a $2,200,000 investment in TruPet LLC, an online seller of pet foods, flea and tick products, pet nutritional products and related pet supplies.  On February 2, 2019 and February 28, 2019, respectively, the Company entered into definitive agreements to acquire the remainder of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. On May 6, 2019, the Company completed the acquisition of (i) Bona Vida, Inc. in accordance with the terms of the Agreement and Plan of Merger, dated as of February 28, 2019, by and among the Company, BCC Merger Sub, Inc. and Bona Vida, Inc. as amended by Amendment No. 1 thereto made and entered into as of May 3, 2019, pursuant to which Merger Sub merged with and into Bona Vida, with Bona Vida surviving as a wholly owned subsidiary of the Company (the “Bona Vida Acquisition”) and (ii) TruPet LLC in accordance with the terms of the Securities Exchange Agreement, dated as of February 2, 2019, by and between the Company and TruPet LLC, as amended by Amendment No. 1 thereto made and entered into as of May 6, 2019, pursuant to which the Company agreed to acquire 93.3% of the outstanding TruPet membership interests with TruPet remaining as a wholly owned subsidiary of the Company. Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.

 

Results of operations for the transition period September 1, 2018 to December 31, 2018 compared to the unaudited period September 1, 2017 to December 31, 2017

 

   

Transition period from

September 1, 2018 to ended

December 31, 2018

(audited)

   

Comparable period from

September 1, 2017 to

December 31, 2017

(unaudited)

   

Increase / (Decrease)

 

Gross profit

  $ -     $ 187     $ (187

)

                         

Selling, general and administrative

    292,060       105,734       186,326  

Operating loss

    (292,060

)

    (105,547

)

    (186,513

)

                         

Total other expense

    (4,120,798

)

    (297,665

)

    (3,823,133

)

Net loss

    (4,412,858

)

    (403,212

)

    (4,009,646

)

Preferred stock dividend

    (64,840

)

    -       (64,840

)

Net loss available to common shareholders

  $ (4,477,698

)

  $ (403,212

)

  $ (4,074,486

)

 

Revenues

 

The Company had sales of $0 during the transition period ended December 31, 2018 compared to $214 for the comparable unaudited period ended December 31, 2017. The Company had cost of goods sold of $0 for gross profit of $0 for the transition period ended December 31, 2018, and cost of goods sold of $27 for gross profit of $187 for the comparable unaudited period ended December 31, 2017.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses were $292,060 for the transition period ended December 31, 2018 compared to $105,734 for the comparable unaudited period ended December 31, 2017, an increase of $186,326. Selling, general and administrative expenses consisted primarily of professional fees, marketing costs, general office expenses, travel costs, rent expense, stock service expense and payroll expenses. The increase in general and administrative expenses for the transition period ended December 31, 2018 was primarily due to increased legal and accounting fees of $104,494.

 

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Other expense

 

Other expense was ($4,120,798) for the transition period ended December 31, 2018 compared to ($297,655) for the comparable unaudited period ended December 31, 2017. The components of the change in other expense are as follows:

 

 

Interest expense 

 

Interest expense for the transition period ended December 31, 2018 was $132,892 compared to $203,310 for the comparable unaudited period ended December 31, 2017, a decrease of $70,418. The decrease in interest expense was primarily due to a decrease in the principal amount of notes payable on the Company’s balance sheet of $770,112.

 

 

Gain on exchange of debt and equity

 

During the transition period ended December 31, 2018, the Company recorded a gain in the amount of $472,267 on exchange of debt and equity to preferred stock. There were no such comparable transactions during the comparable unaudited period ended December 31, 2017.

 

 

Loss on note exchange

 

During the unaudited period ended December 31, 2017, the Company recorded a net loss in the amount of $122,878 on exchange of debt to equity. There were no such comparable transactions during the transition period ended December 31, 2018.  

 

 

Excess value of warrants over net proceeds of sale of common stock

 

In December 2018, the Company closed a private placement offering of 1,400,000 units at a price of $1.95 per unit, each unit consisting of one share of the Company’s common stock and a warrant to purchase one half share of Common Stock. The 700,000 warrants issued in connection with this offering had a fair value of $6,244,548 at issuance, which exceeded the paid-in capital related to the sale of these units by $3,638,849; this amount was charged to interest expense during the transition period ended December 31, 2018. There was no such comparable transaction during the comparable period ended December 31, 2017. 

 

 

Change in fair value of derivative liability 

 

In February and March 2018, the Company issued convertible promissory notes in aggregate amount of $1,027,202 that contain reset features that required the Company to record a derivative liability. In addition, the holders of the warrants to purchase 700,000 shares of the Company’s common stock which were issued in December 2018 have an option to settle in cash in the event of a change of control of the Company and accordingly, the value of these warrants is considered a derivative liability. The net loss on the revaluation of these derivative liabilities was $821,324 for the transition period ended December 31, 2018, an increase of $849,847 compared to a gain on revaluation in the amount of $28,523 during the comparable unaudited period ended December 31, 2017.

 

Net loss 

 

For the reasons described above, the Company had a net loss for the transition period ended December 31, 2018 of $4,412,858, an increase of $4,009,646 compared to a net loss of $403,212 during the comparable unaudited period ended December 31, 2017.

 

Preferred Stock Dividend

 

We accrued a preferred stock dividend for the transition period of $64,840. There were no such comparable transactions during the comparable unaudited period ended December 31, 2017.

 

Net loss available to common stockholders

 

For the reasons described above, the Company had a net loss available to common stockholders for the transition period ended December 31, 2018 of $4,477,698, an increase of $4,074,486 compared to a net loss available to common stockholders of $403,212 during the comparable unaudited period ended December 31, 2017.

 

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Results of operations for the year ended August 31, 2018 compared to the year ended August 31, 2017

 

Revenues

 

The Company had sales of $475 during the year ended August 31, 2018 compared to $1,734 for the year ended August 31, 2017. The Company had cost of goods sold of $211 for gross profit of $264 for the year ended August 31, 2018, and cost of goods sold related to the sales of $334 for gross profit of $1,400 for the year ended August 31, 2017. 

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses were $528,152 for the year ended August 31, 2018 compared to $525,438 for the year ended August 31, 2017, an increase of $2,714. Selling, general and administrative expenses consisted primarily of professional fees, marketing costs, general office expenses, travel costs, rent expense, stock service expense and payroll expenses. The increase in general and administrative expenses for the year ended August 31, 2018 was primarily due to marketing costs in the amount of $140,605 and professional fees in the amount of $107,172, offset by financing penalties in the amount of $272,895. 

 

Interest expense

 

Interest expense for the year ended August 31, 2018 was $1,094,285 compared to $830,676 for the year ended August 31, 2017, an increase of $263,609.  The increase in interest expense was primarily due to amortization of debt discounts on the Company’s convertible notes payable due to an increase in the number of conversions and restructures of the Company’s notes payable during the year ended August 31, 2018. 

 

Gain on restructuring of debt

 

During the year ended August 31, 2018, the Company restructured certain convertible notes payable which resulted in a net gain in the amount of $1,027,260.  There was no such gain or loss during the year ended August 31, 2017.

 

Loss on conversion of debt

 

During the year ended August 31, 2018, certain of the Company’s convertible notes payable were converted to equity which resulted in a net loss in the amount of $474,648.  There was no such gain or loss during the year ended August 31, 2017.

 

Change in fair value of derivative liability

 

The Company has issued convertible promissory notes that contain reset features that required the Company to record a derivative liability.  The Company revalued the derivative liability at August 31, 2018 at $2,317,412.  The net loss on the revaluation of derivative liabilities was $45,348 for the year ended August 31, 2018, a decrease of $343,196 compared to a loss on revaluation in the amount of $388,544 during the year ended August 31, 2017.

 

Net loss from continuing operations

 

For the reasons above, the Company had a net loss from continuing operations for the year ended August 31, 2018 of $1,114,908, a decrease of $628,350 compared to a net loss from continuing operations of $1,743,258 during the year ended August 31, 2017.

 

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Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at December 31, 2018 compared to August 31, 2018.

 

   

December 31,

   

December 31,

   

August 31,

   

August 31,

 
   

2018

   

2017

   

2018

   

2017

 

Current Assets

  $ 364,506     $ 88,497     $ 209,076     $ 16,324  
                                 

Current Liabilities

  $ 7,695,388     $ 1,473,258     $ 2,858,351     $ 1,199,198  
                                 

Working Capital (Deficit)

  $ (7,330,882

)

  $ (1,384,761

)

  $ (2,649,275

)

  $ (1,182,874

)

 

During the transition period, cash used in operating activities was $224,398 compared to $129,550 for the comparable period ended December 31, 2017. The increase in cash used in operating activities was primarily attributable to an increase in accounting and legal fees associated with the Company’s business development activities of  $104,494.

 

The Company had cash provided by financing activities of $2,579,828 for the transition period ended December 31, 2018 compared to $201,750 during the comparable period ended December 31, 2017. The increase was due primarily to proceeds from the sale of common stock in the amount of $2,607,099, offset by payments for the purchase of common stock of $27,271.

 

The Company had cash used in investing activities of $2,200,000 for the transition period, compared to $0 during the comparable period ended December 31, 2017. The increase was due to the investment in TruPet during the transition period. With the proceeds of the Company’s recent private placement and after the making of a $2.2 million loan, the Company had $355,104 of cash as of December 31, 2018 which should be sufficient to meet our working capital needs for at least the next 12 months.

 

During the year ended August 31, 2018, the Company had cash used in operating activities of $842,446. This consisted of Company’s net loss from continuing operations of $1,114,908, increased by the change in fair value of derivative liabilities of $45,348, value of derivative liabilities in excess of principal amount of notes payable of $447,680, amortization of debt discounts of $532,907, and loss on conversion of debt of $474,648, offset by a gain on note exchange of $1,027,260. The Company’s cash position also decreased $203,033 as a result of changes in the components of current assets and current liabilities.

 

The Company had cash provided by financing activities of $1,001,500 for the year ended August 31, 2018 which consisted of proceeds from convertible debt in the amount of $1,232,500, proceeds from related party notes payable in the amount of $35,500, offset by principal payments made on related party notes payable in the amount of $266,500.

 

With the proceeds of the Company’s recent private placement and after the making of a $2.2 million loan, the Company had $10,739,705 of cash as of July 1, 2019 which we believe should be sufficient to meet our working capital needs for at least the next 12 months.

 

Financing Transactions

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 

May 2016 Convertible Notes 

 

On May 11, 2016 the Company entered into Securities Purchase Agreements with certain purchasers (“the May 2016 Convertible Noteholders”).  The Company issued 3.5% original issue discount (“OID”) senior secured convertible promissory notes having an aggregate face amount of $440,000 (the “May 2016 Convertible Notes”).  These notes bear interest at a rate of 10% per annum and mature in six months.  The Company received cash proceeds of $424,600 net of the 3.5% original issue discount of $15,400.  At the Holders option the principal and accrued interest under the Notes are convertible into common stock at a rate of $13 per share and have a full reset feature.  The Notes are secured by all assets of the Company.  The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 125% during the first 90 days and 130% for the period from the 91st day through maturity. During November 2016, the Company entered into forbearance agreements with the May 2016 Convertible Noteholders extending its time to pay the Notes until December 16, 2016. In December 2016, the Company entered into agreements with the May 2016 Convertible Noteholders to substantially restructure the terms of the May 2016 Convertible Notes; see January and February 2017 Convertible Notes below. 

 

During the years ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $0 and $172,735, respectively, in connection with the amortization of the discount on these notes.

  $ -     $ -     $ -  

 

14

Table of Contents

 

    December 31, 2018     August 31, 2018     August 31, 2017  

January and February 2017 Convertible Notes

 

In December 2016, the Company entered into restructuring agreements with the May 2016 Convertible Noteholders in connection with the May 2016 Convertible Notes (see above) under the following terms: new notes (the “January and February 2017 Convertible Notes”) would be issued for the amounts due under the May 2016 Convertible Notes; penalties, fees, and accrued interest in the aggregate amount of $212,702 were added to the principal amount due under the January and February 2017 Convertible Notes; 1,346 shares of common stock were issued as a commitment fee; the January and February 2017 Convertible Notes were issued at a discount of 3.5%, bear interest at the rate of 10% per annum, are convertible at a rate of $13.00 per share, and contain a variable conversion rate whereby, should the Company subsequently sell common stock at a price less than the conversion price, the conversion price of the January and February 2017 Convertible Notes will be reduced to match the lower conversion price. In addition, the proceeds from one of the January and February 2017 Convertible Notes were used to fully redeem one of the May 2016 Convertible Notes. The aggregate original amount of principal due under the January and February 2017 Convertible Notes was $614,258. Two of the January and February 2017 Convertible Notes in the aggregate amount of $494,340 were due on March 31, 2017, and one of the January and February 2017 Convertible Notes in the amount of $119,918 was due on August 17, 2017. In April 2017, the Company received forbearance letters from the Lenders of the January and February 2017 Convertible Notes that were due on March 31, 2017 to extend the due date to April 17, 2017 in exchange for principal payments in the aggregate amount of $75,000; on April 18, 2017, the Company received forbearance letters to further extend the due date to May 1, 2017 in exchange for principal payments in the aggregate amount of $45,000; and on May 1 and 2, 2017, the company entered into forbearance agreements with the holders of the January and February 2017 Convertible Notes to extend the due date to June 2, 2017. On June 5 and June 13, 2017, the Company entered into forbearance agreements with the holders of two of the three January and February 2017 Convertible Notes to extend the due dates to December 27, 2017 in exchange for increase in principal in the aggregate amount of $78,907. On August 17, 2017, the Company entered into a forbearance agreement with the note purchasers of the third January and February Convertible Note (the “Note Purchasers”) to extend the due date to December 27, 2017 in exchange for $10. At August 31, 2017, three of the January and February 2017 Convertible Notes were outstanding in the aggregate amount of $553,976; these notes are due December 27, 2017. During the year ended December 31, 2017, the holders of the January and February 2017 Convertible Notes converted an aggregate of $33,865 in principal and $21,135 in accrued interest into 17,628 shares of common stock; the Company recorded an aggregate loss in the amount of $122,878 on these conversions.

 

On January 17, 2018, the Note Purchaser of one of the January and February 2017 Convertible Notes in the principal amount of $241,802 purchased the remaining two January and February 2017 Convertible Notes in the aggregate principal amount of $278,309. The Company then entered into an agreement with the Note Purchasers to exchange the three January and February 2017 Convertible Notes (the “January 2018 Note Exchange”) in the aggregate principal amount of $520,111 for a new Convertible Note in the principal amount of $542,343 (the “January 2018 Convertible Note”). The Company revalued the derivative liability associated with the conversion feature associated with January and February 2017 notes and compared it with the derivative liability on the January 2018 convertible note, and recorded an expense in the amount of $396,611 related to the change in value. The Company recorded a loss in the amount of $6,409 on the January 2018 Note Exchange related to modification of notes.

 

During the year ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $153,234 and $154,848, respectively in connection with the amortization of the discount on these notes.

  $ -     $ -     $ 553,977  

 

15

Table of Contents

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 

November 2017 Convertible Note

 

On November 17, 2017, the Company entered into a Securities Purchase Agreement with the Note Purchaser. The Company issued a 3.5% original issue discount (“OID”) senior secured convertible promissory note having an aggregate face amount of $250,000 (the “November 2017 Convertible Note”). This note bears interest at a rate of 10% per annum and matures in six months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the Note Purchaser’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share and have a full reset feature. The note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the investor the Option to lend the Company $48,250 on or before January 15, 2018. If the Option is exercised, the Company would issue the investor a $50,000 3.5% original issue discount senior secured convertible promissory note. During the three months ended May 31, 2018, the Company accrued interest in the amount of $12,283 on this note. On May 31, 2018, the Company converted the outstanding balance of principal and interest in the amounts of $250,000 and $13,125, respectively, into a total of 265,782.83 shares of Series B Preferred Stock; the Company recorded a gain on settlement of notes payable in the amount of $130,252 in connection with this transaction.

 

During the year ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $135,307 and $0, respectively in connection with the amortization of the discount on these notes.

  $ -     $ -     $ -  
                         

January 2018 Convertible Note

 

On January 17, 2018, the Company entered into an agreement with the Note Purchasers to exchange the three January and February 2017 Convertible Notes for a new Convertible Note (the “January 2018 Convertible Note”). The Company exchanged outstanding principal in the amount of $520,111 and accrued interest of $15,823 for the January 2018 Convertible Note with a face amount of $542,343, and an original issue discount of $18,982; the Company revalued the derivative liability associated with the conversion feature associated with January and February 2017 notes and compared it with the derivative liability on the January 2018 convertible notes, and recorded an expense in the amount of $396,611 related to the change in value. A non-cash loss on restructuring of debt in the amount of $6,409 was recognized on this transaction during the year ended August 31, 2018. The January 2018 Convertible Note is a senior secured promissory note, bears interest at a rate of 10% per annum, and matures in 12 months. At the Note Purchaser’s option, the principal and accrued interest under the January 2018 Convertible Note are convertible into common stock at a rate of $0.78 per share and have a full reset feature. The note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. On January 29, 2018, the Note Purchaser converted $28,148 in principal and $1,808 in accrued interest into 38,405 shares of common stock. The Company recorded a loss of $351,769 on the conversion of note payable and accrued interest. During the three months ended May 31, 2018, the Company accrued interest in the amount of $13,125 on this note. On May 31, 2018, the Company converted the outstanding balance of principal and interest in the amounts of $514,195 and $18,610, respectively, into a total of 538,186.87 shares of Series B Preferred Stock; the Company recorded a gain in the amount of $933,263 on this transaction, and amortized the remaining discount in the amount of $68,855 to interest expense.

 

During the year ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $0 and $0, respectively in connection with the amortization of the discount on these notes.

  $ -     $ -     $ -  

 

16

Table of Contents

 

 

 

December 31, 2018

 

 

August 31, 2018

 

 

August 31, 2017

 

February 2018 Convertible Note

 

On February 15, 2018, the Company entered into a Securities Purchase Agreement with the Note Purchaser. The Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $250,000 (the “February 2018 Convertible Note”). The February 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the Note Purchaser’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share and have a full reset feature. The February 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the Note Purchaser 19,231 warrants to purchase 19,231 shares of the Company’s common stock with an exercise price of $0.26. The warrants have a five-year term. A derivative liability in the amount of $667,470 was created with regard to the conversion features and warrants associated with this note; $241,250 was charged to discount on notes payable, and the balance of $426,220 was charged to interest expense during the three months ended February 28, 2018. On March 26, 2018, the Company and the Note Purchaser agreed to eliminate the reset feature of this note. During the year ended August 31, 2018, the Company accrued interest in the amount of $13,681 on this note; as of August 31, 2018, principal in the amount of $250,000 was outstanding under the February 2018 Convertible Note. During the three months ended November 30, 2018, the Company accrued interest in the amount of $3,611 on this note. In October 2018, the February 2018 Convertible Note, accrued interest and warrants were converted to a new series of the Company’s preferred stock; see note 10.

 

During the Transition Period ended December 31, 2018, the Company charged to interest expense the amounts of $16,298 in connection with the amortization of the discount on these notes. During the years ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $51,388 and $0, respectively, in connection with the amortization of the discount on these notes.

 

$

-

 

 

$

250,000

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 2018 Convertible Note

 

On March 9, 2018, the Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $777,202 (the “March 2018 Convertible Note”). The March 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $750,000 net of the 3.5% original issue discount of $27,202. At the Note Purchaser’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share. The March 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the Note Purchaser 59,785 warrants to purchase 59,785 shares of the Company’s common stock with an exercise price of $0.26. The warrants have a five-year term. A derivative liability in the amount of $771,460 was created with regard to the conversion features and warrants associated with this note, which was charged to discount on notes payable. On May 9, 2018, the Note Purchaser transferred their ownership in $497,458 of principal and $18,042 of accrued interest in the March 2018 Convertible Note to a third party. The Company revalued the derivative liability associated with the conversion feature of the March 2018 note at the time of this restructure, and recorded a gain on revaluation in the amount of $40,072. During the year ended August 31, 2018, the Company accrued interest in the amount of $37,780 on the March 2018 Convertible. As of August 31, 2018, principal in the amount of $777,202 was outstanding under the March 2018 Convertible Note. During the three months ended November 30, 2018, the Company accrued interest in the amount of $11,226 on this note. In October 2018, the March 2018 convertible note, accrued interest and warrants were converted to a new series of the Company’s preferred stock; see note 10.

 

During the Transition Period ended December 31, 2018, the Company charged to interest expense the amounts of $102,410, in connection with the amortization of the discount on these notes. During the years ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $192,978 and $0, respectively, in connection with the amortization of the discount on these notes.

 

$

-

 

 

$

777,202

 

 

$

-

 

 

17

Table of Contents

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 

Total

  $ -     $ 1,027,202     $ 553,977  

Less: Unamortized discount

    -       (752,988

)

    (153,234

)

Total, net of discount

  $ -     $ 274,214     $ 400,743  
                         

Current portion

  $ -     $ 1,027,202     $ 553,977  

Long term

    -       -       -  

Total

  $ -     $ 1,027,202     $ 553,977  

 

March 2018 Note to Prism

 

Under the terms of a series of agreements (the “Former Agreements”), Yield issued Prism Funding Co, LP (“Prism”) a 10% OID Senior Secured Convertible Note (the “Senior Note”) in the principal amount of $5,500,000 and received the BTC. The Senior Note was payable 30 days following written demand from Prism (the “Maturity Date”) and with interest at 10% per annum.  Pursuant to the terms of the restructuring agreement entered into in August 2018, the Company’s liability for the Senior Note was extinguished upon the restructuring of the BTC loan (see note 3 to the consolidated financial statements).

  

October 2018 Securities Exchange

 

On October 22, 2018, the Company entered into the Exchange Agreement with the holders of the February 2018 Convertible Note, March 2018 Convertible Note, Series B and Warrants. The Company cancelled the February 2018 Convertible Note and March 2018 Convertible Note, 803,969.73 shares of Series B, and 463,631 of the Company’s outstanding Warrants and issued the holders a total of 2,846,356 shares of the Company’s new Series E.

 

Each share of Series E has a stated value of $0.99 per share, and is convertible to common stock at a price of $0.78 per share, based upon stated value (subject to adjustments for stock splits, stock dividends, stock combinations, recapitalizations and similar events). The Series E accrues 10% dividends on the stated value plus additional amounts on a quarterly basis, contains price protection and purchase rights upon the future issuances of securities by the Company at a price below the conversion price then in effect, and is redeemable upon the occurrence of certain triggering events.

 

Related Party Notes

 

During the year ended August 31, 2017, the Company received loans in the aggregate amount of $231,000 from the Company’s CEO, David Lelong, to fund operations. These advances were unsecured, non-interest bearing and due on demand. The Company recorded interest in the amount of $2,011 during the year ended August 31, 2017 related to the advances from Mr. Lelong.

 

During the year ended August 31, 2018, the Company received loans in the aggregate amount of $35,500 from Mr. Lelong, and accrued interest in the amount of $2,291; the Company also repaid to Mr. Lelong principal and interest in the amounts of $266,500 and $4,302, respectively. At December 31 and August 31, 2018, the balance due to Mr. Lelong under these loans was $0.

 

In October 2018, all outstanding principal on our February 2018 Convertible Note and March 2018 Convertible Note in the aggregate amount of $1,027,202 was converted to Series E. With the proceeds from our recent private placement we have sufficient working capital for the next 12 months. However, because of the uncertainty of our acquisition plans, it is possible that we may need to complete another financing. We cannot assure you that we will complete an acquisition or if we do, whether we will need to complete another private placement. Any acquisition and financing may be very dilutive.

 

Private Placement

 

In April and May, 2019, the Company entered into Subscription Agreements with accredited investors for the sale by the Company in a private placement (the “Private Placement”) of an aggregate 5,744,991 shares of its Common Stock at a purchase price of $3.00 per share and warrants to purchase up to 5,744,991 shares of its Common Stock at an exercise price of $4.25 per share (the “Warrants”). The Warrants are exercisable for 24 months from the Closing. The aggregate gross proceeds for the Private Placement were approximately $17.2 million.

 

Loan Agreement

 

In May 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) by and between the Company and Franklin Synergy Bank, a Tennessee banking corporation (the “Lender”), pursuant to which, at the Company’s option and subject to the occurrence of the certain funding conditions, the Lender is obligated to provide advances to the Company in an aggregate amount less than or equal to $6,200,000 (the “Loan”).

 

18

Table of Contents

 

At July 1, 2019, the Company had $10,739,705 in cash and cash equivalents.  Our future capital requirements will depend on many factors, including the development of any business we acquire; the cost and availability of third-party financing for development; and administrative and legal expenses.

 

Presentation of Financial Statements – Going Concern

 

Going Concern Evaluation

 

In connection with preparing consolidated financial statements for the transition period ended December 31, 2018, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

The Company considered the following:

 

● Net loss of $4,412,858 for the transition period ended December 31, 2018.

● At December 31, 2018, the Company had an accumulated deficit of $10,472,149.

● At December 31, 2018, the Company had working capital deficit of $7,330,882.

 

Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.

 

The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:

 

On April 25, 2019, the Company entered into the Private Placement  with accredited investors for the sale by the Company  of (i) 4,946,640 shares of the Company’s common stock at a purchase price of $3.00 per share and (ii) warrants to purchase up to 4,946,640 shares of Common Stock, exercisable at any time after issuance at an exercise price equal to $4.25 per share, subject to adjustments as provided under the terms of the warrants. The warrants are exercisable for 24 months from the initial issue date. On May 6, 2019, the Company closed the Private Placement. At the closing of the Private Placement, the Company issued 5,744,991 shares of its Common Stock at a purchase price of $3.00 per share and warrants to purchase up to 5,744,991 shares of its Common Stock at an exercise price of $4.25 per share (the “Warrants”). The Warrants are exercisable for 24 months from the Closing. The aggregate gross proceeds for the Private Placement were approximately $17.2 million.

 

On May 6, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) by and between the Company and Franklin Synergy Bank, a Tennessee banking corporation (the “Lender”), pursuant to which, at the Company’s option and subject to the occurrence of the certain funding conditions, the Lender is obligated to provide advances to the Company in an aggregate amount less than or equal to $6,200,000 (the “Loan”).

 

On May 6, 2019, the Company completed the acquisition of (i) Bona Vida, Inc. in accordance with the terms of the Agreement and Plan of Merger, dated as of February 28, 2019, by and among the Company, BCC Merger Sub, Inc. (“Merger Sub”), and Bona Vida, Inc. , as amended by Amendment No. 1 thereto made and entered into as of May 3, 2019, pursuant to which Merger Sub merged with and into Bona Vida, with Bona Vida surviving as a wholly owned subsidiary of the Company and (ii) TruPet LLC in accordance with the terms of the Securities Exchange Agreement, dated as of February 2, 2019, by and between the Company and TruPet LLC, as amended by Amendment No. 1 thereto made and entered into as of May 6, 2019, pursuant to which the Company agreed to acquire 93.3% of the outstanding TruPet membership interests with TruPet remaining as a wholly-owned subsidiary of the Company (the “Acquisitions”). Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.

 

Under the terms of the Bona Vida Merger Agreement, the Company issued 18,003,273 shares of its common stock, par value $0.001 per share (“Common Stock”), to Bona Vida’s stockholders for all shares of Bona Vida’s common stock outstanding immediately prior to the Bona Vida Acquisition. The Company also offered to purchase each warrant held by Bona Vida warrant holders for CAD $0.75 per share, with any outstanding warrants at closing being cancelled. Under the terms of the TruPet Merger Agreement, the Company issued 14,079,606 shares of its Common Stock to TruPet’s members for 93.3% of the issued and outstanding membership interests of TruPet outstanding immediately prior to the TruPet Acquisition.

 

Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.
 

19

Table of Contents

 

Management concluded that above factors alleviates doubts about the Company’s ability to generate enough cash from operations and other available sources to satisfy its obligations for the next twelve months from the issuance date.

 

The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:

 

● Raise additional capital through line of credit and/or loans financing for future mergers and acquisition.

● Implement additional restructuring and cost reductions.

● Raise additional capital through a private placement.

 

At July 1, 2019 and December 31, 2018, the Company had $10,739,705 and $355,104, respectively in cash and cash equivalents.

 

December 2018 Equity Offering

 

On December 12, 2018, the Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s common stock, par value $0.001 per share and (ii) a warrant to purchase one half of a share of Common Stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of $2,779,840. Costs associated with the December Offering were $122,741, and net proceeds were $2,657,099. $2,607,099 of the net proceeds were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 common shares, and $50,000 of the net proceeds were received on January 8, 2019 for the sale of 25,641 common shares. The Warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share. The Company entered into a Securities Purchase Agreement, dated as of the Closing Date (the “SPA”) with each investor in the December Offering.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

Significant Accounting Policies

 

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to basis of presentation, use of estimates, cash and cash equivalents, inventory, revenue recognition, income taxes, fair value of financial instruments, fair value measurements, derivative financial instruments, basic and diluted loss per share, related parties, discontinued operations, and investments (see Note 1 to the Company’s consolidated financial statements). We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the significant accounting policies and assumptions as detailed in Note 1 to the financial statements contained herein may involve a higher degree of judgment and complexity than others.

 

ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.

 

 

20

Table of Contents

 

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

21

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Better Choice Company Inc. and subsidiaries (formerly Sport Endurance, Inc.)

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Better Choice Company Inc. and subsidiaries (formerly Sport Endurance, Inc.) (collectively, the “Company”) as of December 31, 2018 and August 31, 2018, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the four months ended December 31, 2018 and year ended August 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and August 31, 2018, and the results of its operations and its cash flows for the four months ended December 31, 2018 and year ended August 31, 2018, in conformity with U.S. generally accepted accounting principles. The consolidated balance sheets as of August 31, 2017, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year ended August 31, 2017 and related notes were audited by another accounting firm.

 

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RBSM LLP

 

We have served as the Company’s auditor since 2018.

 

New York, NY

July 24, 2019

 

22

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Sport Endurance, Inc.

 

 

We have audited the accompanying balance sheets of Sport Endurance, Inc. as of August 31, 2017 and 2016 and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended August 31, 2017 and 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.   

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements for the periods described above present fairly, in all material respects, the financial position of Sport Endurance, Inc., as of August 31, 2017 and 2016, and the results of its operations, stockholders’ equity (deficit) and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has insufficient working capital, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ M&K CPAS, PLLC   

www.mkacpas.com

Houston, Texas

 

November 29, 2017

 

23

Table of Contents

 

Better Choice Company Inc.

(formerly Sport Endurance, Inc.)

CONSOLIDATED BALANCE SHEETS

 

   

December 31,

   

August 31,

   

August 31

 
   

2018

   

2018

   

2017

 

ASSETS

                       

Current assets

                       
                         

Cash and cash equivalents

  $ 355,104     $ 199,674     $ 1,442  

Inventory

    9,402       9,402       14,882  

Total current assets

    364,506       209,076       16,324  
                         

Investment in TruPet

    2,200,000       -       -  
                         

Total Assets

  $ 2,564,506     $ 209,076     $ 16,324  
                         

LIABILITIES AND STOCKHOLDERS' DEFICIT

                       

Current liabilities

                       

Accounts payable and accrued liabilities

  $ 137,994     $ 106,445     $ 132,566  

Dividends payable

    53,501       20,280       -  

Derivative liability

    7,379,893       2,317,412       312,878  

Accrued officer salary

    124,000       140,000       120,000  

Notes payable and accrued interest - related party

    -       -       233,011  

Convertible notes, net of unamortized debt discounts of $0, $752,990 and $153,234, respectively

    -       274,214       400,743  

Total current liabilities

    7,695,388       2,858,351       1,199,198  
                         

Commitments and contingencies

    -       -       -  
                         

Stockholders' deficit

                       

Preferred stock, $0.001 par value, 20,000,000 shares authorized, 16,294,000, 19,194,000, and 19,999,000 shares undesignated and unissued as of December 31, 2018, August 31, 2018, and August 31, 2017, respectively

                       

Series A Preferred stock, $0.001 par value, 1,000 shares designated, 1,000 shares issued and outstanding as of December 31, 2018, August 31, 2018, and August 31, 2017

    1       1       1  

Series B Convertible Preferred stock, $0.001 par value, 805,000 shares designated, 0, 803,969.73 and 0 shares issued and outstanding as of December 31, 2018, August 31, 2018 and August 31, 2017, respectively

    -       804       -  

Series E Convertible Preferred stock, $0.001 par value, 2,900,000 shares authorized, 2,846,355.54, 0, and 0 shares issued and outstanding as of December 31, 2018, August 31, 2018, and August 31, 2017, respectively

    2,846       -       -  

Common stock, $0.001 par value, 580,000,000 shares authorized; 3,415,859, 3,064,763, and 3,008,730 shares issued and outstanding as of December 31, 2018, August 31, 2018, and August 31, 2017, respectively

    3,416       3,065       3,009  

Additional paid-in capital

    5,335,004       3,406,146       1,927,960  

Subscription receivable

    -       -       (5,372

)

Accumulated deficit

    (10,472,149

)

    (6,059,291       (3,108,472

)

Total stockholders' deficit

    (5,130,882

)

    (2,649,275

)

    (1,182,874

)

                         

Total liabilities and stockholders' deficit

  $ 2,564,506     $ 209,076     $ 16,324  

 

See accompanying notes to the consolidated financial statements.

 

24

Table of Contents

 

Better Choice Company Inc.

(formerly Sport Endurance, Inc.)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

For the Transition

   

For the Comparable

   

For the Year

   

For the Year

 
   

Period Ended

   

Period Ended

   

Ended

   

Ended

 
   

December 31,

   

December 31,

   

August 31,

   

August 31,

 
   

2018

   

2017

   

2018

   

2017

 
           

(unaudited)

                 

Revenue

  $ -     $ 214     $ 475     $ 1,734  

Cost of goods sold

    -       27       211       334  
                                 

Gross profit

    -       187       264       1,400  
                                 

Operating expenses:

                               

Selling, general and administrative

    292,060       105,734       528,151       525,438  
                                 

Total operating expenses

    292,060       105,734       528,151       525,438  
                                 

Operating loss

    (292,060

)

    (105,547

)

    (527,887

)

    (524,038

)

                                 

Other income (expense):

                               

Interest on notes payable

    (14,184

)

    (24,221

)

    (111,407

)

    (48,372

)

Interest on notes payable - related parties

    -       (1,516

)

    (2,291

)

    (2,011

)

Interest expense - amortization of discount on notes payable

    (118,708

)

    (177,573

)

    (532,907

)

    (780,293

)

Interest expense - fair value of derivative in excess of notes payable

    -       -       (447,680

)

    -  

Gain on exchange/restructuring of debt

    472,267       -       1,033,669       -  

Loss on restructuring of debt

    -       (122,878

)

    (6,409

)

    -  

Loss on conversion of debt

    -       -       (474,648

)

    -  

Excess value of derivative liabilities over net proceeds of sale of common stock at inception

    (3,638,849

)

    -       -       -  

(Loss) gain on change in fair value of derivative liability

    (821,324

)

    28,523       (45,348

)

    (388,544

)

Total other expense

    (4,120,798

)

    (297,665

)

    (587,021

)

    (1,219,220

)

                                 

Net loss from continuing operations before tax

    (4,412,858

)

    (403,212

)

    (1,114,908

)

    (1,743,258

)

                                 

Provision for income tax

    -       -       -       -  
                                 

Net loss from continuing operations after tax

    (4,412,858

)

    (403,212

)

    (1,114,908

)

    (1,743,258

)

                                 

Net loss from discontinued operations, net of taxes

    -       -       (1,835,911

)

    -  
                                 

Net loss

    (4,412,858

)

    (403,212

)

    (2,950,819

)

    (1,743,258

)

                                 

Preferred stock dividend

    (64,840

)

    -       (20,280

)

    -  
                                 

Net loss available to common shareholders

  $ (4,477,698

)

  $ (403,212

)

  $ (2,971,099

)

  $ (1,743,258

)

                                 

Net loss per share - continuing operations: basic and diluted

  $ (1.47

)

  $ (0.13

)

  $ (0.37

)

  $ (0.58

)

                                 

Net loss per share - discontinued operations: basic and diluted

 

NA

   

NA

    $ (0.60

)

 

NA

 
                                 

Net loss per share - available to common shareholders: basic and diluted

  $ (1.49

)

  $ (0.13

)

  $ (0.98

)

  $ (0.58

)

                                 

Weighted average shares outstanding - basic

    2,999,076       3,018,450       3,046,232       2,996,871  
                                 

Weighted average shares outstanding - diluted

    2,999,076       3,018,450       3,046,232       2,996,871  

 

See accompanying notes to the consolidated financial statements.

 

25

Table of Contents

 

Better Choice Company Inc.

(formerly Sport Endurance, Inc.)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Stock

 

 

 

 

 

 

Total

 

 

 

Preferred Stock Series A 

 

Preferred Stock Series B

 

Preferred Stock Series E

 

Common Stock

 

 

Paid-In

 

 

 Subscriptions

 

 

Accumulated 

 

 

Stockholders'

 

 

 

 Shares 

 

 Amount 

 

 Shares 

 

 Amount 

 

Shares 

 

Amount

 

 Shares 

 

 Amount 

 

 

Capital

 

 

Receivable

 

 

Deficit 

 

 

 Deficit

 

 Balance, August 31, 2016 

 

 

1,000

 

$

1

 

 

-

 

$

-

 

 

 

 

$

 

 

 

2,991,358

 

$

2,992

 

 

$

793,270

 

 

$

(5,372

)

 

$

(1,365,214

)

 

$

(574,323

)

 Issuance of commitment shares 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

1,346

 

 

1

 

 

 

68,949

 

 

 

-

 

 

 

-

 

 

 

68,950

 

 Derivative reclass from liability to equity upon redemption 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

1,015,757

 

 

 

-

 

 

 

-

 

 

 

1,015,757

 

 Issuance of shares for conversion of note payable and accrued interest 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

16,026

 

 

16

 

 

 

49,984

 

 

 

-

 

 

 

-

 

 

 

50,000

 

 Net loss for the period 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,743,258

)

 

 

(1,743,258

)

 Balance, August 31, 2017 

 

 

1,000

 

$

1

 

 

-

 

$

-

 

 

 

 

$

 

 

 

3,008,730

 

$

3,009

 

 

$

1,927,960

 

 

$

(5,372

)

 

$

(3,108,472

)

 

$

(1,182,874

)

Conversion of notes payable and accrued interest to common stock

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

56,034

 

 

56

 

 

 

702,538

 

 

 

-

 

 

 

-

 

 

 

702,594

 

Conversion of notes payable and accrued interest to Preferred Stock Series B

 

 

-

 

 

-

 

 

803,969.73

 

 

804

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

795,928

 

 

 

-

 

 

 

-

 

 

 

796,732

 

Write-off subscriptions receivable

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

-

 

 

 

5,372

 

 

 

-

 

 

 

5,372

 

Preferred stock dividend

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

(20,280

)

 

 

-

 

 

 

-

 

 

 

(20,280

)

Net loss for the period

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

-

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,950,819

)

 

 

(2,950,819

)

Balance, August 31, 2018

 

 

1,000

 

$

1

 

 

803,969.73

 

$

804

 

 

 

 

$

 

 

 

3,064,764

 

$

3,065

 

 

$

3,406,146

 

 

$

-

 

 

$

(6,059,291

)

 

$

(2,649,275

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of notes, interest, Series B Preferred and

Warrants with Series E Preferred Stock

 

 

 

 

 

 

 

 

(803,969.73

)

 

(804

)

 

2,846,355.54

 

 

2,846

 

 

 

 

 

 

 

 

 

2,019,920

 

 

 

 

 

 

 

 

 

 

 

2,021,962

 

Purchase and retirement of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,048,904

)

 

(1,049

)

 

 

(26,222

)

 

 

 

 

 

 

 

 

 

 

(27,271

)

Sale of common stock, net of issuance

costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,400,000

 

 

1,400

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

1,400

 

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,840

)

 

 

 

 

 

 

 

 

 

 

(64,840

)

Net loss for the period 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,412,858

)

 

 

(4,412,858

)

Balance, December 31, 2018

 

 

1,000

 

$

1

 

 

-

 

$

-

 

 

2,846,355.54

 

$

2,846

 

 

3,415,859

 

$

3,416

 

 

$

5,335,004

 

 

$

-

 

 

$

(10,472,149

)

 

$

(5,130,882

)

 

See accompanying notes to the consolidated financial statements.

 

26

Table of Contents

 

Better Choice Company Inc.

(formerly Sport Endurance, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Transition

   

Comparable

   

Year

   

Year

 
   

Period Ended

   

Period Ended

   

Ended

   

Ended

 
   

December 31,

   

December 31,

   

August 31,

   

August 31,

 
   

2018

   

2017

   

2018

   

2017

 
           

(unaudited)

                 

CASH FLOWS FROM OPERATING ACTIVITIES

                               

Net loss - continuing operations

  $ (4,412,858

)

  $ (403,212

)

  $ (1,114,908

)

  $ (1,743,258

)

Adjustments to reconcile net loss to net cash used in operating activities:

                               

Gain on exchange transaction

    (472,267

)

    -       -       -  

Change in fair market value of derivative liabilities

    821,324       (28,523

)

    45,348       388,544  

Excess value of derivative liabilities

    3,638,849       -       447,680       -  

Amortization of discount on convertible debt

    118,708       177,573       532,907       780,293  

Gain on restructure of debt

    -               (1,033,669

)

    -  

Loss on restructure of debt

    -       122,878       6,409       -  

Loss on conversion of debt to equity

    -               474,648       -  

Penalty on debt extension

    -       -       -       306,345  

Subscription receivable write-off

    -               2,172          

Changes in operating assets and liabilities:

                               

Accounts receivable

    -       -       -       45  

Inventory

    -       27       5,480       (8,484

)

Accrued officer salary

    (16,000

)

    32,000       20,000       96,000  

Interest payable - related party

    -       566       (2,011

)

    2,011  

Accounts payable and accrued liabilities

    97,846       (30,859

)

    (226,502

)

    138,749  

Net cash used in operating activities - continuing operations

    (224,398

)

    (129,550

)

    (842,446

)

    (39,755

)

Net cash provided by operating activities - discontinued operations

    -       -       39,178       -  
                                 

CASH FLOWS FROM INVESTING ACTIVITIES

                               
                                 

Investment in TruPet

    (2,200,000

)

    -       -       -  

Net cash used in investing activities

    (2,200,000

)

    -       -       -  
                                 

CASH FLOWS FROM FINANCING ACTIVITIES

                               
                                 

Proceeds from notes payable - related party

    -       35,500       35,500       -  

Repayments of notes payable - related party

    -       (75,000

)

    (266,500

)

    186,000  

Proceeds from convertible debt

    -       241,250       1,232,500       -  

Principal payments made on convertible debt

    -       -       -       (155,000

)

Cash paid for the purchase of common stock

    (27,271

)

    -       -          

Cash from the sale of common stock

    2,607,099       -       -          

Net cash provided by financing activities

    2,579,828       201,750       1,001,500       31,000  
                                 
                                 

Net increase in cash and cash equivalents - continuing operations

    155,430       72,200       159,054       (8,755

)

Net increase in cash and cash equivalents - discontinued operations

    -       -       39,178       -  

Cash and cash equivalents at beginning of year

    199,674       1,442       1,442       10,197  
                                 

Cash and cash equivalents at end of year

  $ 355,104     $ 73,642     $ 199,674     $ 1,442  
                                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                               

Interest paid

  $ -     $ 950     $ 4,302     $ -  

Income taxes paid

  $ -     $ -     $ -     $ -  
                                 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

                               

Common stock issued for conversion of notes payable

  $ -     $ 55,000     $ 702,592     $ 50,000  

Preferred stock Series B issued for cancellation of notes payable and accrued interest

  $ -     $ -     $ 1,860,249     $ -  

Preferred Stock Series E issued for cancellation of notes payable,

accrued interest, Series B Preferred Stock and warrants

  $ 2,022,766     $ -     $ -     $ -  

Accrued interest capitalized into principal of convertible notes

  $ -     $ -     $ 15,823     $ 39,382  

Note payable for loan of BTC

  $ -     $ -     $ 5,000,000     $ -  

BTC loan to third party

  $ -     $ -     $ 5,500,000     $ -  

Discount on notes payable due to beneficial conversion feature

  $ -     $ 126,557     $ 1,132,663     $ 677,437  

Settlement of derivative

  $ 2,003,390     $ 23,447     $ -     $ 1,015,757  

Stock issued for commitment fee

  $ -     $ -     $ -     $ 68,950  

Accrued preferred stock dividends

  $ 64,840     $ -     $ 20,280     $ -  

Fair value of warrants issued with sale of common stock allocated to additional paid in capital

  $ 2,605,699     $ -     $ -     $ -  

 

See accompanying notes to the consolidated financial statements.

 

27

Table of Contents

 

Better Choice Company, Inc.

(formerly Sport Endurance, Inc.)

Notes to the Consolidated Financial Statements

  

Note 1 – Nature of Business and Significant Accounting Policies

 

Nature of Business

 

Better Choice Company, Inc. (the “Company”) was originally incorporated in the State of Nevada on January 3, 2001 (“Inception”). The Company was dormant until it was revived in 2009 with a name change to Sport Endurance, Inc. on August 6, 2009. Effective March 11, 2019, we changed our name to Better Choice Company Inc. after reincorporating in Delaware.

 

The Company previously marketed for sale three sport nutritional products which it suspended in March 2018.  On March 14, 2018, the Company, through its wholly-owned subsidiary Yield Endurance, Inc. (“Yield”), entered into a series of agreements under which Yield borrowed $5 million of bitcoin (“BTC”). The Company simultaneously entered into transactions with Madison Partners LLC and Prism Funding Co. LP to lend the BTC to third parties. On August 21, 2018, the Company entered into a series of restructuring agreements to unwind the BTC transactions thereby exiting the BTC and cryptocurrency markets; see note 3.

 

Effective March 11, 2019, Sport Endurance, Inc. merged into its wholly-owned subsidiary, Better Choice Company Inc., a Delaware corporation. As a result, the name of Sport Endurance, Inc. was changed to Better Choice Company Inc. Pursuant to the merger, each outstanding share of common stock of Sport Endurance, Inc. converted into one share of common stock of Better Choice Company Inc. and each outstanding share of Series E Convertible Preferred Stock (the “Series E”) of Sport Endurance, Inc. converted into one share of Series E Convertible Preferred Stock of Better Choice Company Inc.

 

On December 17, 2018, the Company made a $2,200,000 investment in TruPet LLC, an online seller of pet foods, flea and tick products, pet nutritional products and related pet supplies.  On February 2, 2019 and February 28, 2019, respectively, the Company entered into definitive agreements to acquire the remainder of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. The definitive agreements are based on various conditions being met including completion of a financing (See Note 4).  

     

On March 14, 2019, the Company filed a certificate of amendment of certificate of incorporation (the “Amendment”) with the Delaware Secretary of State to effect a one-for-26 reverse split of the Company’s common stock. The Amendment took effect on March 15, 2019. No fractional shares will be issued or distributed as a result of the Amendment. These financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified. On April 22, 2019, the Company filed a certificate of amendment of certificate of incorporation with the Delaware Secretary of State which reduced its number of authorized shares of common stock from 580,000,000 to 88,000,000 and authorized shares of preferred stock from 20,000,000 to 4,000,000. 

 

Basis of Presentation

 

The audited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”).

 

Effective March 15, 2019, the board of directors of the Company approved a change in our fiscal year end from August 31 to December 31. As a result of this change, we are filing this Transition Report on Form 10-KT for the four month transition period ended December 31, 2018. References to any of our previous fiscal years mean the fiscal years ending on August 31.

 

All amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

28

Table of Contents

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management utilizes various other estimates, including but not limited to determining the collectability of accounts receivable, the fair value of warrants issued, the fair value of conversion features, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

 

Cash and Cash Equivalents

 

Cash and equivalents include investments with initial maturities of three months or less.  The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000.  Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. At December 31, 2018 and August 31, 2018, the uninsured balances amounted to $95,412 and $0, respectively.

 

Inventory

 

Inventory consists of finished goods and is stated at the lower of cost by the first-in, first-out method or net realizable value.  The Company currently has approximately 2,432 containers of “Ultra Peak T” included in inventory at December 31, 2018 and August 31, 2018. 

 

Revenue Recognition

 

Adoption of ASU 2014-09, Revenue from Contracts with Customers

 

On September 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective (cumulative effect) transition method. Under this transition method, results for reporting periods beginning September 1, 2018 or later are presented under ASC 606, while prior period results continue to be reported in accordance with previous guidance. The cumulative effect of the initial application of ASC 606 was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition for our revenue stream was not materially impacted by the adoption of this standard. The Company believes its business processes, systems and controls are appropriate to support recognition and disclosure under ASC 606. Overall, the adoption of ASC 606 did not have a material impact on the Company’s balance sheet, statement of operations and statement of cash flows for the period ended December 31, 2018. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. As described below, the analysis of contracts under ASC 606 supports the recognition of revenue at a point in time, resulting in revenue recognition timing that is materially consistent with the Company’s historical practice of recognizing product revenue when title and risk of loss pass to the customer.

 

Policy

 

The Company recognizes revenue upon product delivery. All of our products are shipped through a third party fulfillment center to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.

  

For revenue from product sales, the Company recognizes revenue in accordance with ASC 606. A five-step analysis must be met as outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied.  Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.  

 

29

Table of Contents

 

Contract Assets

 

The Company does not have any contract assets such as work-in-process. All trade receivables on the Company’s balance sheet are from contracts with customers.

 

Contract Costs

 

Costs incurred to obtain a contract are capitalized unless short term in nature. As a practical expedient, costs to obtain a contract that are short term in nature are expensed as incurred. The Company does not have any contract costs capitalized as of December 31, 2018.

 

Contract Liabilities - Deferred Revenue

 

The Company’s contract liabilities may consist of advance customer payments and deferred revenue. Deferred revenue results from transactions in which the Company has been paid for products by customers, but for which all revenue recognition criteria have not yet been met. Once all revenue recognition criteria have been met, the deferred revenues are recognized.

 

Income Taxes

 

The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes”. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

 

The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax expense.

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. As of the completion of these consolidated financial statements and related disclosures, we have made a reasonable estimate of the effects of the Tax Act. This estimate incorporates assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as the Company may receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Act no later than the fourth quarter of fiscal year 2019.  Future adjustments made to the provisional effects will be reported as a component of income tax expense in the reporting period in which any such adjustments are determined. See Note 12 for additional information. Based on the new tax law that lowers corporate tax rates, the Company revalued its deferred tax assets. Future tax benefits are expected to be lower, with the corresponding one time charge being recorded as a component of income tax expense.

 

Fair Value of Financial Instruments

 

Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.  

 

30

Table of Contents

 

Fair Value Measurements

 

The Company follows Accounting Standards Codification (“ASC”) 820–10 “Fair Value Measurement” of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820–10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820–10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.

 

The three (3) levels of fair value hierarchy defined by ASC 820–10 are described below:

 

Level 1- fair value measurements are those derived from quoted prices (unadjusted in active markets for identical assets or liabilities);

 

Level 2- fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

Level 3- fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

Financial instruments classified as Level 1 - quoted prices in active markets include cash.

 

These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2018 and August 31, 2018. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts payable and accrued expenses.

 

Derivative Financial Instruments

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re- measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The pricing model we use for determining fair value of our derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (see note 11).

 

Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument using effective interest method. 

 

31

Table of Contents

 

Basic and Diluted Loss Per Share

 

The basic net loss per common share is computed by dividing the net loss by the weighted average number of common stock outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common stock outstanding plus potential dilutive securities. Following shares were not included in the calculation of diluted loss per share because the effect would be anti-dilutive.

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 
                         

Conversion of notes payable

    -       82,974       44,245  

Conversion of Series B Convertible Preferred Stock

    -       1,046,423       -  

Conversion of Series E Convertible Preferred Stock

    3,681,273       -       -  

Options

    38,462                  

Warrants to purchase common stock

    700,000       463,631       -  
      4,419,735       1,593,028       44,245  

 

Related Parties

 

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions with related parties are recorded at fair value of the goods or services exchanged. 

 

Discontinued Operations

 

ASC 360-10-45-9 requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which a set of criteria have been met, including criteria that the sale of the asset (disposal group) is probable and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. This criteria was achieved on August 21, 2018. Since the business was started and discontinued during the year ended August 31, 2018, there was no impact on the comparable consolidated financial statements.

 

Investments

 

The Company records minority interest equity investments at cost.  

 

Recently Issued Accounting Pronouncements

 

In February 2016, FASB issued ASU No. 2016–02, “Leases (Topic 842)”, which creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The Company is currently evaluating the impact of the new pronouncement on its consolidated financial statements.

 

32

Table of Contents

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. ASU 2017-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company expects to implement ASU 2017-11 on January 1, 2019 and does not believe it will have a material impact on its consolidated financial statements.

 

ASU 2018-02 - On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Tax Cuts and Jobs Act”). Stakeholders raised a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act of 2017. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement-Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by the Generally Adopted Accounting Principles (“GAAP”). The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

 

This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2018-210—Income Statement—Reporting Comprehensive Income (Topic 220), which has been deleted. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.

 

ASU 2018-05 Accounting Standards Update adds SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act was signed into law. We are currently evaluating the impact of adopting ASU 2017-13 on our consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for public entities, certain not-for-profit entities, and certain employee benefit plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is evaluating the impact of adopting this pronouncement.

 

In July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10 and ASU 2016-02 (collectively, “the new lease standards”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.

 

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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Changes to the Disclosure Requirements for Fair Value Measurement.

 

The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

 

Removals

 

The following disclosure requirements were removed from Topic 820:

 

 

1.

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

 

 

2.

The policy for timing of transfers between levels

 

 

3.

The valuation processes for Level 3 fair value measurements

 

 

4.

For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

 

Modifications

 

The following disclosure requirements were modified in Topic 820:

 

 

1.

In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.

 

 

2.

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

 

 

3.

The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

 

Additions

 

The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:

 

 

1.

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

 

 

2.

The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

 

In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

 

The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.

 

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The impact of this ASU on the Company’s consolidated financial statements is not expected to be material.

 

There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows. 

 

Note 2 – Going Concern

 

Going Concern Evaluation

 

In connection with preparing consolidated financial statements for the transition period ended December 31, 2018, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

 

The Company considered the following:

 

● Net loss of $4,412,858 for the transition period ended December 31, 2018.

● At December 31, 2018, the Company had an accumulated deficit of $10,472,149.

● At December 31, 2018, the Company had working capital deficit of $7,330,882.

 

Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.

 

The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:

 

On April 25, 2019, the Company entered into Subscription Agreements with accredited investors for the sale by the Company in a private placement (the “Private Placement”) of (i) 4,946,640 shares of the Company’s common stock at a purchase price of $3.00 per share and (ii) warrants to purchase up to 4,946,640 shares of Common Stock, exercisable at any time after issuance at an exercise price equal to $4.25 per share, subject to adjustments as provided under the terms of the warrants. The warrants are exercisable for 24 months from the initial issue date. On May 6, 2019, the Company closed the Private Placement. At the closing of the Private Placement, the Company issued 5,744,991 shares of its Common Stock at a purchase price of $3.00 per share and warrants to purchase up to 5,744,991 shares of its Common Stock at an exercise price of $4.25 per share (the “Warrants”). The Warrants are exercisable for 24 months from the Closing. The aggregate gross proceeds for the Private Placement were approximately $17.2 million.

 

On May 6, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) by and between the Company and Franklin Synergy Bank, a Tennessee banking corporation (the “Lender”), pursuant to which, at the Company’s option and subject to the occurrence of the certain funding conditions, the Lender is obligated to provide advances to the Company in an aggregate amount less than or equal to $6,200,000 (the “Loan”).

 

On May 6, 2019, the Company completed the acquisition of (i) Bona Vida, Inc. in accordance with the terms of the Agreement and Plan of Merger, dated as of February 28, 2019, by and among the Company, BCC Merger Sub, Inc. (“Merger Sub”), and Bona Vida, Inc., as amended by Amendment No. 1 thereto made and entered into as of May 3, 2019, pursuant to which Merger Sub merged with and into Bona Vida, with Bona Vida surviving as a wholly owned subsidiary of the Company and (ii) TruPet LLC in accordance with the terms of the Securities Exchange Agreement, dated as of February 2, 2019, by and between the Company and TruPet LLC, as amended by Amendment No. 1 thereto made and entered into as of May 6, 2019, pursuant to which the Company agreed to acquire 93.3% of the outstanding TruPet membership interests with TruPet remaining as a wholly-owned subsidiary of the Company (the “Acquisitions”). Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.

 

Under the terms of the Bona Vida Merger Agreement, the Company issued 18,003,273 shares of its common stock, par value $0.001 per share (“Common Stock”), to Bona Vida’s stockholders for all shares of Bona Vida’s common stock outstanding immediately prior to the Bona Vida Acquisition. The Company also offered to purchase each warrant held by Bona Vida warrant holders for CAD $0.75 per share, with any outstanding warrants at closing being cancelled. Under the terms of the TruPet Merger Agreement, the Company issued 14,079,606 shares of its Common Stock to TruPet’s members for 93.3% of the issued and outstanding membership interests of TruPet outstanding immediately prior to the TruPet Acquisition.

 

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Following the completion of the Acquisitions, the business conducted by the Company became primarily the businesses conducted by TruPet and Bona Vida, which is as an online seller of pet foods, pet nutritional products and related pet supplies and as an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space, respectively.

 

Management concluded that above factors alleviates doubts about the Company’s ability to generate enough cash from operations and other available sources to satisfy its obligations for the next twelve months from the issuance date.

 

The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:

 

● Raise additional capital through line of credit and/or loans financing for future mergers and acquisition.

● Implement additional restructuring and cost reductions.

● Raise additional capital through a private placement.

 

At July 1, 2019 and December 31, 2018, the Company had $10,739,705 and $355,104, respectively in cash and cash equivalents.

 

Note 3 – Discontinued Operations

 

On August 21, 2018, the Company at the request of other parties to the March 2018 agreements cancelled all of the business agreements, related to Yield. The Company’s guaranty of the $5.5 million Note payable was cancelled and the warrants were modified. As a result, the Company entered into a Restructuring Agreement and conveyed to Madison its ownership interest in Yield, including the right to continue the business and affairs of Yield stemming from the March 2018 bitcoin transaction in which the Company sought to enter into bitcoin and other cryptocurrency lending arrangements.

 

Pursuant to the terms of the Restructuring Agreement, the parties agreed to modify the terms of the Former Agreements by (a) assigning to Madison all of the capital stock of Yield to provide for the continuation of the business of Yield as a subsidiary of Madison, (b) terminating the Guaranty Agreement by and between the Company and Prism, and (c) canceling 576,923 of the 961,538 warrants issued to Prism in connection with the NPA. On the Effective Date, the Company transferred its capital stock of Yield to Madison (the “Transfer”) and terminated the Guaranty Agreement, thus, the Company’s liability for the Senior Note, as defined below, issued pursuant to the NPA, was extinguished upon the Transfer.

 

In connection with the Restructuring Agreement, the Company entered into a Securities Purchase Agreement with Madison pursuant to which the Company transferred to Madison all of the capital stock of Yield. Further, the parties released each other from claims with respect to the original purchase of the BTC and the Former Agreements. No payments under the Bitcoin Agreement will be required to be made to the Company.

 

There are no continuing cash inflows or outflows to or from the discontinued operations.

 

The following information presents the major classes of line items constituting the after-tax loss from discontinued operations in the consolidated statements of operations for the year ended August 31, 2018:

 

Share income

  $ (48,593

)

Sales, general and administrative

    368,032  

Interest expense – accrued interest

    117,534  

Interest expense – excess value of warrants

    2,988,090  

Interest expense – amortization of discount on note payable

    5,500,000  

Mark to market BTC

    509,730  

Mark to market derivative liability

    (4,051,087

)

Reserve for uncollectible note receivable

    4,490,270  

Gain on disposal of discontinued operations

    (8,038,065

)

Loss from discontinued operations, net of tax

  $ 1,835,911  

 

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The following table presents the calculation of the gain on the sale of discontinued operations:

 

Assets of discontinued operations disposed in sale

  $ (9,415

)

Liabilities of discontinued operations disposed in sale

    9,648,488  

Fair value of warrants to purchase 384,615 shares of common stock to buyer

    (1,601,008

)

Gain on disposal of discontinued operations

  $ 8,038,065  

  

Note 4 – Investment in TruPet

 

On December 17, 2018 the Company acquired a minority interest in TruPet. The Company invested $2,200,000 into TruPet and acquired a Series A Membership Interest equal to approximately 6.7% of the Membership Interests. The Company is entitled to appoint one of the five managers and certain preferential informational rights. The Company entered into a definitive agreement to acquire the remainder of TruPet in February 2019. The definitive agreement is based on various conditions being met including completion of a financing. On May 6, 2019, the Company acquired the remaining 93.3% of the outstanding TruPet membership interests for 14,079,606 shares of its common stock. See note 13.

 

Note 5 – Dividends Payable

 

On May 30, 2018, the Company issued 803,969.73 shares of its Series B Preferred Stock with a stated value of $0.99 per share for a total stated value of $795,930 (the “Series B Preferred Stock”). The Series B Preferred Stock accrued dividends at the rate of 10% per annum on the stated value. During the year ended August 31, 2018, the Company accrued dividends payable in the amount of $20,280 on the Series B Preferred Stock.

 

At October 22, 2018, the Company had accrued dividends payable on the Series B Preferred stock in the amount of $31,619. On October 22, 2018, the Company entered into an exchange agreement whereby, in part, the Series B Preferred Stock and accrued dividends were exchanged for Series E Preferred Stock (see note 10). The Series E Preferred Stock also accrued dividends at the rate of 10% per annum on the stated value. During the Transition Period ended December 31, 2018, the Company accrued dividends in the amount of $53,501 on the Series E Preferred Stock.

 

Note 6 – Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consist of the following:

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 

Trade accounts payable

  $ 120,774     $ 39,052     $ 106,726  

Payroll and related

    17,220       15,931       9,179  

Accrued interest

    -       51,462       16,661  
    $ 137,994     $ 106,445     $ 132,566  

 

Note 7 – Related Party Transactions

 

On April 29, 2016, the Company’s Board ratified an oral agreement with Mr. Lelong, effective February 1, 2016, pursuant to which he will receive an annual salary of $96,000 for serving as an executive officer of the Company. During the year ended August 31, 2017, the Company received loans in the aggregate amount of $231,000 from Mr. Lelong.  The Company recorded imputed interest in the amount of $2,011 during the year ended August 31, 2017 related to the advances from Mr. Lelong.

 

During the year ended August 31, 2018, the Company paid salary to Mr. Lelong in the amount of $76,000, and accrued an additional $20,000 in salary payable; at August 31, 2018, the amount of accrued salary payable to Mr. Lelong was $140,000.

 

During the Transition Period ended December 31, 2018, the Company paid salary to Mr. Lelong in the amount of $32,000 and paid accrued salary in the amount of $16,000; at December 31, 2018, the amount of accrued salary payable to Mr. Lelong was $124,000.

 

During the year ended August 31, 2018, the Company received loans in the aggregate amount of $35,500 from Mr. Lelong, and accrued interest in the amount $2,291; the Company also repaid to Mr. Lelong principal and interest in the amounts of $266,500 and $4,302, respectively. At August 31, 2018, the balance due to Mr. Lelong under these loans is $0.

 

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Note 8 – Derivative Liability

 

The Company entered into convertible note agreements containing beneficial conversion features.  One of the features is a ratchet reset provision which allows the note holders to reduce the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see note 9). The Company accounts for the fair value of the conversion feature in accordance with ASC 815, Accounting for Derivatives and Hedging and EITF 07-05, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcate treated as a derivative liability. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations.

 

The Company recognized that the conversion feature embedded within its convertible debts is a financial derivative. GAAP required that the Company’s embedded conversion option be accounted for at fair value.

 

During the period ended December 31, 2018, the Company sold 1,400,000 shares of common stock and 700,000 two-year warrants to purchase one share of common stock at a price of $3.90 per share for total proceeds of $2,607,099, net of issuance costs. The warrant holders have an option to settle in cash in the event of a change of control of the Company. The Company considers these warrants a derivative liability, and calculated the fair value of this liability utilizing a Lattice Model that values the warrant based upon a probability weighted discounted cash flow model.

 

The following schedule shows the change in fair value of the derivative liabilities for the period ended December 31, 2018, August 31, 2018 and August 31, 2017:

 

   

Derivative

 
   

Liability

 

Liabilities Measured at Fair Value

       
         

Balance as of August 31, 2016

  $ 254,952  
         

Issuances

    685,139  
         

Redemptions / conversions

    (1,015,757

)

         

Revaluation loss

    388,544  
         

Balance as of August 31, 2017

  $ 312,878  
         

Issuances

    1,565,487  
         

Redemptions / conversions

    (1,207,308

)

         

Reclass from sale of discontinued operations

    1,601,007  
         

Revaluation loss

    45,348  
         

Balance as of August 31, 2018

  $ 2,317,412  
         

Issuances

    6,244,548  
         

Redemptions / conversions

    -  
         

Revaluation loss

    1,135,345  
         

Balance as of December 31, 2018

  $ 7,379,893  

 

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Derivative liabilities incurred during the period ended August 31, 2018 were valued based upon the following assumptions and key inputs:

 

   

August 31,

   

August

 

Assumption

 

2018

   

2017

 

Expected dividends:

    0

%

    0

%

Expected volatility:

    121.1-246.8

%

    37.8-276.9

%

Expected term (years):

 

0.21-1.00 years

   

0.04-0.50 years 

 

Risk free interest rate:

    0.97-2.08.

%

    0.26-0.98

%

Stock price

  $ 0.35-1.11     $ 0.51-1.97  

 

Derivative liabilities incurred during the period ended December 31, 2018 were valued based upon the following assumptions and key inputs:

 

- The quoted stock price ranged from of $6.76 to $11.18 and would fluctuate with the Company's historic volatility.

 

- The projected volatility curve from an annualized analysis for each valuation period was based on the historical volatility of the Company and the term remaining for each Warrant – the volatility ranged from 198.1-207.8%.

 

- The full reset events projected to occur based on future financing events on March 31, 2019 and December 31, 2019 resulting in a potential reset exercise price.

 

- Adjustments to warrant exercise prices have not occurred to date due to reset events.

 

- A fundamental transaction was projected to potentially occur on 4/30/19 or 12/31/19. The likelihood of such an event was estimated at 85% for the 4/30/19 event as of December/January 2019 increasing to 95% by 12/31/18. The 12/31/19 event was estimated at 50% for all dates.

 

- The option to force early exercise was estimated at 0% since it was unlikely that the Company would meet the registration and trading volume requirements necessary to trigger the option.

 

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Note 9 – Convertible Notes Payable

 

   

December 31, 2018

   

August 31, 2018

   

August 31, 2017

 
                         

May 2016 Convertible Notes 

 

On May 11, 2016 the Company entered into Securities Purchase Agreements with certain purchasers (“the May 2016 Convertible Noteholders”).  The Company issued 3.5% original issue discount (“OID”) senior secured convertible promissory notes having an aggregate face amount of $440,000 (the “May 2016 Convertible Notes”).  These notes bear interest at a rate of 10% per annum and mature in six months.  The Company received cash proceeds of $424,600 net of the 3.5% original issue discount of $15,400.  At the Holders option the principal and accrued interest under the Notes are convertible into common stock at a rate of $13 per share and have a full reset feature.  The Notes are secured by all assets of the Company.  The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 125% during the first 90 days and 130% for the period from the 91st day through maturity. During November 2016, the Company entered into forbearance agreements with the May 2016 Convertible Noteholders extending its time to pay the Notes until December 16, 2016. In December 2016, the Company entered into agreements with the May 2016 Convertible Noteholders to substantially restructure the terms of the May 2016 Convertible Notes; see January and February 2017 Convertible Notes below. 

 

During the years ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $0 and $172,735, respectively, in connection with the amortization of the discount on these notes.

  $ -     $ -     $ -  
                         

January and February 2017 Convertible Notes

 

In December 2016, the Company entered into restructuring agreements with the May 2016 Convertible Noteholders in connection with the May 2016 Convertible Notes (see above) under the following terms: new notes (the “January and February 2017 Convertible Notes”) would be issued for the amounts due under the May 2016 Convertible Notes; penalties, fees, and accrued interest in the aggregate amount of $212,702 were added to the principal amount due under the January and February 2017 Convertible Notes; 1,346 shares of common stock were issued as a commitment fee; the January and February 2017 Convertible Notes were issued at a discount of 3.5%, bear interest at the rate of 10% per annum, are convertible at a rate of $13.00 per share, and contain a variable conversion rate whereby, should the Company subsequently sell common stock at a price less than the conversion price, the conversion price of the January and February 2017 Convertible Notes will be reduced to match the lower conversion price. In addition, the proceeds from one of the January and February 2017 Convertible Notes were used to fully redeem one of the May 2016 Convertible Notes. The aggregate original amount of principal due under the January and February 2017 Convertible Notes was $614,258. Two of the January and February 2017 Convertible Notes in the aggregate amount of $494,340 were due on March 31, 2017, and one of the January and February 2017 Convertible Notes in the amount of $119,918 was due on August 17, 2017. In April 2017, the Company received forbearance letters from the Note Purchasers of the January and February 2017 Convertible Notes that were due on March 31, 2017 to extend the due date to April 17, 2017 in exchange for principal payments in the aggregate amount of $75,000; on April 18, 2017, the Company received forbearance letters to further extend the due date to May 1, 2017 in exchange for principal payments in the aggregate amount of $45,000; and on May 1 and 2, 2017, the company entered into forbearance agreements with the holders of the January and February 2017 Convertible Notes to extend the due date to June 2, 2017. On June 5 and June 13, 2017, the Company entered into forbearance agreements with the holders of two of the three January and February 2017 Convertible Notes to extend the due dates to December 27, 2017 in exchange for increase in principal in the aggregate amount of $78,907. On August 17, 2017, the Company entered into a forbearance agreement with the holders of the third January and February Convertible Note to extend the due date to December 27, 2017 in exchange for $10. At August 31, 2017, three of the January and February 2017 Convertible Notes were outstanding in the aggregate amount of $553,976; these notes are due December 27, 2017. During the year ended December 31, 2017, the holders of the January and February 2017 Convertible Notes converted an aggregate of $33,865 in principal and $21,135 in accrued interest into 17,628 shares of common stock; the Company recorded an aggregate loss in the amount of $122,878 on these conversions.

 

On January 17, 2018, the Note Purchasers of one of the January and February 2017 Convertible Notes in the principal amount of $241,802 purchased the remaining two January and February 2017 Convertible Notes in the aggregate principal amount of $278,309. The Company then entered into an agreement with the Note Purchasers to exchange the three January and February 2017 Convertible Notes (the “January 2018 Note Exchange”) in the aggregate principal amount of $520,111 for a new Convertible Note in the principal amount of $542,343 (the “January 2018 Convertible Note”). The Company revalued the derivative liability associated with the conversion feature associated with January and February 2017 notes and compared it with the derivative liability on the January 2018 convertible note, and recorded an expense in the amount of $396,611 related to the change in value. The Company recorded a loss in the amount of $6,409 on the January 2018 Note Exchange related to modification of notes.

 

During the year ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $153,234 and $154,848, respectively in connection with the amortization of the discount on these notes.

  $ -     $ -     $ 553,977  

 

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December 31, 2018

 

 

August 31, 2018

 

 

August 31, 2017

 

November 2017 Convertible Note

 

On November 17, 2017, the Company entered into a Securities Purchase Agreement with the Note Purchaser. The Company issued a 3.5% original issue discount (“OID”) senior secured convertible promissory note having an aggregate face amount of $250,000 (the “November 2017 Convertible Note”). This note bears interest at a rate of 10% per annum and matures in six months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the Note Purchaser’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $13.00 per share and have a full reset feature. The note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the investor the Option to lend the Company $48,250 on or before January 15, 2018. If the Option is exercised, the Company would issue the investor a $50,000 3.5% original issue discount senior secured convertible promissory note. During the three months ended May 31, 2018, the Company accrued interest in the amount of $12,283 on this note. On May 31, 2018, the Company converted the outstanding balance of principal and interest in the amounts of $250,000 and $13,125, respectively, into a total of 265,782.83 shares of Series B Preferred Stock; the Company recorded a gain on settlement of notes payable in the amount of $130,252 in connection with this transaction.

 

During the years ended August 31, 2018 and 2017, the Company charged to interest expense the amounts of $135,307 and $0 respectively, in connection with the amortization of the discount on these notes.

 

$

-

 

 

$

-

 

 

$

-