RTON 10-Q Quarterly Report Dec. 31, 2019 | Alphaminr
Right On Brands, Inc.
ALPHAMINR

RTON 10-Q Quarter ended Dec. 31, 2019

Balance Sheet
Cash Flow
Income Statement
RIGHT ON BRANDS, INC.
10-Q 1 rton_10q.htm FORM 10-Q rton_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2019
¨
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 000-55704
Right On Brands, Inc.
(Exact name of registrant as specified in its charter)
Nevada
45-1994478
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
3235 Skyline Dr, Suite 127, Carrollton, TX 75006
(Address of principal executive offices)
(214) 736-7252
(Registrant’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
N/A
N/A
Indicated 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 x Yes ¨ No
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). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected 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 x No
As of February 14, 2020, there were 777,040,806 shares of common stock, par value $0.001 per share, outstanding.
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These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended December 31, 2019 are not necessarily indicative of the results that can be expected for the full year.
3
RIGHT ON BRANDS, INC.
(unaudited)
December 31,
March 31,
2019
2019
ASSETS
Current assets
Cash
$ 15,616
$ 90,883
Accounts receivable, net of allowance
26,879
24,184
Prepaid expenses
15,575
-
Inventory
258,163
213,957
Total current assets
316,233
329,024
Non-current assets
Property and equipment, net of depreciation
22,712
27,451
Intangible assets, net of amortization
358
768
Right of use asset (Note 8)
102,600
-
Total non-current assets
125,670
28,219
Total assets
$ 441,903
$ 357,243
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable
$ 199,772
$ 66,689
Accrued interest payable
48,922
30,337
Lease liability, current (Note 8)
45,600
-
Notes payable, net of discount
754,164
609,000
Convertible debt, net of discount
240,942
347,473
Derivative liability
484,358
1,034,939
Total current liabilities
1,773,758
2,088,438
Lease liability, non-current (Note 8)
57,000
-
Total liabilities
1,830,758
2,088,438
Commitments and contingencies (Note 8)
Stockholders’ deficit
Series A Preferred stock; 10,000,000 shares authorized of $.001 par value; 5,000,000 and 5,000,000 shares issued December 31, 2019 and March 31, 2019, respectively
5,000
5,000
Common stock; par value $.001; 8,000,000,000 shares authorized 453,040,546 and 73,652,594 shares issued December 31, 2019 and March 31, 2019, respectively
453,041
73,653
Additional paid-in capital
9,964,477
8,295,767
Common stock issuable
56,050
56,050
Accumulated deficit
(11,891,860 )
(10,186,102 )
Total Right On Brands stockholders’ deficit
(1,413,292 )
(1,755,632 )
Noncontrolling interest
24,437
24,437
Total stockholders’ deficit
(1,388,855 )
(1,731,195 )
Total liabilities and stockholders’ deficit
$ 441,903
$ 357,243
The accompanying notes are an integral part of these interim consolidated financial statements.
F-1
RIGHT ON BRANDS, INC.
(unaudited)
Three Months
Ended
Three Months
Ended
Nine Months
Ended
Nine Months
Ended
December 31,
December 31,
December 31,
December 31,
2019
2018
2019
2018
Revenue
$ 106,434
$ 57,476
$ 315,091
$ 153,087
Cost of goods sold
83,357
41,293
221,277
140,480
Gross profit
23,077
16,183
93,814
12,607
Operating expenses
Depreciation and amortization
1,836
679
5,149
2,822
General and administrative
101,518
46,627
336,657
141,838
Advertising and promotion
5,818
33,351
54,749
58,737
Legal and professional
37,306
25,061
169,233
51,639
Executive compensation
39,000
-
62,000
18,000
Consulting
36,555
374,977
68,410
1,054,813
Research and development
-
-
-
337
Total operating expenses
222,033
480,695
696,198
1,328,186
Other income (expense)
Interest expense
(116,783 )
(784,892 )
(606,687 )
(981,383 )
Loss on interest settlement
-
-
(8,693 )
-
Change in fair value of derivative
145,868
(534,387 )
49,230
(509,686 )
Financing costs
(12,623 )
-
(335,102 )
-
Default penalty
-
-
(202,234 )
-
Other income
112
-
112
-
Total other income (expense)
16,574
(1,319,279 )
(1,103,374 )
(1,491,069 )
Net loss including noncontrolling interest
(182,382 )
(1,783,791 )
(1,705,758 )
(2,806,648 )
Net income attributable to noncontrolling interest
-
-
-
253
Net loss attributable to Right On Brands, Inc.
$ (182,382 )
$ (1,783,791 )
$ (1,705,758 )
$ (2,806,395 )
Loss per share
Basic loss per share
$ (0.00 )
$ (0.03 )
$ (0.01 )
$ (0.04 )
Basic weighted average shares outstanding
387,273,071
66,366,478
230,093,250
64,930,832
The accompanying notes are an integral part of these interim consolidated financial statements.
F-2
RIGHT ON BRANDS, INC.
(unaudited)
Total
Preferred Shares
Common Shares
Additional
Paid In
Common
Stock
Accumulated
Noncontrolling
Stockholders’
Equity
Shares
Amount
Shares
Amount
Capital
Issuable
Deficit
Interest
(Deficit)
Balance, March 31, 2018
5,000,000
$ 5,000
63,543,869
$ 63,544
$ 6,513,979
$ 474,000
$ (4,100,945 )
$ 24,437
$ 2,980,015
Issuance of common stock for cash
-
-
3,000,000
3,000
3,000
38,950
-
-
44,950
Issuance of common stock for cash and warrants
-
-
40,000
40
9,960
-
-
-
10,000
Issuance of common stock for consulting services
-
-
-
-
-
36,050
-
-
36,050
Net loss
-
-
-
-
-
-
(2,806,395 )
(252 )
(2,806,647 )
Balance, December 31, 2018
5,000,000
$ 5,000
66,583,869
$ 66,584
$ 6,526,939
$ 549,000
$ (6,907,340 )
$ 24,185
$ 264,368
Balance, March 31, 2019
5,000,000
$ 5,000
73,652,594
$ 73,653
$ 8,295,767
$ 56,050
$ (10,186,102 )
$ 24,437
$ (1,731,195 )
Issuance of common stock for cash
-
-
24,416,666
24,417
80,583
20,000
-
-
125,000
Conversion of debt and interest to common stock
-
-
354,971,286
354,971
1,555,014
(20,000 )
-
-
1,889,985
Warrants issued as financing costs
-
-
-
-
33,113
-
-
-
33,113
Net loss
-
-
-
-
-
-
(1,705,758 )
-
(1,705,758 )
Balance, December 31, 2019
5,000,000
$ 5,000
453,040,546
$ 453,041
$ 9,964,477
$ 56,050
$ (11,891,860 )
$ 24,437
$ (1,388,855 )
The accompanying notes are an integral part of these interim consolidated financial statements.
F-3
RIGHT ON BRANDS, INC.
(unaudited)
Nine Months
Ended
Nine Months
Ended
December 31,
December 31,
2019
2018
Cash flows provided by (used in) operating activities
Net loss
$ (1,705,758 )
$ (2,806,395 )
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
5,149
2,822
Inventory impairment
21,137
35,387
Amortization of prepaid stock compensation
-
962,585
Change in fair value of derivative
(49,230 )
509,686
Amortization of debt discount
533,592
192,704
Financing costs for debt issuances
335,102
782,889
Loss on interest settlement
8,693
-
Default penalties
202,234
-
Common stock issuable
(20,000 )
-
(Increase) decrease in assets
Accounts receivable
(2,695 )
(92,835 )
Prepaid expense
(15,575 )
6,649
Inventory
(65,343 )
(91,350 )
Increase (decrease) in liabilities
Accounts payable
133,083
34,426
Accrued interest payable
73,094
16,037
Net cash used in operating activities
(546,517 )
(447,395 )
Cash flows from investing activities
Deposits
-
2,000
Net cash from investing activities
-
2,000
Cash flows from financing activities
Proceeds from convertible debt
321,250
514,500
Proceeds from notes payable
25,000
-
Proceeds from issuances of common stock
125,000
91,000
Net cash provided by financing activities
471,250
605,500
Decrease in cash
(75,267 )
160,105
Cash-beginning of period
90,883
47,506
Cash-end of period
$ 15,616
$ 207,611
Non-cash investing and financing activities:
Right of use asset and liability, office lease (Note 8)
$ 136,800
$ -
Recognition of right of use asset and lease liability
$ 34,200
$ -
Convertible debt converted into common stock
$ 810,573
$ -
Penalty accrued as note payable
$ 121,091
$ -
Debt discount at note payable origination
$ 25,000
$ -
Debt discount at convertible note origination
$ 327,945
$ -
Derivative at convertible note origination
$ 608,211
$ -
Accrued interest converted to common stock
$ 54,509
$ -
The accompanying notes are an integral part of these interim consolidated financial statements.
F-4
RIGHT ON BRANDS, INC.
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim unaudited condensed financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) on the same basis as the annual financial statements; and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended March 31, 2019 filed with the SEC on form 10-K/A on July 29, 2019.
Certain amounts in the prior period financial statements regarding inventory impairment have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.
Formation and Business Activity
Right on Brands, Inc. (“we” or “our” 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 OTC Pink: RTON. Right On Brands is a health and wellness focused company developing and marketing our brands.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
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, 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.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value). As of December 31, 2019, and March 31, 2019, inventory consisted of the following:
As of
December 31,
2019
As of
March 31,
2019
Raw materials
$ 6,843
$ 43,796
Work-in-process
30,611
30,611
Finished Goods
220,709
139,550
Ending Balance
$ 258,163
$ 213,957
During the nine months ended December 31, 2019 and 2018, inventory impairments or $21,137 and $35,387 were recognized due to expired products. These are included in Cost of Goods Sold in the accompanying consolidated statement of operations.
F-5
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 customers is typically based on written sales terms that do not allow for a right of return after 30 days from the date of purchase.
Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery, and may allow discounts for early payment. We estimate and reserve for our bad debt exposure based on our experience with past due accounts and collectability, the aging of accounts receivable and our analysis of customer data.
Income Taxes
The Company is subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with the Financial Accounting Standards Board (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. The Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
F-6
Fair Value of Financial Instruments
In accordance with the reporting requirements of ASC Topic 825, Financial Instruments , the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.
Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended December 31, 2019 and 2018, except as disclosed.
Fair Value Measurement
The Company did not have any Level 1 or Level 2 assets and liabilities at December 31, 2019 and 2018. The derivative liabilities are Level 3 fair value measurements.
The following is a summary of activity of Level 3 liabilities during the nine months ended December 31, 2019:
Balance at March 31, 2019
$ 1,034,939
Additions to derivative liability for new debt
608,211
Additions to derivative liability for penalty
81,143
Reclass to equity upon conversion/cancellation
(1,190,705 )
Change in fair value
(49,230 )
Balance at December 31, 2019
$ 484,358
From time to time, the Company enters into convertible promissory note agreements (Note 5). 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.
The Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes based on assumptions used in the Black Scholes pricing model. At December 31, 2019 and March 31, 2019, the fair value of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the Company’s common stock of $0.001 and $0.045, respectively; a risk-free interest rate ranging from 1.66% to 2.62%, and expected volatility of the Company’s common stock ranging from 158% to 635%, various estimated exercise prices, and terms under one year.
Convertible Instruments
The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities .
F-7
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.
Earnings (Loss) Per Share
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 December 31, 2019, except as follows. These were excluded from the earnings per share computation since their effect would be anti-dilutive.
Potential additional
common stock
shares
Potentially dilutive security:
Preferred stock
25,000,000
Warrants
19,230,000
Options
8,000,000
Convertible debt
613,058,462
Potentially dilutive securities
665,288,462
During the nine months ended December 31, 2019 stock warrants for 11,250,000 shares were issued in connection with financing received. An additional warrant to purchase 500,000 shares was issued with a subscription agreement September 16, 2019. In connection with the appointment of Advisory Board members, warrants for 3,000,000 shares were issued during October 2019.
A summary of the status of the Company’s option and warrant grants as of December 31, 2019 and the changes during the fiscal quarter then ended is presented below:
Weighted-Average
Shares
Exercise Price
Outstanding, March 31, 2019
12,480,000
$ 0.17
Granted
14,750,000
.04
Exercised
-
-
Expired
-
-
Outstanding, December 31, 2019
27,230,000
$ 0.11
Options and warrants exercisable at December 31, 2019
27,230,000
$ 0.11
F-8
Recent Accounting Pronouncements
During the quarter ended December 31, 2019, 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 financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases . This is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the term of the lease. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard became effective beginning April 1, 2019 at the inception of the Company’s office and warehouse lease (Note 8). The Company believes adoption of the standard did not have a material impact on our results of operations and financial condition.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern, which is dependent upon the Company’s ability to obtain sufficient financing or establish itself as a profitable business. As of December 31, 2019 and 2018, the Company had an accumulated deficit of $11,891,860 and $6,907,339, respectively. For the nine months ended December 31, 2019 and 2018, the Company incurred net losses of $1,705,758 and $2,806,395, respectively.
The Company has had minimal revenue earned since inception and a lack of 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 and/or debt and/or convertible debt. 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 financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.
F-9
NOTE 3. PROPERTY AND EQUIPMENT
As of
December 31,
2019
As of
March 31,
2019
Website development
$ 88,965
$ 88,965
Automobile
31,596
31,596
Studio and office equipment
5,957
5,957
Tenant improvements
11,135
11,135
137,653
137,653
Less: accumulated depreciation
(114,941 )
(110,202 )
Ending Balance
$ 22,712
$ 27,451
Depreciation expense for the nine months ended December 31, 2019 and 2018 was $4,739 and $2,822, respectively.
The Company also has capitalized intangible assets consisting of trademarks valued at a cost of $1,024 as of December 31, 2019 and March 31, 2019. Amortization expense for the nine months ended December 31, 2019 and 2018 was $410 and $256, respectively.
NOTE 4. 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 is 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, by January 1, 2020. Should we fail to provide this additional capital, 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 December 31, 2019, the noncontrolling interest was $24,437 in the accompanying consolidated financial statements.
As of December 31, 2019, our total investment into Spring Hill to date was $101,470. Since entering into the venture, there have been no significant operations or expenditures in the joint venture except for expensing the remainder of the prepaid lease due to the low likelihood of utilization.
F-10
NOTE 5. CONVERTIBLE DEBT
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 early 2019 the shares were still pending issuance; accordingly, the Company reclassified the amount due to the noteholder to notes payable at the fair value of the common stock. See Note 9, Subsequent Events .
On July 7, 2016, the Company issued a convertible promissory note with an entity for $25,000. The unsecured note bears interest at 6% per annum and is due on January 7, 2017. This note is convertible at $0.10 per share and can be converted on or before the maturity date. The Company and lender mutually agreed to extend the maturity date of the note to March 30, 2020.
On November 21, 2017, the Company issued a convertible promissory note with an entity for $20,000. The unsecured note bears interest at 6% per annum and was due on May 21, 2018 but was extended to March 30, 2020. This note is convertible at $0.20 per share and can be converted on or before the maturity date. See note 7.
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, an additional 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 quarter ended June 30, 2019 and remains outstanding.
On November 22, 2019, the Company issued a $50,000 promissory note to an individual for a $25,000 cash borrowing. Accordingly, a $25,000 discount was recorded at issuance, $6,164 of which was amortized by December 31, 2019. The non-interest bearing note is due February 20, 2020.
At December 31, 2019, the Company’s short-term convertible promissory notes carrying a 12% interest rate and related debt discount and derivative liability are summarized as follows:
Gross amount
Net amounts
Corresponding
Gross amount
offset by
of liabilities
Derivative
Note holder
of liability
debt discount
presented
Balance
Noteholder 2
$ 21,487
$ -
$ 21,487
$ 14,350
Noteholder 3
37,125
-
37,125
21,470
Noteholder 5
318,150
204,026
114,124
437,118
Noteholder 6
21,206
-
21,206
11,420
Other notes
47,000
-
47,000
-
$ 444,968
$ 204,026
$ 240,942
$ 484,358
During the nine months ended December 31, 2019, six convertible note holders submitted notices of conversion for a portion of the principal and interest owing to them totaling $865,082. The conversions resulted in the settlement of $1,190,705 of the derivative liability, an $8,693 loss on settlement of interest payable, and the issuance of 354,971,286 shares of common stock.
The convertible debt held by noteholders 3 and 6 is in default at December 31, 2019. At the noteholder’s discretion, if notice is given to the Company, additional penalties would be due. During January 2020, the penalties assessed totaled $12,500 and penalties of $5,551 and the remainder of the principal and interest due under the note was settled through the issuance of common stock. See Note 9.
These fiscal 2019 note agreements require a certain number of shares be reserved so that they are readily available for note conversion. As of December 31, 2019 and March 31, 2019, we had approximately 5.3 billion shares and 398 million shares, respectively, of our common stock reserved or designated for future issuance upon conversion of outstanding convertible promissory notes. As of December 31, 2019, one note had fewer shares reserved than required under the terms of the note agreements.
During the nine months ended December 31, 2019 and 2018, respectively, interest expense was $73,094 and $11,435. During the nine months ended December 31, 2019 and 2018, respectively, amortization of debt discount was $533,592 and $192,704.
F-11
NOTE 6. 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. Our Series A Preferred Stock does not have any special dividend rights.
On October 1, 2016, the Company issued 5,000,000 shares of our Series A Preferred Stock to Daniel Crawford in exchange for 10,000,000 shares of Series A Preferred Stock in Humbly Hemp.
Common Stock
During the nine months ended December 31, 2019, the Company issued a total of 354,971,286 shares of common stock to six noteholders in connection with the settlement of principal and interest totaling $865,082.
During the nine months ending December 31, 2019, the Company issued several subscription agreements for the purchase of common stock by various investors at a price ranging from $.0025 to $.03. A total of 24,416,666 shares of common stock were issued during the nine months ended December 31, 2019 for cash proceeds received totaling $125,000.
NOTE 7. RELATED PARTY
During December 2017, the Company entered into a consulting agreement with Dr. Ashok Patel, our current President, 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 December 31, 2018, the first anniversary shares had yet to be issued. Accordingly, they are reported in the accompanying consolidated statement of stockholders’ equity (deficit) as common stock issuable.
The trustee of La Dulce Vita Trust (LDVT) is the aunt of Daniel Crawford, the Company’s majority voting holder and the sister of Jerry Grisaffi, the Company’s CEO and Board of Directors Chairman. At December 31, 2019 and March 31, 2019, $474,000 is owed to LDVT reported in notes payable, and $22,000 is included in convertible debt on the accompanying consolidated balance sheets. See Note 9, Subsequent Events .
On April 16, 2018, the Company entered into an operating agreement with Centre Manufacturing, Inc. (“Centre”) and formed an LLC 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 President of the Company. On June 19, 2018, the Company formed a majority owned subsidiary, Endo & Centre Venture LLC. No significant activity has occurred during the nine months ended December 31, 2019 and 2018, respectively.
During the nine months ended December 31, 2019 and 2018, the Company purchased inventory totaling $12,400 and $76,946 from Centre, respectively. The Company owed Centre $0 and $26,791, respectively, at December 31, 2019 and March 31, 2019 which is included in accounts payable on the accompanying consolidated balance sheets.
On October 1, 2019 the Company appointed three members to an advisory board and issued each member a warrant convertible into 1,000,000 shares of common stock at $.01 per share.
F-12
NOTE 8. COMMITMENTS AND CONTINGENCIES
On April 1, 2019 the Company entered into a three-year office and warehouse lease of approximately 5,700 square feet 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. Rent expense for the nine months ended December 31, 2019 and 2018 was $34,200 and $0, respectively.
Aggregate future lease liability expense under ASC 842 are as follows:
Years Ending
March 31,
Amount
2020
$ 11,400
2021
45,600
2022
45,600
$ 102,600
There is a dispute between the Company and the holder of a convertible note regarding the timing of the conversion. As of December 31, 2019, the full amount of the penalty totaling $114,000 has been recorded on the accompanying consolidated balance sheet, and neither side has filed formal legal proceedings against the other side and negotiations are ongoing to resolve the matter.
NOTE 9. SUBSEQUENT EVENTS
During January 2020, the $22,000 notes payable with LDVT (Note 7) were sold to another party and amended to a total principal amount of $22,580 with a conversion price similar to that of other convertible note holders.
During February 2020, the Company issued 800,000 common stock shares to LDVT pursuant to the October 2016 debt extinguishment (see Notes 5 and 7). As a result, the note payable of $474,000 is no longer outstanding.
On February 12, 2020, the Company entered into a Letter of Intent with Choice Wellness Brands, Inc., Wyoming corporation (“Choice”). Under the terms of the Letter of Intent, the Company will acquire 100% of the ownership of Choice in exchange for the issuance of a new class of preferred stock that will have the effect of giving the shareholders of Choice a 30% equity interest in the Company. This transaction will not result in a change in control of the Company. The Company anticipates that the acquisition of Choice will be completed by February 28, 2020.
On February 13, 2020, the Company issued a $100,000 convertible promissory note to Noteholder 6. The note bears interest at 12%, matures December 13, 2020, and is convertible into shares of the Company’s common stock at a 40% discount. Upon note issuance, 40,700,000 shares were authorized for issuance as a commitment fee.
Subsequent to December 31, 2019 the Company issued common stock for settlement of convertible debt as summarized below:
Shares
Penalty
Principal
Noteholder
Issued
Settled
Converted
Noteholder 6
90,500,260
$ -
$ 21,206
Noteholder 3
232,700,000
$ 5,551
25,000
323,200,260
$ 5,551
$ 46,206
F-13
We urge you to read the following discussion in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended March 31, 2019, as well as with our condensed financial statements and the notes thereto included elsewhere herein.
Company Overview
Our business is conducted through our wholly owned subsidiaries, Humbly Hemp, Endo Brands, and Humble Water Company. Humbly Hemp sells and markets a line of hemp enhanced snack foods. Humble Water Company is in a partnership with Springhill Water Co. to develop a line of High Alkaline, Natural Mineral Water, and a bottling and packaging facility. Endo Brands creates and markets a line of CBD consumer products and through ENDO Labs, a joint venture with Centre Manufacturing, creates white label products and formulations for CBD brands. Right On Brands is at the focus of health and wellness. We create lasting brands with emerging functional ingredients, and our focus right now is industrial hemp, hemp derived CBD, and high alkaline water. As of September 30, 2019, the Board of Directors of the Company voted to merge Humbly Hemp, Inc. into the Company in order to have a more efficient and less costly corporate structure.
Basis of Presentation of Financial Information
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern, which is dependent upon the Company’s ability to establish itself as a profitable business. At December 31, 2019, the Company had an accumulated deficit of $11,891,860 and for the nine months ended December 31, 2019, incurred net losses of $1,705,758, as compared to $2,806,395 for the same period in 2018. Management expects that the Company will need to raise additional capital to sustain operations until such time as the Company can achieve profitability. However, there can be no assurance that management will be successful in obtaining additional funding or in attaining profitable operations.
The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.
Significant Accounting Policies
There have been no changes from the Summary of Significant Accounting Policies described in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on July 29, 2019.
Note Conversions to Common Stock
During the nine months ended December 31, 2019 the Company received several notices of conversion from its noteholders as summarized here:
Average
Noteholder
Debt Converted
Conversion Price
Shares Issued
Noteholder 2
$ 210,663
$ 0.005
44,759,514
Noteholder 3
60,375
$ 0.002
38,415,000
Noteholder 4
104,341
$ 0.003
41,431,396
Noteholder 5
244,650
$ 0.003
75,316,850
Noteholder 6
108,794
$ 0.001
135,652,946
Noteholder 7
81,750
$ 0.004
19,395,570
4
Results of Operations
Comparison of Three Months Ended December 31, 2019 and 2018
During the three months ended December 31, 2019, we generated revenue of $106,434 and our cost of goods sold was $62,220, resulting in gross profit of $44,214. We incurred total operating expenses of $243,115, interest expense of $116,783, and a net loss of $182,382. By comparison, during the three months ended December 31, 2018, we generated revenue of $57,476 and our cost of goods sold was $41,293, resulting in gross profit of $16,183. We incurred operating expenses of $480,695, interest expense of $784,892 and we recorded a net loss of $1,783,791.
Our revenues increased significantly compared to the same period last year due to increased product distribution and sales. Our operating expenses decreased significantly due primarily to lower consulting fees. However, this was offset by higher general and administrative expenses related to contract labor, commissions, insurance, lease and travel expenses. Other expenses increased related to debt financing, including interest, financing costs, and default penalties.
Comparison of Nine Months Ended December 31, 2019 and 2018
For the nine months ended December 31, 2019 and 2018, the Company’s revenue totaled $315,091 and $153,087, respectively, for which our respective costs of goods sold totaled $200,140 and $105,093. The $162,004 increase in revenue resulted from additional sales. During 2019 the Company also introduced its Humbly Hemp line of energy bars and sparkling teas.
For the nine months ended December 31, 2019, the Company had operating expenses totaling $719,970 compared to $1,363,573 for the same period in 2018, a decrease of $643,603. This change is primarily a result of lower consulting fees. General and administrative expenses increased by approximately $197,454, from $141,838 in the nine months ended December 31, 2018 to $339,292 over the same period in 2019 due to increased contract labor, commissions, insurance, lease and travel expenses. Other expenses increased related to debt financing, including interest, financing costs, loss on derivatives issued with debt, and default penalties. The Company also recorded depreciation and amortization expense of $5,149 for the nine months ended December 31, 2019 compared to $2,822 for the nine months ended December 31, 2018.
We expect that our expenses, as well as our revenues, will continue to increase over the current fiscal year as we work to expand sales and distribution of our products.
5
Liquidity and Capital Resources
As of December 31, 2019, we had current assets in the amount of $316,233, consisting of cash in the amount of $15,616, accounts receivable of $26,879, and inventory of $258,163. As of December 31, 2019, we had current liabilities of $1,773,758. The current liabilities consisted of accounts payable of $199,772, accrued interest payable of $48,922, notes payable net of discount of $754,164, convertible debt net of discount in the amount of $240,942, and a derivative liability of $484,358.
We also entered into an office lease April 1, 2019 which resulted in a long-term asset and lease liabilities of $102,600 at December 31, 2019.
We have funded our operations to date through the issuance of common stock in offerings exempt under Rule 506, as well as through the issuance of convertible notes. During the nine months ended December 31, 2019:

· We issued a total of 24,416,666 shares of common stock to an investor for total proceeds of $125,000.
Our ability to successfully execute our business plan is contingent upon us obtaining additional financing and/or upon realizing sales revenue sufficient to fund our ongoing expenses. Until we are able to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
Off Balance Sheet Arrangements
As of December 31, 2019, there were no off-balance sheet arrangements.
6
A smaller reporting company is not required to provide the information required by this Item.
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Jerry Grisaffi and our Chief Financial Officer, A. David Youssefyeh. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the period ended December 31, 2019, besides the addition of two Certified Public Accountants to assist with the bookkeeping and financial reporting.
Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
7
There is a dispute between the Company and the holder of a convertible note regarding the timing of the conversion. As of December 31, 2019, neither side has filed formal legal proceedings against the other side and negotiations are ongoing to resolve the matter.
A smaller reporting company is not required to include this information. For a description of the risk factors applicable to our business and operations, please refer to our Annual Report on Form 10-K/A for the year ended March 31, 2019, filed with SEC on July 29, 2019.
During the nine months ended December 31, 2019, we sold 24,416,666 shares of common stock for proceeds of $125,000 used to fund operations.
None
Not applicable.
None.
8
Exhibit
Number
Description of Exhibit
101
Materials from the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2019 formatted in Extensible Business Reporting Language (XBRL)
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Right On Brands, Inc.
Date: February 14, 2020
By:
/s/ Jerry Grisaffi
Name:
Jerry Grisaffi
Title:
Chief Executive Officer
Date: February 14, 2020
By:
/s/ A. David Youssefyeh
Name:
A. David Youssefyeh
Title:
Chief Financial Officer
10
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