UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
Commission
File Number:
(Exact Name of Registrant as Specified in Its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| ||
| (Address of Principal Executive Offices and Zip Code) | (Registrant’s telephone number, including area code) |
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
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.
Indicate
by check mark whether the registrant has submitted electronically, if any, 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended 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 ☐ No
The
number of outstanding shares of Home Bistro, Inc.’s common stock as of May 16, 2023 was
HOME BISTRO, INC. AND SUBSIDIARIES
FORM 10-Q
January 31, 2023
TABLE OF CONTENTS
THE COMPANY’S MOST RECENT FINANCIAL STATEMENTS AND INFORMATION AS REPORTED WITHIN THIS FORM 10-Q FILING ARE NOT COMPLETE AND HAVE NOT BEEN REVIEWED BY THE COMPANY’S AUDITOR. THE COMPANY IS CURRENTLY UNDERGOING ITS AUDIT FOR THE 12 MONTH PERIOD ENDED OCTOBER 31, 2022, AND BELIEVES IT WILL BE COMPLETED IN THE COMING WEEKS AND REFILED WITH AN AMENDMENT TO THE PRIOR FORM 10-K FILING, AT WHICH POINT IT WILL WORK TO COMPLETE THIS 10Q FILING. THE INFORMATION CONTAINED HEREIN IS FOR INFORMATION ONLY AND SHOULD NOT BE RELIED UPON FOR INVESTMENT OR ANY OTHER PURPOSE.
i
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance, or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
These factors include, among others:
| ● | current or future financial performance; |
| ● | management’s plans and objectives for future operations; |
| ● | uncertainties associated with product research and development |
| ● | uncertainties associated with dependence upon the actions of government regulatory agencies; |
| ● | product plans and performance; |
| ● | management’s assessment of market factors; and |
| ● | statements regarding our strategy and plans. |
Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Report and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “SEC”).
We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts. These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances, or assumptions underlying such statements, or otherwise.
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME BISTRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Finance lease right-of-use assets, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Liabilities to be settled with common stock | ||||||||
| Convertible notes payable, net of debt discount and put premium | ||||||||
| Convertible notes payable - related party, net of debt discount | ||||||||
| Notes payable - current portion | ||||||||
| Advances payable | ||||||||
| Derivative liabilities | ||||||||
| Unredeemed gift cards | ||||||||
| Financing lease liability - current portion | ||||||||
| Operating lease liabilities - current portion | ||||||||
| Common stock repurchase obligations | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Financing lease liability - long-term portion | ||||||||
| Operating lease liability- long-term portion | ||||||||
| Notes payable - long-term portion | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingency (Note 12) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred Stock: $ | ||||||||
| Common stock: $ | ||||||||
| Additional paid-in capital | ||||||||
| Deferred compensation | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
HOME BISTRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product Sales, net | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ( | ) | ||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Compensation and related expenses (includes $ | ||||||||||||||||
| Professional and consulting expenses (includes $ | ||||||||||||||||
| Professional and consulting expenses - related party (includes $ | ||||||||||||||||
| Product development expense (includes $ | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Settlement expense | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Gain on extinguishment of accounts payable | ||||||||||||||||
| Total Other Expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deemed Dividend | ( | ) | ( | ) | ||||||||||||
| Net Loss Attributable to Common Shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
HOME BISTRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Deferred | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Compensation | Deficit | Equity | |||||||||||||||||||||||||
| Balance at October 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||||||
| Common stock issued for services and prepaid services | - | |||||||||||||||||||||||||||||||
| Common stock warrant issued for professional services | - | - | ||||||||||||||||||||||||||||||
| Reduction of the repurchase obligation pursuant to the Put Option Agreement | - | - | ||||||||||||||||||||||||||||||
| Common stock issued for product development agreements | - | |||||||||||||||||||||||||||||||
| Common stock issued pursuant to lock-up agreements | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at January 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock warrant issued for stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees | - | - | ||||||||||||||||||||||||||||||
| Common stock issued for commitment fee included in interest expense | - | |||||||||||||||||||||||||||||||
| Reduction of the repurchase obligation pursuant to the Put Option Agreement | - | - | ||||||||||||||||||||||||||||||
| Accretion related to common stock issued for product development agreements | - | - | ||||||||||||||||||||||||||||||
| Common stock issued pursuant to lock-up agreements | - | |||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||||||
| Common stock issued pursuant to lock-up agreement with related party | - | |||||||||||||||||||||||||||||||
| Common stock issued for cashless exercise and settlement of warrants | - | ( | ) | |||||||||||||||||||||||||||||
| Common stock issued pursuant to settlement agreements | - | |||||||||||||||||||||||||||||||
| Repurchase obligation pursuant to stock repurchase agreement | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Relative fair value of warrants issued with convertible debt | - | - | ||||||||||||||||||||||||||||||
| Accretion related to common stock issued for product development agreements | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at July 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
3
| Preferred Stock | Common Stock | Additional | Total | |||||||||||||||||||||||||||||
| Number of | Number of | Paid-in | Deferred | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Compensation | Deficit | Deficit | |||||||||||||||||||||||||
| Balance at October 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Common stock issued as commitment fee | - | |||||||||||||||||||||||||||||||
| Common stock warrants issued for services | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at January 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued for services and prepaid services | - | ( | ) | |||||||||||||||||||||||||||||
| Common stock issued for stock based compensation | - | - | ||||||||||||||||||||||||||||||
| Common stock and common stock warrants issued as commitment fee | - | |||||||||||||||||||||||||||||||
| Reduction of the repurchase obligation pursuant to the Put Option Agreement | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at April 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||||||
| Common stock and common stock warrants issued as commitment fee | - | |||||||||||||||||||||||||||||||
| Common stock issued for acquisition of subsidiary (see Note 3) | - | |||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Reduction of the repurchase obligation pursuant to the Put Option Agreement | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at July 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
HOME BISTRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended | ||||||||
| July 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of intangible assets | ||||||||
| Common stock and warrants issued for stock-based compensation | ||||||||
| Common stock and warrants issued for professional services – related party | ||||||||
| Common stock and warrants issued for services and prepaid services | ||||||||
| Common stock issued for commitment fee in interest expense | ||||||||
| Interest expense related to put premium on stock-settled debt | ||||||||
| Common stock and warrants issued for product development | ||||||||
| Common stock issued pursuant to lock-up agreements | ||||||||
| Gain on extinguishment of accounts payable | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Common stock issued for settlement expense | ||||||||
| Amortization of debt discount on convertible notes payable and advances payable | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
| Change in operating assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued expense and other liabilities | ( | ) | ( | ) | ||||
| Unredeemed gift cards | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Payment for acquisition of subsidiary | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock, net of issuance costs | ||||||||
| Proceeds from note payable | ||||||||
| Proceeds from convertible notes payable, net of debt discount | ||||||||
| Proceeds from convertible note payable - related party, net of debt discount | ||||||||
| Proceeds from advances payable | ||||||||
| Payment on stock repurchase agreement | ( | ) | ||||||
| Repayment of convertible notes payable | ( | ) | ( | ) | ||||
| Repayments of advance payable | ( | ) | ( | ) | ||||
| Repayment of convertible notes payable - related party | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Initial amount of ROU asset and related liability | $ | $ | ||||||
| Reduction of the repurchase obligation pursuant to the Put Option Agreement | $ | $ | ||||||
| Common stock and common stock warrants issued as commitment fee in connection with convertible notes payable, recorded as debt discount | $ | $ | ||||||
| Liabilities to be settled with common stock in connection with convertible notes payable | $ | $ | ||||||
| Fair value of true-up shares in connection with the commitment fee | $ | $ | ||||||
| Initial derivative liability recorded in connection with convertible notes payable | $ | $ | ||||||
| Increase in debt discount for relative fair value of warrants | $ | $ | ||||||
| Increase in stock repurchase obligation and reduction of additional paid-in capital pursuant to settlement agreement | $ | $ | ||||||
| Net Assets and Liabilities Assumed in Acquisition: | ||||||||
| Prepaid expenses and other assets | $ | $ | ||||||
| Inventory | ||||||||
| Operating right-of-use asset | ||||||||
| Computer software | ||||||||
| Customer relationships | ||||||||
| Trademark | ||||||||
| Goodwill | ||||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Operating right-of-use liability | ( | ) | ||||||
| Note Payable | ( | ) | ||||||
| Net assets acquired (liabilities assumed) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Home Bistro, Inc. (formerly known as Gratitude Health, Inc.) (the “Company”) was incorporated in the State of Nevada on December 17, 2009. Effective March 23, 2018, the Company changed its name from Vapir Enterprises Inc. to Gratitude Health, Inc. On September 14, 2020, the Company changed its name from Gratitude Health, Inc. to Home Bistro, Inc. The Company is in the business of providing prepackaged and prepared meals to consumers focused on offering a broad array of the highest quality meal delivery, and preparation services.
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 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. The Company has applied for and received certain financial assistance under the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”) enacted in March 2020 by the U.S. Government in response to COVID-19 (see Note 6).
On
July 6, 2021, the Company entered and closed on an Agreement and Plan of Merger with the members of Model Meals, LLC (“Model Meals”),
acquiring Model Meals through a reverse triangular merger, whereby Model Meals merged with Model Meals Acquisition Corp., a wholly owned
subsidiary of the Company, with Model Meals being the surviving entity (the “Acquisition”). As a result, Model Meals became
a wholly owned subsidiary of the Company, and the members of Model Meals received and aggregate of
In January 2022, the Company’s board of directors and management changed the Company’s fiscal year end from December 31st to October 31st, effective immediately (see Note 2).
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 (“SEC”) for interim financial information, which present the unaudited consolidated financial statements of the Company and its active wholly owned subsidiaries, Home Bistro Holdings, Inc. and Model Meals LLC (acquired on July 6, 2021) for the period ending July 31, 2022. All intercompany transactions and balances have been eliminated. 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. The results for the interim period are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2022.
Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Transition Report, due to our change in fiscal year end, on Form 10-KT filed with the SEC on January 31, 2022.
6
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Going Concern
The
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements,
for the nine months ended July 31, 2022, the Company had a net loss and cash used in operations of $
Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. Management believes that the Company’s capital resources are not currently adequate to continue operating and maintaining its business strategy for a period of twelve months from the issuance date of this report. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates as of July 31, 2022 and October 31, 2021 include the assumptions used in the redemption recognition method for unredeemed gift cards, useful life of property and equipment and intangible assets, valuation of right-of-use (“ROU”) assets and lease liabilities, estimates of current and deferred income taxes and deferred tax valuation allowances, fair value of assets acquired and liabilities assumed in a business combination, and the fair value of non-cash equity transactions and derivative liabilities.
Cash
For purposes of the statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. On July 31, 2022 and October 31, 2021, the Company did not have any cash equivalents.
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. As of July 31,
2022 and October 31, 2021, the bank balance was in excess of FDIC insured levels by approximately $
Fair Value of Financial Instruments and Fair Value Measurements
FASB ASC 820 - Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on July 31, 2022. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
7
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The three levels of the fair value hierarchy are as follows:
| Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. | |
| Level 2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. | |
| Level 3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the consolidated balance sheets for cash, due from and to related parties, prepaid expenses, accounts payable and accrued liabilities approximate their fair market value based on the short-term maturity of these instruments.
Assets or liabilities measured at fair value on a recurring basis include embedded conversion options in convertible debt (see Note 4) and were as follows on July 31, 2022 and October 31, 2021:
| July 31, 2022 | October 31, 2021 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
A roll forward of the level 3 valuation financial instruments is as follows:
| Nine Months Ended July 31, 2022 | ||||
| (Unaudited) | ||||
| Balance on October 31, 2021 | $ | |||
| Increase in derivative liabilities included in debt discount | ||||
| Change in fair value of derivative liabilities | ( | ) | ||
| Balance on July 31, 2022 | $ | |||
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding equity instruments.
Derivative Liabilities
The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10 – Derivative and Hedging – Contract in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on debt extinguishment.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of purchase prices over the fair value of nets assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. Goodwill is evaluated for impairment on an annual basis at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Goodwill and
indefinite lived intangible assets are tested for impairment at the reporting unit level by first performing a qualitative assessment
to determine whether it is more likely than not (that is, a likelihood of more than
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets including intangible assets with finite life, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Inventory
Inventory consists of non-perishable food items distributed by the Company and are stated at the lower of cost and net realizable value utilizing the first-in first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the net realizable value. These reserves are based on estimates and included in cost of sales. As of July 31, 2022 and October 31, 2021, the inventory balances were insignificant and the Company determined that there was no allowance needed.
Revenue Recognition
The Company’s revenues consist of high quality, direct-to-consumer, ready-made meals that can be ordered by customers through www.homebistro.com, www.modelmeals.com and restaurant quality meats and seafood through its Colorado Prime Brand. Revenues from the Company’s ready-made meals are recognized when the product is delivered to the customer and title has transferred. It is at this point in time that the Company’s performance obligations have been completed. Product sales are recorded net of any discounts or allowances and include shipping charges.
Customers can purchase gift cards via phone or online through the Company’s e-commerce website. Gift card purchases are initially recorded as unredeemed gift card liabilities and are recognized as product sales upon redemption. Historically, the majority of gift cards are redeemed within two to three years of issuance. The Company does not charge administrative fees on unused gift cards, and its gift cards do not have an expiration date.
Based on historical redemption patterns, a portion of issued gift cards are not expected to be redeemed (breakage). The Company uses the redemption recognition method for recognizing breakage related to unredeemed gift cards for which it has sufficient historical redemption information. Under the redemption recognition method, breakage revenue is recorded in proportion to, and over the time period gift cards are actually redeemed. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. At least three years of historical data, which is updated annually, is used to estimate redemption patterns. Model meals, the Company’s wholly-owned subsidiary, does not have sufficient historical redemption information to recognize breakage. Therefore, all issued gift cards are recorded as a liability upon issuance and revenue when used.
Cost of Sales
The Company’s policy is to recognize product related cost of sales in conjunction with revenue recognition, when the product costs are incurred which is upon delivery of product. Cost of sales includes the food and processing costs directly attributable to fulfillment and the delivery of the product to customers including both inbound and outbound shipping costs. In addition, the royalty fee related to the Joint Product Development and Distribution Agreement (see Note 11) was also included in cost of sales.
Shipping
and handling costs incurred for product shipped to customers are included in cost of sales and amounted to $
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation”, which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Advertising Costs
The
Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in
the period incurred. Advertising costs charged to operations were $
Income Taxes
The Company accounts for income taxes using the liability method prescribed by ASC 740 - Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. For the nine months ended July 31, 2022, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
Leases
The Company accounts for its leases using the method prescribed by ASC 842 – Lease Accounting. The Company assess whether the contract is, or contains, a lease at the inception of a contract which is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use (“ROU”) assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating and financing lease ROU assets represents the right to use the leased asset for the lease term. Operating and financing 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 uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Basic and Diluted Loss Per Share
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock options and stock warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents may be dilutive in the future.
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The potentially dilutive common stock equivalents as of July 31, 2022 and 2021 were excluded from the dilutive loss per share calculation as they would be antidilutive due to the net loss and included the following:
| July 31, | ||||||||
| 2022 | 2021 | |||||||
| Common Stock Equivalents: | ||||||||
| Stock Warrants | ||||||||
| Convertible Notes | ||||||||
| Total | ||||||||
Concentration Risk
The
Company purchased approximately
During the nine months ended July 31, 2022, the Company had two kitchen facilities located at Pembroke Pines, FL 33009 and Santa Ana, CA. The Company started producing and packaging its food products at these locations in addition to purchasing food products from other vendors which mitigated this concentration risk.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and edging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470- 20, Debt with Conversion and Other Options, for convertible instruments. Under the amendments in ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. The amendments in ASU 2020-06 provide financial statement users with a simpler and more consistent starting point to perform analyses across entities. The amendments also improve the operability of the guidance and reduce, to a large extent, the complexities in the accounting for convertible instruments and the difficulties with the interpretation and application of the relevant guidance. To further improve the decision usefulness and relevance of the information being provided to users of financial statements, amendments in ASU 2020-06 increased information transparency by making the following amendments to the disclosure for convertible instruments:
| 1. | Add a disclosure objective |
| 2. | Add information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed |
| 3. | Add information on which party controls the conversion rights |
| 4. | Align disclosure requirements for contingently convertible instruments with disclosure requirements for other convertible instruments |
| 5. | Require that existing fair value disclosures in Topic 825, Financial Instruments, be provided at the individual convertible instrument level rather than in the aggregate. |
Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, amendments in ASU 2020-06 added disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The amendments in ASU 2020-06 are effective for public business entities, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of its annual fiscal year and are allowed to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption. If an entity elects the fully retrospective method of transition, the cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. The Company early adopted ASU 2020-06 effective November 1, 2021 and did not have a significant impact on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its consolidated financial statements.
NOTE 3 – ACQUISITION OF A SUBSIDIARY
Acquisition of Model Meals
Model Meals was formed on May 1, 2015. Model Meals provides prepackaged and prepared meals as a solution for time-constrained but discerning consumers focused on satisfying every member of the family by offering a broad array of the highest quality meal planning, delivery, and preparation services. Products are customized meal solutions, delivered fresh directly to the home and utilizes third-party food delivery services to fulfill customers’ orders.
On
July 6, 2021, the Company entered and closed on an Agreement and Plan of Merger with the members of Model Meals, acquiring Model Meals
through a reverse triangular merger, whereby Model Meals merged with Model Meals Acquisition Corp., a wholly owned subsidiary of the
Company, with Model Meals being the surviving entity (the “Acquisition”).
Further, on August 12, 2021, the Company filed, an amended current report Form 8-K/A, Model Meals’; (i) audited balance sheets and audited statement of operations as of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019, respectively; (ii) unaudited balance sheet and unaudited statement of operations as of March 31, 2021 and for the three months ended March 31, 2021, respectively, and; (iii) unaudited pro forma combined financial information derived by the application of pro forma adjustments to the historical consolidated financial statements of the Company and Model Meals which gives effect to the Acquisition between the Company and Model Meals as if the Acquisition had occurred on January 1, 2020 with respect to the unaudited annual pro forma combined statement of operation, and as of January 1, 2021 for the three months ended March 31, 2021 unaudited pro forma combined statement of operation, and as of March 31, 2021 with respect to the unaudited pro forma combined balance sheets.
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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In connection with the Acquisition, the assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The fair values are subject to adjustment during measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the purchase price measurement period, the Company will record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments may have been determined. Based upon the purchase price allocation, the following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of the acquisition:
| Total | ||||
| Assets acquired: | ||||
| Current assets | $ | |||
| Computer software | ||||
| Customer relationships | ||||
| Trademark | ||||
| Goodwill | ||||
| Total assets acquired at fair value | ||||
| Less: total liabilities assumed | ( | ) | ||
| Net asset acquired | $ | |||
| Purchase consideration paid: | ||||
| Fair value of common shares issued | $ | |||
| Cash consideration | ||||
| Total purchase consideration paid | $ | |||
Goodwill recognized as a result of the acquisition is not deductible for tax purposes. See Note 4 for additional information about other intangible assets. The recognized goodwill related to Model Meals is directly attributable to synergies expected to arise after the acquisition.
The following unaudited pro forma consolidated results of operations for the nine months ended July 31, 2021 have been prepared as if the acquisition of Model Meals had occurred as of the beginning of the period:
| Nine Months Ended | ||||
| July 31, 2021 | ||||
| (Unaudited) | ||||
| Net Revenues | $ | |||
| Net Loss | $ | ( | ) | |
| Net Loss per Share | $ | ( | ) | |
Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
On
July 6, 2021, the Company acquired Model Meals’ net assets with total fair value of $
On
June 24, 2021, the Company entered into a licensing agreement (“License Agreement”) with a celebrity chef and majority member
interest holder of Homemade Meals, LLC (“Homemade Meals”). As a condition to finalizing the License Agreement, the Company
executed a Membership Interest Purchase Agreement (the “Member Agreement”) and issued an aggregate of
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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The Company and the celebrity chef (collectively as “Parties”) had a preexisting relationship and other arrangements before negotiations for the acquisition of Homemade Meals and had planned to enter into a License Agreement during the negotiations, which is separate from the Member Agreement. Since ASC 805-50 includes only general principles related to accounting for an asset acquisition and in the absence of specific guidance, the Company analogized to the guidance in ASC 805-10-25-20 through 25-21– Business Combination to identify and account for transactions that are separate from a business combination. Under this guidance, the Company, when applying the acquisition method, recognized “only the consideration transferred to acquire the asset, the license. Any separate transactions were accounted for separately from acquisition of the License Agreement in accordance with the relevant GAAP.
Therefore,
in accordance with ASC 805-10-25-21, the Company accounted for the
Goodwill
| Estimated Life | July 31, 2022 | October 31, 2021 | ||||||||
| (Unaudited) | ||||||||||
| Goodwill | $ | $ | ||||||||
| Less: impairment | ||||||||||
| Goodwill, net | $ | $ | ||||||||
Intangible Assets
| Estimated Life | July 31, 2022 | October 31, 2021 | ||||||||
| (Unaudited) | ||||||||||
| Computer software | $ | $ | ||||||||
| Customer relationships | ||||||||||
| Trademark | ||||||||||
| License agreement | ||||||||||
| Total | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | $ | $ | ||||||||
| Intangible assets with a finite life, net | $ | $ | ||||||||
During
the three and nine months ended July 31, 2022, the Company recorded a total of $
Amortization of intangible assets attributable to future periods is as follows:
| Year ending October 31: | Amount | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
NOTE 5 – CONVERTIBLE NOTES
On July 31, 2022 and October 31, 2021, convertible notes consisted of the following:
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Principal amount | $ | $ | ||||||
| Add: put premium on stock-settled debt | ||||||||
| Less: debt discount | ( | ) | ( | ) | ||||
| Convertible notes payable, net | $ | $ | ||||||
| Principal amount – related party | $ | $ | ||||||
| Less: debt discount – related party | ( | ) | ||||||
| Convertible note payable - related party, net | $ | $ | ||||||
| Total convertible notes payable, net | $ | $ | ||||||
January 2021 Financing
January 2021 Note II
On
January 27, 2021, the Company entered into a Securities Purchase Agreement (the “January 2021 SPA II”) with an investor for
the sale of the Company’s convertible note. Pursuant to the January 2021 SPA II, the Company; (i) issued a convertible note with
principal amount of $
The
January 2021 Warrant II, issued to the investor as commitment fee, provides for the right to purchase up to
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JULY 31, 2022
March 2021 Financings
March 2021 Note I
On
March 22, 2021, the Company entered into a Securities Purchase Agreement (the “March 2021 SPA I”) with an investor for the
sale of the Company’s convertible note. Pursuant to the March 2021 SPA I, the Company; (i) issued a convertible note with principal
amount of $
The
March 2021 Warrant I, issued to the investor as a commitment fee, provides for the right to purchase up to
March 2021 Note III – Related Party
On
March 30, 2021, the Company entered into a Securities Purchase Agreement (the “March 2021 SPA III”) with an investor, who
is also a major stockholder and director and considered to be a related party, for the sale of the Company’s convertible note.
Pursuant to the March 2021 SPA III, the Company; (i) issued a convertible note with principal amount of $
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The
March 2021 Warrant III, issued to the investor as a commitment fee, provides for the right to purchase up to
March 2021 Note V
On
March 31, 2021, the Company entered into a Securities Purchase Agreement (the “March 2021 SPA V”) with an investor for the
sale of the Company’s convertible note. Pursuant to the March 2021 SPA V, the Company; (i) issued a convertible note with principal
amount of $
The
March 2021 Warrant V, issued to the investor as a commitment fee, provides for the right to purchase up to
April 2021 Financing
On
April 7, 2021, the Company closed a Securities Purchase Agreement dated March 29, 2021 (the “April 2021 SPA”) with an investor
for the sale of the Company’s convertible note. Pursuant to the April 2021 SPA, the Company; (i) issued a convertible note with
principal amount of $
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The
April 2021 Warrant, issued to the investor as a commitment fee, provides for the right to purchase up to
May 2021 Financings
May 2021 Note I
On
May 17, 2021, the Company closed a Securities Purchase Agreement (the “May 2021 SPA I”) with an investor for the sale of
the Company’s convertible note. Pursuant to the May 2021 SPA I, the Company (i) issued a convertible note with principal amount
of $
The
May 2021 Warrant I, issued to the investor as a commitment fee, provides for the right to purchase up to
May 2021 Note II
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The
May 2021 Warrant II, issued to the investor as a commitment fee, provides for the right to purchase up to
September 2021 Financings
September 2021 Note I
On
September 1, 2021, the Company closed a Securities Purchase Agreement (the “September 2021 SPA I”) with an investor for the
sale of the Company’s convertible note. Pursuant to the September 2021 SPA I, the Company (i) issued a convertible note with principal
amount of $
The
September 2021 Warrant I, issued to the investor as a commitment fee, provides for the right to purchase up to
September 2021 Note II
On
September 8, 2021, the Company closed a Securities Purchase Agreement (the “September 2021 SPA II”) with an investor for
the sale of the Company’s convertible note. Pursuant to the September 2021 SPA II, the Company (i) issued a convertible note with
principal amount of $
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The
September 2021 Agreements II contain other provisions, covenants, and restrictions common with this type of debt transaction. The September
2021 SPA II also provides the investor with certain “piggyback” registration rights, permitting them to request
that the Company include the issued shares for sale in certain registration statements filed by the Company under the Securities Act
of 1934, as amended. During the nine months ended July 31, 2022, the Company paid $
The
September 2021 Warrant II, issued to the investor as commitment fee, provides for the right to purchase up to
May 2022 Note I
On
May 18, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA I”) with an investor for the sale of
the Company’s convertible note. Pursuant to the May 2022 SPA I, the Company; (i) issued a convertible note with principal amount
of $
The
May 2022 Warrant I issued to the investor, provides for the right to purchase up to
If the Company at any time while the May 2022 Note I and May 2022 Warrant I are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note I and May 2022 Warrant I), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased. The May 2022 Note I and May 2022 Warrant I also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended.
As
of July 31, 2022, the May 2022 Note I had outstanding principal of $
May 2022 Note II
On
May 24, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA II”) with an investor for the sale
of the Company’s convertible note. Pursuant to the May 2022 SPA II, the Company; (i) issued a convertible note with principal amount
of $
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
The
May 2022 Warrant II issued to the investor, provides for the right to purchase up to
If the Company at any time while the May 2022 Note II and May 2022 Warrant II are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note II and May 2022 Warrant II), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased.
The May 2022 Note II and the May 2022 Warrant II also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended.
As
of July 31, 2022, the May 2022 Note II had outstanding principal of $
May 2022 Note III
On
May 24, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA III”) with an investor for the sale
of the Company’s convertible note. Pursuant to the May 2022 SPA III, the Company; (i) issued a convertible note with principal
amount of $
The
May 2022 Warrant III issued to the investor, provides for the right to purchase up to
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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If the Company at any time while the May 2022 Note III and May 2022 Warrant III are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note III and May 2022 Warrant III), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased. The May 2022 Note III and the May 2022 Warrant III also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended.
As
of July 31, 2022, the May 2022 Note III had outstanding principal of $
July 2022 Note
On
July 19, 2022 (the “Issue Date”), the Company entered into Securities Purchase Agreements dated as of July 19, 2022
(the “July 2022 SPA”), by and between the Company and 1800 Diagonal Lending LLC, a Virginia limited liability company
(the “Investor”). Pursuant to the July 2022 SPA, among other things, the Company agreed to issue to the Investor a
convertible note in the original principal amount of $
The Company has the right to prepay the outstanding principal amount of the Note, plus any accrued interest on the outstanding principal (including any default interest) at a rate of (x) 120% during the period ending 120 days after the Issue Date and (y) 125% during the period between 121 days and 180 days after the Issue Date. The Company does not have a prepayment right following the expiration of the 180-day period.
Upon the occurrence and during the continuation of any event of default under the Note, the Note becomes immediately due and payable and the Company is obligated to pay the Investor in full satisfaction of its obligations thereunder an amount equal to the greater of (i) the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment multiplied by 150% and (ii)(a) the highest number of shares of Common Stock issuable upon conversion of the default sum at the Conversion Price, multiplied by (b) the highest closing price for the Common Stock during the period beginning on the date of first occurrence of the event of default and ending one day prior to the mandatory prepayment date.
The obligations under the July 2022 Note are not secured by any assets of the Company.
The July 2022 SPA and July 2022 Note agreements contain other provisions, covenants and restrictions common with this type of debt transaction. Furthermore, the Company is subject to negative covenants under the Agreements, which the Company also believes are also customary for transactions of this type.
The
July 2022 Note was treated as stock settled debt under ASC 480-Distinguishing Liabilities from Equity, and a put premium of $
As
of July 31, 2022, the July 2022 Note had an outstanding balance of $
22
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Valuation of Warrants
The Company uses the Binomial Valuation Model to determine the fair value of its stock warrants which requires the Company to make several key judgments including:
| ● | the value of the Company’s common stock; |
| ● | the expected life of issued stock warrants; |
| ● | the expected volatility of the Company’s stock price; |
| ● | the expected dividend yield to be realized over the life of the stock warrants; and |
| ● | the risk-free interest rate over the expected life of the stock warrants. |
The Company’s computation of the expected life of issued stock warrants was based on the simplified method as the Company does not have adequate exercise experience to determine the expected term. The interest rate was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of volatility was based on the historical volatility of the Company’s common stock.
Commitment Share True-Up Provision
Derivative Liabilities Pursuant to Convertible Notes
In connection with the issuance of the March 2021 Financings, April 2021 Financing, May 2021 Financings, September 2021 Financings and May 2022 Financings (collectively referred to as “Notes”), the Company determined that the terms of the Notes contain redemption features to be accounted for as derivative liabilities pursuant to ASC 815-15-25-42 as the redemption feature is not clearly closely related to the debt host. Accordingly, under the provisions of ASC 815-40 –Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion options was determined using the Monte Carlo valuation model. At the end of each period and on note conversion date or repayment, the Company revalues the derivative liabilities resulting from the embedded option.
In
connection with the issuance of the May 2022 Notes, on the initial measurement date, the fair values of the embedded conversion option
of $
On
July 31, 2022, the Company revalued the embedded conversion option derivative liabilities. In connection with these revaluations, the
Company recorded a gain from the change in the derivative liabilities fair value of $
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
During the nine months ended July 31, 2022, the fair value of the derivative liabilities were estimated using the Monte Carlo Valuation Model with the following assumptions (see Note 2):
| July 31, 2022 | ||||
| Dividend rate | % | |||
| Term (in years) | ||||
| Volatility | % | |||
| Risk—free interest rate | % | |||
| Default probability | % | |||
| Probability of uplist offering | % | |||
For
the nine months ended July 31, 2022 and 2021, amortization of debt discounts related to the convertible notes amounted to $
NOTE 6 – NOTES PAYABLE
Notes payable is summarized below:
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Principal amount | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Notes payable – long-term portion | $ | $ | ||||||
Minimum principal payments under notes payable are as follows:
| Year ended October 31, 2022 (remaining) | $ | |||
| Year ended October 31, 2023 | ||||
| Year ended October 31, 2024 | ||||
| Year ended October 31, 2025 | ||||
| Thereafter | ||||
| Total principal payments | $ |
Economic Injury Disaster Loan
On
May 20, 2020, the Company entered into a Loan Authorization and Agreement (“SBA Loan Agreement”) with the SBA, under the
SBA’s Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic. Pursuant to the SBA Loan
Agreement, the Company received an advanced of $
On
June 17, 2020, the Company entered into a Loan Authorization and Agreement (“SBA Loan Agreement”) with the SBA, under the
SBA’s Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic. Pursuant to the SBA Loan
Agreement, the Company received an advanced of $
24
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
November Note Payable
On
November 12, 2020, the Company entered into a Note Agreement with an investor for the sale of the Company’s note (the “Note”).
Pursuant to the terms provided for in the Note Agreement, the Company issued to the investor a Note and the Company received proceeds
in the amount of $
NOTE 7 – ADVANCE PAYABLE
On
July 9, 2021, the Company entered into a capital advance agreement with Shopify (“July Advance Agreement”). Under the terms
of the July Advance Agreement, the Company has received $
On
August 31, 2021, the Company entered into a capital advance agreement with Shopify (“August Advance Agreement”). Under the
terms of the August Advance Agreement, the Company has received $
On
April 5, 2022, the Company entered into a capital advance agreement with PayPal (“PayPal Advance Agreement I”). Under the
terms of the PayPal Advance Agreement I, the Company received $
On
April 6, 2022, the Company entered into a capital advance agreement with Shopify (“April Advance Agreement I”). Under the
terms of the April Advance Agreement I, the Company received $
On
April 6, 2022, the Company entered into a capital advance agreement with Shopify (“April Advance Agreement II”). Under the
terms of the April Advance Agreement II, the Company received $
On
April 16, 2022, the Company entered into a capital advance agreement with Shopify (“April Advance Agreement IV”). Under the
terms of the April Advance Agreement III, the Company received $
25
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
NOTE 8 – UNREDEEMED GIFT CARDS
Unredeemed gift cards activities as of July 31, 2022 and October 31, 2021 are summarized as follows:
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Beginning balance | $ | $ | ||||||
| Acquired gift card liability (see Note 3) | ||||||||
| Sale of gift cards | ||||||||
| Promotional and other gift cards issued | ||||||||
| Revenue from breakage | ( | ) | ( | ) | ||||
| Gift card redemptions | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
NOTE 9 – LEASE LIABILITIES
Operating Lease Right-of-Use (“ROU”) Asset and Operating Lease Liabilities
On
July 6, 2021, the Company acquired Model Meals (see Note 3), which had a lease agreement for its facility in Santa Ana, California which
expired in December 2021 (see Note 12) and had remaining operating right-of-use asset and liability of $
On June 1, 2021, the Company entered into a lease agreement, effective July 13, 2021, for its facility in Pembroke Pine, Florida. The lease is for a period of 36 months commencing in July 2021 and expiring in July 2024. Pursuant to the lease agreement, the Company shall pay a monthly base rent of; (i) $8,062 in the first year; (ii) $8,465 in the second year and; (iii) $8,888 in the third year.
For
the nine months ended July 31, 2022, total rent expense amounted to $
The
significant assumption used to determine the present value of the operating lease liabilities was a discount rate of
On July 31, 2022 and October 31, 2021, operating lease right-of-use assets is summaries below:
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Operating ROU assets | $ | $ | ||||||
| Less accumulated reductions | ( | ) | ( | ) | ||||
| Balance of Operating ROU assets, net | $ | $ | ||||||
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Operating lease liabilities related to the Operating ROU assets is summarized below:
July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Operating lease liabilities | $ | $ | ||||||
| Reduction of operating lease liabilities | ( | ) | ( | ) | ||||
| Total | ||||||||
| Less: short term portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
Future minimum operating lease payments under the operating lease agreements on July 31, 2022 are as follows:
| Year | Amount | |||
| Ending October 31, 2022 (remaining) | $ | |||
| Ending October 31, 2023 | ||||
| Ending October 31, 2024 | ||||
| Total minimum non-cancellable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total operating lease liabilities on July 31, 2022 | $ | |||
Financing Lease Right-of-Use (“ROU”) Assets and Financing Lease Liability
On July 13, 2021, the Company entered into a financing agreement with a lessor for the purchase of equipment. Pursuant to the financing agreement, the Company shall make a monthly payment of $6,500 for a period of 36 months commencing in August 2021 through August 2024. The monthly payment shall consist of $6,000 cash and $500 in gift card allowance, reflected in the accompanying unaudited consolidated balance sheet under accrued expense and other liabilities. At the effective date of the financing agreement, the Company recorded a financing lease payable of $200,509.
The
significant assumption used to determine the present value of the financing lease liability was a discount rate of
Financing right-of-use (“Financing ROU”) asset is summarized below:
July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Financing ROU assets | $ | $ | ||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Balance of financing ROU assets, net | $ | $ | ||||||
For
the three and nine months ended July 31, 2022, depreciation expense related to Financing ROU assets amounted to $
Financing lease liability related to the Financing ROU assets is summarized below:
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Financing lease payables for equipment | $ | $ | ||||||
| Reduction of financing lease liability | ( | ) | ( | ) | ||||
| Total | ||||||||
| Less: short term portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Future minimum lease payments under the financing lease agreement on July 31, 2022 are as follows:
| Year | Amount | |||
| Year ending October 31, 2022 (remaining) | $ | |||
| Year ending October 31, 2023 | ||||
| Year ending October 31, 2024 | ||||
| Total minimum non-cancellable financing lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total financing lease liabilities on July 31, 2022 | $ | |||
NOTE 10 – RELATED PARTY BALANCES AND TRANSACTIONS
The
Company utilizes the shipping carrier account of a related entity, owned
See also related party convertible note in Note 5 – March 2021 Note III – Related Party.
See consulting agreement in Note 12 – Consulting Agreement – Related Party
NOTE 11 – STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
The
Company is authorized to issue
Common Stock
Shares Authorized
The
Company is authorized to issue
Common Stock Issued for Cash
| ● | During the nine months ended July 31, 2021, the Company issued an aggregate of |
| ● | During the nine months ended July 31, 2022, the Company issued an aggregate of |
Common Stock Issued for Services and Prepaid Services
| ● | On April 1, 2021, the Company issued an aggregate of |
| ● | On November 8, 2021, the Company issued an aggregate of |
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
| ● | During the nine months ended July 31, 2022, the Company granted |
Common Stock for Commitment Fee with Convertible Notes Payable
| ● | In December 2020, the Company issued an aggregate of |
| ● | On January 12, 2021, the Company issued |
| ● | On February 3, 2021, the Company issued |
| ● | On March 22, 2021, the Company issued |
| ● | On March 29, 2021, the Company issued |
| ● | On March 30, 2021, the Company issued |
| ● | On March 30, 2021, the Company issued |
| ● | On March 31, 2021, the Company granted |
| ● | On April 7, 2021, the Company granted | |
| ● | On May 17, 2021, the Company granted | |
| ● | On May 28, 2021, the Company granted |
| ● | During the nine months ended July 31, 2022, the Company granted |
29
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Common Stock Issued Pursuant to Lock-Up & Leak Out Agreements
| ● | During the nine months ended July 31, 2022, the Company issued as consideration, to several stockholders, an aggregate of | |
| On May 1, 2022, the Company issued as consideration to a related party stockholder |
Common Stock Issued Pursuant to Product Development Agreements
| ● | During the three months ended January 31, 2022, the Company issued |
Common Stock Issued Pursuant to Stock-Based Compensation
| ● | On April 29, 2021, the Company issued |
Common Stock Issued for Acquisition of Subsidiary
| ● | On July 6, 2021, the Company issued an aggregate of |
Common Stock Issued for Warrant Exchange Agreements
| ● | On May 1, 2022, in connection with the settlement of a down round exercise price trigger, the Company entered into a warrant exchange agreement with various warrant holders (collectively as “Parties”) pursuant to which the Parties exercised an aggregate of |
| ● | On June 30, 2022, in connection with a lock-up and leak out settlement agreement, the Company issued |
Common stock issued pursuant to settlement agreements
| ● |
30
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Stock Warrants
Warrants Issued Pursuant to Stock-Based Compensation
| ● | On March 25, 2022, the Company issued to two executives fully vested warrants to purchase up to an aggregate of |
Warrants Issued for Professional Services
| ● | During the three months ended January 31, 2021, the Company issued fully vested warrants to purchase up to |
| ● | During the three months ended January 31, 2022, the Company issued fully vested warrants to purchase up to |
Warrants for Commitment Fee with Convertible Notes Payable
| ● | On February 2, 2021, the Company issued a warrant to purchase up to |
| ● | On March 22, 2021, the Company issued a warrant to purchase up to |
| ● | On March 25, 2021, the Company issued warrant to purchase up to |
| ● | On March 29, 2021, the Company issued a warrant to purchase up to |
31
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
| ● | On March 29, 2021, the Company issued a warrant to purchase up to |
| ● | On March 30, 2021, the Company issued a warrant to purchase up to |
| ● | On March 31, 2021, the Company issued a warrant to purchase up to |
| ● | On April 7, 2021, the Company issued a warrant to purchase up to |
| ● | On May 17, 2021, the Company issued a warrant to purchase up to |
| ● | On May 28, 2021, the Company issued a warrant to purchase up to |
| ● | On May 18, 2022, the Company issued a warrant to purchase up to | |
| ● | On May 24, 2022, the Company issued a warrant to purchase up to |
The Company used the Binomial pricing model to determine the fair value of its common stock warrants which requires the Company to make several key judgments including:
| ● | the expected life of issued stock warrants; |
| ● | the expected volatility of the Company’s stock price; |
| ● | the expected dividend yields to be realized over the life of the stock warrants; and |
| ● | the risk-free interest rate over the expected life of the stock warrants. |
The
Company’s computation of the expected life of issued stock warrants was based on the simplified method as the Company does not
have adequate exercise experience to determine the expected term and was estimated to be
| Dividend rate | % | |
| Term (in years) | ||
| Volatility | ||
| Risk-free interest rate |
32
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
A summary of the Company’s outstanding stock warrants as of July 31, 2022 and changes during the period ended are presented below:
| Number of Stock Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance on October 31, 2021 | $ | |||||||||||
| Warrants issued for services | ||||||||||||
| Warrants issued pursuant to employment agreements | ||||||||||||
| Warrants issued in connection with convertible debt | ||||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Balance on July 31, 2022 | $ | |||||||||||
| Stock warrants exercisable on July 31, 2022 | $ | |||||||||||
Certain
exercisable stock warrants had per share intrinsic value of $
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreement
On
October 1, 2021, the Company entered into an employment agreement (“Duchman Employment Agreement”) with Zalmi Scher Duchman
to serve as the Company’s Chief Executive Officer. The Duchman Employment Agreement has a term of three years (“Term”)
from the effective date and provides for (i) an annual salary of $
On
March 25, 2022, the Company entered into an employment agreement (“May Employment Agreement”) with Camille May to serve as
the Company’s Chief Financial Officer. The May Employment Agreement has a term of
Lease Obligation Settlement
On
February 22, 2018, the Company entered into a Surrender Agreement with a former landlord for rental obligations dating back to the year
ended December 31, 2017 until the space was vacated by the Company on March 31, 2017. Upon executing the Surrender Agreement, the former
landlord and the Company agreed that the total rental obligation due was $
33
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Put Option Agreement and Stock Repurchase Agreement
On April 20, 2020, the Company and a stockholder entered into a Put Option Agreement (see Note 3), pursuant to which, among other things, the Company agreed, at the election of the stockholder, to purchase certain shares of common stock from such stockholder no sooner than two years from the date of the Put Option Agreement also referred to herein as Market Period. Pursuant to the Put Option Agreement, in the event that the stockholder does not generate $1.3 million dollars also referred to herein as 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 expired fourteen (14) days from end of the Market Period. In connection with the Put Option Agreement, the Company recorded an initial common stock repurchase obligation in the amount of $1.3 million, reflected in the accompanying consolidated balance sheets as common stock repurchase obligation, and reduction of additional paid in capital upon entering the Put Option Agreement. The repurchase obligation is re-assessed by the Company each reporting period and adjusted for the proceeds received by the stockholder from sale of common stock. During the ten months ended October 31, 2021, the Company recorded a reduction of $681,725. During the nine months ended July 31, 2022, the Company recorded a reduction of $113,072. As of July 31, 2022, the Company has recorded an aggregate reduction of $794,797 for net proceeds realized by the stockholder on sale of Company common stock which was reclassified to additional paid in capital. As of July 31, 2022 and October 31, 2021, the Company had $505,203 and $618,275 million of common stock repurchase obligation outstanding, respectively.
On
June 30, 2022, the Company and a stockholder entered into a Stock Repurchase Agreement, pursuant to which, among other things, the Company
agreed to purchase certain shares of common stock from such stockholder for an aggregate purchase price of $
Joint Product Development and Distribution Agreement
Corlich Enterprises, Inc
On
September 22, 2020, the Company and Corlich Enterprises, Inc., a New Jersey corporation (“Corlich”) entered into a Joint
Product Development and Distribution Agreement (the “Development Agreement”), effective the same date, pursuant to which,
among other things, Corlich agreed to provide certain commercial services (the “Services”) of Cat Cora, an American professional
chef, in order for the Company and Corlich to collaboratively develop a brand of meals (the “Cat Cora Meals”). In consideration
for the Services, the Company agreed to (i) pay Corlich a royalty on net revenues generated from (A) the Cat Cora Meals, and (B) Home
Bistro and Prime Chop brand orders where a dedicated code is used at purchase, and (ii) issue a warrant to purchase up to
During
the first year of the Development Agreement’s term, Corlich is guaranteed a minimum royalty payment of $
34
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Hungry Fan Brand, LLC
On February 18, 2021, the Company and Hungry Fan Brand, LLC (“Hungry Fan”) (collectively as “Parties”) entered into a Joint Product Development and Distribution Agreement (the “Development Agreement”), effective the same date. The Development Agreement shall remain in effect for twelve months from the effective. Pursuant to the Development Agreement, the Parties shall jointly contribute and be responsible for the development of the Hungry Fan Meals, under the terms and conditions of the Development Agreement.
For
the use of Hungry Fan Meals and all associated intellectual property for the benefit of the Hungry Fan Meals, the Company shall pay to
Hungry Fan the following: (i)
In
addition, subject to the terms and conditions of this Development Agreement, the Company shall pay to Hungry Fan a guaranteed minimum
compensation of $
Red Velvet XOXO, LLC
On March 19, 2021, the Company and Red Velvet XOXO LLC, a New York corporation (“Red Velvet”) (collectively as “Parties”) entered into a Joint Product Development and Distribution Agreement (the “Development Agreement”), effective the same date. The Development Agreement shall remain in effect for twelve months from the effective date unless sooner terminated as defined in the Development Agreement, or unless extended by mutual agreement of the Parties. Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of desserts, marketed and sold exclusively utilizing Red Velvet’s recipes (the “Red Velvet Desserts”) under the Home Bistro label, under the terms and conditions of the Development Agreement.
For
the use of Red Velvet Desserts and all associated intellectual property for the benefit of the Red Velvet Desserts, Bistro shall pay
to Red Velvet the following: (i)
Chef Roblé & Co.
On April 13, 2021, the Company and Roblé Ali (“Roblé”), celebrity chef and reality TV personality “Chef Roblé & Co.” (collectively as “Parties”) entered into a Joint Product Development and Distribution Agreement (the “Development Agreement”), effective the same date. The Development Agreement shall remain in effect for two years from the effective date. Pursuant to the Development Agreement, the Parties shall jointly contribute and be responsible for the development of the Roblé Meals, under the terms and conditions of the Development Agreement.
35
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
For
the use of Roblé Meals and all associated intellectual property for the benefit of the Roblé Meals, the Company shall pay
to Roblé the following: (i)
In addition, subject to the terms and conditions of this Development Agreement, the Company shall pay to Roblé a guaranteed minimum compensation of $36,000 for twelve months (the “GMC”) as follows: (i) $9,000 upon the Company’s receipt and approval of all recipes submitted by Roblé; (ii) $9,000 upon the commencement of selling of the Roblé Meals (“Selling Date”); (iii) $3,000 per month for a period of six months, commencing the month immediately following the Selling Date. The total aggregate compensation paid to Roblé shall be reduced by the GMC. During the transitional period ending October 31, 2021, the first condition has been satisfied by both parties and the Company paid $9,000 the GMC. As of July 31, 2022 and October 31, 2021, there were no accrued GMC as the Selling Date has not yet occurred.
Claudia Cocina LLC
On
June 22, 2021, the Company and Claudia Cocina LLC (f/s/o Claudia Sandoval), a California limited liability company (“Claudia Cocina”)
(collectively as “Parties”) entered into a Joint Product Development and Distribution Agreement (the “Development Agreement”).
Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of meals, marketed and sold utilizing the Property
(“CS Meals”) jointly with the Home Bistro label, under the terms and conditions of the Development Agreement. The Development
Agreement is effective upon signature and shall remain in effect from the first date on which the CS Meals are commercially launched
(the “Launch Date”) until the last day of the month that is one year from the Launch Date (the “Initial Term”).
The Parties shall have the right to renew the Development Agreement for an additional one-year term (“Renewal Term”) (the
Initial Term and the Renewal Term, individually and together, (the “Term”) upon mutual written consent, which consent must
be provided no later than sixty days prior to the end of the current Term. The Renewal Term shall be on the same terms and conditions
as provided herein for the Initial Term, except that the Guaranteed Minimum Sales and the Guaranteed Minimum Royalties (“GMR”)
payable during the Renewal Term shall be mutually agreed to between the Parties. The Company issued
Claudia
36
HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
Chef Richard Blais
On
July 22, 2021 (“Effective Date”), the Company and Trail Blais, LLC (f/s/o Chef Richard Blais), celebrity chef and reality
TV personality (“Chef Richard Blais”) (collectively as “Parties”), entered into a Joint Product Development and
Distribution Agreement (the “Development Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively
develop a brand of meals, marketed and sold utilizing the Property (“Blais Meals”) jointly with the Home Bistro label, under
the terms and conditions of the Development Agreement. The Development Agreement shall remain in effect from the Effective Date until
the last day of the month that is one-year from the Effective Date (“Term”), ending no later than July 30, 2022. The first
twelve-month anniversary of the Development Agreement shall be deemed “Year ”. The Company shall only distribute the Blais
Meals within the Term and any Renewal Term (defined below), as mutually agreed. The Company agrees that following the Term, The Company
shall use best efforts to cease the distribution of all Blais Meals. The Parties shall have the right to renew the Development Agreement
for an additional one-year term (“Renewal Term”) upon mutual written consent. The Renewal Term shall be negotiated in good
faith within ninety days of the end of the Term. The Company issued
Perfect Athlete LLC
On
September 15, 2021 (“Effective Date”), the Company and Perfecting Athletes, LLC (“PA” or “Perfecting Athletes”)
(collectively as “Parties”), entered into a Joint Product Development and Distribution Agreement (the “Development
Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of meals, marketed and sold
utilizing the Property (“PA Meals”) jointly with the Home Bistro label, under the terms and conditions of the Development
Agreement. The Development Agreement shall remain in effect from the Effective Date until the last day of the month that is two-years
from the Effective Date (“Term”). The first twelve-month anniversary of the Development Agreement shall be deemed “”. The Company shall only distribute the PA Meals within the Term and any Renewal Term (defined below), as mutually agreed.
The Company agrees that following the Term, The Company shall use best efforts to cease the distribution of all PA Meals. The Parties
shall have the right to renew the Development Agreement for an additional one-year term (“Renewal Term”) upon mutual written
consent. The Company issued
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
For
the use of Perfecting Athletes and all associated intellectual property for the benefit of the PA Meals, the Company shall pay to Perfecting
Athletes the following: (i)
Spicy Mango Foodies LLC
On
January 19, 2022 (“Effective Date”), the Company and Spicy Mango Foodies LLC (f/s/o Chef Priyanka Naik (“CPN”))
(collectively as “Parties”), entered into a Joint Product Development and Distribution Agreement (the “Development
Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of meals, marketed and sold
utilizing the Property (“CPN Meals”) jointly with the Home Bistro label, under the terms and conditions of the Development
Agreement. The Development Agreement shall remain in effect from the Effective Date until the last day of the month that is two-year
from the Effective Date (“Term”). The first twelve-month anniversary of the Development Agreement shall be deemed “Year
One”. The Company shall only distribute the CPN Meals within the Term and any Renewal Term (defined below), as mutually agreed.
The Company agrees that following the Term, the Company shall use best efforts to cease the distribution of all CPN Meals. The Parties
shall have the right to renew the Development Agreement for an additional one-year term (“Renewal Term”) upon mutual written
consent. The Company issued
For
the use of Spicy Mango Foodies, LLC (“SMF”) and all associated intellectual property for the benefit of the CPN Meals, the
Company shall pay to SMF the following: (i)
Mini Melanie, LLC
On February 22, 2022 (“Effective Date”), the Company and Mini Melanie, LLC (f/s/o Chef Melanie Moss (“MM”)) (collectively as “Parties”), entered into a Joint Product Development and Distribution Agreement (“Development Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of desserts (“Moss Deserts”) jointly with the Home Bistro label, under the terms and conditions of the Development Agreement. The Development Agreement shall remain in effect from the Effective Date until the last day of the month that is one-year from the Effective Date.
For the use of MM and all associated intellectual property for the benefit of the Moss Deserts, the Company shall pay to MM 5% of all Net Revenue generated from the sale of Moss Deserts (“MM Royalty”). For the purpose of this agreement “Net Revenue” shall be defined as gross sales generated on Moss Deserts less discounts and returns. The MM Royalty generated during each calendar month in which an agreement is in effect shall be due and payable by the 10th business day of the following month in which the MM Royalty was earned. During the three months ended July 31, 2022, there were no payments made or owed under the Development Agreement.
Consulting Agreements
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HOME BISTRO, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2022
On September 10, 2021, the Company and Bench International, LLC (“Bench International”) (collectively as “Parties”) entered into an agreement to marketing consulting services (“Agreement”). The Agreement shall remain in effect for twelve months from the effective date of September 10, 2021. Pursuant to the Agreement, Bench International shall be paid, in cash, and aggregate amount of $350,000 to be paid in seven monthly instalments of $50,000 beginning September 2021 until March 2022. In 2021, the Company paid an aggregate amount of $100,000. During the nine months ended July 31, 2022, the Company paid an aggregate amount of $205,000. During the nine months ended July 31, 2022, the Company recognized $246,667 of expense related to this Agreement and recorded as selling and marketing expenses in the accompanying unaudited consolidated statement of operations. As of July 31, 2022 and October 31, 2021, the prepaid expense related to this Agreement were $0 and $41,667, respectively.
On October 1, 2021, the Company and a consultant (collectively as “Parties”) entered into a consulting agreement which shall remain in effect until April 1, 2022, unless sooner terminated as provided in the agreement, or unless extended by agreement of the Parties. Pursuant to the agreement, the Company issued warrants to purchase 500,000 of common stock (“Warrant”) with a grant date fair value of $678,253 for services rendered and was recorded as professional and consulting expenses in the accompanying consolidated statement of operations in 2021. The Warrant vested upon issuance, has an exercise price of $0.001 and expiration date of October 1, 2026. In addition, the consultant shall receive $3,000 per month, payable in cash on the first of each month commencing on the effective date.
Consulting Agreement – Related Party
On
October 1, 2021,
Lock-Up and Leak Out Agreements
In
2021 and during the nine months ended July 31, 2022, the Company and various stockholders (collectively as “Parties”) entered
into a Lock-Up and Leak Out Agreement (“Lock-Up Agreements”). Pursuant to the Lock-Up Agreements, stockholders, including
the stockholders’ affiliated entities, agreed that for the period beginning on the respective effective dates of their Lock-Up
Agreements and ending in the period between October 2021 to June 2023 (the “Lock-Up Period”), the stockholders will not offer,
sell, contract to sell, pledge, give, donate, transfer or otherwise dispose of, directly or indirectly, any shares of Company’s
common stock or securities convertible into or exercisable for common stock or securities or rights convertible into or exchangeable
or exercisable for any common stock, whether owned by the stockholders as the date hereof or acquired subsequent to the date hereof (collectively,
the “Lock-Up Shares”), enter into a transaction which would have the same effect, or enter into any swap, hedge or other
arrangement that transfers, in whole or in part, any of the economic or voting consequences of ownership of such securities, whether
any such aforementioned transaction is to be settled by delivery of the Lock-Up Shares or such other securities, in cash or otherwise,
or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap,
hedge or other arrangement. During the ten-months ended October 31, 2021, as consideration for the stockholders’ execution of the
Lock-Up Agreements, the Company issued an aggregate of
License Agreement
On
June 24, 2021, the Company entered into a licensing agreement (“License Agreement”) with Ayesha Curry (see Note 4). The License
Agreement has a term of three years and renewable under the terms and conditions specified in the License Agreement. Pursuant to the
License Agreement the Company shall pay Ayesha Curry a
NOTE 13 – SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this Report. Our actual results or actions may differ materially from these forward-looking statements for many reasons. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect. See “CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION” above. As used herein, the terms “we,” “us,” “our” and the “Company” refers to Home Bistro, Inc., a Nevada corporation and its subsidiaries unless otherwise stated.
Overview
Home Bistro, Inc. (formerly known as Gratitude Health, Inc.) (the “Company”) was incorporated in the State of Nevada on December 17, 2009. Effective March 23, 2018, the Company changed its name from Vapir Enterprises Inc. to Gratitude Health, Inc. On September 14, 2020, the Company changed its name from Gratitude Health, Inc. to Home Bistro, Inc. The Company is in the business of providing pre-packaged and prepared meals to consumers focused on offering a broad array of the highest quality meal delivery, and preparation services. The Company’s primary former operations were in the business of manufacturing, selling, and marketing functional RTD (Ready to Drink) beverages sold under the Company’s trademark (the “RTD Business”). The RTD Business was disposed on September 25, 2020 as discussed below.
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 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. The Company has applied for and received certain financial assistance under the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”) enacted in March 2020 by the U.S. Government in response to COVID-19.
On July 6, 2021, the Company entered and closed on an Agreement and Plan of Merger with the members of Model Meals, LLC (“Model Meals”), acquiring Model Meals through a reverse triangular merger, whereby Model Meals merged with Model Meals Acquisition Corp., a wholly owned subsidiary of the Company, with Model Meals being the surviving entity (the “Acquisition”). As a result, Model Meals became a wholly owned subsidiary of the Company, and the members of Model Meals received and aggregate of 2,008,310 shares of common stock and were paid $60,000 in cash. Pursuant to the Acquisition, the Company issued 2,008,310 shares of common stock with grant date fair value of $ 2,028,393.
In January 2022, the Company’s board of directors and management changed the Company’s fiscal year end from December 31st to October 31st, effective immediately.
Recent Developments
On January 19, 2021 (“Effective Date”), the Company and Spicy Mango Foodies LLC (f/s/o Chef Priyanka Naik (“CPN”)) (collectively as “Parties”), entered into a Joint Product Development and Distribution Agreement (the “Development Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of meals, marketed and sold utilizing the Property (“CPN Meals”) jointly with the Home Bistro label, under the terms and conditions of the Development Agreement. The Development Agreement shall remain in effect from the Effective Date until the last day of the month that is two-year from the Effective Date (“Term”). The first twelve-month anniversary of the Development Agreement shall be deemed “Year One”. The Company shall only distribute the CPN Meals within the Term and any Renewal Term (defined below), as mutually agreed. The Company agrees that following the Term, the Company shall use best efforts to cease the distribution of all CPN Meals. For the use of Spicy Mango Foodies, LLC (“SMF”) and all associated intellectual property for the benefit of the CPN Meals, the Company shall pay to SMF the following: (i) 10% of all Net Revenue generated from the sale of CPN Meals (“SMF Royalty”). For the purpose of this agreement “Net Revenue” shall be defined as gross sales generated on CPN Meals less discounts and returns. The SMF Royalty generated during each calendar month in which an agreement is in effect shall be due and payable by the 10th business day of the following month in which the SMF Royalty was earned and; (ii) 10% of all Net Revenue generated from the sale of Home Bistro and Prime Chop brand orders in which a SMF Dedicated Code was used at the time of purchase (“SMF Commission”) and all sales derived from that account thereafter. The SMF Commission generated during each calendar month in which an agreement is in effect shall be due and payable by the 10th business day of the following month in which the SMF Commission was earned.
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On February 22, 2022 (“Effective Date”), the Company and Mini Melanie, LLC (f/s/o Chef Melanie Moss (“MM”)) (collectively as “Parties”), entered into a Joint Product Development and Distribution Agreement (“Development Agreement”). Pursuant to the Development Agreement, the Parties shall collaboratively develop a brand of desserts (“Moss Deserts”) jointly with the Home Bistro label, under the terms and conditions of the Development Agreement. The Development Agreement shall remain in effect from the Effective Date until the last day of the month that is one-year from the Effective Date. For the use of MM and all associated intellectual property for the benefit of the Moss Deserts, the Company shall pay to MM 5% of all Net Revenue generated from the sale of Moss Deserts (“MM Royalty”). For the purpose of this agreement “Net Revenue” shall be defined as gross sales generated on Moss Deserts less discounts and returns. The MM Royalty generated during each calendar month in which an agreement is in effect shall be due and payable by the 10th business day of the following month in which the MM Royalty was earned.
On March 25, 2022, the Company’s Board of Directors (“Board”), appointed Camille May as Chief Financial Officer of the Company. Ms. May, 34, joined the Company in October 2021 in connection with the acquisition of Model Meals LLC. She was a co-founder and chief financial officer of Model Meals since January 2015. In connection with the appointment, the Board approved an employment agreement with Ms. May, which provides for an annual salary of $120,000, a grant of five year warrants to purchase 250,000 shares of common stock of the Company at an exercise price of $0.001 per share, a performance-based bonus of up to $45,000 in cash and up to 100,000 shares of common stock upon attainment of certain performance targets specified therein, and weekly meal packages of up to 16 meals at no cost. The employment agreement has a two-year initial term and provides that her employment may only be terminated by the Company for cause.
Results of Operations
For the Three and Nine months ended July 31, 2022 and 2021
Product Sales
During the three months ended July 31, 2022 and 2021, product sales were $619,187 and $408,821, respectively, an increase of $210,366, or 51.5%.
During the nine months ended July 31, 2022 and 2021, product sales were $2,164,248 and $1,135,872, respectively, an increase of $1,028,376, or 90.5%.
Cost of Sales
The primary components of cost of sales are raw materials and direct kitchen labor, shipping and handling costs, packaging costs, and with the introduction of the Company’s celebrity chef program in the fourth quarter of 2020, it now incurs associated royalty fees. During the three months ended July 31, 2022 and 2021, the Company had total cost of sales of $707,346 and $371,118, respectively, an increase of $336,228, or 90.6%. The increase was due to an increase in direct kitchen labor, royalty fees and packaging expenses.
During the nine months ended July 31, 2022 and 2021, the Company had total cost of sales of $2,069,942 and $951,440, respectively, an increase of $1,118,502, or 117.6%. The increase was due to an increase in direct kitchen labor, royalty fees and packaging expenses.
Operating Expenses
For the three and nine months ended July 31, 2022 and 2021, operating expenses consisted of the following:
| Three Months Ended July 31, | Nine Months Ended July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Compensation and related expenses | $ | 273,348 | $ | 111,406 | $ | 1,265,025 | $ | 277,228 | ||||||||
| Professional and consulting expenses | 371,451 | 756,886 | 3,439,253 | 1,279,609 | ||||||||||||
| Professional and consulting expenses – related party | 57,500 | — | 117,500 | — | ||||||||||||
| Product development expense | 99,063 | — | 370,677 | — | ||||||||||||
| Selling and marketing expenses | 368,344 | 96,732 | 956,413 | 307,980 | ||||||||||||
| General and administrative expenses | 394,032 | 108,779 | 1,229,076 | 262,523 | ||||||||||||
| Settlement expense | 365,140 | — | 365,140 | — | ||||||||||||
| Total | $ | 1,928,878 | $ | 1,073,803 | $ | 7,743,084 | $ | 2,127,340 | ||||||||
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Compensation and Related Expenses
| ● | During the three months ended July 31, 2022 and 2021, compensation and related expenses amounted to $273,348 and $111,406, respectively, an increase of $161,942, or 145.4%. The increase was primarily attributable to an increase in executive salary in 2022. |
| ● | During the nine months ended July 31, 2022 and 2021, compensation and related expenses amounted to $1,265,025 and $277,228, respectively, an increase of $987,797, or 356.3%. The increase was primarily attributable to an increase of $349,810 stock-based compensation and increase in executive salary in 2022. |
Professional and Consulting Expenses:
| ● | During the three months ended July 31, 2022 and 2021, professional and consulting expenses amounted to $371,451 and $756,886, respectively, a decrease of $385,435, or 50.9%. The decrease was primarily due a decrease stock-based compensation of $450,000, a decrease in accounting fees pf $1,635, and a decrease in investor relations fee of $124,632, offset be an increase in consulting fees of $18,922, an increase in filing fees of $21,266 and an increase in legal fees of $150,644. |
| ● | During the nine months ended July 31, 2022 and 2021, professional and consulting expenses amounted to $3,439,253 and $1,279,609, respectively, an increase of $2,159,644, or 168.8%. The increase was primarily due an increase in stock-based compensation of $1,643,591 related to commons stock issued for lock up and leak out agreements and common stock issued for services and prepaid services, an increase in consulting fees of $121,284, an increase in accounting fees of $128,380, an increase in legal fees of $265,760, and an increase of filing fees of $35,803, offset by a decrease in investor relations fee of $35,174. |
Professional and Consulting Expenses – Related Party:
| During the three and nine months ended July 31, 2022, professional and consulting expenses – related party amounted to $57,500 and $117,500, respectively. We did not incur professional and consulting expenses – related party during the 2021 periods. We entered into a consulting agreement with a related party, dated October 1, 2021 which provides for $10,000 monthly consulting fee. Additionally, on May 1, 2022, the Company issued as consideration to a related party stockholder 25,000 shares of common stock with grant date fair value of $27,500, or $1.10 per share, based on the market price of common stock on grant date, for the stockholder’s execution of a Lock-Up & Leak Out Agreement. In connection with this issuance, on May 1, 2022, the Company recorded stock-based professional fees of $27,500. |
Product Development Expenses
| ● | During the three months ended July 31, 2022 and 2021, product development expenses amounted to $99,063 and $0, respectively, an increase of $99,063, or 100%. The product development expense in the 2022 period was primarily due to the amortization of the deferred compensation resulting from common stock issued in connection with the product development agreements. |
| ● | During the nine months ended July 31, 2022 and 2021, product development expenses amounted to $370,677 and $0, respectively, an increase of $370,677, or 100%. The product development expense in the 2022 period was primarily due to the amortization of the deferred compensation resulting from common stock issued in connection with the product development agreements. |
Selling and Marketing Expenses
| ● | During the three months ended July 31, 2022 and 2021, selling and marketing expenses amounted to $368,344 and $96,732, respectively, an increase of $271,612, or 280.8%. The increase was primarily due to the expansion of our multi-channel digital marketing strategy to further promote our celebrity chef program. |
| ● | During the nine months ended July 31, 2022 and 2021, selling and marketing expenses amounted to $956,413 and $307,980, respectively, an increase of $648,433, or 210.5%. The increase was primarily due to the expansion of our multi-channel digital marketing strategy to further promote our celebrity chef program in and acquisition of Model Meals in July 2021. |
General and Administrative Expenses
| ● | During the three months ended July 31, 2022 and 2021, general and administrative expenses amounted to $394,032 and $108,779, respectively, an increase of $285,253, or 262.2%. The increase was due to an increase in depreciation and amortization expense of $245,899 primarily related to the amortization of intangible assets acquired in July 2021, and a net increase in other general and administrative expenses of $39,354. |
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| ● | During the nine months ended July 31, 2022 and 2021, general and administrative expenses amounted to $1,229,076 and $262,523, respectively, an increase of $966,553, or 368.2%. The increase was due to an increase in depreciation and amortization expense of $755,813 primarily related to the amortization of intangible assets acquired in July 2021, an increase in kitchen related expenses of $12,135, an increase in rent of $79,469, an increase in utilities of $25,054, an increase in travel expenses of $26,500, and a net increase in other general and administrative expenses of $67,582. |
Settlement Expenses
During the three and nine months ended July 31, 2022, settlement expense amounted to $365,140. We did not incur settlement expense during the 2021 periods. On June 30, 2022, pursuant to a stock repurchase and settlement agreement and a lock-up and settlement agreement, the Company issued an aggregate of 585,000 shares of its common stock with grant date fair value of 169,650, or $0.29 per share, based on the market price of common stock on grant date, for the stockholders’ execution of a Lock-Up & Leak Out Agreement. In connection with these agreements, the Company recorded settlement expense of $185,344. Additionally, on June 30, 2022, in connection with a lock-up and leak out settlement agreement, the Company issued 674,100 shares of its common stock in connection with the cashless exercise of 674,100 warrants and no cash consideration. The 674,100 had grant date fair value of $194,490 or $0.29 per share based on the market price of common stock on grant date. In connection with this cashless exercise of warrants, the Company recorded settlement expense of $194,490.
Loss from Operations
| ● | During the three months ended July 31, 2022 and 2021, loss from operations amounted to $2,017,037 and $1,036,100, respectively, an increase of $980,937, or 94.7%. The increase was due to the changes discussed above. |
| ● | During the nine months ended July 31, 2022 and 2021, loss from operations amounted to $7,648,778 and $1,942,908, respectively, an increase of $5,705,870, or 293.7%. The increase was due to the changes discussed above. |
Other Income (Expense), net
| ● | During the three months ended July 31, 2022 and 2021, other expense, net amounted to $270,638 and $341,325, respectively, a decrease of $70,687, or 20.7%. The change was primarily due to a decrease in interest expense of $178,101 resulting from a decrease in average outstanding convertible notes in 2022, offset by a decrease in gain from change in fair value of derivative liabilities of $92,660 and offset by a decrease in gain on extinguishment of accounts payable of $14,754. |
| ● | During the nine months ended July 31, 2022 and 2021, other expense, net amounted to $588,716 and $596,642, respectively, a decrease $7,926, or 1.3%. The change was primarily due to decrease in interest expense of $263,957 resulting from a decrease in average outstanding convertible notes in 2022, offset by a decrease in gain from change in fair value of derivative liabilities of $207,573, a decrease in gain on extinguishment of accounts payable of $14,754 and a decrease in gain on extinguishment of debt of $33,704. |
Net Loss
| ● | During the three months ended July 31, 2022 and 2021, we had a net loss of $2,287,675 and $1,377,425, respectively, an increase of $910,250, or 66.1%. The increase was due to the changes discussed above. For the three months ended July 31, 2022 and 2021, net loss attributable to common shareholders, which included a deemed dividend related to the cashless exercise and settlement of warrants of $2,578,446 and $0, amounted to $4,866,121, or $(0.12) per basic and diluted common share, and $(1,377,425), or $(0.06) per basic and diluted common share, respectively. |
| ● | During the nine months ended July 31, 2022 and 2021, we had a net loss of $8,237,494 and $2,539,550, respectively, an increase of $5,697,944, or 224.4%. The increase was due to the changes discussed above. For the nine months ended July 31, 2022 and 2021, net loss attributable to common shareholders, which included a deemed dividend related to the cashless exercise and settlement of warrants of $2,578,446 and $0, amounted to $10,815,940, or $(0.28) per basic and diluted common share, and $2,539,550, or $(0.12) per basic and diluted common share, respectively. |
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital deficit of $2,936,693 and cash of $71,613 as of July 31, 2022 and a working capital deficit of $318,797 and cash of $2,275,397 as of October 31, 2021.
| July 31, 2022 | October 31, 2021 | Change | Percentage Change | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 227,729 | $ | 2,372,058 | $ | (2,144,329 | ) | 90 | % | |||||||
| Total current liabilities | (3,164,422 | ) | (2,690,855 | ) | (473,567 | ) | 18 | % | ||||||||
| Working capital deficit | $ | (2,936,693 | ) | $ | (318,797 | ) | $ | (2,617,896 | ) | 821 | % | |||||
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The increase in working capital deficit was primarily attributable to a decrease in current assets of $2,144,329 and an increase in current liabilities of $473,567, which was primarily due to the use of cash in operations, the amortization of intangible assets, and a net increase in of convertible notes.
Recent Financings
On May 18, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA I”) with an investor for the sale of the Company’s convertible note. Pursuant to the May 2022 SPA I, the Company; (i) issued a convertible note with principal amount of $500,000 (“May 2022 Note I”) with the Company receiving $450,000 in net proceeds, net of $40,000 of OID and $10,000 of legal fees; (ii) issued warrants to purchase up to 769,231 shares of common stock (“May 2022 Warrant I”). The May 2022 Note I bears an annual interest rate of 15% and matures on May 18, 2023. The May 2022 Note I is convertible at any time or times on or after the occurrence of an event of default, at a price equal to $0.39, provided, however, that if the Company consummates an Uplist Offering (as defined in this May 2022 Note I) within 180 calendar days after the issuance date, then the conversion price shall equal 75% of the Uplist Offering. If the date of a respective conversion under the May 2022 Note I, is prior to the date of the Uplist Offering, then the Conversion Price shall equal $0.39 per share. At any time prior to an event of default the Company shall have the option to pre-pay the outstanding principal at an amount equal to 115% of the outstanding balance plus accrued. The May 2022 Warrant I issued to the investor, provides for the right to purchase up to 769,231 shares of common stock exercisable at $0.65, provided, however, upon the Uplist Offering, the exercise price shall equal 120% of the Uplist Offering; after180 calendar days from the issuance date the exercise price shall be $0.65; The warrants are subject to adjustments and 4.99% ownership limitation and expire on the third-year anniversary from the date of issuance. If the Company at any time while the May 2022 Note I and May 2022 Warrant I are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note I and May 2022 Warrant I), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased. The May 2022 Note I and May 2022 Warrant I also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended. As of July 31, 2022, the May 2022 Note I had outstanding principal of $500,000.
On May 24, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA II”) with an investor for the sale of the Company’s convertible note. Pursuant to the May 2022 SPA II, the Company; (i) issued a convertible note with principal amount of $125,000 (“May 2022 Note II”) with the Company receiving $102,500 in net proceeds, net of $12,500 of OID and $10,000 of legal fees; (ii) issued warrants to purchase up to 217,391 shares of common stock (“May 2022 Warrant II”). The May 2022 Note II bears an annual interest rate of 15% and matures on May 24, 2023. The May 2022 Note II is convertible at any time or times on or after the occurrence of an event of default, at a price equal to the lower of; (i) 75% of the closing price of the common stock on the date of the investment, and (ii) 90% of the lowest VWAP for the common stock during the five trading day period ending on the latest complete trading day prior to the conversion date however if the Company consummates an Uplist Offering (as defined in the May 2022 Note II) within the 180 calendar days after the issuance date, then the conversion price shall equal 75% of the offering price per share of common stock at which the Uplist Offering is made. Unless otherwise adjusted pursuant to the terms of the May 2022 Note II, if the date of a conversion under the May 2022 Note II is prior to the date of the Uplist Offering, then the conversion price shall equal $0.345 per share. At any time prior to an event of default the Company shall have the option to pre-pay the May 2022 Note II at an amount equal to 115% of the outstanding balance plus accrued and unpaid interest on the outstanding balance. Upon the occurrence and during the continuation of any event of default, the May 2022 Note II shall become immediately due and payable at an amount equal to 150% of the outstanding principal plus accrued and unpaid interest and any default interest, if any. The May 2022 Warrant II issued to the investor, provides for the right to purchase up to 217,391 shares of common stock exercisable at $0.575, provided, however, that if the Company consummates an Uplist Offering within 180 calendar days from the issuance date in which case the exercise price shall be equal to 120% of the Uplist Offering price; after180 calendar days from the issuance date the exercise price shall be $0.575. The warrants are subject to adjustments and 4.99% ownership limitation and expire on the third-year anniversary from the date of issuance. If the Company at any time while the May 2022 Note II and May 2022 Warrant II are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note II and May 2022 Warrant II), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased. The May 2022 Note II and the May 2022 Warrant II also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended. As of July 31, 2022, the May 2022 Note II had outstanding principal of $125,000.
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On May 24, 2022, the Company entered into a Securities Purchase Agreement (“May 2022 SPA III”) with an investor for the sale of the Company’s convertible note. Pursuant to the May 2022 SPA III, the Company; (i) issued a convertible note with principal amount of $182,927 (“May 2022 Note III”) with the Company receiving $150,000 in net proceeds, net of $18,293 of OID and $14,634 of legal fees; (ii) issued warrants to purchase up to 318,134 shares of common stock (“May 2022 Warrant III”). The May 2022 Note III bears an annual interest rate of 15% and matures on May 24, 2023. The May 2022 Note III is convertible at any time or times on or after the occurrence of an event of default, at a price equal to the lower of; (i) 75% of the closing price of the common stock on the date of the investment, and (ii) 90% of the lowest VWAP for the common stock during the five trading day period ending on the latest complete trading day prior to the conversion date however if the Company consummates an Uplist Offering (as defined in the May 2022 Note III) within the 180 calendar days after the issuance date, then the conversion price shall equal 75% of the offering price per share of common stock at which the Uplist Offering is made. Unless otherwise adjusted pursuant to the terms of the May 2022 Note III, if the date of a conversion under the May 2022 Note III is prior to the date of the Uplist Offering, then the conversion price shall equal $0.345 per share. At any time prior to an event of default the Company shall have the option to pre-pay the May 2022 Note III at an amount equal to 115% of the outstanding balance plus accrued and unpaid interest on the outstanding balance. Upon the occurrence and during the continuation of any event of default, the May 2022 Note III shall become immediately due and payable at an amount equal to 150% of the outstanding principal plus accrued and unpaid interest and any default interest, if any. Upon an event of default, at the option of the investor the conversion price shall equal 90% of the lowest VWAP for the common stock during the five-trading day period prior to the conversion date. The May 2022 Warrant III issued to the investor, provides for the right to purchase up to 318,134 shares of common stock exercisable at $0.575 however if the Company consummates an Uplist Offering within 180 calendar days from the issuance date in which case the exercise price shall be equal to 120% of the Uplist Offering price; after180 calendar days from the issuance date the exercise price shall be $0.575. The warrants are subject to adjustments and 4.99% ownership limitation and expire on the third-year anniversary from the date of issuance. If the Company at any time while the May 2022 Note III and May 2022 Warrant III are outstanding, sell or grant any option to purchase, sell, grant any right to re-price, or otherwise dispose of or issue any common stock or common stock equivalents (other than an exempt issuance as defined in the May 2022 Note III and May 2022 Warrant III), at a share price per less than the initial conversion and/or exercise price then the conversion and/or exercise price shall be reduced equal to such price and the number of common stock and/or warrant shares issuable thereunder shall be increased. The May 2022 Note III and the May 2022 Warrant III also provide the investor with certain “piggyback” registration rights, permitting them to request that the Company include the shares issued upon conversion of the note or exercise of the warrant, respectively, for sale in certain registration statements filed by the Company under the Securities Act of 1933, as amended. As of July 31, 2022, the May 2022 Note III had outstanding principal of $182,927.
On July 19, 2022 (the “Issue Date”), the Company entered into Securities Purchase Agreements dated as of July 19, 2022 (the “July 2022 SPA”), by and between the Company and 1800 Diagonal Lending LLC, a Virginia limited liability company (the “Investor”). Pursuant to the July 2022 SPA, among other things, the Company agreed to issue to the Investor a convertible note in the original principal amount of $154,250 (the “July 2022 Note”). Upon closing, the Company received $138,000 in net proceeds from the Investor, which was net of $16,250 of legal fees. The July 2022 Note accrues interest at an annual interest rate of 8%, has a default interest rate of 22%, and matures on January 19, 2024 (the “Maturity Date”). The Investor may convert the July 2022 Note into shares of the Company’s common stock 180 days after the Issue Date until the later of (i) the Maturity Date and (ii) the date the Company pays any amounts owed in connection with an event of default. The per share conversion price into which the July 2022 Note is convertible into shares of common stock (the “Conversion Price”) is 65% multiplied by the average of the lowest two closing bid prices for the common stock during the ten trading days ending on the last trading day prior to the conversion date. The Company has the right to prepay the outstanding principal amount of the Note, plus any accrued interest on the outstanding principal (including any default interest) at a rate of (x) 120% during the period ending 120 days after the Issue Date and (y) 125% during the period between 121 days and 180 days after the Issue Date. The Company does not have a prepayment right following the expiration of the 180-day period. Upon the occurrence and during the continuation of any event of default under the Note, the Note becomes immediately due and payable and the Company is obligated to pay the Investor in full satisfaction of its obligations thereunder an amount equal to the greater of (i) the principal amount then outstanding plus accrued interest (including any default interest) through the date of full repayment multiplied by 150% and (ii)(a) the highest number of shares of Common Stock issuable upon conversion of the default sum at the Conversion Price, multiplied by (b) the highest closing price for the Common Stock during the period beginning on the date of first occurrence of the event of default and ending one day prior to the mandatory prepayment date. The obligations under the July 2022 Note are not secured by any assets of the Company. The July 2022 SPA and July 2022 Note agreements contain other provisions, covenants and restrictions common with this type of debt transaction. Furthermore, the Company is subject to negative covenants under the Agreements, which the Company also believes are also customary for transactions of this type. As of July 31, 2022, the July 2022 Note had outstanding principal of $154,250.
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Cash Flows
The following table provides detailed information about our net cash flows:
| Nine Months Ended July 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (3,343,172 | ) | $ | (1,489,863 | ) | ||
| Net cash used in investing activities | (11,750 | ) | (187,075 | ) | ||||
| Net cash provided by financing activities | 1,151,138 | 2,055,789 | ||||||
| Net change in cash | $ | (2,203,784 | ) | $ | 378,851 | |||
Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended July 31, 2022 and 2021, were $3,343,172 and $1,489,863, respectively, an increase of $1,853,309, or 124%.
| ● | Net cash used in operating activities for the nine months ended July 31, 2022 primarily reflected our net loss of $8,237,494 adjusted for the add-back on non-cash items such as depreciation and amortization expense of $851,833, total stock-based compensation, professional fees and product development fees of $3,016,326, amortization of debt discount of $426,495, settlement expense from the issuance of common stock of $365,140, non-cash interest expense of $83,058 related to put premium on stock-settled debt, a gain on change in fair value of derivative liability of $55,855, and changes in operating assets and liabilities consisting of an increase of inventory of $31,114, an increase in prepaid expenses and other current assets of $28,341, an increase in accounts payable of $280,791, an increase in unredeemed gift cards of $69,720 offset by a decrease in accrued expense and other liabilities of $113,610. |
| ● | Net cash used in operating activities for the nine months ended July 31, 2021 primarily reflected our net loss of $2,539,550 adjusted for the add-back on non-cash items such as depreciation expense of $10,390, stock-based compensation and professional fees for services of $636,221, gain on extinguishment of accounts payable of $7,075, gain on extinguishment of debt of $41,241, amortization of debt discount of $817,922, gain on change in fair value of derivative liability of $289,351, and changes in operating asset and liabilities consisting primarily of an increase in prepaid expenses and other current assets of $50,406, an increase in accounts payable of $28,955 and an increase in unredeemed gift cards of $19,836, offset by a decrease in accrued expense and other liabilities of $73,998. |
Net Cash Used in Investing Activities
Net cash used in investing activities the nine months ended July 31, 2022 and 2021, were $11,750 and $187,075, respectively, a decrease of $175,325, or 94%.
| ● | Net cash used by investing activities for the nine months ended July 31, 2022 consisted of purchase of property and equipment in the amount of $11,750. |
| ● | Net cash used by investing activities for the nine months ended July 31, 2021 consisted of purchase of property and equipment in the amount of $127,075 and a payment of $60,000 for the acquisition of Model Meals. |
Net Cash Provided by Financing Activities
Net cash provided by financing activities the nine months ended July 31, 2022 and 2021, were $1,151,138 and $2,055,789, respectively, a decrease of $907,388, or 44%.
| ● | Net cash provided by financing activities for the nine months ended July 31, 2022 consisted of net proceeds from sale of common stock of $1,368,492, net proceeds from advances payable of $322,502, and net proceeds from convertible notes of $790,500 offset by repayments of convertible notes payable of $998,054, repayments of advances payable of $219,233, the payment of a stock repurchase agreement of $50,000, and repayment of convertible note – related party of $63,069. |
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| ● | Net cash provided by financing activities for the nine months ended July 31, 2021 consisted of net proceeds from the sale of common stock of $866,770, net proceeds from note payable of $7,000, net proceeds from convertible note payable of $1,647,300, net proceeds from related party convertible note payable of $100,000, and net proceeds from advances payable of $274,040, offset by repayments convertible notes payable of $652,667 and repayments of advances payable of $186,654. |
Cash Requirements
We are dependent on our product sales to fund our operations and may require the sale of additional common stock to maintain operations. Our officers and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans, and/or financial guarantees.
Going Concern
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, for the nine months ended July 31, 2022, the Company had a net loss and cash used in operations of $8,237,494 and $3,343,172, respectively. On July 31, 2022, the Company had an accumulated deficit, stockholders’ equity, and working capital deficit of $(29,951,604), $1,383,704 and $(2,936,693), respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. The Company’s primary source of operating funds has primarily from the sale of common stock and the issuance of convertible debt notes. The Company has experienced net losses from operations since inception but expects these conditions to improve in the near term and beyond as it develops its business model.
Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. Management believes that the Company’s capital resources are not currently adequate to continue operating and maintaining its business strategy for a period of twelve months from the issuance date of this report. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Inflation and Changing Prices
Neither inflation nor changing prices for the nine months ended July 31, 2022 had a material impact on our operations.
Off-Balance Sheet Arrangements
None.
Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial statements. We believe the critical accounting policies in Note 2 to the unaudited consolidated financial statements appearing in the consolidated financial statements for the three and nine months ended July 31, 2022 affect our more significant judgments and estimates used in the preparation of our unaudited consolidated financial statements.
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Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates as of July 31, 2022 and October 31, 2021 include the assumptions used in the redemption recognition method for unredeemed gift cards, useful life of property and equipment and intangible assets, valuation of right-of-use (“ROU”) assets and lease liabilities, estimates of current and deferred income taxes and deferred tax valuation allowances, fair value of assets acquired and liabilities assumed in a business combination, and the fair value of non-cash equity transactions and derivative liabilities.
Fair Value of Financial Instruments and Fair Value Measurements
FASB ASC 820 - Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on July 31, 2022. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
| Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. | |
| Level 2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. | |
| Level 3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the consolidated balance sheets for cash, due from and to related parties, prepaid expenses, accounts payable and accrued liabilities approximate their fair market value based on the short-term maturity of these instruments.
Goodwill and Indefinite Lived Intangible Assets
Goodwill represents the excess of purchase prices over the fair value of nets assets acquired, is carried at cost. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. Goodwill is evaluated for impairment on an annual basis at a level of reporting referred to as the reporting unit, and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired.
Goodwill and indefinite lived intangible assets are tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount. The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors and overall company financial performance. If the reporting unit does not pass the qualitative assessment, the carrying amount of the reporting unit, including goodwill, is compared to its fair value. When the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized up to a maximum amount of the recorded goodwill related to the reporting unit. Goodwill impairment losses are not reversed. There was no impairment loss of goodwill or indefinite lived intangible assets for the nine months ended July 31, 2022.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, the Company reviews long-lived assets including intangible assets with finite life, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
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Derivative Liabilities
The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10 – Derivative and Hedging – Contract in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on debt extinguishment.
Revenue Recognition
The Company’s revenues consist of high quality, direct-to-consumer, ready-made meals that can be ordered by customers through www.homebistro.com, www.modelmeals.com and restaurant quality meats and seafood through its Colorado Prime Brand. Revenues from the Company’s ready-made meals are recognized when the product is delivered to the customer and title has transferred. It is at this point in time that the Company’s performance obligations have been completed. Product sales are recorded net of any discounts or allowances and include shipping charges.
Customers can purchase gift cards via phone or online through the Company’s e-commerce website. Gift card purchases are initially recorded as unredeemed gift card liabilities and are recognized as product sales upon redemption. Historically, the majority of gift cards are redeemed within two to three years of issuance. The Company does not charge administrative fees on unused gift cards, and its gift cards do not have an expiration date.
Based on historical redemption patterns, a portion of issued gift cards are not expected to be redeemed (breakage). The Company uses the redemption recognition method for recognizing breakage related to unredeemed gift cards for which it has sufficient historical redemption information. Under the redemption recognition method, breakage revenue is recorded in proportion to, and over the time period gift cards are actually redeemed. The estimated breakage rate is based on historical issuance and redemption patterns and is re-assessed by the Company on a regular basis. At least three years of historical data, which is updated annually, is used to estimate redemption patterns. Model meals, the Company’s wholly-owned subsidiary, does not have sufficient historical redemption information to recognize breakage. Therefore, all issued gift cards are recorded as a liability upon issuance and revenue when used.
Leases
The Company accounts for its leases using the method prescribed by ASC 842 – Lease Accounting. The Company assess whether the contract is, or contains, a lease at the inception of a contract which is based on (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. The Company allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use (“ROU”) assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating and financing lease ROU assets represents the right to use the leased asset for the lease term. Operating and financing 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 uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
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Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and edging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”) to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470- 20, Debt with Conversion and Other Options, for convertible instruments. Under the amendments in ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. By removing those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. The amendments in ASU 2020-06 provide financial statement users with a simpler and more consistent starting point to perform analyses across entities. The amendments also improve the operability of the guidance and reduce, to a large extent, the complexities in the accounting for convertible instruments and the difficulties with the interpretation and application of the relevant guidance. To further improve the decision usefulness and relevance of the information being provided to users of financial statements, amendments in ASU 2020-06 increased information transparency by making the following amendments to the disclosure for convertible instruments:
| 1. | Add a disclosure objective |
| 2. | Add information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed |
| 3. | Add information on which party controls the conversion rights |
| 4. | Align disclosure requirements for contingently convertible instruments with disclosure requirements for other convertible instruments |
| 5. | Require that existing fair value disclosures in Topic 825, Financial Instruments, be provided at the individual convertible instrument level rather than in the aggregate. |
Additionally, for convertible debt instruments with substantial premiums accounted for as paid-in capital, amendments in ASU 2020-06 added disclosures about (1) the fair value amount and the level of fair value hierarchy of the entire instrument for public business entities and (2) the premium amount recorded as paid-in capital.
The amendments in ASU 2020-06 are effective for public business entities, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of its annual fiscal year and are allowed to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. In applying the modified retrospective method, entities should apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments are adopted. Transactions that were settled (or expired) during prior reporting periods are unaffected. The cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings at the date of adoption. If an entity elects the fully retrospective method of transition, the cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. The Company early adopted ASU 2020-06 during the three months ended January 31, 2022 and did not have a significant impact on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company does not believe the adoption of this ASU will have a significant impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive and Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures 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.
With respect to the quarterly period ending July 31, 2022, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management has concluded that our disclosure controls and procedures were not effective as of July 31, 2022 due to our limited internal resources and lack of ability to have multiple levels of transaction review. In connection with this evaluation, management identified the following control deficiencies that represent material weaknesses as of July 31, 2022:
| (1) | the lack of multiples levels of management review on complex accounting and financial reporting issues, and business transactions, |
| (2) | a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting process and accounting function as a result of our limited financial resources to support hiring of personnel and implementation of accounting systems, |
| (3) | a lack of operational controls and lack of controls over assets by the acquired subsidiaries, and |
| (4) | a lack of adequate controls over the board of director’s approval and timely distribution and review of material contracts and agreements. |
Changes in internal control over financial reporting
There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) for the period ended July 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
THE COMPANY’S MOST RECENT FINANCIAL STATEMENTS AND INFORMATION AS REPORTED WITHIN THIS FORM 10-Q FILING ARE NOT COMPLETE AND HAVE NOT BEEN REVIEWED. THE COMPANY IS CURRENTLY UNDERGOING ITS AUDIT FOR THE 12 MONTH PERIOD ENDED OCTOBER 31, 2022, AND BELIEVES IT WILL BE COMPLETED IN THE COMING WEEKS AND REFILED WITH AN AMENDMENT TO THE PRIOR FORM 10-K FILING, AT WHICH POINT IT WILL WORK TO COMPLETE THIS 10Q FILING. THE INFORMATION CONTAINED HEREIN IS FOR INFORMATION ONLY AND SHOULD NOT BE RELIED UPON FOR INVESTMENT OR ANY OTHER PURPOSE.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings. However, from time to time, the Company may be involved in litigation matters relating to claims arising from the ordinary course of business. While the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material effect on our business, results of operations, financial condition or cash flows.
ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| 1. | During the three months ended July 31, 2022, the Company issued an aggregate of 104,502 shares of common stock, to non-affiliate investors for aggregate net cash proceeds of $64,764. |
| 2. | On May 1, 2022, the Company issued as consideration to a related party stockholder 25,000 shares of common stock with grant date fair value of $27,500, or $1.10 per share, based on the market price of common stock on grant date, for the stockholder’s execution of a Lock-Up & Leak Out Agreement. In connection with this issuance, on May 1, 2022, the Company recorded stock-based professional fees of $27,500. |
| 3. | On May 1, 2022, in connection with the settlement of a down round exercise price trigger, the Company entered into a warrant exchange agreement with various warrant holders (collectively as “Parties”) pursuant to which the Parties exercised an aggregate of 922,495 warrants with initial exercise price of $2.50 issued between January to September 2021, an agreed upon reduced exercise price of $0.75 with the Company issuing an aggregate of 3,048,917 shares of common stock in exchange for the outstanding warrants and no cash consideration. In connection with this warrant exchange, the Company recorded a deemed dividend of $2,578,446. |
| 4. | On June 30, 2022, in connection with a lock-up and leak out settlement agreement, the Company issued 674,100 shares of its common stock in connection with the cashless exercise of 674,100 warrants and no cash consideration. The 674,100 had grant date fair value of $194,490 or $0.29 per share based on the market price of common stock on grant date. In connection with this cashless exercise of warrants, the Company recorded settlement expense of $194,490. |
| 5. | On June 30, 2022, pursuant to a stock repurchase and settlement agreement and a lock-up and settlement agreement, the Company issued an aggregate of 585,000 shares of its common stock with grant date fair value of 169,650, or $0.29 per share, based on the market price of common stock on grant date, for the stockholders’ execution of a Lock-Up & Leak Out Agreement. In connection with these agreements, the Company recorded settlement expense of $185,344. |
The shares of common stock referenced herein were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(a)(2) of the Securities Act of 1933, as amended, (“Securities Act”).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
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| * | Filed herein |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HOME BISTRO, INC. | ||
| Date: May 17, 2023 | By: | /s/ Zalmi Duchman |
| Zalmi Duchman | ||
| Chief
Executive Officer (Principal Executive Officer) | ||
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