Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Note
1 - Organization and Operations
Gratitude
Health, Inc. (the “Company”) was incorporated in the State of Nevada on December 17, 2009. Effective March 23, 2018,
the Company changed its legal name to Gratitude Health, Inc. from Vapir Enterprises Inc. On March 26, 2018, the Company merged
with Gratitude Health Inc., a private company incorporated in Florida on September 14, 2017 (“Gratitude Subsidiary”),
in a transaction treated as a reverse acquisition and recapitalization effected by a share exchange. The Company’s former
business was focused on inventing, developing and producing aromatherapy devices and vaporizers before such merger. As a result
of such merger, the Company became engaged in manufacturing, selling and marketing functional RTD (Ready to Drink) beverages sold
under the Company’s trademark.
On
March 26, 2018 (the “Closing Date”), Gratitude Subsidiary, entered into a Share Exchange Agreement (the “Exchange
Agreement”) with the Company, Hamid Emarlou, the principal shareholder of the Company (“Acquiror Principal Shareholder”),
and all of the principal shareholders of Gratitude Subsidiary. Upon closing of the transactions contemplated under the Exchange
Agreement (the “Transactions”), Gratitude Subsidiary became a wholly-owned subsidiary of the Company.
On
March 26, 2018, the Company closed the Transactions with Gratitude Subsidiary. The Transactions constituted a change in control
and the majority of the Board of Directors changed with the consummation of the Transactions. The Company issued to the stockholders
of Gratitude Subsidiary shares of preferred stock which represented approximately 86% of the combined company on a fully converted
basis after the closing of the Exchange Agreement and the Spin off Agreement as described below.
On
the Closing Date, Acquiror Principal Shareholder entered into a Spin Off Agreement with the Company for the sale of the existing
wholly-owned subsidiary of the Company, Vapir, Inc., in exchange for Acquiror Principal Shareholder’s 36,309,768 shares
of the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Spin Off Agreement closed
on April 14, 2018. The Company recognized the disposition of the Vapir business on the date such merger.
On
April 7, 2020, the Board of Directors of the Company approved the increase of authorized shares of Common Stock to 1,000,000,000
from 600,000,000 (see Note 6 and Note 9).
On
April 20, 2020, the Company, Fresh Market Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company
(“Merger Sub”), and Home Bistro, Inc., a privately-held Delaware corporation engaged in the food preparation and home-delivery
business (“Home Bistro”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant
to which, among other things, Merger Sub agreed to merge with and into Home Bistro, with Home Bistro becoming a wholly-owned subsidiary
of the Company and the surviving corporation in the merger (the “Merger”). Pursuant to the terms of the Merger Agreement,
Home Bistro filed a Certificate of Merger with the Nevada Secretary of State on April 20, 2020 (see Note 9).
On
April 20, 2020, pursuant to the terms of the Merger Agreement, Roy G. Warren, Jr., Mike Edwards and Bruce Zanca resigned as directors
of the Company and Roy G. Warren, Jr. resigned as Chief Operating Officer of the Company. The resignations were not the result
of any disagreement related to the Company’s operations, policies or practices. Furthermore, on April 20, 2020, Mr. Zalmi
Duchman, the Chief Executive Officer of Home Bistro, Michael Finkelstein and Michael Novielli were appointed as directors of the
Company. In addition, Mr. Duchman was appointed Chief Executive Officer (see Note 9). As a result of the acquisition of Home Bistro,
the Company now also provides high quality, direct-to-consumer, ready-made meals at www.homebistro.com, and restaurant quality
meats and seafood through its Colorado Prime brand. Home Bistro is uniquely positioned to take advantage of the developing market
opportunity generated by consumers’ growing demand for prepared meals ordered online and delivered to their homes.
Note
2 - Significant and Critical Accounting Policies and Practices
Basis
of Presentation
The
accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange
Commission (the “SEC”) for interim financial information, which present the consolidated financial statements of the
Company and its wholly-owned subsidiary as of March 31, 2020. All intercompany transactions and balances have been eliminated.
Accordingly, the interim audited condensed consolidated financial statements do not include all the information and notes necessary
for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the audited
financial statements of the Company for the year ended December 31, 2019 and included in the Annual Report on Form 10-K filed
with the SEC on May 14, 2020. It is management’s opinion that all material adjustments (consisting of normal
recurring adjustments) have been made, which are necessary for a fair financial statement presentation. Significant intercompany
accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative
of the results to be expected for the year ending December 31, 2020.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
These
interim unaudited condensed consolidated financial statements for the period ending March 31, 2020 consist of the interim unaudited
consolidated balance sheets of the Company as of March 31, 2020 and December 31, 2019 and the related interim unaudited condensed
consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for the three month periods
ended March 31, 2020 and 2019, and the related notes, and accordingly do not reflect the acquisition of the Company’s new
wholly-owned subsidiary, Home Bistro, which was consummated on April 20, 2020, as more fully disclosed in Note 9.
Use
of Estimates and Assumptions and Critical Accounting Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet, and revenues and expenses for the period then ended. Actual results may differ significantly from
those estimates. Significant estimates made by management include, but are not limited to valuation of deferred tax assets and
valuation of debt discounts.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact
on the Company’s previously reported financial position or results of operations.
Cash
and cash equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less,
when purchased, to be cash equivalents. The Company held no cash equivalents as of March 31, 2020 and December 31, 2019. The
Company maintains cash balances at one financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000. As of March 31, 2020 and December 31, 2019, the Company has not reached bank balances exceeding the FDIC insurance
limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the
rating of the financial institution in which it holds deposits.
Fair
value of financial instruments
The
estimated fair value of certain financial instruments, including cash, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued expenses and accrued salaries and related payroll liabilities are carried at historical cost
basis, which approximates their fair values because of the short-term nature of these instruments.
Revenue
Recognition
The
Company recognizes revenue by applying the following steps:
Step
1: Identify the contract(s) with a customer.
Step
2: Identify the performance obligations in the contract.
Step
3: Determine the transaction price.
Step
4: Allocate the transaction price to the performance obligations in the contract.
Step
5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The
Company’s performance obligations are satisfied at the point in time when products are shipped or delivered to the customer,
which is when the customer has title and the significant risks and rewards of ownership. Therefore, the Company’s contracts
have a single performance obligation (shipment or delivery of product). The Company primarily receives fixed consideration
for sales of product.
Cost
of Sales
The
primary components of cost of sales include the cost of the product, production costs, warehouse storage costs and shipping fees.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Research
and development
Research
and development costs incurred in the development of the Company’s products are expensed as incurred. During the three months
ended March 31, 2020 and 2019, research and development costs were $39,945 and $0, respectively.
Shipping
and Handling Costs
The
Company accounts for shipping and handling fees in accordance with ASC 606. While amounts charged to customers for shipping products
are included in revenues, the related costs of shipping products to customers are classified in general and administrative expenses
as incurred. Shipping costs included in general and administrative expense were $0 and $1,006 for the three months ended March
31, 2020 and 2019, respectively.
Advertising
Costs
The
Company applies ASC 720 “Other Expenses” to account for advertising related costs. Pursuant to ASC 720-35-25-1, the
Company expenses the advertising costs when the first time the advertising takes place. Advertising costs were $12,453 and $11,887
for the three months ended March 31, 2020 and 2019, respectively, and are included in general and administrative expenses.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation —
Stock Compensation” (“ASC 718”), which requires recognition in the consolidated financial statements of the
cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period
the employee, director or non-employee is required to perform the services in exchange for the award (presumptively, the vesting
period). ASC 718 also requires measurement of the cost of employee, director, and non-employee services received in exchange for
an award based on the grant-date fair value of the award.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The
updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the
updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue
guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before
the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain
leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.
For contracts entered into on or after the effective date, at the inception of a contract the Company assess whether the contract
is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset,
(2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and
(3) whether we have the right to direct the use of the asset. We allocate the consideration in the contract to each lease component
based on its relative stand-alone price to determine the lease payments. Leases entered into prior to January 1, 2019, are accounted
for under ASC 840 and were not reassessed. We have elected not to recognize right-of-use assets and lease liabilities for short-term
leases that have a term of 12 months or less.
Operating
lease ROU assets represent the right to use the leased asset for the lease term and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not
provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date
in determining the present value of future payments. Operating lease expense is recognized on a straight-line basis over the lease
term and is included in general and administrative expenses in the consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” (“ASC
740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The
asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided
to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will
not be realized.
The
Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed,
there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained.
In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset
or aggregated with other positions.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Tax
positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated
with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax
benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination. The Company believes its tax positions are all more likely than not to be upheld upon examination.
As such, the Company has not recorded a liability for uncertain tax benefits.
The
Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine
whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides
that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally
extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even
if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and
the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination
by the IRS and state taxing authorities, generally for three years after they are filed.
Basic
and diluted net loss per share
Basic
net loss per share is computed by dividing the net loss by the weighted average number of common shares during the period. Diluted
net loss per share is computed using the weighted average number of common shares and potentially dilutive securities outstanding
during the period.
The
potentially dilutive common stock equivalents for the three months ended March 31, 2020 and 2019 were excluded from the dilutive
loss per share calculation as they would be antidilutive due to the net loss. The following were the computation of diluted shares
outstanding and in periods where the Company has a net loss, all dilutive securities are excluded.
|
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,940,000
|
|
|
|
1,940,000
|
|
|
Convertible notes payable
|
|
|
28,187,500
|
|
|
|
-
|
|
|
Convertible Preferred Stock
|
|
|
267,250,000
|
|
|
|
111,000,000
|
|
|
Total
|
|
|
297,377,500
|
|
|
|
112,940,000
|
|
Recent
accounting pronouncements
Accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that
are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Note
3 - Going Concern
The
Company’s interim unaudited condensed consolidated financial statements have been prepared assuming that it will continue
as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the
normal course of business. As reflected in the interim unaudited condensed consolidated financial statements, the Company has
an accumulated deficit of approximately $3,909,133 at March 31, 2020, and incurred a net loss of approximately $305,628 and used
cash in operating activities of approximately $208,093 for the three months ended March 31, 2020. These circumstances raise substantial
doubt about the Company’s ability to continue as a going concern for a period of 12 months from the date of this report.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to implement its business
plan, raise capital, and generate sufficient revenues. Currently, management is seeking capital to implement its business plan
and generate sufficient revenues. There is no guarantee that the Company will be able to raise sufficient capital or generate
a level of revenues to sustain its operations. The interim unaudited condensed consolidated financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Note
4 - Operating Lease Right-of-Use Assets and Operating Lease Liabilities
Operating
lease right-of-use assets and liabilities are recognized at the present value of the future lease payments at the lease commencement
date. The interest rate used to determine the present value is our incremental borrowing rate, estimated to be 10%, as the interest
rate implicit in most of our leases is not readily determinable. Operating lease expense is recognized on a straight-line basis
over the lease term. During the three months ended March 31, 2020 and 2019, the Company recorded $6,166 and $5,907, respectively,
as operating lease expense which is included in general and administrative expenses on the statements of operations.
In
April 2018, the Company entered into a lease agreement for its corporate facility in Palm Beach Gardens, Florida. The lease is
for a period of 36 months commencing in July 2018 and expiring in July 2021. Pursuant to the lease agreement, the lease requires
the Company to pay a monthly base rent of $2,154 plus a pro rata share of operating expenses beginning July 2018 and subject to
annual increases beginning the 2nd and 3rd lease year. In addition to the monthly base rent, the Company is charged separately
for common area maintenance which is considered a non-lease component. These non-lease component payments are expensed as incurred
and are not included in operating lease assets or liabilities.
In
March 2019, the Company entered into an equipment lease agreement for a copier on March 27, 2019 expiring March 27, 2022 and requiring
monthly payments of $145 with an option to purchase the equipment at fair market value at the end of the lease term.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter is not
applicable to the Company. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12
month or less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities
of $63,566.
Right-of-use
assets are summarized below:
|
|
|
March 31,
2020
|
|
|
|
|
(Unaudited)
|
|
|
Office lease (remaining lease term of 15 months)
|
|
$
|
59,069
|
|
|
Equipment lease (remaining lease term of 24 months)
|
|
|
4,497
|
|
|
Subtotal
|
|
|
63,566
|
|
|
Less accumulated amortization
|
|
|
(29,033
|
)
|
|
Right-of-use assets, net
|
|
$
|
34,533
|
|
Operating
Lease liabilities are summarized below:
|
|
|
March 31,
2020
|
|
|
|
|
(Unaudited)
|
|
|
Office lease
|
|
$
|
59,069
|
|
|
Equipment lease
|
|
|
4,497
|
|
|
Reduction of lease liability
|
|
|
(29,033
|
)
|
|
Total lease liabilities
|
|
|
34,533
|
|
|
Less: current portion
|
|
|
(26,257
|
)
|
|
Long term portion of lease liability
|
|
$
|
8,276
|
|
Minimum
lease payments under non-cancelable operating lease at March 31, 2020 are as follows:
|
Nine months ended December 31, 2020
|
|
$
|
21,672
|
|
|
Year ended December 31, 2021
|
|
|
15,450
|
|
|
Year ended December 31, 2022
|
|
|
435
|
|
|
Total
|
|
$
|
37,557
|
|
|
Less: Present value discount
|
|
|
(3,024
|
)
|
|
Lease liability
|
|
$
|
34,533
|
|
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Note
5 - Convertible Notes Payable
Convertible
notes payable consisted of the following:
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
1,127,500
|
|
|
$
|
1,045,000
|
|
|
Unamortized debt discount
|
|
|
(10,305
|
)
|
|
|
(64,352
|
)
|
|
Total convertible notes payable
|
|
$
|
1,117,195
|
|
|
$
|
980,648
|
|
On
February 13, 2019, the Company issued an unsecured promissory note for principal borrowings of $50,000. The 10% promissory note
and all accrued interest were due on February 22, 2019. Any amount of principal or interest on this promissory note which was
not paid when due would bear interest at the rate of 20% per annum from the due date. In March 2019, this note was repaid in full
using proceeds from the issuance of a convertible note as discussed below.
On
March 7, 2019 and on May 14, 2019, the Company closed a financing transaction by entering into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with an accredited investor for purchase of a promissory note (together with
other notes issued under the Securities Purchase Agreement, the “Notes”). The Company raised an aggregate principal
amount of $550,000 and gross cash proceeds of $500,000. The offering represented $1.10 of note principal for each $1.00 of proceeds
purchased, with rolling closings in minimum amounts of $25,000. The March 7, 2019 and May 14, 2019 promissory notes were convertible
into Common Stock at an initial conversion price of $0.05 and $0.04, respectively, which were subject to price protection, whereby
upon any issuance of securities of the Company at a price below the effective conversion price of the Notes would be adjusted
to the new lower issuance price (“Down Round Feature”). In accordance with ASU 2017-11 “Earnings Per Share (Topic
260)”, Down Round Features are accounted for in the period when triggered. No such triggering events occurred during the
three-month periods ended March 31, 2020 and 2019. The Notes had a term of one year from the date of issuance. The Company received
gross proceeds of $500,000 of which $50,000 was used to pay the promissory note issued in February 2019. See below regarding the
trigger of the Down Round Feature when the conversion price on the convertible note dated March 7, 2019 was reduced from $0.05
to $0.04. As of March 31, 2020, the Notes had an aggregate outstanding principal balance of $550,000.
On
August 12, 2019, the Company entered into an First Allonge Agreement with a lender whereby the principal amount of a convertible
note dated March 7, 2019 was increased by $137,500 (“First Allonge Principal”) with original issue discount of 10%,
receiving gross cash proceeds of $125,000. The maturity date with respect to the First Allonge Principal was March 7, 2020 and
all the terms of the note dated on March 7, 2019 remained as originally stated except the First Allonge Principal was convertible
into Common Stock at an initial conversion rate of $0.04, subject to price protection. The Company determined that there was no
beneficial conversion feature as the effective conversion price was greater than the fair value of Common Stock shares on date
of issuance.
On
October 11, 2019, the Company entered into a Second Allonge Agreement with a lender whereby the principal amount of a convertible
note dated March 7, 2019 was increased by another $110,000 (“Second Allonge Principal”) with original issue discount
of 10%, receiving gross cash proceeds of $100,000. The maturity date with respect to the Second Allonge Principal was March 7,
2020 and all the terms of the note dated on March 7, 2019 remained as originally stated. The Company determined that there was
no beneficial conversion feature as the effective conversion price was greater than the fair value of convertible instrument related
to the Second Allonge Principal.
On
November 19, 2019, the Company entered into a Third Allonge Agreement with a lender whereby the principal amount of a convertible
note dated March 7, 2019 was increased by another $247,500 (“Third Allonge Principal”) with original issue discount
of 10%, receiving gross cash proceeds of $225,000. The maturity date with respect to the Third Allonge Principal was on March
7, 2020 and all the terms of the note dated on March 7, 2019 remained as originally stated. The Company determined that there
was no beneficial conversion feature as the effective conversion price was greater than the fair value of convertible instrument
related to the Third Allonge Principal.
On
January 30, 2020, the Company entered into a Fourth Allonge Agreement with a lender whereby the principal amount of a convertible
note dated March 7, 2019 was increased by another $82,500 (“Fourth Allonge Principal”) with original issue discount
of 10%, receiving gross cash proceeds of $75,000. The maturity date with respect to the Fourth Allonge Principal was March 7,
2020 and all the terms of the note dated on March 7, 2019 remained as originally stated. The Company determined that there was
no beneficial conversion feature as the effective conversion price was greater than the fair value of convertible instrument related
to the Fourth Allonge Principal.
As
of March 31, 2020, the note had an aggregate outstanding principal balance of $577,500 pursuant to the First, Second, Third and
Fourth Allonge Agreements as discussed above.
The
Company accounted for beneficial conversion features on the convertible notes payable based on the intrinsic value on date of
issuance. The debt discounts at issuance consisted of beneficial conversion features of $68,750, financing costs of $14,950, legal
fees of $2,500 and debt premium of $102,500.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
During
the three months ended March 31, 2020 and 2019, the Company recorded $61,547 and $3,039, respectively, as amortization of debt
discount which is included in interest expense on the interim unaudited condensed consolidated statements of operations. As of
March 31, 2020, the remaining unamortized debt discount was $10,305 which was being amortized over the term of the note, which
was to mature May 2020.
Convertible
notes in an aggregate principal amount of $852,500 with maturity date of March 7, 2020 were considered in default. On April 20,
2020, all convertible notes payable outstanding as of March 31, 2020 were exchanged for warrants to purchase up to 28,187,500
shares of common stock (see Note 9).
Note
6 - Stockholders’ Equity (Deficit)
Shares
Authorized
As
of March 31, 2020, the authorized capital of the Company consisted of 600,000,000 shares of common stock, par value $0.001 per
share and 20,000,000 shares of preferred stock, par value $0.001 per share.
On
April 7, 2020, the Board of Directors of the Company approved the increase of the authorized shares of the Common Stock to 1,000,000,000
from 600,000,000 (see Note 1 and Note 9).
Common
Stock
On
March 24, 2020, the Company sold 2,500,000 shares of Common Stock to an investor for gross proceeds of $25,000.
Preferred
Stock
On
March 19, 2018, the Company designated 520,000 shares of Series A Preferred Stock, par value $0.001 per share (the “Series
A Preferred Stock”). Each share of Series A Preferred Stock is convertible into shares of Common Stock with a stated value
of $10 per share of Series A Preferred Stock and the conversion price of $0.10 per share, subject to adjustment in the event of
stock split, stock dividends, and recapitalization or otherwise. The holders of the Series A Preferred Stock shall not possess
any voting rights. The Series A Preferred Stock does not contain any redemption provision. The Series A Preferred Stock are entitled
to receive in cash out of assets of the Company before any amounts shall be paid to the holders of any of shares of junior stock,
an amount equal to the stated value plus any accrued and unpaid dividends thereon and any other fees due and owing.
On
March 19, 2018, the Company designated 500,000 shares of Series B Preferred Stock, par value $0.001 per share (the “Series
B Preferred Stock”). Each share of Series B Preferred Stock is convertible into shares of Common Stock with a stated value
of $10 per share of Series B Preferred Stock and conversion price of $0.10 per share, subject to adjustment in the event of stock
split, stock dividends, and recapitalizations or otherwise, and was adjusted down to $0.04 on May 14, 2019 due to a trigger event
that occurred. The Series B Preferred Stock are entitled to receive in cash out of assets of the Company before any amounts shall
be paid to the holders of any of shares of junior stock, an amount equal to the Stated Value plus any accrued and unpaid dividends
thereon and any other fees due and owing. Holders of Series B Preferred Stock voting as a single class, in the aggregate, are
entitled to vote with all voting securities of the Company on all matters submitted to the holders of voting securities for vote
with the holders of the Series B Preferred Stock entitling the holder thereof to cast that number of votes equal to the number
of shares of Common Stock issued and outstanding eligible to vote, at the time of the respective vote plus the number of votes
which all other series, or classes of securities are entitled to cast together with the holders of Common Stock at the time of
the relevant vote plus one additional share of Common Stock. Solely with respect to matters of the Company’s capitalization
and similar matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders
of the outstanding shares of Series B Preferred Stock shall vote together with the holders of Common Stock without regard to class,
except as to those matters on which separate class voting is required by applicable law or the Certificate of Incorporation or
bylaws.
On
August 1, 2018, the Company designated 1,000 shares of Series C Preferred Stock, par value $0.001 per share (the “Series
C Preferred Stock”). Each share of Series C Preferred Stock is convertible into shares of Common Stock with a stated value
of $200 per share of Series C Preferred Stock and conversion price of $0.05 per share of Common Stock, subject to adjustment in
the event of stock split, stock dividends, subsequent equity sales with lower effective price, and recapitalization or otherwise.
The Series C Preferred Stock votes with the Common Stock on a fully as converted basis. The Series C Preferred Stock does not
contain any redemption provision. The Series C Preferred Stock are entitled to receive in cash out of assets of the Company before
any amounts shall be paid to the holders of any of shares of junior stock, an amount equal to the stated value plus any accrued
and unpaid dividends thereon and any other fees due and owing. In October 2018, the Board of Directors of the Company approved
and authorized an amendment to increase the number of designated authorized shares of the Series C Preferred Stock from 1,000
to 2,500 shares.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
On
April 20, 2020 all of the Company’s issued and outstanding shares of Series A Preferred Stock, Series C Preferred
Stock, stock options and convertible notes were converted into an aggregate of 172,377,500 shares of Common Stock on a fully
diluted basis, consisting of 56,831,789 shares of Common Stock and warrants to purchase up to 115,545,711 shares of Common
Stock. The 250,000 shares of Series B Convertible Preferred Stock remain issued and outstanding and the other 250,000 shares
of Series B Convertible Preferred Stock owned by a former officer were cancelled on April 9, 2020 pursuant to a General
Release Agreement (See Note 9).
Common
Stock Options
Stock
option activity for the three months ended March 31, 2020 is summarized as follows:
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life
(Years)
|
|
|
Aggregate Intrinsic
Value
|
|
|
Balance at December 31, 2019
|
|
|
1,940,000
|
|
|
|
0.10
|
|
|
|
1.04
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020
|
|
|
1,940,000
|
|
|
|
0.10
|
|
|
|
0.79
|
|
|
|
-
|
|
|
Options exercisable at March 31, 2020
|
|
|
1,940,000
|
|
|
$
|
0.10
|
|
|
|
0.79
|
|
|
$
|
-
|
|
As
of March 31, 2020, all outstanding options are fully vested and there was no unrecognized compensation expense in connection with
unvested stock options.
On
April 20, 2020 all of the Company’s issued and outstanding shares of Series A Preferred Stock, Series C Preferred
Stock, stock options and convertible notes were converted into an aggregate of 172,377,500 shares of Common Stock on a fully
diluted basis, consisting of 56,831,789 shares of Common Stock and warrants to purchase up to 115,545,711 shares of Common
Stock (See Note 9).
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Note
7 - Commitments and Contingencies
License
Agreement
In
January 2018, the Company entered into a Standard Exclusive License Agreement (the “License Agreement”) whereby the
licensor agreed to grant exclusive license to the Company for licensed patent owned or controlled by a licensor. The licensed
patent is related to tea polyphenols esters and analogs for cancer prevention and treatment. The term of this license began on
the effective date of the License Agreement and continue until the later of the date that no licensed patent remains a pending
application or an enforceable patent, or the date on which Company’s obligation to pay royalties expires pursuant to the
License Agreement. Further, the License Agreement contains provisions allowing the university to terminate the license under certain
conditions including, but not limited to, the Company not “diligently developing and commercializing” licensed product
in the territory. The Company agreed to pay license issue fee of $5,000 within 30 days of the effective date, which was paid
in March 2018.
Additionally,
the Company agreed to pay certain royalty payments as follows:
|
|
i.
|
three
percent (3%) for Net Sales of Licensed Products, and Licensed Processes (all as defined
in the License Agreement), for each product or process, on a country-by-country basis,
for cumulative Net Sales up to one million dollars ($1,000,000); and
|
|
|
ii.
|
four
percent (4%) for Net Sales of Licensed Products and Licensed Processes, for each product
or process, on a country-by-country basis, for cumulative Net Sales from one million
dollars ($1,000,000) to five million dollars ($5,000,000); and
|
|
|
iii.
|
five
percent (5%) for Net Sales of Licensed Products and Licensed Processes, for each product
or process, on a country-by-country basis, Net Sales over five million dollars ($5,000,000).
|
Furthermore,
the Company agreed to pay the licensor minimum royalty payments, as follows:
|
Payment
|
|
Year
|
|
$
|
20,000
|
|
2018
|
|
$
|
50,000
|
|
2019
|
|
$
|
100,000
|
|
2020 and every year thereafter on the same date,
for the life of this License Agreement.
|
The
minimum royalty shall be paid in advance on a quarterly basis for each year in which the License Agreement is in effect. The first
minimum royalty payment was on March 31, 2018 and in the amount of $5,000. The minimum royalty for a given year shall be due in
advance and shall be paid in quarterly installments on March 31, June 30, September 30, and December 31 for the following quarters.
As of March 31, 2020 and December 31, 2019, the Company has accrued royalty of $97,897 and $66,000, respectively, which is included
in accounts payable and accrued expenses on the interim unaudited condensed consolidated balance sheets.
Note
8 - Concentrations of Revenue and Supplier
Revenue
Concentration
|
|
●
|
During
the three months ended March 31, 2020, Company had no revenue.
|
|
|
●
|
During
the three months ended March 31, 2019, the Company’s beverage sales to two customers
represented approximately 100% of the Company’s net sales.
|
Accounts
Receivable Concentration
|
|
●
|
As
of March 31, 2020, the Company had no accounts receivable.
|
|
|
●
|
As
of December 31, 2019, the Company had accounts receivable from two customers which represented
approximately 100% of total accounts receivable.
|
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Supplier
Concentration
|
|
●
|
During
the three months ended March 31, 2020, the Company had no raw materials and products.
|
|
|
●
|
During
the three months ended March 31, 2019, the Company purchased raw materials and products
from a vendor totaling approximately $550 (100% of the purchases).
|
Note
9 – Subsequent Events
Increase
in Authorized Common Stock
On
April 7, 2020, the Board of Directors of the Company approved the increase the authorized shares of Common Stock to 1,000,000,000
from 600,000,000 (see Note 1 and Note 6).
Agreement
and Plan of Merger
On
April 20, 2020, the Company, Fresh Market Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company,
also referred to herein as Merger Sub, and Home Bistro, Inc., a privately-held Delaware corporation engaged in the food preparation
and home-delivery business, also referred to herein also Home Bistro, entered into an Agreement and Plan of Merger, also referred
to herein as the Merger Agreement, pursuant to which, among other things, Merger Sub agreed to merge with and into Home Bistro,
with Home Bistro becoming a wholly-owned subsidiary of the Company and the surviving corporation in the merger, also referred
to herein as the Merger. Pursuant to the terms of the Merger Agreement, Home Bistro filed a Certificate of Merger with the Nevada
Secretary of State on April 20, 2020 (see Note 1).
Prior
to the effective time of the Merger, the Company and certain of its existing securityholders entered into an Exchange Agreement
providing for, among other things, the exchange (the “Exchange”) of securities held by such securityholders for shares
of Common Stock, as more fully detailed therein. As a result of the Exchange, all of the Company’s issued and outstanding
shares of Series A Preferred Stock, Series C Preferred Stock, stock options and convertible notes (See Note 5) were converted
into an aggregate of 172,377,500 shares of Common Stock on a fully-diluted basis, consisting of 56,831,789 shares of Common Stock
and warrants to purchase up to 115,545,711 shares of Common Stock. The 250,000 shares of Series B Convertible Preferred Stock
remain issued and outstanding and the other 250,000 shares of Series B Convertible Preferred Stock owned by a former officer were
cancelled on April 9, 2020 pursuant to a General Release Agreement.
At
the effective time of the Merger, and subject to the terms and conditions of the Merger Agreement, each outstanding share of common
stock of Home Bistro was converted into the right to receive fifteen thousand one hundred and point three (15,100.3) shares of
Common Stock. Accordingly, the aggregate consideration issuable in the Merger to the former securityholders of Home Bistro is
767,838,260 shares of Common Stock on a fully-diluted basis consisting of 546,447,393 shares of Common Stock and warrants to purchase
up to 221,390,867 shares of Common Stock. As a result of the Merger, the Company has 961,047,825 shares of Common Stock issued
and outstanding on a fully-diluted basis consisting of 608,222,315 shares of Common Stock and warrants to purchase up to 352,825,510
shares of Common Stock.
The
Company plans to change its name to “Home Bistro, Inc.” and change its ticker symbol as soon as possible and upon
approval from the Secretary of State of the State of Nevada and the Financial Industry Regulatory Authority. Further, the Company
intends to effect a reverse stock split of its Common Stock such that every holder of Common Stock shall receive 1 share of Common
Stock for every 31.993 shares of Common Stock held (with fractional shares rounded up to the nearest whole share) as soon as possible
and upon approval from the Secretary of State of the State of Nevada and the Financial Industry Regulatory Authority.
On
April 20, 2020, pursuant to the terms of the Merger Agreement, Roy G. Warren, Jr., Mike Edwards and Bruce Zanca resigned as directors
of the Company and Roy G. Warren, Jr. resigned as Chief Operating Officer of the Company. The resignations were not the result
of any disagreement related to the Company’s operations, policies or practices. Furthermore, on April 20, 2020, Mr. Zalmi
Duchman, the Chief Executive Officer of Home Bistro, Michael Finkelstein and Michael Novielli were appointed as directors of the
Company. In addition, Mr. Duchman was appointed Chief Executive Officer (see Note 1).
In
connection with the Merger, certain Company shareholders entered into a Lock-Up and Leak-Out Agreement with the Company pursuant
to which, among other thing, such shareholders agreed to certain restrictions regarding the resale of Common Stock for a period
of two years from the date of the Merger Agreement, as more fully detailed therein.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
Additionally,
on April 20, 2020, the Company and a shareholder entered into a Put Option Agreement, pursuant to which, among other things, the
Company agreed, at the election of the shareholder, to purchase certain shares of Common Stock from such shareholder no sooner
than two years from the date of the Put Option Agreement (the “Market Period”). Pursuant to the Put Option Agreement,
in the event that the shareholder does not generate $1.3 million dollars (the “Total Investment”) in gross proceeds
from the sale of its shares of Common Stock by the second anniversary of the Put Option Agreement, then the stockholder has the
right to cause the Company to purchase shares held by the stockholder at a price equal to the difference between the Total Investment
and the net proceeds actually realized by the stockholder from shares of Common Stock sold during the Market Period and the number
of shares of Common Stock held by the stockholder on the date the put right is exercised. The put right expires fourteen (14)
days from end of the Market Period.
Effective
April 20, 2020, the Company acquired all the issued and outstanding shares of Home Bistro pursuant to the Merger Agreement and
Home Bistro became a wholly-owned subsidiary of the Company. As a result of the Merger Agreement, for financial statement reporting
purposes, the business combination between the Company and Home Bistro has been treated as a reverse acquisition and recapitalization
with Home Bistro deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of
accounting in accordance with FASB Accounting Standards Codification (“ASC”) Section 805-10-55. At the time of the
Merger Agreement, both the Company and Home Bistro had their own separate operating segments. Accordingly, the assets and liabilities
and the historical operations that are reflected in the consolidated financial statements after the Merger Agreement are those
of Home Bistro and are recorded at the historical cost basis of Home Bistro. The acquisition process utilizes the capital structure
of the Company and the assets and liabilities of Home Bistro which are recorded at historical cost. The results of operations
of the Company are consolidated with results of operations of Home Bistro starting on the date of the Merger Agreement. The equity
of the consolidated entity is the historical equity of Home Bistro retroactively restated to reflect the number of shares issued
by the Company in the reverse acquisition.
The
Merger constituted a change of control and the majority of the Board of Directors changed with the consummation of the Merger.
The Company issued to Home Bistro shares of common stock and warrants which represented approximately 80% of the combined company
on a fully converted basis after the closing of the Merger.
Paycheck
Protection Program Loan
On April 8, 2020, Home Bistro executed
a note (the “PPP Note”) for the benefit of JPMorgan Chase Bank, N.A. (the “Lender”) in the aggregate amount
of $14,612 under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”). The PPP is administered by the U.S. Small Business Administration (the “SBA”).
The interest rate of the loan is 0.98% per annum and accrues on the unpaid principal balance computed on the basis of the actual
number of days elapsed in a year of 360 days. Commencing seven months after the effective date of the PPP Note, Home Bistro is
required to pay the Lender equal monthly payments of principal and interest as required to fully amortize any unforgiven principal
balance of the loan by the two-year anniversary of the effective date of the PPP Note (the “Maturity Date”). The Maturity
Date can be extended to five years if mutually agreed upon by both the Lender and Home Bistro. The PPP Note contains customary
events of default relating to, among other things, payment defaults, making materially false or misleading representations to
the SBA or the Lender, or breaching the terms of the PPP Note. The occurrence of an event of default may result in the repayment
of all amounts outstanding under the PPP Note, collection of all amounts owing from Home Bistro, or filing suit and obtaining
judgment against Home Bistro. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted
forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations,
based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Recent
modifications to the PPP by the U.S. Treasury and Congress have extended the time period for loan forgiveness beyond the original
eight-week period, making it possible for Home Bistro to apply for forgiveness of its PPP loan. No assurance can be given
that Home Bistro will be successful in obtaining forgiveness of the loan in whole or in part.
Agreement for Use of Processing Kitchen
Facility
On June 12, 2020, Home Bistro entered
into an agreement for the use of a processing kitchen facility in Pompano Beach, Florida. The agreement has a month-to-month term.
The owner of the kitchen facility may terminate the agreement, in its sole and absolute discretion, by prior written notice and
Home Bistro may terminate the lease with 30 days prior written notice. Pursuant to the agreement, the Company is required to pay
$5,335 per month, subject to change with advanced notice.
Economic
Injury Disaster Loan
On
June 17, 2020, Home Bistro executed the standard loan documents required for securing a loan (the “EIDL Loan”) from
the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19
pandemic on the Company’s business.
Pursuant
to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan
is up to $150,000, with proceeds to be used for working capital purposes. As of the date of this Quarterly Report on Form 10-Q,
Home Bistro has not requested any disbursements under the EIDL Loan, and the EIDL Loan requires all requests for disbursements
be made by December 17, 2020 (six months after the date of the EIDL Loan), unless the SBA, in its sole discretion, extends the
disbursement period. If the Company does not request disbursements by such date, the EIDL Loan commitment will terminate and Home
Bistro will lose the ability to draw the funds. Interest accrues at the rate of 3.75% per annum and will accrue only on funds
actually advanced from the date of each advance. Installment payments, including principal and interest, are due monthly beginning
June 17, 2021 (twelve months from the date of the SBA Note (defined below)) in the amount of $731. The balance of principal and
interest is payable thirty years from the date of the SBA Note. In connection therewith, the Company received a $5,000
advance, which does not have to be repaid.
GRATITUDE HEALTH, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated
Financial Statements
March 31, 2020
In
connection therewith, Home Bistro executed (i) a note for the benefit of the SBA (the “SBA Note”), which contains
customary events of default and (ii) a Security Agreement, granting the SBA a security interest in all tangible and intangible
personal property of Home Bistro, which also contains customary events of default (the “SBA Security Agreement”).
Home
Bistro returned the executed SBA Loan Agreement, the SBA Note and the SBA Security Agreement to the SBA within the two month deadline
from June 17, 2020 in order to avoid forfeiting the EIDL Loan.
COVID-19
The
ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States
economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread
of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business
activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.
The COVID-19 pandemic has the potential to significantly impact the Company’s Home Bistro segment’s supply chain,
food manufacturers, distribution centers, or logistics and other service providers. Additionally, the Company’s service
providers and their operations may be disrupted, temporarily closed or experience worker or meat or other food shortages, which
could result in additional disruptions or delays in shipments of Home Bistro’s products. To date, the Company has been able
to avoid layoffs and furloughs of employees. The Company is not able to estimate the duration of the pandemic and potential impact
on the business if disruptions or delays in shipments of product occur. To date, the Company is not aware of any such disruptions.
In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand
for product and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues
to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
