The following discussion contains certain statements that may be deemed
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements appear in a number of places in
this Report, including, without limitation, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These statements are
not guarantees of future performance and involve risks, uncertainties and
requirements that are difficult to predict or are beyond our control.
Forward-looking statements speak only as of the date of this quarterly report.
You should not put undue reliance on any forward-looking statements. We assume
no responsibility to update the forward-looking statements contained in this
quarterly report on Form 10-Q. The following should also be read in conjunction
with the unaudited Financial Statements and notes thereto that appear elsewhere
in this report.
Company Overview
The Company
Vitalibis® is a socially conscious brand focused on people, products and the
planet. We are a technology-based formulator of premium, full spectrum
phytocannabinoid rich hemp products with naturally occurring cannabidiol (CBD),
along with safe personal care and nutritional products. Our Ambassador program
combines critical elements of social selling, ecommerce and affiliate marketing
into one highly focused business system which empowers our people and social
mission-driven ecosystem.
Chapter 11 Proceedings
On June 15, 2020, Vitalibis, Inc. (the "Debtor"), filed a voluntary petition
(the "Bankruptcy Petition"), for reorganization under chapter 11 of the United
States Bankruptcy Code, (the "Bankruptcy Code"), in the United States Bankruptcy
Court for the Southern District of Texas-Corpus Christi Division ("Bankruptcy
Court"), As of June 30, 2020, certain conditions precedent to consummation of a
Plan of Reorganization and emergence from the Chapter 11 proceedings had not yet
been met, and, as a result, the Company continued to operate its business as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court.
Effect of the Bankruptcy Proceedings
During the bankruptcy proceedings, the Debtor conducts normal business
activities and was authorized to pay certain vendor payments, wage payments and
tax payments in the ordinary course. In addition, subject to certain specific
exceptions under the Bankruptcy Code, the Bankruptcy Petitions automatically
stayed most judicial or administrative actions against the Debtors or their
property to recover, collect, or secure a prepetition claim. For example, the
Bankruptcy Petitions prohibited lenders or note holders from pursuing claims for
defaults under the Debtors' debt agreements during the pendency of the chapter
11 cases.
Operations
We market and sell consumer products containing full spectrum phytocannabinoid
rich hemp oil with naturally occurring CBD under our Vitalibis® brand in a range
of market sectors including wellness, and personal care. We currently distribute
8 Vitalibis® branded products and we expect to continue to add new products to
our Vitalibis® portfolio to enhance our line of full spectrum phytocannabinoid
rich hemp products with naturally occurring cannabidiol (CBD) and hemp-related
consumer products. We also expect to develop and launch new brands under the
Vitalibis® product development umbrella to more effectively market and sell
certain products. We also sell water soluble full spectrum phytocannabinoid rich
hemp powder with naturally occurring cannabidiol (CBD) acquired through our
supply relationships in the United States to various customers that produce
products for resale into the market. We also began offering non-exclusive leases
of our proprietary Vitalibis® technology back-end, which is being offered as a
Software as a Service (SaaS) platform.
18
We seek to take advantage of an emerging worldwide trend to re-energize the
production of industrial hemp and to foster its many uses for consumers.
Historically cultivated for industrial and practical purposes, hemp is used
today for textiles, paper, auto parts, biofuel, cosmetics, animal feed,
nutritional supplements, and much more. The market for hemp-derived products is
expected to increase substantially over the next five years, and we believe
Vitalibis® is well positioned to have a demonstrable impact on the rapidly
emerging hemp industry.
Hemp-derived CBD is one of at least 80 cannabinoids found in hemp and is
non-psychoactive. Our U.S. based supplier oversees our raw material supply chain
and raw material processing. Our internal team manages product development and
manufacturing, and sales and marketing. We will continue to scale-up our
processing capability to accommodate new products in our pipeline.
We expect to realize revenue to fund our working capital needs through the sale
of finished products and raw materials to third parties. However, in order to
fund our product development efforts, we will need to raise additional capital
either through the issuance of equity and/or the issuance of debt. In the event
we are unable to raise sufficient additional capital to fund our product
development efforts, we may need to curtail or delay such activity.
We are an emerging growth company as defined in Section 2(a)(19) of the
Securities Act. We will continue to be an emerging growth company until: (i) the
last day of our fiscal year during which we had total annual gross revenues of
$1,000,000,000 or more; (ii) the last day of our fiscal year following the fifth
anniversary of the date of the first sale of our common stock pursuant to an
effective registration statement under the Securities Act; (iii) the date on
which we have, during the previous 3-year period, issued more than
$1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed
to be a large accelerated filer, as defined in Section 12b-2 of the Exchange
Act.
As an emerging growth company, we are exempt from:
Section 14A (a) and (b) of the Exchange Act, which requires companies to hold
stockholder advisory votes on executive compensation and golden parachute
compensation;
The requirement to provide in any registration statement periodic report or
other report to be filed with the Securities and Exchange Commission, certain
modified executive compensation disclosure under Item 402 of Regulation S-K or
selected financial data under Item 301 of Regulation S-K for any period before
the earliest audited period presented in our initial registration statement;
Compliance with new or revised accounting standards until those standards are
applicable to private companies;
The requirement under Section 404(b) of the Sarbanes-Oxley Act of 2002 to
provide auditor attestation of our internal controls and procedures; and
Any Public Company Accounting Oversight Board ("PCAOB") rules regarding
mandatory audit firm rotation, or an expanded auditor report and any other PCAOB
rules subsequently adopted, unless the Securities and Exchange Commission
determines the new rules are necessary for protecting the public.
We have elected to use the extended transition period for complying with new or
revised accounting standards under Section 102(b)(1) of the Jumpstart Our
Business Startups Act.
Vitalibis, Inc. (the "Company") was formed on April 11, 2014, as a Nevada
corporation, under the name Crowd 4 Seeds, Inc. On January 9, 2017, the Company
filed a certificate of amendment to its Certificate of Incorporation with the
Secretary of State of the State of Nevada in order to change its name to "Sheng
Ying Entertainment Corp." On December 16, 2017, new management took over control
of the Company and, on February 5, 2018, the Company filed a certificate of
amendment to its Certificate of Incorporation with the Secretary of State of the
State of Nevada in order to change its name to "Vitalibis, Inc".
19
As of June 30, 2020, and through current date, most of our resources and work
have been devoted to adopting and integrating our new business plan, research
and development, seeking capital to finance our operations and complying with
our obligations under applicable securities laws, rules and regulations.
We are a public company and, as such, we have incurred and will continue to
incur significant expenses for legal, accounting and related services. As a
public entity, subject to the reporting requirements of the Exchange Act of
1934, we incur ongoing expenses associated with professional fees for
accounting, legal and a host of other expenses including annual reports and
proxy statements, if required. We estimate that these costs will range up to
$80,000 per year over the next few years and may be significantly higher if our
business volume and transactional activity increases, based on our overall
business volume (and financial transactions), and we will not yet be subject to
the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we
exceed $75 million in market capitalization (if ever). These obligations will
certainly reduce our ability and resources to expand our business plan and
activities. We hope to be able to use our status as a public company to increase
our ability to use non-cash means of settling outstanding obligations (i.e.
issuance of restricted shares of our common stock) and compensate independent
contractors who provide professional services to us, although there can be no
assurances that we will be successful in any of these efforts. We will also
reduce compensation levels paid to management (if we attract or retain outside
personnel to perform this function) if there is insufficient cash generated from
operations to satisfy these costs.
On March 29, 2019, the Company entered into an unsecured convertible promissory
note which allowed for up to $750,000 of principal, with a total original issue
discount of up to $150,000, with a principal amount of $250,000. In April 2019,
the Company received net cash proceeds of $200,000 after an original issue
discount of $50,000. In July 2019, the Company received additional proceeds of
$200,000 after an original issue discount of $50,000, and received an additional
$200,000 of net proceeds after $50,000 original issue discount in August 2019.
The convertible note bears interest at 8% and all principal amounts matured on
September 30, 2019, with interest accruing at a rate of 22% if the Company is in
default. Beginning at the issuance of the note, the holder may convert the note
at any time through the maturity date into shares of common stock, to the extent
and provided that no holder of these notes was or will be permitted to convert
such notes to the extent that the holder or any of its affiliates would
beneficially own in excess of 4.99% of the Company's common stock after such
conversion. The conversion price is the lesser of $2 or 70% of the lowest
trading price during the 30 trading days prior to the conversion date. During
the year ended December 31, 2019, the lender converted $50,000 of principal into
714,296 shares of common stock in accordance with the terms of the agreement.
During the six months ended June 30, 2020, the lender converted $161,102 of
principal into 22,782,707 shares of common stock. The conversions were in
accordance with the terms of the note and no gain or loss was recognized.
On March 13, 2020, the lender provided the Company with notice of default of the
convertible promissory note. In accordance with the terms of the agreement, an
additional $349,534 of principal became due and payable, and the Company began
accruing interest expense at the default rate of 22%. The additional principal
was recorded as debt discount and amortized to interest expense immediately. As
of June 30, 2020, there is $888,432 of principal outstanding on this convertible
promissory note in default.
On September 6, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $153,000. The Company received net
cash proceeds of $150,000 after payment of fees of $3,000. The convertible note
bears interest at 10% and matures on September 6, 2021, with interest accruing
at a rate of 22% if the Company is in default. Beginning six months after the
issuance of the note, the holder may convert the note at any time through the
maturity date into shares of common stock, to the extent and provided that no
holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. The conversion
price is determined based on 65% of the lowest trading price during the 15
trading days prior to the conversion date. The Company determined that the
conversion features should be accounted for as a derivative liability at the
time the notes became convertible. During the six months ended June 30, 2020,
the holder converted $153,000 of principal and $7,650 of accrued interest into
20,101,064 shares of common stock. These conversions were in accordance with the
terms of the note and no gain or loss was recognized. There is not outstanding
balance on this convertible note payable.
20
On November 25, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $78,000. The Company received net
cash proceeds of $75,000 after payment of fees of $3,000. The convertible note
bears interest at 10% and matures on November 25, 2021, with interest accruing
at a rate of 22% if the Company is in default. Beginning six months after the
issuance of the note, the holder may convert the note at any time through the
maturity date into shares of common stock, to the extent and provided that no
holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. The conversion
price is determined based on 65% of the lowest trading price during the 15
trading days prior to the conversion date. On April 29, 2020, the Company
received a notice of default from the holder of the September 6, 2019
convertible note payable, the November 25, 2019 convertible note payable with
$78,000 of principal and the February 7, 2020 convertible note payable, as a
result of insufficient shares authorized to settle conversion of these notes
payable. As a result of the default notice, each of these notes became due and
payable immediately, interest is accrued at the default rate of 22%, and the
principal balance outstanding at the time of default is doubled. The September
2019 note increase in principal by $61,100 as a result of this default. During
the six months ended June 30, 2020 the lender converted the $139,100 of
principal and $3,900 of accrued interest into 22,024,952 shares of common stock.
These conversions were in accordance with the terms of the note and no gain or
loss was recognized. There is no outstanding balance on this convertible note
payable.
On November 25, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $150,000. The Company received net
cash proceeds of $131,000 after an original issue discount of $15,000 and fees
of $4,000. The convertible note bears interest at 5% and matures on November 25,
2020, with interest accruing at a rate of 15% if the Company is in default. The
note is convertible upon issuance through the maturity date into shares of
common stock at a fixed price of $1.00 per share to the extent and provided that
no holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. Beginning six
months after the issuance of the note, the holder may convert the note at any
time, at a price based on the lower of the fixed price of $1.00 per share or 75%
of the lowest trading price during the 15 trading days prior to the conversion
date. During the six months ended June 30, 2020 the lender converted the $89,966
of principal and $7,200 of accrued interest into 19,200,000 shares of common
stock. These conversions were in accordance with the terms of the note and no
gain or loss was recognized. There was $60,034 of principal outstanding on this
note as of June 30, 2020.
On December 10, 2019, the Company entered into an unsecured convertible
promissory note, with a principal amount of $110,000. The Company received net
cash proceeds of $97,000 after an original issue discount of $10,000 and fees of
$3,000. The lender also received 35,000 shares of common stock as a deferred
finance cost, with a fair value of $8,407. The convertible note bears interest
at 10% and matures on December 10, 2020, with interest accruing at a rate of 24%
if the Company is in default. Beginning six months after the issuance of the
note, the holder may convert the note at any time through the maturity date into
shares of common stock, to the extent and provided that no holder of these notes
was or will be permitted to convert such notes to the extent that the holder or
any of its affiliates would beneficially own in excess of 4.99% of the Company's
common stock after such conversion. The conversion price is determined based on
the lessor of 1) $0.149, or 2) the lesser of 62% of the lowest trade price or
the closing bid price during the 20 trading days prior to the conversion date.
During the six months ended June 30, 2020 the lender converted the $35,300 of
principal and $4,250 of accrued interest into 37,252,975 shares of common stock.
These conversions were in accordance with the terms of the note and no gain or
loss was recognized. There was $74,700 of principal outstanding on this note as
of June 30, 2020.
On February 7, 2020, the Company entered into an unsecured convertible
promissory note, with a principal amount of $78,000. The Company received net
cash proceeds of $75,000 after payment of fees of $3,000. The convertible note
bears interest at 10% and matures on February 7, 2022, with interest accruing at
a rate of 22% if the Company is in default. Beginning six months after the
issuance of the note, the holder may convert the note at any time through the
maturity date into shares of common stock, to the extent and provided that no
holder of these notes was or will be permitted to convert such notes to the
extent that the holder or any of its affiliates would beneficially own in excess
of 4.99% of the Company's common stock after such conversion. The conversion
price is determined based on 65% of the lowest trading price during the 15
trading days prior to the conversion date. There was $78,000 of principal
outstanding on this note as of June 30, 2020.
21
As a result of the Bankruptcy Petition, all unamortized debt discount and
deferred finance costs were amortized to interest expense, with a total of
$151,338 included within reorganization costs on the statement of operations for
the three and six months ended June 30, 2020. Prior to the bankruptcy filing on
June 15, 2020, the Company recognized amortization of debt discount and deferred
finance costs of $453,853 and $819,082 during the three and six months ended
June 30, 2020, respectively. All unsecured or undersecured debt is included in
Liabilities subject to compromise on the Company's balance sheet as of June 30,
2020. An additional $151,338 of debt discount was written amortized to interest
and classified as part of reorganization costs on the statement of operations,
for total amortization of debt discount and deferred finance costs of $970,420
during the six months ended June 30, 2020.
Results of Operations
Three months ended June 30, 2020 compared to three months ended June 30, 2019
Revenue and Gross Profit
During the three months ended June 30, 2020, the Company generated $49,332 in
revenue and $23,210 in gross profit. During the three months ended June 30,
2019, the Company generated $40,204 in revenue and $21,920 in gross profit. The
increase in revenue and gross profit is primarily related to new product
offerings and increased awareness of the Company's products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses amounted to $83,871 and $756,416,
respectively for the three months ended June 30, 2020 and 2019, a decrease of
$672,545. The decrease was primarily due to lower stock-based compensation and
lower executive officer compensation in the current period
Professional fees
Professional fees amounted to $1,516 and $81,700, respectively for the three
months ended June 30, 2020 and 2019. The decrease of $80,184 was primarily due
to write downs of certain accounts payable associated with the Bankruptcy
Petition filed on June 15, 2020.
Reorganization Costs
Reorganization costs for the three months ended June 30, 2020 were $161,441 and
consisted primarily of $151,338 of amortization of deferred finance costs and
debt discount on convertible notes subject to compromise under the Bankruptcy
Petition, and certain legal fees related to the Petition.
Interest expense
Interest expense was $458,004 for the three months ended June 30, 2020 compared
to $119,787 for the three months ended June 30, 2019. The interest expense
primarily relates to the Company's recently issued convertible notes, including
amortization of discount and deferred financing fees of $453,853 during the
three months ended June 30, 2020.
22
Derivative loss
Derivative losses were $193,649 and $116,208 for the three months ended June 30,
2020 and 2019, respectively. The increase is due to more convertible debt
outstanding during the current period resulting in higher derivative
liabilities.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Revenue and Gross Profit
During the six months ended June 30, 2020, the Company generated $99,494 in
revenue and $51,754 in gross profit. During the six months ended June 30, 2019,
the Company generated $179,789 in revenue and $73,008 in gross profit. The
decrease in revenue and gross profit is primarily related to a bulk product sale
to a single customer in the prior period that did not occur in the current year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses amounted to $270,447 and
$3,204,822, respectively for the six months ended June 30, 2020 and 2019, a
decrease of $2,934,375. The decrease was primarily due to lower stock-based
compensation and lower executive officer compensation in the current period
Professional fees
Professional fees amounted to $44,712 and $129,541, respectively for the six
months ended June 30, 2020 and 2019. The decrease of $84,829 was primarily due
to write downs of certain accounts payable associated with the Bankruptcy
Petition filed on June 15, 2020 and decreased legal fees due to the Company's
S-1 filing in the prior period.
Reorganization Costs
Reorganization costs for the six months ended June 30, 2020 were $161,441 and
consisted primarily of $151,338 of amortization of deferred finance costs and
debt discount on convertible notes subject to compromise under the Bankruptcy
Petition, and certain legal fees related to the Petition.
Interest expense
Interest expense was $854,580 for the six months ended June 30, 2020 compared to
$123,127 for the six months ended June 30, 2019. The interest expense primarily
relates to the Company's recently issued convertible notes, including
amortization of discount and deferred financing fees of $819,338.
Derivative loss
Derivative losses were $521,373 and $116,208 for the six months ended June 30,
2020 and 2019, respectively. The increase is due to more convertible debt
outstanding during the current period resulting in higher derivative
liabilities.
23
Liquidity and Capital Resources
The following is a summary of the Company's cash flows used in operating
activities for the six months ended June 30, 2020 and 2019:
Six Months ended Six Months ended
June 30, 2020 June 30, 2019Net cash used in operating activities $ (177,727 ) $ (605,580 )
Net cash provided by financing activities
126,760 445,611
Net effect on cash $ (50,967 ) $ (159,969 )
Operating Activities
The cash used in operating activities of $177,727 for the six months ended June
30, 2020 was primarily due to selling, general and administrative costs as the
Company increased its operations during the current period and uses of working
capital.
Financing Activities
The cash provided by financing activities of $126,760 during the six months
ended June 30, 2020 was primarily from one convertible debt issuance, which
provided proceeds of $78,000, proceeds from an SBA loan of $68,300, partially
offset by payments of debt issuance costs of $3,000 and payments on unsecured
notes payable of $16,540. During the six months ended June 30, 2019, the cash
provided by financing activities of $445,611 was primarily from convertible debt
issuances, which provided proceeds of $466,000, offset by payments of debt
issuance costs of $9,000 and payments on unsecured notes payable of $11,389.
We are a public company and as such we have incurred and will continue to incur
significant expenses for legal, accounting and related services. As a public
entity, subject to the reporting requirements of the Exchange Act of 1934, we
incur ongoing expenses associated with professional fees for accounting, legal
and a host of other expenses including annual reports and proxy statements, if
required. We estimate that these costs will increase over the next few years and
may be significantly higher if our business volume and transactional activity
increases but we will not yet be subject to the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 until we exceed $75 million in market
capitalization (if ever). These obligations will certainly reduce our ability
and resources to expand our business plan and activities. We hope to be able to
use our status as a public company to increase our ability to use noncash means
of settling outstanding obligations (i.e. issuance of restricted shares of our
common stock) and compensate independent contractors who provide professional
services to us, although there can be no assurances that we will be successful
in any of these efforts. We will also reduce compensation levels paid to
management (if we attract or retain outside personnel to perform this function)
if there is insufficient cash generated from operations to satisfy these costs.
We hope to be able to use our status as a public company to enable us to use
non-cash means of settling obligations and compensate persons and/or firms
providing services to us, although there can be no assurances that we will be
successful in any of those efforts. However, these actions, if successful, will
result in dilution of the ownership interests of existing shareholders, may
further dilute common stock book value, and that dilution may be material. Such
issuances may also serve to enhance existing management's ability to maintain
control of the Company because the shares may be issued to parties or entities
committed to supporting existing management. The Company may offer shares of its
common stock to settle a portion of the professional fees incurred in connection
with its registration statement. No negotiations have taken place with any
professional and no assurances can be made as to the likelihood that any
professional will accept shares in settlement of obligations due to them.
As of June 30, 2020, total liabilities increased to $2,137,758 from $1,710,195
as of December 31, 2019, mainly due to the convertible debt issuances by the
Company during the current period and the increase in the associated derivative
liability. Of these liabilities, $2,129,365 are classified as liabilities
subject to compromise as part of the Company's Bankruptcy Petition.
24
Going Concern
Our auditor has issued a "going concern" qualification as part of its opinion in
the Audit Report for the year ending December 31, 2019, and our unaudited
financial statements for the six months ended June 30, 2020, including a "going
concern" note disclosing that our ability to continue as a going concern is
contingent on us being able to raise working capital to grow our operations and
generate revenue.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities in the financial statements and accompanying notes. The SEC has
defined a company's critical accounting policies as the ones that are most
important to the portrayal of the company's financial condition and results of
operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. We believe that our estimates and assumptions are
reasonable under the circumstances; however, actual results may vary from these
estimates and assumptions.
Recently Issued Accounting Pronouncements
The Company does not believe that any other recently issued effective
pronouncements, or pronouncements issued but not yet effective, if adopted,
would have a material effect on the accompanying financial statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources and would be considered
material to investors.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
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VITALIBIS, INC. 
