The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS |
Formation and Business Activity
Right on Brands, Inc. (“we” or “the Company” or “Right on Brands”) was incorporated under the laws of the State of Nevada on April 1, 2011, as HealthTalk Live, Inc. On August 10, 2017, the Company amended is articles of incorporation and changed its name to Right On Brands, Inc. On August 31, 2017, the Company common shares commenced trading under the new stock symbol RTON. The Company’s primary business is the sale of health and wellness products.
The Company has the following wholly owned subsidiaries:
| · | Endo Brands, Inc. |
| · | Humble Water Company |
The Company has the following partially owned subsidiaries:
| · | Endo & Centre Venture LLC (51% owner) |
| · | Spring Hill Water Company, LLC (49% owner – see Note 7) |
The Company, through its subsidiaries Humble Water Company and Endo & Centre Venture LLC, had joint ventures with no activity. The Company has discontinued these joint ventures and Humble Water Company and Endo & Centre Venture LLC contain no assets, liabilities, or operations.
On April 16, 2018, the Company entered into an operating agreement with Centre Manufacturing, Inc. ("Centre") and agreed to form an LLC. The LLC is owned 51% by the Company and 49% owned by Centre, but all income and losses will be split evenly. The owner of Centre is the former CEO of the Company. On June 19, 2018, the Company formed a majority owned subsidiary, Endo & Centre Venture LLC. No significant activity has occurred to date. At March 31, 2022 and 2021, the Company owed Centre $14,154, respectively, which is included in accounts payable on the accompanying consolidated balance sheets.
The Company continues to sell health and wellness products focused in the hemp marketplace through online and in-person retail sales.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended March 31, 2022, the Company had an accumulated deficit of approximately $15,770,000, had a net loss of approximately $257,000, and net cash used in operating activities of approximately $151,000, with approximately $997,000 revenue earned, and a lack of profitable operational history. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to generate greater revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds by way of additional public and/or private offerings of its stock. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate revenues.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Right On Brands, Inc. and its wholly owned subsidiaries and majority owned business (Endo Brands, Inc., Humble Water Company, Springhill Water Co, and Endo & Centre Venture LLC). Intercompany accounts and transactions have been eliminated upon consolidation.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company has defined cash and cash equivalents as all cash in banks and highly liquid investments available for current use with an initial maturity of three months or less to be cash equivalents. The Company had no cash equivalents at March 31, 2022, or March 31, 2021.
The Company maintains its cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). The FDIC provides coverage of up to $250,000 per depositor, per financial institution, for the aggregate total of depositors' interest and non-interest-bearing accounts. At March 31, 2022, none of the Company's cash balances were in excess of FDIC limits. The Company has not experienced any losses on these accounts and management does not believe that the Company is exposed to any significant risks.
Accounts Receivable
The Company performs periodic credit evaluations of its customers’ financial condition and extends credit to virtually all of its customers on an uncollateralized basis. Credit losses to date have been insignificant and within management’s expectations. The Company provides an allowance for doubtful accounts that is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal accounts receivable are due 30 to 45 days after the issuance of the invoice. Receivables past due more than 60 days are considered delinquent. Delinquent receivables are evaluated for collectability based on individual credit evaluation and specific circumstances of the customer. As of March 31, 2022, and March 31, 2021, the Company’s allowance for doubtful accounts was $0, respectively. The Company wrote off $7,169 of accounts receivable against the allowance for doubtful accounts during fiscal year ended March 31, 2021.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value). Cost includes materials related to the purchase of finished goods to be sold to retail customers. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the straight-line method over the useful lives of the related assets, ranging from one to five years.
The cost of building the Company's website has been capitalized and amortized over a period of three years. Expenditures for minor enhancements and maintenance are expensed as incurred.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recoverability of Long-Lived Assets
The Company's long-lived assets and other assets (consisting of property and equipment) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, "Property, Plant, and Equipment," and FASB ASC Topic 205 "Presentation of Financial Statements". The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management's estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through March 31, 2022, and 2021, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company's products or services will continue, which could result in an impairment of long-lived assets in the future.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when management assesses that it is probably that a liability has been incurred and the amount can be reasonable estimated.
Stock Based Compensation
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718. Costs are measured at the estimated fair value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 718.
Income Taxes
In accordance with FASB ASC Topic 740, "Income Taxes," the Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and 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. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
In addition, the Company’s management performs an evaluation of all uncertain income tax positions taken or expected to be taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. This evaluation is required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes. If the Company has interest or penalties associated with insufficient taxes paid, such expenses are reported in income tax expense.
Revenue Recognition
We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of hemp products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. The transfer of control of products to our online customers is typically based on sales terms that do not allow for a right of return after 7 days from the date of purchase. The transfer of control of products to our in-store customers is typically based on sales terms that do not allow for a right of return.
Our products are sold for cash with payments received at pickup or before shipping.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurement
ASC Topic 820, “Fair Value Measurement”, requires that certain financial instruments be recognized at their fair values at our balance sheet dates. However, other financial instruments, such as debt obligations, are not required to be recognized at their fair values, but Generally Accepted Accounting Principles in the United States (“GAAP”) provides an option to elect fair value accounting for these instruments. GAAP requires the disclosure of the fair values of all financial instruments, regardless of whether they are recognized at their fair values or carrying amounts in our balance sheets. For financial instruments recognized at fair value, GAAP requires the disclosure of their fair values by type of instrument, along with other information, including changes in the fair values of certain financial instruments recognized in income or other comprehensive income. For financial instruments not recognized at fair value, the disclosure of their fair values is provided below under “Financial Instruments.”
Nonfinancial assets, such as property, plant and equipment, and nonfinancial liabilities are recognized at their carrying amounts in the Company’s balance sheets. GAAP does not permit nonfinancial assets and liabilities to be remeasured at their fair values. However, GAAP requires the remeasurement of such assets and liabilities to their fair values upon the occurrence of certain events, such as the impairment of property, plant and equipment. In addition, if such an event occurs, GAAP requires the disclosure of the fair value of the asset or liability along with other information, including the gain or loss recognized in income in the period the remeasurement occurred.
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The Company did not have any Level 1 or Level 2 assets and liabilities at March 31, 2022 or 2021. The Derivative liabilities are Level 3 fair value measurements.
The following is a summary of activity of Level 3 liabilities during the year ended March 31, 2022:
Balance at March 31, 2021 | | $ | 472,471 | |
Settlement | | | (213,156 | ) |
Change in fair value | | | (100,209 | ) |
Balance at March 31, 2022 | | $ | 159,106 | |
The following is a summary of activity of Level 3 liabilities during the year ended March 31, 2021:
Balance at March 31, 2020 | | $ | 1,574,097 | |
Additions | | | 96,958 | |
Conversions of debt to equity | | | (1,977,958 | ) |
Settlements | | | (3,474,572 | ) |
Change in fair value | | | 4,253,946 | |
Balance at March 31, 2021 | | $ | 472,471 | |
During prior years, the Company entered into several convertible note agreements (Note 6). These notes are convertible at a fraction of the stock closing price near the conversion date. Additionally, the conversion price, as well as other terms including interest rates, adjust if any future financings have more favorable terms. The conversion features of these notes meet the definition of a derivative which therefore requires bifurcation and are accounted for as a derivative liability.
At March 31, 2021, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $0.0035; a risk-free interest rate of 0.05%, and expected volatility of the Company’s common stock of 375%, various estimated exercise prices, and terms under one year.
At March 31, 2022, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes based on assumptions used in the Cox-Ross-Rubinstein binomial pricing model using the following inputs: the price of the Company’s common stock of $0.0007; a risk-free interest rate of 1.06%, and expected volatility of the Company’s common stock of 180%, various estimated exercise prices, and terms under one year.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
The Company’s financial instruments include cash and cash equivalents, receivables, payables, and debt and are accounted for under the provisions of ASC Topic 825, “Financial Instruments”. The carrying amount of these financial instruments, with the exception of discounted debt, as reflected in the consolidated balance sheets approximates fair value.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 "Derivatives and Hedging Activities."
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The 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 other GAAP 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.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. Proceeds from these convertible notes are reported under the financing section of the statements of cash flows. Changes to the fair value of the derivative liability are reported as adjustments to reconcile net loss to net cash used in operating activities in the accompanying statement of cash flows.
Basic and Diluted Loss Per Share
Basic net loss/income per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options, warrants and convertible notes. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented.
Recently Accounting Pronouncements
During the year ended March 31, 2022, and subsequently, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
Subsequent Events
The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure consideration.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2022 and March 31, 2021, inventory consisted of the following:
| | March 31, 2022 | | | March 31, 2021 | |
Finished goods | | $ | 114,944 | | | $ | 73,553 | |
| | $ | 114,944 | | | $ | 73,553 | |
NOTE 5 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS |
The Company’s property and equipment consisted of the following at the respective balance sheet dates:
| | March 31, 2022 | | | March 31, 2021 | |
| | |
Website development | | $ | 88,965 | | | $ | 88,965 | |
Automobile | | | 31,596 | | | | 31,596 | |
Studio and office equipment | | | 5,957 | | | | 5,957 | |
Tenant improvements | | | 10,879 | | | | 10,879 | |
Intangible assets | | | 1,024 | | | | 1,024 | |
| | | 144,630 | | | | 144,630 | |
Accumulated depreciation and amortization | | | (129,145 | ) | | | (123,545 | ) |
| | $ | 15,485 | | | $ | 21,439 | |
Depreciation expense of property and equipment for the years ended March 31, 2022 and 2021 was $5,600 and $6,307, respectively.
Intangible assets consist of a trademark acquired March 31, 2017 and was being amortized over five years. Amortization expense for the year ended March 31, 2021, was $307.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes Payable
During October 2016, the Company extinguished $129,549 of debt in exchange for 5,000,000 shares of newly issued common stock. The original note had a maturity date of November 11, 2016, and no interest rate. A total of 4,200,000 shares were issued to three of the four noteholders. As of December 31, 2016, the remaining balance of 800,000 shares of common stock was pending issuance to one noteholder, so common stock payable of $474,000 was recorded in the accompanying consolidated statement of stockholders’ equity. As of July 2019, the shares were still pending issuance; accordingly, the Company reclassified the amount due to Noteholder 8 to notes payable at the fair value of the common stock. During February 2020, the Company issued 800,000 shares of the Company’s common stock pursuant to the October 2016 debt extinguishment. As a result, the note payable of $474,000 is no longer outstanding. On February 12, 2019, Noteholder 1 submitted a notice of conversion for $125,000 principal and $11,250 accrued interest after the note was in default. The note terms provided a $3,000 daily fee for failure to deliver common stock prior to a deadline of two days after the conversion notice. The shares due under the conversion were not issued until May 8, 2019. Accordingly, a note payable of $135,000 was recorded as a penalty at March 31, 2019. An additional $114,000 was accrued as a penalty during the year ended March 31, 2020. The $249,000 balance remained outstanding and was in default at March 31, 2021. On June 28, 2021, the Company and Noteholder 1 entered into a Settlement Agreement and Mutual Release whereby the Company issued 83,333,333 shares valued at $425,000 to Noteholder 1 to settle the $249,000 balance of the note and $59,760 in accrued interest.
On November 22, 2019, the Company issued a $50,000 promissory note to a third-party lender for a $25,000 cash borrowing. Accordingly, a $25,000 discount was recorded at issuance, all of which was amortized by March 31, 2020. The non-interest-bearing note is secured by inventory, matured February 20, 2020, and remains in default at March 31, 2022.
On May 9, 2020, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company received a two-year loan for $68,000 from Noteholder 12. Interest is deferred for six months, then is at 1% until maturity in May 2022. The Company applied for the loan to be forgiven by the Small Business Administration and on October 12, 2021, forgiveness of the principal and interest related to the loan was granted.
On January 31, 2022, the Company entered into a loan agreement totaling $73,450, consisting of cash proceeds totaling $65,000 and loan fees totaling $8,450. The note is to be repaid on an ongoing basis by deducting 19.75% of daily sales and applying against the loan balance. The note matures on July 1, 2023, but will be paid off during the year ending March 31, 2023, based on current daily sales. At March 31, 2022, the balance of the note totaled $52,429.
During the year ended March 31, 2022, the Company incurred interest expenses related to notes payable totaling $661.
Convertible Debt
At March 31, 2022, the Company's convertible debt and derivative liability related to the notes which can be converted at variable discounted rates are summarized as follows:
Noteholder | | Origination | | Maturity | | Interest rate | | | Variable conversion discount | | | Principal balance | | | Debt discount | | | Net amount of liabilities presented | | | Corresponding derivative balance | |
Noteholder 10 | | 2/27/2020 | | 2/26/2021 | | | 10.00 | % | | | 40.00 | % | | $ | 131,788 | | | $ | - | | | $ | 131,788 | | | $ | 159,045 | |
| | | | | | | | | | | | | | $ | 131,788 | | | $ | - | | | $ | 131,788 | | | $ | 159,045 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noteholder | | Origination | | Maturity | | Interest rate | | | Fixed conversion rate | | | Principal balance | | | Debt discount | | | Net amount of liabilities presented | | | Corresponding derivative balance | |
Noteholder 9 | | 7/7/2016 | | 9/30/2019 | | | 6.00 | % | | $0.10/Share | | | $ | 25,000 | | | $ | - | | | $ | 25,000 | | | $ | - | |
Noteholder 13 | | 2/16/2021 | | 8/16/2021 | | | 6.00 | % | | $0.015/Share | | | | 140,000 | | | | - | | | | 140,000 | | | | 61 | |
| | | | | | | | | | | | | | $ | 165,000 | | | $ | - | | | $ | 65,000 | | | $ | 61 | |
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2021, the Company's convertible debt and derivative liability related to the notes which can be converted at variable discounted rates are summarized as follows:
Noteholder | | Origination | | Maturity | | Interest rate | | | Variable conversion discount | | | Principal balance | | | Debt discount | | | Net amount of liabilities presented | | | Corresponding derivative balance | |
Noteholder 2 | | 11/1/2018 | | 8/1/2019 | | | 12.00 | % | | | 35.00 | % | | $ | 21,487 | | | $ | - | | | $ | 21,487 | | | $ | 37,914 | |
Noteholder 8 | | 11/21/2017 | | 5/21/2018 | | | 6.00 | % | | See below | | | | 20,000 | | | | - | | | | 20,000 | | | | 210,951 | |
Noteholder 10 | | 2/27/2020 | | 2/26/2021 | | | 10.00 | % | | | 40.00 | % | | | 131,788 | | | | - | | | | 131,788 | | | | 202,568 | |
| | | | | | | | | | | | | | $ | 173,275 | | | $ | - | | | $ | 173,275 | | | $ | 451,433 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noteholder | | Origination | | Maturity | | Interest rate | | | Fixed conversion rate | | | Principal balance | | | Debt discount | | | Net amount of liabilities presented | | | Corresponding derivative balance | |
Noteholder 9 | | 7/7/2016 | | 9/30/2019 | | | 6.00 | % | | $0.10/Share | | | $ | 25,000 | | | $ | - | | | $ | 25,000 | | | $ | - | |
Noteholder 13 | | 2/16/2021 | | 8/16/2021 | | | 6.00 | % | | $0.015/Share | | | | 140,000 | | | | - | | | | 140,000 | | | | 21,038 | |
| | | | | | | | | | | | | | $ | 165,000 | | | $ | - | | | $ | 165,000 | | | $ | 21,038 | |
During the year ended March 31, 2022, the Company incurred interest expenses related to convertible debt totaling $24,975.
On July 10, 2020, the Company and Noteholder 8 agreed to amend the conversion terms of the $20,000 convertible note payable so that the conversion price is equal to the lessor of $0.0002 or the lowest price the Company has issued stock to any other common stockholder or through the issuance of stock for the conversion of debt during the 90 days prior to the date of submission of a conversion notice by Noteholder 8. The change in conversion terms resulted in a derivative liability and financing costs incurred of $96,958 as a result of this debt extinguishment.
On October 20, 2021, the Company and Noteholder 8 reached an agreement resolving an ongoing dispute related to Noteholder 8’s convertible note payable. As part of the agreement, the Company issued 225,910,000 shares of the Company’s common stock to settle the dispute and all unpaid principal and interest on the convertible note.
The convertible debt held by noteholders 9, 10 and 13 are in default at March 31, 2022.
Future Maturities
The Company’s future maturities of notes payable and convertible debt are as follows:
Year ending | | | |
March 31, | | Amount | |
2023 | | $ | 399,217 | |
Amortization of Debt Discount
During the years ended March 31, 2022 and 2021, the Company recorded amortization of debt discounts totaling $966 and $313,246, respectively.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – NONCONTROLLING INTEREST |
Investments in partnerships, joint ventures and less-than-majority-owned subsidiaries in which we have significant influence are accounted for under the equity method.
As of March 31, 2018, the Company's consolidated financial statements includes a venture for the development of a commercial bottled water operation near Browning, Montana. The new venture will be operated through Spring Hill Water Company, LLC, a Nevada limited liability company ("Spring Hill"). Spring Hill is 49% owned by our newly-formed subsidiary corporation, Humble Water Company, and 51% owned by Doore, LLC. Doore, LLC, which serves as the manager of Spring Hill, has contributed the land and water source to be used in the new operation through a Land & Water Lease Agreement under which Spring Hill will have the use of 2 acres of land and no less than 5 acre-feet of water for an initial term of 25 years and at a lease rate of $1 per year. Through Humble Water Company, our initial capital contribution to Spring Hill was approximately $100,000 to be used in commencing operations. In addition, we have committed to provide additional capital to be used for a bottling facility and equipment, in an amount up to $530,000, within the next 2 years. Should we fail to provide this additional capital within the next 2 years, our ownership percentage in Spring Hill will be reduced from 49% to 20%. Although we hold a minority ownership percentage in Spring Hill, we will have voting control over the company with 75% of the voting membership units. Further, 100% of the losses, expenditures, and deductions from Spring Hill will be allocated to our subsidiary, Humble Water Company. The activity of Spring Hill is accounted for under the voting interest method, and we consolidate 100% of the business activity and record 25% of noncontrolling interest on the balance sheet and 0% of the net losses based on the terms of the agreement.
As of March 31, 2022 and 2021, the noncontrolling interest was $24,437 in the accompanying consolidated financial statements. As of March 31, 2022 and 2021, our total investment into Spring Hill to date was $101,470. During the years ended March 31, 2022 and 2021, there have been no significant operations or expenditures in the joint venture.
NOTE 8 – EARNINGS PER SHARE |
FASB ASC Topic 260, “Earnings Per Share,” requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
The Company had no potential additional dilutive securities outstanding at March 31, 2022 and 2021, except as follows:
| | March 31, 2022 | | | March 31, 2021 | |
Preferred stock | | | 25,000,000 | | | | 25,000,000 | |
Warrants | | | - | | | | 14,750,000 | |
Options | | | - | | | | 8,000,000 | |
Convertible debt | | | 339,053,333 | | | | 152,763,705 | |
Total | | | 364,053,333 | | | | 200,513,705 | |
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – STOCKHOLDERS’ EQUITY |
Series A Preferred Stock
The Series A Preferred Stock is convertible to common stock at a rate of five shares for every share held and the holder(s) have the right to cast a total of fifty-percent (50%) plus one votes on all matters submitted to a vote of holder of the Company’s common stock. Our Series A Preferred Stock ranks equally, on an as-converted basis, to our common stock with respect to rights upon winding up, dissolution, or liquidation.
On June 6, 2019 the Board of Directors agreed to amend the certificate of designation for the Series A Preferred stock to have the right to cast a total of fifty-percent (50%) plus one votes on all matters submitted to a vote of holder of the Company’s common stock, including the election of directors, and all other matters as required by law. There is no right to cumulative voting in the election of directors. The holders of Series A Preferred Stock shall vote together with all other classes and series of common stock of the Company as a single class on all actions to be taken by the common stock holders of the Company except to the extent that voting as a separate class or series is required by law. Our Series A Preferred Stock does not have any special dividend rights.
Common Stock
During December 2017, the Company entered into a three-year consulting agreement with Dr. Ashock Patel, the Company’s former CEO, to serve as Director of Product Development. Consideration for services under the agreement provided for the issuance of 700,000 shares of common stock of the Company at the time of execution of the agreement, and the following two anniversaries of the agreement. Since the shares have yet to be issued at March 31, 2022 and 2021, they are reported in common stock payable in the accompanying consolidated statement of stockholders’ deficit.
During the year ended March 31, 2021, the Company received conversion notices related to $416,641 in convertible debt and accrued interest resulting in the issuance of 3,640,429,964 shares of common stock. As a result of the conversions, the derivative liability related to convertible debt was reduced by $1,977,958.
During July 2020, the Company issued 3,000,000 shares of common stock related to $15,000 cash received when the investor purchased the shares in June 2019, reducing common stock payable by $15,000.
During October 2020, the Company issued a total of 380,000,000 shares of common stock valued at $76,000 to five individuals for services performed on behalf of the Company. Included in the shares issued were 100,000,000 shares to Director A. David Youssefyeh, 100,000,000 shares to Director and CEO Jerry Grisaffi, and 50,000,000 shares to Director David Lewis.
During February 2021, the Company issued 369,999,999 shares of common stock to four investors for proceeds totaling $124,000, of which $14,000 was received in May 2021.
During February 2021, the Company issued 83,333,333 shares of common stock to an investor for $25,000, all of which was paid directly to a vendor for the purchase of inventory.
During March 2021, the Company issued a total of 1,700,000 shares of common stock valued at $7,990 to three individuals for services performed on behalf of the Company.
During the year ended March 31, 2022, the Company issued several subscription agreements for the purchase of common stock by various investors. A total of 383,333,332 shares of common stock were issued during the year ended March 31, 2022, and the Company received cash proceeds received totaling $89,000.
During May 2021, the Company and Noteholder 3 entered into a settlement and mutual release agreement to settle a dispute over the dilution of 750,000 warrants issued during the year ended March 31, 2020, and the convertible debt held by Noteholder 3 (Note 6). As part of the agreement, the Company agreed to issued Noteholder 338,114,035 shares of common stock with a fair value of $80,000 to settle the convertible debt and outstanding warrants. The resulting loss from the settlement was accrued at March 31, 2021 and has been settled as of March 31, 2022.
During June 2021, the Company issued 13,000,000 shares of common stock to a vendor to pay accounts payable owed to the vendor totaling $8,000. The shares were valued at $29,900, resulting in a loss on settlement of $21,900.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During August 2021, the Company issued 1,500,000 shares of common stock for services provided to the Company.
During the year ended March 31, 2022, the Company and a former noteholder determined that the Company had issued 212,034,632 common shares in excess of what was owed for conversion notices received by the Company from the noteholder during the year ended March 31, 2021. Accordingly, the Company rescinded the excess share issuance as detailed on the consolidated statement of stockholders’ deficit and has retired the common shares previously issued.
Stock Options and Warrants
On November 19, 2018, the Company issued options to its former Chief Executive Officer and Chief Financial Officer to purchase 6,000,000 and 2,000,000 shares of common stock, respectively, at $0.05 per share. The options were immediately vested and expired November 19, 2021.
During the year ended March 31, 2020, stock warrants for 11,250,000 common shares were issued in connection with financing received. An additional warrant to purchase 500,000 common shares was issued with a subscription agreement dated September 16, 2019. The warrants are convertible one-for-one into common stock at an exercise price of $.05. The warrants were immediately exercisable and expired between July and November 2021.
Additionally, in connection with the appointment of Advisory Board members, warrants for 3,000,000 common shares were issued during October 2019. The warrants are convertible one-for-one into common stock at an exercise price of $0.01. The warrants were immediately exercisable and expired September 30, 2021.
A summary of the status of the Company’s option and warrant grants as of March 31, 2021, and the changes during the fiscal year then ended is presented below:
| | Shares | | | Weighted Avg Exercise Price | |
Outstanding, March 31, 2020 | | | 27,230,000 | | | $ | 0.05 | |
Granted | | | - | | | $ | - | |
Exercised | | | - | | | $ | - | |
Expired | | | (4,480,000 | ) | | $ | 0.01 | |
Outstanding, March 31, 2021 | | | 22,750,000 | | | $ | 0.04 | |
Exercisable, March 31, 2021 | | | 22,750,000 | | | $ | 0.04 | |
A summary of the status of the Company’s option and warrant grants as of March 31, 2022, and the changes during the fiscal year then ended is presented below:
| | Shares | | | Weighted Avg Exercise Price | |
Outstanding, March 31, 2021 | | | 22,750,000 | | | $ | 0.04 | |
Granted | | | - | | | $ | - | |
Exercised | | | - | | | $ | - | |
Expired | | | (22,750,000 | ) | | $ | 0.04 | |
Outstanding, March 31, 2022 | | | - | | | $ | - | |
Exercisable, March 31, 2022 | | | - | | | $ | - | |
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – RELATED PARTY TRANSACTIONS |
During the year ended March 31, 2021, the Company incurred $52,000 in compensation expenses to the Company’s CEO, including $20,000 from 100,000,000 common shares issued for services as disclosed in Note 9.
During the year ended March 31, 2021, the Company incurred $20,000 in compensation expenses to the Company’s CFO from 100,000,000 common shares issued for services as disclosed in Note 9.
During the year ended March 31, 2021, the Company incurred $10,000 in compensation expenses to one of the Company’s Directors from 50,000,000 common shares issued for services as disclosed in Note 9.
At March 31, 2021, the Company had accounts payable totaling $45,227 and $9,500 due to the Company’s CEO and CFO, respectively.
During the year ended March 31, 2022, the Company incurred $16,514 and $47,700 in compensation expenses to the Company’s CEO and CFO, respectively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES |
On April 1, 2019, the Company entered into an office and warehouse lease in Carrollton, Texas. At the inception of the lease, the Company adopted ASC 842 requiring the recording of assets and liabilities related to leases on the balance sheet. The Company records rent on straight-line basis over the terms of the underlying lease. As a result of the ongoing COVID-19 pandemic, the lease was abandoned during May 2020. The Company impaired the right-of-use asset related to the lease, resulting in a $91,200 impairment expense for the year ended March 31, 2021. The lease states the Company is responsible for the remaining payments through March 31, 2022, totaling approximately $87,000. Through March 31, 2022 and 2021, the Company has accrued $87,341 and $30,341, respectively, of the remaining payments as accrued expenses. To date, the lessor has not demanded payment from the Company for the any unpaid amounts due under the lease.
On March 17, 2021, the Company entered into a storefront lease agreement in Rowlett, Texas. At the inception of the lease, the Company recorded a right of use asset and lease liability of $93,000, respectively. The Company records rent on straight-line basis over the terms of the underlying lease. Minimum lease payments under the lease are as follows:
Year Ending March 31, | | Amount | |
2023 | | $ | 25,958 | |
2024 | | | 26,659 | |
2025 | | | 25,025 | |
| | $ | 77,642 | |
During December 2017, the Company entered into a consulting agreement with Dr. Ashok Patel, who served as CEO until September 2019, to serve as Director of Product Development. Consideration for services under the agreement provided for the issuance of 700,000 shares of common stock of the Company at the time of execution of the agreement, and the following two anniversaries of the agreement. At March 31, 2022, and 2021, the anniversary shares, valued at approximately $37,000, have yet to be issued. Accordingly, they are reported in the accompanying consolidated statement of stockholders’ deficit as common stock payable.
During December 2021, the Company was listed as defendant on a complaint from Noteholder 10 seeking repayment of amounts due under the February 2020 convertible note payable (Note 6). The Company has recorded all unpaid principal and interest due to Noteholder 10 through March 31, 2022. On April 15, 2022, the Company and Noteholder 10 entered into a settlement agreement whereby the Company will repay Noteholder 10 a total of $115,000 consisting of $25,000 paid on April 18, 2022, $5,000 to be paid monthly from May 15, 2022 to October 15, 2022, $6,250 to be paid monthly from November 15, 2022 to April 15, 2023, and $7,500 to be paid monthly from May 15, 2023 to July 15, 2023.
RIGHT ON BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – FEDERAL INCOME TAX |
The Company accounts for income taxes under ASC 740-10, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes. The provision (benefit) for income taxes for the years ended March 31, 2022, and 2021, assumes a statutory 21%, effective tax rate for federal income taxes.
| | March 31, 2022 | | | March 31, 2021 | |
| | | | | | |
Federal tax statutory rate | | | 21 | % | | | 21 | % |
Temporary differences | | | 8 | % | | | -12 | % |
Changes in estimates | | | 0 | % | | | 0 | % |
Valuation allowance | | | -29 | % | | | -9 | % |
Effective rate | | | 0 | % | | | 0 | % |
The components of deferred tax assets and liabilities as of March 31, 2022, are as follows:
| | March 31, 2022 | |
Deferred tax assets (liabilities): | | | |
Net loss | | $ | (257,016 | ) |
Temporary differences | | | | |
Stock-based compensation | | | 3,000 | |
Change in derivative valuation | | | (100,209 | ) |
Valuation allowance | | | 354,225 | |
Net deferred tax assets | | $ | - | |
The Company had deferred income tax assets as of March 31, 2022, and 2021, as follows:
| | March 31, 2022 | | | March 31, 2021 | |
| | | | | | |
Loss carryforwards | | $ | 2,299,000 | | | $ | 2,225,000 | |
Less - valuation allowance | | | (2,299,000 | ) | | | (2,225,000 | ) |
Total net deferred tax assets | | $ | - | | | $ | - | |
The Company provides for a valuation allowance when it is more likely than not that it will not realize a portion of the deferred tax assets. The Company has established a valuation allowance against the net deferred tax asset due to the uncertainty that enough taxable income will be generated in those taxing jurisdictions to utilize the assets. Therefore, we have not reflected any benefit of such deferred tax assets in the accompanying financial statements. Our net deferred tax asset and valuation allowance increased by $74,000 and $595,000 in the fiscal years ending March 31, 2022 and 2021, respectively. In the fiscal year ended March 31, 2022, the March 31, 2021, valuation allowance was increased by $427,000 due to an adjustment of the previously estimated loss carryforward of approximately $2,032,000.
At March 31, 2022, the Company had approximately $10,950,000 in federal net operating loss carryforwards. These carry forwards are allowed to be carried forward indefinitely and are to be limited to 80% of the taxable income. Pursuant to Internal Revenue Code Section 382, the future utilization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
To the extent that the tax deduction is included in a net operating loss carry forward and is in excess of amounts recognized for book purposes, no benefit will be recognized until the loss carry forward is recognized. Upon utilization and realization of the carry forward, the corresponding change in the deferred asset and valuation allowance will be recorded as additional paid-in capital.
As of March 31, 2022, the Company had no uncertain tax positions, or interest and penalties, that qualify for either recognition or disclosure in the financial statements. The company is subject to U.S. federal, state and local income tax examinations by tax authorities for years 2016 through 2021. The tax returns for the fiscal year ended March 31, 2022 has not yet been filed.
