This discussion summarizes the significant factors affecting the operating
results, financial condition, liquidity and cash flows of the Company for the
fiscal years ended December 31, 2019 and 2018. The discussion and analysis that
follows should be read together with the section entitled "Forward Looking
Statements" and our consolidated financial statements and the notes to the
consolidated financial statements included elsewhere in this annual report on
Form 10-K.
Except for historical information, the matters discussed in this section are
forward-looking statements that involve risks and uncertainties and are based
upon judgments concerning various factors that are beyond the Company's control.
Consequently, and because forward-looking statements are inherently subject to
risks and uncertainties, the actual results and outcomes may differ materially
from the results and outcomes discussed in the forward-looking statements. You
are urged to carefully review and consider the various disclosures made by us in
this report.
10
Company Overview
We market and sell consumer products containing full spectrum phytocannabinoid
rich hemp oil with naturally occurring CBD under our Vitalibis® brand in a range
of market sectors including wellness, and personal care. We currently distribute
3 Vitalibis® branded products and we expect to continue to add new products to
our Vitalibis® portfolio to enhance our line of full spectrum phytocannabinoid
rich hemp products with naturally occurring cannabidiol (CBD) and hemp-related
consumer products. We also expect to develop and launch new brands under the
Vitalibis® product development umbrella to more effectively market and sell
certain products. We also sell water soluble full spectrum phytocannabinoid rich
hemp powder with naturally occurring cannabidiol (CBD) acquired through our
supply relationships in the United States to various customers that produce
products for resale into the market. We also began offering non-exclusive leases
of our proprietary Vitalibis® technology back-end, which is being offered as a
Software as a Service (SaaS) platform.
We seek to take advantage of an emerging worldwide trend to re-energize the
production of industrial hemp and to foster its many uses for consumers.
Historically cultivated for industrial and practical purposes, hemp is used
today for textiles, paper, auto parts, biofuel, cosmetics, animal feed,
nutritional supplements, and much more. The market for hemp-derived products is
expected to increase substantially over the next five years, and we believe
Vitalibis® is well positioned to have a demonstrable impact on the rapidly
emerging hemp industry.
Hemp-derived CBD is one of at least 80 cannabinoids found in hemp and is
non-psychoactive. Our U.S. based supplier oversees our raw material supply chain
and raw material processing. Our internal team manages product development and
manufacturing, and sales and marketing. We will continue to scale-up our
processing capability to accommodate new products in our pipeline.
We expect to realize revenue to fund our working capital needs through the sale
of finished products and raw materials to third parties. However, in order to
fund our product development efforts, we will need to raise additional capital
either through the issuance of equity and/or the issuance of debt. In the event
we are unable to raise sufficient additional capital to fund our product
development efforts, we may need to curtail or delay such activity.
On January 10, 2019, the Company entered into a convertible promissory note,
with a principal amount of $126,000. The Company received net cash proceeds of
$102,000 after an original issue discount of $21,000 and fees of $3,000. The
convertible note bears interest at 8% and matures on January 10, 2020, with
interest accruing at a rate of 22% if the Company is in default. Beginning six
months after the issuance of the note, the holder may convert the note at any
time through the maturity date into shares of common stock, to the extent and
provided that no holder of these notes was or will be permitted to convert such
notes to the extent that the holder or any of its affiliates would beneficially
own in excess of 4.99% of the Company's common stock after such conversion. The
conversion price is determined based on 85% of the lowest trading price during
the 15 trading days prior to the conversion date. In July 2019, this note was
paid off in full.
On February 7, 2019, the Company entered into a convertible promissory note,
with a principal amount of $83,000. The Company received net cash proceeds of
$80,000 after payment fees of $3,000. The convertible note bears interest at 10%
and matures on February 7, 2020, with interest accruing at a rate of 22% if the
Company is in default. Beginning six months after the issuance of the note, the
holder may convert the note at any time through the maturity date into shares of
common stock, to the extent and provided that no holder of these notes was or
will be permitted to convert such notes to the extent that the holder or any of
its affiliates would beneficially own in excess of 4.99% of the Company's common
stock after such conversion. The conversion price is determined based on 65% of
the lowest trading price during the 15 trading days prior to the conversion
date. In August 2019, this note was paid off in full.
On March 29, 2019, the Company entered into an unsecured convertible promissory
note which allowed for up to $750,000 of principal, with a total original issue
discount of up to $150,000, with a principal amount of $250,000. In April 2019,
the Company received net cash proceeds of $200,000 after an original issue
discount of $50,000. In July 2019, the Company received additional proceeds of
$200,000 after an original issue discount of $50,000, and received an additional
$200,000 of net proceeds after $50,000 original issue discount in August 2019.
The convertible note bears interest at 8% and all principal amounts matured on
September 30, 2019, with interest accruing at a rate of 22% if the Company is in
default. As of December 31, 2019 and the date of this filing, the Company has
not been provided with a notice of default as required of the lender. Beginning
at the issuance of the note, the holder may convert the note at any time through
the maturity date into shares of common stock, to the extent and provided that
no holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. The conversion
price is the lesser of $2 or 70% of the lowest trading price during the 30
trading days prior to the conversion date. On April 3, 2019, the Company issued
35,000 shares to this lender. During the year ended December 31, 2019, the
lender converted $50,000 of principal into a total of 714,296 shares of common
stock. Subsequent to December 31, 2019, the lender converted $40,000 of
principal into 322,581 shares of common stock.
11
On May 22, 2019, the Company entered into a convertible promissory note, with a
principal amount of $78,000. The Company received net cash proceeds of $75,000
after payment fees of $3,000. The convertible note bears interest at 10% and
matures on May 22, 2020, with interest accruing at a rate of 22% if the Company
is in default. Beginning six months after the issuance of the note, the holder
may convert the note at any time through the maturity date into shares of common
stock, to the extent and provided that no holder of these notes was or will be
permitted to convert such notes to the extent that the holder or any of its
affiliates would beneficially own in excess of 4.99% of the Company's common
stock after such conversion. The conversion price is determined based on 65% of
the lowest trading price during the 15 trading days prior to the conversion
date. In November 2019, this note and accrued interest was repaid in full.
On September 6, 2019, the Company entered into a convertible promissory note,
with a principal amount of $153,000. The Company received net cash proceeds of
$150,000 after payment fees of $3,000. The convertible note bears interest at
10% and matures on September 6, 2021, with interest accruing at a rate of 22% if
the Company is in default. Beginning six months after the issuance of the note,
the holder may convert the note at any time through the maturity date into
shares of common stock, to the extent and provided that no holder of these notes
was or will be permitted to convert such notes to the extent that the holder or
any of its affiliates would beneficially own in excess of 4.99% of the Company's
common stock after such conversion. The conversion price is determined based on
65% of the lowest trading price during the 15 trading days prior to the
conversion date.
On November 25, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $78,000. The Company received net
cash proceeds of $75,000 after payment of fees of $3,000. The convertible note
bears interest at 10% and matures on November 25, 2021, with interest accruing
at a rate of 22% if the Company is in default. Beginning six months after the
issuance of the note, the holder may convert the note at any time through the
maturity date into shares of common stock, to the extent and provided that no
holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. The conversion
price is determined based on 65% of the lowest trading price during the 15
trading days prior to the conversion date.
On November 25, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $150,000. The Company received net
cash proceeds of $131,000 after an original issue discount of $15,000 and fees
of $4,000. The convertible note bears interest at 5% and matures on November 25,
2020, with interest accruing at a rate of 22% if the Company is in default. The
note is convertible upon issuance through the maturity date into shares of
common stock at a fixed price of $1.00 per share to the extent and provided that
no holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. Beginning six
months after the issuance of the note, the holder may convert the note at any
time, at a price based on the lower of the fixed price of $1.00 per share or 75%
of the lowest trading price during the 15 trading days prior to the conversion
date.
On December 10, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $110,000. The Company received net
cash proceeds of $97,000 after an original issue discount of $10,000 and fees of
$3,000. The lender also received 35,000 shares of common stock as a deferred
finance cost. The convertible note bears interest at 10% and matures on December
10, 2020, with interest accruing at a rate of 24% if the Company is in default.
Beginning six months after the issuance of the note, the holder may convert the
note at any time through the maturity date into shares of common stock, to the
extent and provided that no holder of these notes was or will be permitted to
convert such notes to the extent that the holder or any of its affiliates would
beneficially own in excess of 4.99% of the Company's common stock after such
conversion. The conversion price is determined based on the lessor of 1) $0.24,
or 2) the lesser of 62% of the lowest trade price or the closing bid price
during the 20 trading days prior to the conversion date.
12
Results of Operations
For the years ended December 31, 2019 and 2018
Revenue and Gross Profit
During the year ended December 31, 2019, the Company generated $303,197 in
revenue and $140,692 in gross profit. For the year ended December 31, 2018, the
Company began selling its products midway through the year and generated $51,331
in revenue and $28,330 in gross profit. The significant increase in revenue is
primarily due to a significant sale during the first quarter of 2019 and
increased operational activity during the current year driven by new product
offerings and increased marketing efforts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the period ending December 31,
2019, were $5,798,272 compared to $2,095,787, for the year ending December 31,
2018. The increase was primarily due to increased stock-based compensation as
the Company entered into new agreements with consultants, contractors and
advisory board members, the compensation cost related to the issuance of Series
A Preferred shares to our two officers, increased officer compensation from the
new management beginning in the middle of 2018, increased contractor expense,
increased marketing and investor relations expense, and increased general costs
associated with the higher level of operations in the current period.
Professional fees
Professional fees for the period ending December 31, 2019, were $225,827
compared to $160,463 for the year ending December 31, 2018. The increase of
$65,364 was due to increased legal, accounting and audit fees associated with
the increased operations of the Company, including the filing of the Company's
S-1 registration statement in the current year.
Liquidity and Capital Resources
The following is a summary of the Company's cash flows provided by (used in)
operating, investing, and financing activities for the year ended December 31,
2019 and for the year ending December 31, 2018:
Year ended Year ended
December 31, December 31,
2019 2018
Operating Activities (1,088,405 ) (543,204 )
Investing Activities - (176,177 )
Financing Activities 982,041 891,360
Net Effect on Cash (106,364 ) 171,979
Operating Activities
The cash used in operating activities of $1,088,405 for the year ended December
31, 2019 was primarily due to increased selling, general and administrative
costs as the Company increased its operations during the year.
Investing Activities
The Company had no cash flows from investing activities during the year ended
December 31, 2019. The cash used in investing activities of $176,177 during the
year ended December 31, 2018 was due to costs incurred to build our website.
Financing Activities
The cash provided by financing activities of $982,041 during the year ended
December 31, 2019 was primarily from proceeds from issuances of convertible debt
of $1,332,000, partially offset by repayments on the convertible notes of
$287,000, payment of deferred financing costs of $22,000 and repayments on
unsecured notes payable of $40,959. The cash provided by financing activities of
$891,360 during the year ended December 31, 2018 was primarily from sales of
common stock for cash of $912,400, partially offset by repayments of unsecured
notes payable of $21,240.
13
We are a public company and as such we have incurred and will continue to incur
significant expenses for legal, accounting and related services. As a public
entity, subject to the reporting requirements of the Exchange Act of 1934, we
incur ongoing expenses associated with professional fees for accounting, legal
and a host of other expenses including annual reports and proxy statements, if
required. We estimate that these costs will increase over the next few years and
may be significantly higher if our business volume and transactional activity
increases but should be lower for this year in 2017 because our overall business
volume (and financial transactions) will be lower, and we will not yet be
subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
until we exceed $75 million in market capitalization (if ever). These
obligations will certainly reduce our ability and resources to expand our
business plan and activities. We hope to be able to use our status as a public
company to increase our ability to use noncash means of settling outstanding
obligations (i.e. issuance of restricted shares of our common stock) and
compensate independent contractors who provide professional services to us,
although there can be no assurances that we will be successful in any of these
efforts. We will also reduce compensation levels paid to management (if we
attract or retain outside personnel to perform this function) if there is
insufficient cash generated from operations to satisfy these costs.
We hope to be able to use our status as a public company to enable us to use
non-cash means of settling obligations and compensate persons and/or firms
providing services to us, although there can be no assurances that we will be
successful in any of those efforts. However, these actions, if successful, will
result in dilution of the ownership interests of existing shareholders, may
further dilute common stock book value, and that dilution may be material. Such
issuances may also serve to enhance existing management's ability to maintain
control of the Company because the shares may be issued to parties or entities
committed to supporting existing management. The Company may offer shares of its
common stock to settle a portion of the professional fees incurred in connection
with its registration statement. No negotiations have taken place with any
professional and no assurances can be made as to the likelihood that any
professional will accept shares in settlement of obligations due to them.
As of December 31, 2019, total liabilities increased to $1,710,195 from $180,389
as of December 31, 2018, mainly due to the convertible debt issued by the
Company during the current period and the related derivative liability
recognized during the current period.
Critical Accounting Policies
The preparation of these financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. On an ongoing basis management
evaluates its critical accounting policies and estimates.
A "critical accounting policy" is one which is both important to the
understanding of the financial condition and results of operations of the
Company and requires management's most difficult, subjective, or complex
judgments, and often requires management to make estimates about the effect of
matters that are inherently uncertain. Management believes the following
accounting policies fit this definition:
Revenue Recognition - The Company recognizes revenue in accordance with ASC
Topic 606, Revenue From Contracts With Customers, which was adopted on January
1, 2018 using the modified retrospective method, with no impact to the Company's
comparative financial statements. Revenues are recognized when control of the
promised goods or services is transferred to the customer in an amount that
reflects the consideration the Company expects to be entitled to in exchange for
transferring those goods or services. Revenue is recognized based on the
following five step model:
•- Identification of the contract with a customer
• Identification of the performance obligations in the contract
• Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the
contract
• Recognition of revenue when, or as, the Company satisfies a performance
obligation
14
Product sales are recognized all of the following criteria are satisfied: (i) a
contract with an end user exists which has commercial substance; (ii) it is
probable the Company will collect the amount charged to the end user; and (iii)
the Company has completed its performance obligation whereby the end user has
obtained control of the product. A contract with commercial substance exists
once the Company receives and accepts a purchase order or once it enters into a
contract with an end user. If collectibility is not probable, the sale is
deferred and not recognized until collection is probable or payment is received.
Control of products typically transfers when title and risk of ownership of the
product has transferred to the customer. Payment is received before shipment of
the product. Net revenues comprise gross revenues less customer discounts and
allowances, actual and expected returns. Shipping charges billed to customers
are included in net sales. Various taxes on the sale of products and enrollment
packages to customers are collected by the Company as an agent and remitted to
the respective taxing authority. These taxes are presented on a net basis and
recorded as a liability until remitted to the respective taxing authority. The
Company allows for customers to return unopened products within 45 days. During
the year ended December 31, 2019, there were a trivial amount of refunds
processed for returned product.
Inventory - Inventory is manufactured at third party facilities. Inventories are
stated at the lower of cost or net realizable value, using the first-in,
first-out method. The Company reviews its inventory for obsolescence and any
inventory identified as obsolete is reserved or written off. The Company's
determination of obsolescence is based on assumptions about the demand for its
products, product expiration dates, estimated future sales, and management's
future plans.
Website Development Cost - The Company capitalizes certain development costs
associated with internal use software incurred during the application
development stage. The Company expenses costs associated with preliminary
project phase activities, training, maintenance and any post-implementation
period costs as incurred. Capitalization of qualifying application development
cost begins when management authorized and commits to funding the project and it
is probable that the project will be completed for the function intended.
Capitalized internal use software costs are normally amortized over estimated
useful lives ranging from 2 to 5 years once the related project has been
completed and deployed for customer use. At time the software is considered to
have be an indefinite lived asset in which case it is evaluated for impairment
at least annually. These costs are related to the development of our website and
customer portal. The Company amortizes capitalized costs over an estimated
useful life of three years.
Stock-Based Compensation - The Company measures the total amount of employee
stock-based compensation expense for a grant based on the grant date fair value
of each award and recognizes the stock-based compensation expense on a
straight-line basis over the requisite service period for each separately
vesting tranche of an award. Stock-based compensation is based on unvested
outstanding awards. The Company has elected to recognize forfeitures when
realized.
Recently Issued Accounting Pronouncements
Refer to the notes to the financial statements for a complete description of
recent accounting standards which we have not yet been required to implement and
may be applicable to our operation, as well as those significant accounting
standards that have been adopted during the current year.
Going Concern
Our auditor has issued a "going concern" qualification as part of their opinion
for the fiscal years ended December 31, 2019 and 2018.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources and would be considered
material to investors.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
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VITALIBIS, INC. 
