Right On Brands, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Securities registered pursuant to Section 12(b) of the Act:

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes     ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). x Yes     ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

If an emerging growth company, indicate by check mark if the registrant has elected transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes     x No

As of November 14, 2019, there were 372,020,130 shares of common stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Our financial statements included in this Form 10-Q are as follows:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2019 are not necessarily indicative of the results that can be expected for the full year.

RIGHT ON BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

The accompanying notes are an integral part of these interim consolidated financial statements.

RIGHT ON BRANDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these interim consolidated financial statements.

The accompanying notes are an integral part of these interim consolidated financial statements.

RIGHT ON BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these interim consolidated financial statements.

RIGHT ON BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited condensed financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) on the same basis as the annual financial statements; and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these condensed financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended March 31, 2019 filed with the SEC on form 10-K/A on July 29, 2019.

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

Formation and Business Activity

Right on Brands, Inc. (“we” or “the Company” or “Right On Brands”) was incorporated under the laws of the State of Nevada on April 1, 2011, as HealthTalk Live, Inc. On August 10, 2017, the Company amended is articles of incorporation and changed its name to Right On Brands, Inc. On August 31, 2017 the Company common shares commenced trading under the new stock symbol OTC Pink: RTON. Right On Brands is a health and wellness focused company developing and marketing our brands.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.  

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided by the straight-line method over the useful lives of the related assets, from one to five years.

The cost of building the Company's website has been capitalized and amortized over a period of three years. Expenditures for minor enhancements and maintenance are expensed as incurred.

Inventory

Inventories are stated at the lower of cost (average cost) or market (net realizable value). As of September 30, 2019, and March 31, 2019, inventory consisted of the following:

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue when our performance obligation is satisfied. Our primary performance obligation (the distribution and sales of hemp products) is satisfied upon the shipment or delivery of products to our customers, which is also when control is transferred. The transfer of control of products to our customers is typically based on written sales terms that do not allow for a right of return after 30 days from the date of purchase.

Our products are sold for cash or on credit terms. Our credit terms, which are established in accordance with local and industry practices, typically require payment within 30 days of delivery, and may allow discounts for early payment. We estimate and reserve for our bad debt exposure based on our experience with past due accounts and collectability, the aging of accounts receivable and our analysis of customer data.

Income Taxes

The Company is subject to income taxes in the U.S.  Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with the Financial Accounting Standards Board (FASB) ASC Topic 740, "Income Taxes," the Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company accounts for income tax under the provisions of FASB ASC Topic 740, "Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Fair Value of Financial Instruments

In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have assets or liabilities measured at fair value on a recurring basis except its derivative liability.

Consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended September 30, 2019 and 2018, except as disclosed.

Fair Value Measurement

The Company did not have any Level 1 or Level 2 assets and liabilities at September 30, 2019 and 2018. The derivative liabilities are Level 3 fair value measurements.

The following is a summary of activity of Level 3 liabilities during the six months ended September 30, 2019:

From time to time, the Company enters into convertible promissory note agreements (Note 5). These notes are convertible at a fraction of the stock closing price near the conversion date. Additionally, the conversion price, as well as other terms including interest rates, adjust if any future financings have more favorable terms. The conversion features of these notes meet the definition of a derivative which therefore requires bifurcation and are accounted for as a derivative liability.

The Company estimated the fair value of the conversion feature derivatives embedded in the convertible promissory notes based on assumptions used in the Black Scholes pricing model. At September 30, 2019 and March 31, 2019, the fair value of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: the price of the Company’s common stock of $0.0044 and $0.045, respectively; a risk-free interest rate ranging from 2.32% to 2.62%, and expected volatility of the Company’s common stock ranging from 158% to 535%, various estimated exercise prices, and terms under one year.

Convertible Instruments

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

The Company had no potential additional dilutive securities outstanding at September 30, 2019, except as follows:

During the six months ended September 30, 2019 stock warrants for 750,000 shares were issued in connection with financing from Noteholder 3. An additional warrant to purchase 500,000 shares was issued with a subscription agreement September 16, 2019.

A summary of the status of the Company’s option and warrant grants as of September 30, 2019 and the changes during the fiscal quarter then ended is presented below:

Recent Accounting Pronouncements

During the quarter ended September 30, 2019, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the term of the lease. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard became effective beginning April 1, 2019 at the inception of the Company’s office and warehouse lease (Note 8). The Company believes adoption of the standard did not have a material impact on our results of operations and financial condition.

NOTE 2. GOING CONCERN

The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern, which is dependent upon the Company's ability to obtain sufficient financing or establish itself as a profitable business. As of September 30, 2019, the Company had an accumulated deficit of $11,709,478 and for the six months ended September 30, 2019 and 2018, the Company incurred net losses of $1,523,376 and $1,030,945, respectively.

The Company has had minimal revenue earned since inception and a lack of operational history. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. While the Company is attempting to generate greater revenues, the Company's cash position may not be significant enough to support the Company's daily operations. Management intends to raise additional funds by way of additional public and/or private offerings of its stock and/or debt and/or convertible debt. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate revenues.

The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

NOTE 3. PROPERTY AND EQUIPMENT

Depreciation expense for the six months ended September 30, 2019 and 2018 was $3,160 and $1,360, respectively.

The Company also has capitalized intangible assets consisting of trademarks valued at a cost of $1,024 as of September 30, 2019 and March 31, 2019. Amortization expense for the six months ended September 30, 2019 and 2018 was $153 and $782, respectively.

NOTE 4. NONCONTROLLING INTEREST

Investments in partnerships, joint ventures and less-than-majority-owned subsidiaries in which we have significant influence are accounted for under the equity method.

As of March 31, 2018, the Company's consolidated financial statements includes a venture for the development of a commercial bottled water operation near Browning, Montana. The new venture is operated through Spring Hill Water Company, LLC, a Nevada limited liability company ("Spring Hill"). Spring Hill is 49% owned by our newly-formed subsidiary corporation, Humble Water Company, and 51% owned by Doore, LLC. Doore, LLC, which serves as the manager of Spring Hill, has contributed the land and water source to be used in the new operation through a Land & Water Lease Agreement under which Spring Hill will have the use of 2 acres of land and no less than 5 acre-feet of water for an initial term of 25 years and at a lease rate of $1 per year. Through Humble Water Company, our initial capital contribution to Spring Hill was approximately $100,000 to be used in commencing operations. In addition, we have committed to provide additional capital to be used for a bottling facility and equipment, in an amount up to $530,000, by January 1, 2020. Should we fail to provide this additional capital, our ownership percentage in Spring Hill will be reduced from 49% to 20%. Although we hold a minority ownership percentage in Spring Hill, we will have voting control over the company with 75% of the voting membership units. Further, 100% of the losses, expenditures, and deductions from Spring Hill will be allocated to our subsidiary, Humble Water Company. The activity of Spring Hill is accounted for under the voting interest method and we consolidate 100% of the business activity and record 25% of noncontrolling interest on the balance sheet and 0% of the net losses based on the terms of the agreement. As of September 30, 2019, the noncontrolling interest was $24,437 in the accompanying consolidated financial statements.

As of September 30, 2019, our total investment into Spring Hill to date was $101,470. Since entering into the venture, there have been no significant operations or expenditures in the joint venture except for expensing the remainder of the prepaid lease due to the low likelihood of utilization.

NOTE 5. CONVERTIBLE DEBT

During October 2016, the Company extinguished $129,549 of debt in exchange for 5,000,000 shares of newly issued common stock. The original note had a maturity date of November 11, 2016 and no interest rate. A total of 4,200,000 shares were issued to three of the four noteholders. As of December 31, 2016, the remaining balance of 800,000 shares of common stock was pending issuance to one noteholder, so common stock payable of $474,000 was recorded in the accompanying consolidated statement of stockholders’ equity. As of 2019 the shares are still pending issuance; accordingly, the Company reclassified the amount due to the noteholder to notes payable at the fair value of the common stock.

On July 7, 2016, the Company issued a convertible promissory note with an entity for $25,000. The unsecured note bears interest at 6% per annum and is due on January 7, 2017. This note is convertible at $0.10 per share and can be converted on or before the maturity date which was extended to March 30, 2020. The Company and lender mutually agreed to extend the maturity date of the note.

On November 21, 2017, the Company issued a convertible promissory note with an entity for $20,000. The unsecured note bears interest at 6% per annum and was due on May 21, 2018 but was extended. This note is convertible at $0.20 per share and can be converted on or before the maturity date. See note 7.

On February 12, 2019, Noteholder 1 submitted a notice of conversion for $125,000 principal and $11,250 accrued interest after the note was in default. The note terms provided a $3,000 daily fee for failure to deliver common stock prior to a deadline of two days after the conversion notice. The shares due under the conversion were not issued until May 8, 2019. Accordingly, an additional note payable of $135,000 was recorded as a penalty at March 31, 2019. An additional $114,000 was accrued as a penalty during the quarter ended June 30, 2019.

 At September 30, 2019, the Company's convertible promissory notes and related debt discount and derivative liability are summarized as follows:

During the six months ended September 30, 2019, six convertible note holders submitted notices of conversion for a portion of the principal and interest owing to them totaling $800,960. The conversions resulted in the settlement of $1,108,777 of the derivative liability, an $8,693 loss on settlement of interest payable, and the issuance of 245,201,169 shares of common stock.

The convertible debt held by noteholder 6 is in default at September 30, 2019. At the noteholders’ discretion, if notice is given to the Company, additional penalties of approximately $104,000 would be due. As of November 14, 2019, the Company has not received notices of default from the noteholder.

These fiscal 2019 note agreements require a certain number of shares be reserved so that they are readily available for note conversion. As of September 30, 2019 and March 31, 2019, we had approximately 530 million shares and 398 million shares, respectively, of our common stock reserved or designated for future issuance upon conversion of outstanding convertible promissory notes. As of September 30, 2019, four notes had fewer shares reserved than required under the terms of the note agreements.

During the six months ended September 30, 2019 and 2018, respectively, interest expense was $54,717 and $97,642. During the six months ended September 30, 2019 and 2018, respectively, amortization of debt discount was $435,187 and $107,191.

NOTE 6. STOCKHOLDERS' EQUITY

Series A Preferred Stock

The Series A Preferred Stock is convertible to common stock at a rate of five shares for every share held and the holder(s) have the right to cast a total of fifty-percent (50%) plus one votes on all matters submitted to a vote of holder of the Company’s common stock. Our Series A Preferred Stock ranks equally, on an as-converted basis, to our common stock with respect to rights upon winding up, dissolution, or liquidation. Our Series A Preferred Stock does not have any special dividend rights.

On October 1, 2016, the Company issued 5,000,000 shares of our Series A Preferred Stock to Daniel Crawford in exchange for 10,000,000 shares of Series A Preferred Stock in Humbly Hemp.

Common Stock

During the six months ended September 30, 2019, the Company issued a total of 245,201,169 shares of common stock to six noteholders in connection with the settlement of principal and interest totaling $800,960.

During the six months ending September 30, 2019, the Company issued several subscription agreements for the purchase of common stock by various investors at a price ranging from $.0025 to $.03. A total of 1,250,000 shares of common stock were issued during the quarter ended June 30, 2019 for cash proceeds received totaling $25,000. An additional 18,166,000 shares are to be issued; accordingly, common stock payable was recorded of $90,000 related to these shares.

NOTE 7. RELATED PARTY

During December 2017, the Company entered into a consulting agreement with Dr. Ashok Patel, our current President, to serve as Director of Product Development. Consideration for services under the agreement provided for the issuance of 700,000 shares of common stock of the Company at the time of execution of the agreement, and the following two anniversaries of the agreement. At September 30, 2019, the first anniversary shares have yet to be issued. Accordingly, they are reported in the accompanying consolidate statement of stockholders’ equity (deficit) as common stock payable.

The trustee of La Dulce Vita Trust (LDVT) is the aunt of Daniel Crawford, the Company’s majority voting holder and the sister of Jerry Grisaffi, the Company’s CEO and Board of Directors Chairman. At September 30, 2019 and March 31, 2019, $474,000 is owed to LDVT reported in notes payable, and $22,000 is included in convertible debt on the accompanying consolidated balance sheets.

On April 16, 2018, the Company entered into an operating agreement with Centre Manufacturing, Inc. ("Centre") and formed an LLC owned 51% by the Company and 49% owned by Centre, but all income and losses will be split evenly. The owner of Centre is the President of the Company. On June 19, 2018, the Company formed a majority owned subsidiary, Endo & Centre Venture LLC. No significant activity has occurred during the six months ended September 30, 2019 and 2018, respectively.

During the six months ended September 30, 2019 and 2018, the Company purchased inventory totaling $2,761 and $53,936 from Centre, respectively. The Company owed Centre $0 and $18,531, respectively, at September 30, 2019 and March 31, 2019 which is included in accounts payable on the accompanying consolidated balance sheets.

NOTE 8. COMMITMENTS AND CONTINGENCIES

On April 1, 2019 the Company entered into an office and warehouse lease of approximately 5,700 square feet in Carrollton, Texas. At the inception of the lease, the Company adopted ASC 842 requiring the recording of assets and liabilities related to leases on the balance sheet. The Company records rent on straight-line basis over the terms of the underlying lease. Rent expense for the six months ended September 30, 2019 and 2018 was $11,400 and $0, respectively.

Aggregate future lease liability expense under ASC 842 are as follows:

There is a dispute between the Company and the holder of a convertible note regarding the timing of the conversion. As of September 30, 2019, the full amount of the penalty has been recorded on the accompanying consolidated balance sheet, and neither side has filed formal legal proceedings against the other side and negotiations are ongoing to resolve the matter.

NOTE 9. SUBSEQUENT EVENTS

On October 1, 2019 the Company appointed five members to an advisory board and issued each member a warrant convertible into 1,000,000 shares of common stock at $.01 per share.

On October 10, 2019, the Company’s Board of Directors approved an increase in the number of authorized shares to 8,000,000,000.

On October 14, 2019, the Company issued a convertible promissory note with Noteholder 5 for $68,250. The unsecured note bears interest at 12% per annum and is due on October 14, 2020. The note is convertible into shares of the Company’s stock at a variable conversion price, resulting in the recognition of a derivative liability of $55,545 at issuance.

On October 29, 2019, the Company authorized the issuance of 10,000,000 shares of common stock to a stockholder for the payment of $10,000 in expenses on behalf of the Company.

Subsequent to September 30, 2019 the Company issued common stock for settlement of convertible debt as summarized below:

Item 2. Management's Discussion and Analysis or Plan of Operation

We urge you to read the following discussion in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended March 31, 2019, as well as with our condensed financial statements and the notes thereto included elsewhere herein.

Company Overview

Our business is conducted through our wholly owned subsidiaries, Humbly Hemp, Endo Brands, and Humble Water Company. Humbly Hemp sells and markets a line of hemp enhanced snack foods. Humble Water Company is in a partnership with Springhill Water Co. to develop a line of High Alkaline, Natural Mineral Water, and a bottling and packaging facility. Endo Brands creates and markets a line of CBD consumer products and through ENDO Labs, a joint venture with Centre Manufacturing, creates white label products and formulations for CBD brands. Right On Brands is at the focus of health and wellness. We create lasting brands with emerging functional ingredients, and our focus right now is industrial hemp, hemp derived CBD, and high alkaline water. As of September 30, 2019, the Board of Directors of the Company has voted to merge Humbly Hemp, Inc. into the Company in order to have a more efficient and less costly corporate structure.

Basis of Presentation of Financial Information

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern, which is dependent upon the Company's ability to establish itself as a profitable business. At September 30, 2019, the Company had an accumulated deficit of $11,709,478 and for the six months ended September 30, 2019, incurred net losses of $1,523,376, as compared to $1,030,945 for the same period in 2018. Management expects that the Company will need to raise additional capital to sustain operations until such time as the Company can achieve profitability. However, there can be no assurance that management will be successful in obtaining additional funding or in attaining profitable operations.

The financial statements do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.

Significant Accounting Policies

There have been no changes from the Summary of Significant Accounting Policies described in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on July 29, 2019.

Note Conversions to Common Stock

During the six months ended September 30, 2019 the Company received several notices of conversion from its noteholders as summarized here:

Results of Operations

Comparison of Three Months Ended September 30, 2019 and 2018

During the three months ended September 30, 2019, we generated revenue of $56,783 and our cost of goods sold was $40,880, resulting in gross profit of $15,903. We incurred total operating expenses of $268,855, interest expense of $199,123, and a net loss of $751,399. By comparison, during the three months ended September 30, 2018, we generated revenue of $24,810 and our cost of goods sold was $16,532, resulting in gross profit of $8,278. We incurred operating expenses of $393,387, interest expense of $27,076 and we recorded a net loss of $442,563.

Our revenues increased significantly compared to the same period last year due to increased product distribution and sales. Our operating expenses decreased significantly due primarily to lower consulting fees. However, this was offset by higher general and administrative expenses related to contract labor, commissions, insurance, lease and travel expenses. Other expenses increased related to debt financing, including interest, financing costs, and default penalties.

Comparison of Six Months Ended September 30, 2019 and 2018

For the six months ended September 30, 2019 and 2018, the Company’s revenue totaled $208,657 and $95,610, respectively, for which our respective costs of goods sold totaled $137,920 and $63,800. The $113,047 increase in revenue resulted from additional sales. During this quarter the company also introduced its Humbly Hemp line of energy bars and sparkling teas.

For the six months ended September 30, 2019, the Company had operating expenses totaling $476,856 compared to $882,887 for the same period in 2018, a decrease of $406,031. This change is primarily a result of lower consulting fees and a prior year inventory impairment. General and administrative expenses increased by approximately $159,961, from $77,869 in the six months ended September 30, 2018 to $237,830 over the same period in 2019 due to increased contract labor, commissions, insurance, lease and travel expenses. Other expenses increased related to debt financing, including interest, financing costs, loss on derivatives issued with debt, and default penalties. The Company also recorded depreciation and amortization expense of $3,313 for the six months ended September 30, 2019 compared to $2,142 for the six months ended September 30, 2018.

We expect that our expenses, as well as our revenues, will continue to increase over the current fiscal year as we work to expand sales and distribution of our products.

Liquidity and Capital Resources

As of September 30, 2019, we had current assets in the amount of $295,304, consisting of cash in the amount of $21,893, accounts receivable of $28,696, and inventory of $244,715. As of September 30, 2019, we had current liabilities of $1,717,596. The current liabilities consisted of accounts payable of $84,524, accrued interest payable of $37,316, notes payable of $723,000, convertible debt net of discount in the amount of $193,347, and a derivative liability of $656,609.

We also entered into an office lease April 1, 2019 which resulted in a long-term asset and lease liabilities of $114,000 at September 30, 2019.

We have funded our operations to date through the issuance of common stock in offerings exempt under Rule 506, as well as through the issuance of convertible notes. During the six months ended September 30, 2019:

Our ability to successfully execute our business plan is contingent upon us obtaining additional financing and/or upon realizing sales revenue sufficient to fund our ongoing expenses. Until we are able to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.

Off Balance Sheet Arrangements

As of September 30, 2019, there were no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Jerry Grisaffi and our Chief Financial Officer, A. David Youssefyeh. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the period ended September 30, 2019, besides the addition of two Certified Public Accountants to assist with the bookkeeping and financial reporting.

Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There is a dispute between the Company and the holder of a convertible note regarding the timing of the conversion. As of September 30, 2019, neither side has filed formal legal proceedings against the other side and negotiations are ongoing to resolve the matter.

Item 1A. Risk Factors

A smaller reporting company is not required to include this information. For a description of the risk factors applicable to our business and operations, please refer to our Annual Report on Form 10-K/A for the year ended March 31, 2019, filed with SEC on July 29, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six months ended September 30, 2019, we sold 19,416,000 shares of common stock for proceeds of $115,000. Of this amount, 18,166,000 shares, representing $90,000, had not been issued as of September 30, 2019 and were recorded as Stock Issuable.

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.