NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 1 - Organization and Basis of Presentation
Organization and Line of Business
Pura Naturals, Inc. (formerly Yummy Flies, Inc.) (the "Company" or "Pura - CO") was incorporated under the laws of the State of Colorado on December 26, 2005. On November 17, 2016, the Company changed its name from Yummy Flies, Inc. to Pura Naturals, Inc.
Pura Naturals, Inc., ("Pura - DE") was incorporated on April 20, 2015 under the laws of the state of Delaware. Prior to incorporating in Delaware, the Company was incorporated on October 21, 2013 under the laws of the state of Nevada as a limited liability company. On June 30, 2015, the Company exchanged membership interests in the Nevada corporation for common stock of the Pura - DE.
Effective July 18, 2016, the Company entered into that certain share exchange agreement by and among the Company, Pura - DE") and certain shareholders of Pura – DE (the "PURA Shareholders"). Pursuant to the Share Exchange Agreement, the Company exchanged the outstanding common and preferred stock of Pura - DE held by the PURA Shareholders for shares of common stock of the Company. At the closing date, Robert Lee, the holder of 30,536,100 shares of common stock, agreed to cancelation of such shares. Other than Robert Lee, shareholders of Company common stock held 7,625,700 shares. Also on the closing date, the Company issued 23,187,876 shares of common stock to the PURA shareholders. In addition, shares issuable under outstanding options of Pura – DE will be exercisable into shares of common stock of the Company, pursuant to the terms of such instruments.
As a result of the share exchange agreement and the other transactions contemplated there under, Pura - DE became a wholly owned subsidiary of the Company.
The exchange of shares with Pura - DE was accounted for as a reverse acquisition under the purchase method of accounting since Pura - DE obtained control of the Company. Accordingly, the merger of Pura - DE into the Company was recorded as a recapitalization of Pura - DE, Pura - DE being treated as the continuing entity. The historical financial statements presented are the financial statements of Pura - DE. The share exchange agreement was treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of this transaction, the net liabilities of the legal acquirer, Pura - CO, were $20,040.
The Company is engaged in the marketing and sales of consumer products through the use of direct sales, brokers and distributors to wholesalers, mass merchandisers, retail stores and on the internet.
Stock Split
On November 17, 2016, the Company affected a 3.7 to 1 forward stock split. All share and per share information was retroactively restated to reflect this forward stock split.
Note 2 – Summary of Significant Accounting Policies
Accounting Method
The Company's consolidated financial statements ("CFS") are prepared using the accrual method of accounting. The Company elected a fiscal year ending on December 31.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Reclassification
Certain amounts in the prior period financial statements were reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
Principles of Consolidation
The accompanying CFS include the accounts of the Company and its wholly-owned subsidiary, PURA - DE, and have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany transactions and balances were eliminated.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP 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 reporting amounts of revenues and expenses during the reporting period.
The Company's significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful accounts; and obsolescence; and interest rate; revenue recognized or recognizable; sales returns and allowances; valuation of derivative liabilities, valuation of options, income tax rate, income tax provision, deferred tax assets and valuation allowance of deferred tax assets; and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Cash
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. As of December 31, 2017 and 2016, the Company did not have any cash equivalents.
Restricted Cash
At December 31, 2015, the Company was required to maintain a separate bank account with a financial institution as collateral for a Company credit card. In March 2016, the Company canceled the credit card and the balance is the restricted account became available to the Company.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Accounts Receivable and Allowance for Doubtful Accounts
The Company grants credit to customers under credit terms that it believes are customary in the industry and does not require collateral to support customer receivables. The Company currently does not provide an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal receivable terms vary from 30-90 days after the issuance of the invoice and typically would be considered past due when the term expires. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. The Company's allowance for doubtful accounts was $0 at December 31, 2017 and December 31, 2016, respectively.
Gross Profit
Gross profit is equal to product sales, net of allowances less cost of goods sold. Cost of goods sold is associated with sales of our products and includes direct costs associated with the purchase of components, and costs associated with the packaging, preparation, and shipment of the product.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on an average cost basis which approximates actual cost on a first-in, first out basis and includes raw materials, labor and manufacturing overhead.
At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence.
The Company considers historical demand and forecast in relation to the inventory on hand, market conditions and product life cycles when determining obsolescence and net realizable value. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.
Intangible Assets
Intangible assets consist of a license with a related party and amounts paid to obtain trademarks. Intangible assets are amortized over 120 months.
Long-Lived Assets
The Company applies ASC Topic 360,
Property, Plant, and Equipment
, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review at December 31, 2017 and 2016, the Company believes there was no impairment of its long-lived assets.
Derivative Financial Instruments
The Company applies ASC 815-10,
Derivatives and Hedging
("ASC 815-10"). Derivatives within the scope of ASC 815-10 must be recorded on the balance sheet at fair value ("FV"). During the year ended December 31, 2017, the Company issued convertible debentures and recorded derivative liabilities related to the embedded conversion feature of the convertible notes (See Note 7).
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The Company determined the conversion feature of the convertible notes represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability.
Therefore, the FV of the derivative instruments has been recorded as liabilities on the balance sheet with the corresponding amount recorded as discounts to the Notes. Such discounts will be accreted from the issuance date to the maturity date of the Notes.
The change in the FV of the derivative liabilities will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liabilities on the balance sheet. The FV of the embedded derivative liabilities on the convertible notes were determined using a Black-Scholes-Merton options pricing model ("Black-Scholes") on the issuance dates with the assumptions in the table below.
The Company recognizes revenue from sales of consumer products to wholesalers, mass merchandisers and retail stores. The Company's revenue recognition policies comply with FASB ASC Topic 605. Revenue is recognized at the date of delivery to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred income.
Deferred Income
In some instances, the Company receives payments prior to delivery of its products, whereupon such revenues are deferred until the revenue recognition criteria are met.
Stock-Based Compensation
The Company records stock-based compensation in accordance with FASB ASC Topic 718,
Compensation – Stock Compensation
. FASB ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at FV at the grant date and recognize the expense over the employee's requisite service period. The Company recognizes in the statement of operations the grant-date FV of stock options and other equity-based compensation issued to employees and non-employees. There were 7,193,750 and 1,156,250 options outstanding as of December 31, 2017 and 2016, respectively.
Income Taxes
The Company accounts for income taxes in accordance with ASC Topic 740,
Income Taxes
. ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Under ASC 740, a tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Basic and Diluted Earnings (Loss) Per Share
Earnings per share is calculated in accordance with ASC Topic 260,
Earnings Per Share
. Basic earnings per share ("EPS") is based on the weighted average number of common shares outstanding. Diluted EPS is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Based on the conversion prices in effect, the potential dilutive effects of 7,193,750 and 1,156,250 options during 2017 and 2016, respectively were not considered in the calculation of EPS as the effect would be anti-dilutive.
Based on the conversion prices in effect, the potentially dilutive effects of 29,316,095 due to convertible debt were not considered in the calculation of EPS as the effect would be anti-dilutive on December 31, 2017. There were no convertible debt outstanding as of December 31, 2016.
Recent Accounting Pronouncements
In July 2017,
the Financial Accounting Standards Board ("FASB") issued ASU 2017-11
, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
(the "ASU"). Part I of this ASU changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features and clarifies existing disclosure requirements. Part II does not have an accounting effect. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted. Management is currently evaluating the potential impact of these changes on the CFS of the Company.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory
, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this accounting standard update on its CFS.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this accounting standard update on its CFS.
In April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity's promise to grant a license provides a customer with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time).
The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgment necessary to comply with Topic 606. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our CFS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Management has considered all recent accounting pronouncements issued since and their potential effect on our financial statements. The Company's management believes that these recent pronouncements will not have a material effect on the Company's CFS.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future CFS.
NOTE 3 - GOING CONCERN AND MANAGEMENT PLANS
The Company's CFS for the year ended December 31, 2017, were prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has incurred losses from operations since its change of ownership, management and line of business on July 18, 2016. Management recognizes successful business operations and the Company's transition to attaining profitability are dependent upon obtaining additional financing and achieving a level of revenue adequate to support its cost structure. These conditions raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of uncertainties.
The Company incurred losses from operations of $4,269,673 for the year ended December 31, 2017 and $1,412,646 for the year ended December 31, 2016, and had an accumulated deficit of $7,325,684 at December 31, 2017. In addition, the Company used cash in operating activities of $1,108,611 for the year ended December 31, 2017. These factors raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to establish an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern, the Company's cash position may not be adequate to support the Company's daily operations. Management intends to raise additional funds by seeking equity and/or debt financing; however there can be no assurances that it will be successful in those efforts. The ability of the Company to continue as a going concern is dependent upon the Company's ability to obtain financing, further implement its business plan, and generate revenues.
There are significant risks and uncertainties which could negatively affect the Company's operations. These are principally related to (i) the absence of a distribution network for the Company's products, (ii) the absence of any significant commitments or firm orders for the Company's products. The Company's limited sales to date for the Company's products make it impossible to identify any trends in the Company's business prospects. Accordingly, there can be no assurance that we will be able to pay obligations which we may incur in the future.
The Company's only sources of additional funds to meet continuing operating expenses, fund additional development and fund additional working capital are through the sale of securities and/or debt instruments. We are actively seeking additional debt or equity financing, but no assurances can be given that such financing will be obtained or what the terms thereof will be. The Company may need to discontinue a portion or all of our operations if the Company is unsuccessful in generating positive cash flow or financing for the Company's operations through the issuance of securities.
The audited financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 4 – Intangible Assets
The following are the details of intangible assets at December 31, 2017 and 2016:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
License
|
|
$
|
996,346
|
|
|
$
|
996,346
|
|
Trademarks
|
|
|
10,530
|
|
|
|
4,825
|
|
|
|
|
1,006,876
|
|
|
|
1,001,171
|
|
Less accumulated amortization
|
|
|
(251,194
|
)
|
|
|
(149,452
|
)
|
|
|
$
|
755,682
|
|
|
$
|
851,719
|
|
Amortization expense for 2017 and 2016 was $99,635 and $99,635, respectively.
The following summarizes estimated future amortization expense as of December 31, 2017 related to intangible assets:
Years ending December 31,
|
|
|
|
2018
|
|
$
|
100,688
|
|
2019
|
|
|
100,688
|
|
2020
|
|
|
100,688
|
|
2021
|
|
|
100,688
|
|
2022
|
|
|
100,688
|
|
Thereafter
|
|
|
251,806
|
|
|
|
$
|
755,246
|
|
Note 5 –Related Party Transactions
The Company has balances outstanding that are due from affiliated companies and payable to affiliated companies. These amounts are payable upon demand and are non-interest bearing. At December 31, 2017 and 2016, the amounts due from related parties was $11,890 and $31,908, respectively. At December 31, 2017 and 2016, the amounts due to related parties was $392,037 and $763,664, respectively.
During 2015, the Company entered into a license agreement for 10 years with Advanced Innovative Recovery Technologies, Inc. a stockholder of the Company. In connection with the license, the Company issued 927,516 shares of common stock and agreed to pay $375,000 on each of June 30, 2016 and 2017. The value of the common stock of $300,000 was based on recent sales of the Company's common stock. The value of the license was $996,346 which equals the common stock issued that was valued at $300,000 plus $696,346, the present value of the two payments of $375,000. The Company did not made the $375,000 payment due June 30, 2016; as a result, the Company has accrued interest on the unpaid balance at the rate of 5% per month.
The Company did not make the $375,000 payment due June 30, 2017; as a result, the Company has accrued interest on the unpaid balance at the rate of 5% per month. The Company made a partial payment of $97,656 in April 2017 towards the outstanding balance.
On May 22, 2017, the Company entered into an agreement with Advanced Innovative Recovery Technologies, Inc. to, as of March 31, 2017, cancel its debt and acquire the formula. The Company issued 1,300,000 shares of its common stock with a total stated value equal to that of the agreed upon principal of $750,000 and penalties of $168,750, for a total agreed upon amount of $918,750. In connection with this payment in full, during the year ended December 31, 2017, the Company recorded a gain on settlement of a liability of $42,855, which is included in other expenses and income in the accompanying CFS.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 6 - Fair Value Measurement
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 820,
Fair Value Measurements and Disclosures
, requires disclosure of the FV of financial instruments held by the Company. FASB ASC Topic 825,
Financial Instruments
, defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their FVs because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
·
|
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
·
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
·
|
Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the FV measurement.
|
·
|
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic 480,
Distinguishing Liabilities from Equity
, and FASB ASC Topic 815,
Derivatives and Hedging
.
|
The Company uses Level 2 inputs for its valuation methodology for its derivative liability as its FV was determined by using the Black-Scholes-Merton pricing model based on various assumptions. The Company's derivative liability is adjusted to reflect FV at each period end, with any increase or decrease in the FV being recorded in results of operations as adjustments to FV of derivatives.
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic 480,
Distinguishing Liabilities from Equity
, and FASB ASC Topic 815,
Derivatives and Hedging
.
As of December 31, 2017 and 2016, respectively, the Company did not identify any assets and liabilities required to be presented on the balance sheet at fair value.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 7 - Derivative Liabilities
During the year ended December 31, 2017, the Company identified conversion features embedded within its convertible debt. The Company has determined that the conversion feature of the convertible note represents an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, the Note is not considered to be conventional debt and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability.
Therefore, the FV of the derivative instruments was recorded as liabilities on the balance sheet with the corresponding amount recorded as discounts to the Notes. Such discounts will be accreted from the issuance date to the maturity date of the Notes. The change in the FV of the derivative liabilities will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liabilities on the balance sheet. The FV of the embedded derivative liabilities on the convertible notes were determined using the Black-Scholes valuation model on the issuance dates with the assumptions in the table below.
The FV of the warrants was calculated using a Black-Scholes valuation model.
The FV of the Company's derivative liabilities at and during the year ended December 31, 2017 is as follows:
Derivative liability balance, December 31, 2016
|
|
$
|
-
|
|
Issuance of derivative liability
|
|
|
1,611,351
|
|
Derivative liability associated with repaid convertible note
|
|
|
(66,615
|
)
|
Change in derivative liability
|
|
|
(646,768
|
)
|
Derivative liability balance, December 31, 2017
|
|
$
|
897,968
|
|
The FV's at the commitment dates and re-measurement dates for the convertible debt and warrants treated as derivative liabilities are based upon the following estimates and assumptions made by management for the year ended December 31, 2017:
Risk free rate
|
|
|
1.46% - 1.76%
|
|
Volatility
|
|
|
103% - 156%
|
|
Conversion/Exercise Price
|
|
$
|
0.035 - $0.1825
|
|
Dividend rate
|
|
|
0%
|
|
Term (Years)
|
|
|
0.02 - 0.96
|
|
|
|
|
|
|
Stock Price
|
|
|
|
|
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 8 – Convertible Notes Payable
Convertible Promissory Note
On April 7, 2017, the Company issued to an accredited investor a Convertible Promissory Note of $570,000 that matures on January 7, 2018.
The Company will receive the $570,000 in three tranches as follows:
(1)
|
$200,000 upon signing of the Convertible Promissory Note, the Securities Purchase Agreement and Registration Rights Agreement of which $50,000 may be sent to the Company's auditor to complete the audit for the fiscal year ended December 31, 2016);
|
(2)
|
$150,000 upon filing of a registration statement and receipt of up to $10,000,000 shares of the Company's common stock issuable under the Securities Purchase Agreement; and
|
(3)
|
$150,000 upon the registration statement becoming effective.
|
A registration statement was filed on July 12, 2017 and the Company received the second tranche of $150,000.
During the year ended December 31, 2017, the holder of the Convertible Promissory Note converted a portion of the note as follows:
Conversion
Date
|
Number of Shares
of Common Stock
|
Principal and
Amount Converted
|
Price per
Share
|
November 2, 2017
|
300,000
|
54,750
|
0.182500
|
November 21, 2017
|
300,000
|
23,250
|
0.077500
|
December 11, 2017
|
500,000
|
38,363
|
0.076725
|
Total
|
1,100,000
|
116,363
|
|
As of December 31, 2017, the total balance of the Convertible Promissory Note was $282,638 comprised of principal note balance of $233,638, original issue discount of $35,000 and debt issuance costs of $14,000.
Pursuant to the terms of the Convertible Promissory Note, the Company is not required to make any payments on the Convertible Promissory Note until maturity, and no interest shall accrue except in default. Prepayment of the Convertible Promissory Note is permitted without penalty; however, the investor has the right to convert all or any portion of the balance of the Note beginning six months after the issuance date, at a conversion price per share of 75% of the lowest trading price during the valuation period or "look back" period immediately preceding and including the date of conversion (as defined and calculated pursuant to the Convertible Promissory Note). There is no minimum conversion price.
Should the Company default on the Note, the default interest rate shall be the lower of 18% or the highest rate permitted under applicable law. The date of conversion is also adjustable in accordance with the Note's terms in the event certain capital reorganization, merger, or liquidity events of the Company as further described in the Note.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Due to the potential adjustment in the conversion price associated with this Convertible Promissory Note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $273,266 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the convertible note payable up to the face amount of the convertible note. The debt discount of $273,266 is being amortized over the term of the convertible note. The Company recognized interest expense of $264,717 and 0 during the year ended December 31, 2017 and 2016, respectively for the amortization of the debt discount.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense in the amount of $47,461 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of original issue discount and debt issuance costs totaled $1,539 and $0 at December 31, 2017 and December 31, 2016, respectively.
8% Promissory Note
On July 5, 2017, the Company issued an 8% Fixed Rate Convertible Debenture amount of $220,000, with an Original Issue Discount of $20,000 and Debt Issuance Costs of $20,000 to an accredited investor. This 8% Fixed Rate Convertible Debenture is due and payable on January 6, 2018, plus the one-time interest charge of on the principal of 8%. The holder shall have the right to convert all or any part of the outstanding amount due under this 8% Fixed Rate Convertible Debenture into fully paid and non-assessable shares of common stock upon an event of default.
The Company may prepay the amounts outstanding to the holder at any time up to the 90th day period immediately following the issue date of this note by making a payment to the note holder of an amount in cash for 135% of the outstanding balance.
Due to the potential adjustment in the conversion price associated with this 8% Fixed Rate Convertible Debenture payable based on the Company's stock price, the Company determined the conversion feature is a derivative liability. The embedded conversion feature was initially calculated to be $230,656 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the This 8% Fixed Rate Convertible Debenture payable up to the face amount of the convertible note with the excess of $50,656 being recorded as a financing cost. The debt discount of $180,000 is being amortized over the term of the This 8% Fixed Rate Convertible Debenture. The Company recognized interest expense of $174,162 and $0 during the year ended December 31 2017 and December 31, 2016, respectively for the amortization of the debt discount.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense in the amount of $38,703 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of original issue discount and debt issuance costs totaled $1,297 and $0 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense in connection with the This 8% Fixed Rate Convertible Debenture in the amount of $17,029 and $0, for the year ended December 31, 2017 and 2016, respectively. Accrued interest due under the This 8% Fixed Rate Convertible Debenture totaled $17,029 and $0 as of December 31, 2017 and December 31, 2016, respectively.
In connection with the convertible note, the Company granted 85,000 shares of common stock as inducement shares. These common stock were valued at the market share price of $0.739 per share and recorded interest expense of $62,815 for the year ended December 31, 2017.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Convertible Promissory Note-Commitment Fee
On July 14, 2017, the Company issued a Convertible Promissory Note of $330,000, with an original issue discount of $30,000 to an accredited investor for commitment fee related to the convertible promissory note. This convertible note is due and payable on April 17, 2018. The holder shall have the right to convert all or any part of the outstanding amount due under this Convertible Promissory Note into fully paid and non-assessable shares of Common Stock, at a conversion price per share of 65% of the low trade price of the common stock during 30 days preceding the date of the applicable conversion notice.
Pursuant to the terms of the Convertible Promissory Note, the Company is not required to make any payments on the Convertible Promissory Note until maturity, and no interest shall accrue except in default.
Due to the potential adjustment in the conversion price associated with this Convertible Promissory Note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $369,485 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the Convertible Promissory Note payable up to the face amount of the Convertible Promissory Note with the excess of $69,485 being recorded as a financing cost. The debt discount of $300,000 is being amortized over the term of the Convertible Promissory Note.
The Company recognized interest expense of $186,131 and $0 during the year ended December 31, 2017 and 2016, respectively for the amortization of the debt discount.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense in the amount of $18,613 and $0 relating to the amortization of the original issue discount. The unamortized balance of original issue discount totaled $11,387 and $0 at December 31, 2017 and December 31, 2016, respectively.
12 % Convertible Note
On September 20, 2017, the Company issued a 12% Convertible Note of $75,000, with an original issue discount of $4,500 and debt issuance costs of $3,000 to an accredited investor. This 12% Convertible Note is due and payable on September 20, 2018. The holder shall have the right to convert all or any part of the outstanding amount due under this 12% Convertible Note into fully paid and non-assessable shares of common stock.
The conversion price hereunder shall equal the lower of: (i) the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date, and (ii) 50% of either the lowest sale price for the common stock on the principal market during the twenty (20) consecutive trading days including and immediately preceding the conversion date, or the closing bid price, whichever is lower
The Company may prepay, at any time during the period beginning on the issue date and ending on the date which is six months following the issue date.
The payment amount is the total of 135%, multiplied by the sum of: the then outstanding principal amount of this 12% Convertible Note plus accrued and unpaid interest on the unpaid principal amount of this 12% Convertible Note to the optional prepayment date plus default interest, if any. If the Company delivers an optional prepayment notice and fails to pay or fails to cause to be paid the optional prepayment amount due to the holder of the 12% Convertible Note within two (2) business days following the optional prepayment date, the Company will forfeit its right to prepay the Note.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Due to the potential adjustment in the conversion price associated with this 12% Convertible Note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $100,798 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the convertible note payable up to the face amount of the convertible note with the excess of $33,298 being recorded as a financing cost. The debt discount of $67,500 is being amortized over the term of the 12% Convertible Note. The Company recognized interest expense of $18,863 and $0 during the year ended December 31 2017 and 2016, respectively for the amortization of the debt discount for the note.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense in the amount of $2,096 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of original issue discount and debt issuance costs totaled $5,404 and $0 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense in connection with the Convertible Note in the amount of $2,515 and $0, for the year ended December 31, 2017 and 2016, respectively. Accrued interest due under the Convertible Note totaled $2,515 and $0 as of December 31, 2017 and September 30, 2016, respectively.
12 % Convertible Promissory Note
On September 12, 2017, the Company issued a 12% Convertible Promissory Note of $160,500, with debt issuance costs of $10,500 to an accredited investor. This 12% Convertible Promissory Note is due and payable on September 12, 2018. The Holder shall be entitled to convert all of the outstanding and unpaid principal and accrued interest of this Note into fully paid and non-assessable shares of common stock in accordance with the stated conversion price commencing on the date that is 180 days from the issuance date.
The conversion price hereunder shall be 50% discount to the lowest trading price during the previous 20 trading days to the date of a conversion notice.
The Company may pay this 12% Convertible Promissory Note in full, together with any and all accrued and unpaid interest, plus any applicable pre-payment premium at any time on or prior to the date which occurs 180 days after the issuance date. In the event the 12% Convertible Promissory Note is not prepaid in full on or before the prepayment date, it shall be deemed a "Pre-Payment Default". Until the 90th day after the issuance date the Company may pay the principal at a cash redemption premium of 135%, in addition to outstanding interest, without the holder's consent; from the 91st day to the 120th day after the issuance date, the Company may pay the principal at a cash redemption premium of 140%, in addition to outstanding interest, without the holder's consent; from the 121st day to the prepayment date, the Company may pay the principal at a cash redemption premium of 145%, in addition to outstanding interest, without the holder's consent. After the prepayment date up to the maturity date this 12% Convertible Promissory Note shall have a cash redemption premium of 150% of the then outstanding principal amount of the 12% Convertible Promissory Note, plus accrued interest and default interest, if any, which may only be paid by the Company upon holder's prior written consent. At any time on or after the maturity date, the Company may repay the then outstanding principal plus accrued interest and default interest, if any, to the holder.
Due to the potential adjustment in the conversion price associated with this convertible note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $251,454 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the convertible note payable up to the face amount of the convertible note with the excess of $101,454 being recorded as a financing cost. The debt discount of $150,000 is being amortized over the term of the convertible note. The Company recognized interest expense of $45,205 and 0 during the year ended December 31, 2017 and 2016, respectively for the amortization of the debt discount.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
During the year ended December 31, 2017 and 2016 the Company recognized interest expense of $3,164 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of debt issuance costs totaled $7,336 and $0 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense in connection with the 12% Convertible Promissory Note of $5,804 and $0, for the year ended December 31, 2017 and 2016, respectively. Accrued interest due under the 12% Convertible Promissory Note totaled $5,804and $0 as of December 30, 2017 and December 31, 2016, respectively.
8 % Convertible Promissory Note
On October 23, 2017, the Company issued an 8% Convertible Promissory Note of $95,000, with debt issuance costs of $14,250 and original issue discount of $2,000 to an accredited investor. This 8% Convertible Promissory Note is due and payable on October 23, 2018. The holder shall be entitled to convert at any time, all of the outstanding and unpaid principal and accrued interest of this 8% Convertible Promissory Note into fully paid and non-assessable shares of common stock in accordance with the stated conversion price.
The conversion price hereunder shall be 55% discount to the lowest trading price during the previous 15 trading days to the date of a conversion notice.
The Company may pay this 8% Convertible Promissory Note in full, together with any and all accrued and unpaid interest, plus any applicable pre-payment premium at any time on or prior to the date which occurs 180 days after the issuance date. Until the 60th day after the issuance date the Company may pay the principal plus at a cash redemption premium of 110%, in addition to outstanding interest, without the Holder's consent; from the 61st day to the 120th day after the issuance date, the Company may pay the principal at a cash redemption premium of 120%, in addition to outstanding interest, without the holder's consent; from the 121st day to the prepayment date, the Company may pay the principal at a cash redemption premium of 130%, in addition to outstanding interest, without the holder's consent. The 8% Convertible Promissory Note may not be repaid after the 180th daily anniversary.
Due to the potential adjustment in the conversion price associated with this 8% Convertible Promissory note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $129,589 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the convertible note payable up to the face amount of the convertible note with the excess of $50,839 being recorded as a financing cost. The debt discount of 78,839 is being amortized over the term of the 8% Convertible Promissory Note. The Company recognized interest expense of 3,072 and 0 during the year ended December 31, 2017 and 2016, respectively for the amortization of the debt discount.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense of $1,437 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of debt issuance costs and original issue discount totaled $13,178 and $0 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense in connection with the 8% Convertible Promissory Note of $1,437 and $0, for the year ended December 31, 2017 and 2016, respectively. Accrued interest due under the 8% Convertible Promissory Note totaled $1,437and $0 as of December 30, 2017 and December 31, 2016, respectively.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
4.25 % Convertible Promissory Note
On December 18, 2017, the Company issued a 4.25% Convertible Secured Redeemable Note of $125,000, with debt issuance costs of $16,250 and original issue discount of $750 to an accredited investor. This 4.25% Convertible Secured Redeemable Note is due and payable on October 23, 2018. The holder shall be entitled to convert at any time following six months after the issue date and from time to time thereafter to convert all or any amount of the principal face of the note into fully paid and non-assessable shares of common stock in accordance with the stated conversion price.
The conversion price hereunder shall be 61% discount to the lowest trading price during the previous 15 trading days to the date of a conversion notice.
The Company may pay this 4.25% Convertible Secured Redeemable Note in full, together with any and all accrued and unpaid interest, plus any applicable pre-payment premium at any time on or prior to the date which occurs 180 days after the issuance date as follows:
Prepayment Date
|
Prepayment Amount
|
<=30 days after issuance
|
115% of the sum of principal and interest
|
>30 days <=60 days after issuance
|
120% of the sum of principal and interest
|
>60 days <=90 days after issuance
|
125% of the sum of principal and interest
|
>90 days <=120 days after issuance
|
130% of the sum of principal and interest
|
>120 days <=150 days after issuance
|
135% of the sum of principal and interest
|
>150 days <=180 days after issuance
|
140% of the sum of principal and interest
|
|
|
This note may not be prepaid after the 180th daily anniversary.
Due to the potential adjustment in the conversion price associated with this convertible note payable based on the Company's stock price, the Company determined the conversion feature is considered a derivative liability. The embedded conversion feature was initially calculated to be $143,675 which is recorded as a derivative liability as of the date of issuance. The derivative liability was recorded as a debt discount to the 4.25% Convertible Secured Redeemable Note payable up to the face amount of the 4.25% Convertible Secured Redeemable Note convertible note with the excess of $35,675 being recorded as a financing cost. The debt discount of 108,000 is being amortized over the term of the convertible note. The Company recognized interest expense of 3,847 and 0 during the years ended December 31, 2017 and 2016, respectively for the amortization of the debt discount.
During the year ended December 31, 2017 and 2016 the Company recognized interest expense of $605 and $0 relating to the amortization of the original issue discount and debt issuance costs. The unamortized balance of debt issuance costs and original issue discount totaled $16,395 and $0 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense in connection with the 4.25% Convertible Secured Redeemable Note of $189 and $0, for the year ended December 31, 2017 and 2016, respectively. Accrued interest due under the 4.25% Convertible Secured Redeemable Note totaled $189 and $0 as of December 30, 2017 and December 31, 2016, respectively.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Registration Rights Agreement
On April 7, 2017, in connection with the issuance of the convertible promissory note as described in Note 8, the Company entered into a Registration Rights Agreement ("RRA") with an accredited investor whereby the Company agreed to provide certain registration rights under the Securities Act, and applicable state laws. Pursuant to the RRA, the Company shall register its shares of common stock issuable to such investor under the SPA (as defined below) on a registration statement on Form S1 (or on such other form as is available to the Company within 30 days of the execution of the RRA). In addition, the Company agreed to cause such registration statement to be declared effective within the earlier of (i) five months of the date of filing the registration statement, or (ii) five days after receiving written notice of Commission clearance and will within said five days request acceleration of effectiveness. Under the Securities Purchase Agreement ("SPA), the Company is required to reserve a sufficient number of shares of Common Stock for the purpose of enabling the Company to issue Drawn Down Shares pursuant to the SPA.
Subject to the terms and conditions of the SPA and RRA, including that there is an effective registration statement, the Company, at its sole and exclusive option, may issue and sell to the Investor, and the Investor shall purchase from the Company, the shares upon the Company's delivery of written notices to the Investor. The maximum amount of all purchases that the Investor shall be obligated to make under the SPA shall not exceed $10,000,000. Once a written notice is received by the Investor, it shall not be terminated, withdrawn or otherwise revoked by the Company.
The amount for each purchase of the shares as designated by the Company in the applicable draw down notices shall be calculated by the average of the last three days' closing price of the Company common shares; however, shall not in any case exceed (i) 4.9% of the then current shares outstanding or (ii) the previous 10 day average trading volume of the draw down shares multiplied by 3. There shall be a maximum draw down investment amount of $1,000,000. The purchase price for the Shares to be paid by the Investor shall be the average of the lowest three closing prices during the last five consecutive trading days following the delivery by the Company of a notice. Additionally, The Company's Chief Executive Officer Robert Doherty and the Company's Corporate Secretary Robert Switzer entered into a Security Agreement with the Investor whereby each of them pledged 250,000 of the Company's shares (currently held by each of them individually) as collateral for the convertible promissory note, to be returned upon repayment of the outstanding balance or its conversion to shares of the Company.
Note 9 – Note Payable
During 2016 the Company issued a note for $30,000. The note payable accrued interest at 74% per annum and required daily payments of $163. The note was due on August 10, 2017 and was personally guaranteed by a former officer. The outstanding balance was $0 and $18,068 at December 31, 2017 and December 31, 2016, respectively.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 10 – Stockholders' Equity
Common stock
During 2016, the Company issued shares of common stock as follows:
|
·
|
447,533 shares for services valued at $278,803. The shares were valued based on the Company's stock price at the date of issuance;
|
|
·
|
401,427 shares for cash of $304,500;
|
|
·
|
1,739,093 shares upon the exercise of stock options;
|
|
·
|
533,000 shares for the conversion of a convertible note payable; and
|
|
·
|
7,625,700 shares in connection with the reverse merger transaction described in Note 1
|
During 2017, the Company issued shares of common stock as follows:
|
·
|
2,342,000 shares for services valued at $1,558,978. The shares were valued based on the Company's stock price at the date of issuance;
|
|
·
|
142,868 shares for cash of $224,500;
|
|
·
|
462,500 shares upon the exercise of stock options;
|
|
·
|
1,300,000 shares for the conversion of a note payable into equity;
|
|
·
|
1,100,000 shares for the conversion of a convertible note payable into equity; and
|
|
·
|
69,965 shares utilized to pay accounts payable.
|
Stock options
The following is a summary of stock option activity:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractural
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding. December 31, 2015
|
|
|
1,713,206
|
|
|
|
0.003
|
|
|
|
*
|
|
|
$
|
959,229.00
|
|
Granted
|
|
|
1,690,887
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(508,750
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,739,093
|
)
|
|
|
0.003
|
|
|
|
|
|
|
|
|
|
Outstanding. December 31, 2016
|
|
|
1,156,250
|
|
|
|
0.001
|
|
|
|
4.59
|
|
|
$
|
2,554,156
|
|
Granted
|
|
|
6,500,000
|
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(462,500
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
Outstanding. December 31, 2017
|
|
|
7,193,750
|
|
|
|
|
|
|
|
4.58
|
|
|
$
|
551,250
|
|
* the options do not have an expiration date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The exercise price for options outstanding at December 31, 2017:
Outstanding
|
|
|
Exercisable
|
|
Number of
options
|
|
|
Exercise
Price
|
|
|
Number of
options
|
|
|
Exercise
Price
|
|
|
7,193,750
|
|
|
$
|
0.001
|
|
|
|
2,642,500
|
|
|
$
|
0.001
|
|
For options granted during 2017 and 2016 where the exercise price was less than the stock price at the date of the grant, the weighted-average FV of such options was $0.37 and $0.65 per share, respectively, and the weighted-average exercise price of such options was $0.001 and $0.001, respectively. No options were granted during 2017 and 2016 where the exercise price was equal to or greater than the stock price at the date of grant.
The FV of the stock options is being amortized to stock option expense over the vesting period. The Company recorded stock option expense of $840,328 and $167,003 during 2017 and 2016, respectively. At December 31, 2017, the unamortized stock option expense was $3,167,706 which will be amortized to expense through June 30, 2019 and when certain milestone are met.
The assumptions used in calculating the FV of options granted using the Black-Scholes option- pricing model for options granted in 2017 and 2016 are as follows:
|
2017
|
2016
|
Risk-free interest rate
|
1.92%
|
1.07 - 1.74%
|
Expected life of the options
|
5.0 Years
|
2.5 Years
|
Expected volatility
|
129%
|
350%
|
Exoected dividend yield
|
0%
|
0%
|
Note 11 - Concentrations
The Company had certain customers whose accounts receivable balances individually represented 10% or more of the Company's total accounts receivable, as follows:
For the year ended December 31, 2017 one customers accounted for 30%, one customer accounted for 14% and one customer accounted for 15% of accounts receivable. For the year ended December 31, 2016, one customer accounted for 24%, one customer accounted for 16% and one customer account for 14% of accounts receivable.
The Company had certain vendors whose accounts payable balances individually represented 10% or more of the Company's total accounts payable, as follows:
For the year ended December 31, 2017 one vendor accounted for 12% of accounts payable. For the year ended December 31, 2016, one vendor accounted for 15% and one customer vendor for 12% of accounts receivable.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Note 12 – Income Taxes
For tax purposes the Company has federal net operating loss ("NOL") carryovers of approximately $2,500,000 as of the year ended December 31, 2017, that are available to offset future taxable income. These NOL carryovers expire beginning in the year 2030. As a result of the Company's reorganization, as further described in Note 1, the NOL carryovers generated prior to the reorganization are limited by Section 382 of the Internal Revenue Code resulting in no NOL carryover for the years prior to reorganization.
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A full valuation allowance is established against all net deferred tax assets as of December 31, 2017 based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its new business model. Because of the impacts of the valuation allowance, there was no income tax expense or benefit for 2017 and 2016.
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax asset:
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
1,045,781
|
|
|
$
|
696,949
|
|
State Income tax
|
|
|
248,996
|
|
|
|
-
|
|
Stock Compensation
|
|
|
(192,786
|
)
|
|
|
-
|
|
Amortization of debt discount
|
|
|
(248,168
|
)
|
|
|
-
|
|
Accrued interest
|
|
|
(6,253
|
)
|
|
|
-
|
|
Gain on the settlement of liabilities
|
|
|
9,000
|
|
|
|
-
|
|
Gain/loss on change in FV of Derivatives
|
|
|
(135,821
|
)
|
|
|
-
|
|
Total deferred tax asset
|
|
$
|
720,749
|
|
|
$
|
696,949
|
|
Valuation allowance
|
|
|
(720,749
|
)
|
|
|
(696,949
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the differences between the effective and statutory income tax rates for year ended December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Federal statutory rates
|
|
$
|
1,045,781
|
|
|
|
21.0
|
%
|
|
$
|
(529,651
|
)
|
|
|
34.0
|
%
|
State income tax
|
|
|
248,996
|
|
|
|
5.0
|
%
|
|
|
(77,890
|
)
|
|
|
5.0
|
%
|
Stock compensation
|
|
|
(192,786
|
)
|
|
|
-3.9
|
%
|
|
|
173,864
|
|
|
|
-11.2
|
%
|
Amortization of debt discount
|
|
|
(248,168
|
)
|
|
|
-5.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Accrued interest
|
|
|
(6,253
|
)
|
|
|
-0.1
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Gain on the settlement of liabilities
|
|
|
9,000
|
|
|
|
-0.2
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Gain/loss on change in FV of Derivatives
|
|
|
(135,821
|
)
|
|
|
-2.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Valuation allowance against net deferred tax assets
|
|
|
(720,749
|
)
|
|
|
-14.5
|
%
|
|
|
433,677
|
|
|
|
-27.8
|
%
|
Effective rate
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded as of December 31, 2017 and 2016 a valuation allowances of $720,749 and $696,949, respectively, as it believes that it is more likely than not that the deferred tax assets will not be realized in future years. Management has based its assessment on the Company's lack of profitable operating history.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to reduce the deferred tax assets. The realization of these assets is dependent upon generation of future taxable income sufficient to offset the related deductions and NOL carryovers within the applicable carryover periods as previously discussed. Management is unsure of the Company's ability to generate sufficient taxable income to realize the deferred tax assets. As such, the Company has recorded a valuation allowance for the entire net deferred tax asset.
The effective rate used for estimation of deferred taxes was 21% for the years ended December 31, 2017 and 2016.
The tax years that remain subject to taxing authorities' examination at December 31, 2017 are 2015 through 2017. The Company's policy is to classify penalties and interest associated with uncertain tax positions, if required, as a component of its income tax provisions.
The Company annually conducts an analysis of its tax positions and has concluded that it has no uncertain tax positions as of December 31, 2017 and 2016.
The Company has net operating loss carry-forwards of approximately $2,500,000 as of December 31, 2017. Such amounts are subject to IRS code section 382 limitations and expire in 2031. The 2015 to 2017 tax years are still subject to audit. As a limited liability company, through June 30, 2015, in the event of an examination of the Company's tax return for the periods prior to July 1, 2015, the tax liability of the members could be changed if an adjustment in the Company's income (loss) is ultimately sustained by the taxing authorities.
Note 12 – Commitments and Contingencies
From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company's financial position. The Company maintains a head office at 23101 Lake Center Drive, Suite 100, Lake Forest, CA 92630. This property is leased until March 31, 2017 at $ 2,636 per month. . Effective February 21, 2018, the lease was extended to March 31, 2019. The basic rent is abated for April 2018 with rent of $3,494.25 from May 1, 2018 to March 31, 2019.
Note 13 - Subsequent Events
On January 17, 2018, the Company entered into an agreement with the holder to amend terms of the 8% Promissory Note (see Note 7). The due date of the Promissory Note was amended to February 6, 2018 from the original due date of January 6, 2018, In exchange for the amendment the Company shall deliver 300,000 shares of common stock ("Extension Shares").
On January 17, 2018, the holder of the Convertible Note Payable (see Note 7) converted $31,875 of the Convertible Note Payable into equity. The conversion price was $0.06375 per share for a total of 500,000 common shares.
On January 31, 2018, the Company entered into an agreement with the holder to amend terms of the 8% Promissory Note (see Note 7). The due date of the Promissory Note was amended to March 6, 2018 from the original due date of January 6, 2018, In exchange for the amendment the holder shall convert $50,000 of the outstanding balance of the note. If, on the date that is the six-month anniversary of the date of the date of this amendment ("True-Up Date"), the volume weighted average price of the common stock on the day immediately preceding the True-Up Date as reported on the Company's Principal Market is less than the closing price of the common stock on the date of this amendment, the Company shall, within three trading days of the Buyer's provision of written notice, issue and deliver an additional number of duly and validly issued, fully paid and non-assessable shares of common stock equal to the quotient of $25,000 divided by the subsequent share price multiplied by 1.5, less the extension shares.
PURA NATURALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
On January 31, 2018, the holder of the Convertible Note Payable (see Note 7) converted $31,875 of the Convertible Note Payable into equity. The conversion price was $0.06375 per share for a total of 500,000 common shares.
On January 31, 2018, the holder of the 8% Promissory Note converted $50,000 of the Promissory Note into equity. The conversion price was $0.036 per share for a total of 1,388,889 common shares.
On February 8, 2018, 85,000 common shares were issued to the holder of the 8% Promissory Note (see Note 7). These shares were issued as "inducement shares" in connection with the 8% Promissory Note.
On February 8, 2018, the Company issued a 12% Convertible Promissory Note, in the principal amount of $103,000 to Geneva Roth Remark Holdings, Inc. The Note is due November 20, 2019. The Holder shall have the right from time to time, and at any time during the period beginning on the date which is 180 days following the date of the note and ending on the later of: (i) the maturity date and (ii) the date of payment of the default amount, each in respect of the remaining outstanding principal amount of this Note to convert all or any amount of the outstanding and unpaid principal amount of the Note into fully paid and non-assessable shares of common stock. The conversion price is 58% of the average of the lowest two trading prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date.
On March 5, 2018, the Company issued an 8% Convertible Redeemable Note, in the principal amount of $126,000 to ONE44 Capital LLC. The Note is due March 6, 2019. The Holder is entitled, at its option, at any time, to convert all or any amount of the principal face amount of this Note then outstanding into shares of Common Stock. The conversion price is 60% of the lowest trading prices for the common stock during the 20 trading day period ending on the latest complete trading day prior to the conversion date.
On March 5, 2018, the Company issued a 12% Convertible Promissory Note, in the principal amount of $103,000 to Geneva Roth Remark Holdings, Inc. The Note is due December 15, 2019. The Holder shall have the right from time to time, and at any time during the period beginning on the date which is 180 days following the date of the note and ending on the later of: (i) the maturity date and (ii) the date of payment of the default amount, each in respect of the remaining outstanding principal amount of this Note to convert all or any amount of the outstanding and unpaid principal amount of the Note into fully paid and non-assessable shares of common stock. The conversion price is 61% of the average of the lowest two trading prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date.
On March 12, 2018, the holder of the 8% Promissory Note (see Note 7) converted $50,000 of the Convertible Note Payable into equity. The conversion price was $0.035 per share for a total of 1,428,571 common shares.
On March 15, 2017, Daniel Kryger, a member of the Board of Directors entered into an employment agreement with the Company. Mr. Kryger's role is the Vice President of Business Development. The salary is $3,000 per month. In addition, upon execution of the employment agreement, Mr Kryger will receive 60,000 shares of the Company's Common Stock. 30,000 shares will vest immediate and 5,000 per month will vest monthly thereafter. In addition, Mr. Kryger will be eligible to receive 30,000 shares of the Company's common stock and 50,000 options to purchase the Company's common stock at par value through the Company's qualified employee stock incentive plan, which may be awarded as a bonus for milestones that the Company may establish from time to time.
On March 16, 2018, the holder of the Convertible Note Payable (see Note 7) converted $20,325 of the Convertible Note Payable into equity. The conversion price was $0.04065 per share for a total of 500,000 common shares.