Attached files
file | filename |
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EX-32 - EX-32 - MVC CAPITAL, INC. | a20-1716_1ex32.htm |
EX-31 - EX-31 - MVC CAPITAL, INC. | a20-1716_1ex31.htm |
EX-22.1 - EX-22.1 - MVC CAPITAL, INC. | a20-1716_1ex22d1.htm |
10-K - 10-K - MVC CAPITAL, INC. | a20-1716_110k.htm |
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RuMe Inc. |
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Financial Statements |
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As of December 31, 2018 and 2017 and for the Years Ended December 31, 2018, 2017 and 2016 |
RuMe Inc.
Contents | |
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Independent Auditors Report |
1 |
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Financial Statements: |
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Balance Sheets |
3 |
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Statements of Operations |
5 |
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Statement of Changes in Stockholders Deficit |
6 |
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Statements of Cash Flows |
7 |
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Notes to Financial Statements |
8 |
Independent Auditors Report
Board of Directors
RuMe Inc.
Centennial, Colorado
We have audited the accompanying financial statements of RuMe Inc., which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of operations, changes in stockholders deficit, and cash flows for the years ended December 31, 2018, 2017 and 2016, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
ACM LLP | Denver · Boulder · Northern Colorado · Laramie
303 East 17th Avenue, Suite 600 | Denver, Colorado 80203 | 303.830.1120 | www.acmllp.com | denver@acmllp.com
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RuMe Inc. as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018, 2017 and 2016 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 of the financial statements, the Company has experienced significant losses, negative cash flows from operations, and has an accumulated deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
ACM LLP
Denver, Colorado
November 15, 2019
www.acmllp.com
RuMe Inc.
Balance Sheets
December 31, |
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2018 |
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2017 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
750,116 |
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$ |
42,602 |
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Accounts receivable, net |
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652,305 |
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1,589,550 |
| ||
Inventories, net |
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912,501 |
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1,255,487 |
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Prepaid expenses and other current assets |
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177,811 |
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94,059 |
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Total current assets |
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2,492,733 |
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2,981,698 |
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Property and equipment, net |
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406,773 |
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533,725 |
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Other long-term assets: |
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Intangible assets, net |
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10,577 |
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9,160 |
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Total other long-term assets |
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10,577 |
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9,160 |
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Total assets |
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$ |
2,910,083 |
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$ |
3,524,583 |
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Continued. |
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RuMe Inc.
Balance Sheets
December 31, |
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2018 |
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2017 |
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Liabilities and stockholders deficit |
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Current liabilities: |
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Accounts payable |
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$ |
824,420 |
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$ |
2,130,449 |
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Accrued expenses and other liabilities |
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907,648 |
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1,067,312 |
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Senior line of credit, net of loan costs |
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|
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1,471,361 |
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Capital lease obligations, current |
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46,951 |
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47,661 |
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Current portion of senior notes payable, net of discount and loan costs |
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1,765,160 |
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Total current liabilities |
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1,779,019 |
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6,481,943 |
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Long-term liabilities: |
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Senior line of credit, non-current portion, net of loan costs |
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858,203 |
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Senior notes payable, non-current portion, net of discount and loan costs |
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1,711,072 |
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Accrued dividends |
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1,940,110 |
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1,618,583 |
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Subordinated related party note payable, net of discount |
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4,846,377 |
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1,016,838 |
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Capital lease obligations, non-current |
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46,283 |
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Total liabilities |
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11,134,781 |
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9,163,647 |
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Commitments and contingencies |
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Stockholders deficit: |
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Series A preferred stock- $0.18 per share, $0.01 par value, 5,002,774 shares authorized, issued and outstanding; liquidation preference of $1,666,761 |
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50,028 |
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50,028 |
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Series B preferred stock- $0.20 per share, $0.01 par value, 2,500,924 shares authorized, issued and outstanding; liquidation preference of $891,612 |
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25,009 |
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25,009 |
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Series B-1 preferred stock- $0.20 per share, $0.01 par value, 4,999,076 shares authorized, issued and outstanding; liquidation preference of $1,782,236 |
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49,991 |
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49,991 |
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Series C preferred stock- $0.1423 per share, $0.01 par value, 42,361,393 shares authorized, and 23,896,634 shares issued and outstanding; liquidation preference of $4,667,726 |
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238,966 |
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238,966 |
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Common stock- $0.01 par value, 90,000,000 shares authorized; 5,910,048 (2018) and 14,597,549 (2017) shares issued and outstanding |
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59,100 |
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145,975 |
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Additional paid-in-capital |
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4,458,572 |
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4,801,309 |
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Accumulated deficit |
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(13,106,364 |
) |
(10,950,342 |
) | ||
Total stockholders deficit |
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(8,224,698 |
) |
(5,639,064 |
) | ||
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Total liabilities and stockholders deficit |
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$ |
2,910,083 |
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$ |
3,524,583 |
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See independent auditors report and accompanying notes to the financial statements.
RuMe Inc.
Statements of Operations
Year Ended December 31, |
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2018 |
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2017 |
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2016 |
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Sales, net of discounts, returns and allowances |
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$ |
6,947,810 |
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$ |
12,614,960 |
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$ |
12,560,330 |
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Cost of sales |
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4,429,108 |
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8,476,741 |
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6,660,901 |
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Gross profit |
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2,518,702 |
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4,138,219 |
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5,899,429 |
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Operating expenses: |
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Payroll expense |
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1,954,624 |
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2,801,049 |
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2,528,503 |
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Sales, advertising and marketing |
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808,567 |
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2,281,014 |
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2,327,402 |
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General and administrative |
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1,077,851 |
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1,357,746 |
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2,395,519 |
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Research and development |
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16,151 |
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46,988 |
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18,856 |
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Depreciation and amortization |
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94,170 |
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130,875 |
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124,338 |
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Total operating expenses |
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3,951,363 |
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6,617,672 |
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7,394,618 |
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Loss from operations |
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(1,432,661 |
) |
(2,479,453 |
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(1,495,189 |
) | |||
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Other income (expense): |
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Other income (expense) |
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44,652 |
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13,178 |
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(46,072 |
) | |||
Interest expense |
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(768,013 |
) |
(703,438 |
) |
(244,007 |
) | |||
Total other expense, net |
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(723,361 |
) |
(690,260 |
) |
(290,079 |
) | |||
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Net loss |
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$ |
(2,156,022 |
) |
$ |
(3,169,713 |
) |
$ |
(1,785,268 |
) |
See independent auditors report and accompanying notes to the financial statements.
RuMe Inc.
Statement of Changes in Stockholders Deficit
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Preferred Stock |
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Preferred Stock |
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Preferred Stock |
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Preferred Stock |
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Additional |
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Series A |
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Series B |
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Series B-1 |
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Series C |
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Common Stock |
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Paid-in |
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Accumulated |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Total |
| ||||||||
Balance, January 1, 2016 |
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5,002,774 |
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$ |
50,028 |
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2,500,924 |
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$ |
25,009 |
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4,999,076 |
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$ |
49,991 |
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23,896,634 |
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$ |
238,966 |
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14,597,549 |
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$ |
145,975 |
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$ |
4,482,112 |
|
$ |
(5,995,361 |
) |
$ |
(1,003,280 |
) |
Stock based compensation |
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|
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|
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|
|
|
|
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|
9,691 |
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9,691 |
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Dividends- non cash |
|
|
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|
|
|
|
|
|
|
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|
|
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|
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(275,657 |
) |
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(275,657 |
) | ||||||||
Stock warrants issued in connection with debt |
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|
|
|
|
|
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|
462,221 |
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|
|
462,221 |
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Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,785,268 |
) |
(1,785,268 |
) | ||||||||
Balance, December 31, 2016 |
|
5,002,774 |
|
50,028 |
|
2,500,924 |
|
25,009 |
|
4,999,076 |
|
49,991 |
|
23,896,634 |
|
238,966 |
|
14,597,549 |
|
145,975 |
|
4,678,367 |
|
(7,780,629 |
) |
(2,592,293 |
) | ||||||||
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,652 |
|
|
|
12,652 |
| ||||||||
Dividends- non cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297,710 |
) |
|
|
(297,710 |
) | ||||||||
Stock warrants issued in connection with debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408,000 |
|
|
|
408,000 |
| ||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,169,713 |
) |
(3,169,713 |
) | ||||||||
Balance, December 31, 2017 |
|
5,002,774 |
|
50,028 |
|
2,500,924 |
|
25,009 |
|
4,999,076 |
|
49,991 |
|
23,896,634 |
|
238,966 |
|
14,597,549 |
|
145,975 |
|
4,801,309 |
|
(10,950,342 |
) |
(5,639,064 |
) | ||||||||
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,823 |
|
|
|
8,823 |
| ||||||||
Dividends- non cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(321,527 |
) |
|
|
(321,527 |
) | ||||||||
Shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,687,501 |
) |
(86,875 |
) |
(30,033 |
) |
|
|
(116,908 |
) | ||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,156,022 |
) |
(2,156,022 |
) | ||||||||
Balance, December 31, 2018 |
|
5,002,774 |
|
$ |
50,028 |
|
2,500,924 |
|
$ |
25,009 |
|
4,999,076 |
|
$ |
49,991 |
|
23,896,634 |
|
$ |
238,966 |
|
5,910,048 |
|
$ |
59,100 |
|
$ |
4,458,572 |
|
$ |
(13,106,364 |
) |
$ |
(8,224,698 |
) |
See independent auditors report and accompanying notes to the financial statements.
RuMe Inc.
Statements of Cash Flows
Year Ended December 31, |
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2018 |
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2017 |
|
2016 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
|
$ |
(2,156,022 |
) |
$ |
(3,169,713 |
) |
$ |
(1,785,268 |
) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
| |||
Depreciation |
|
234,786 |
|
243,459 |
|
202,690 |
| |||
Amortization |
|
10,932 |
|
24,754 |
|
22,815 |
| |||
Amortization of debt discounts |
|
208,822 |
|
435,942 |
|
106,858 |
| |||
Amortization of loan costs |
|
124,448 |
|
30,238 |
|
|
| |||
Bad debt expense, net of recoveries |
|
5,098 |
|
(4,043 |
) |
46,332 |
| |||
Inventory write-off expense and loss provisions |
|
(60,000 |
) |
215,000 |
|
|
| |||
Interest paid-in-kind |
|
279,539 |
|
95,632 |
|
21,205 |
| |||
Stock based compensation expense |
|
8,823 |
|
12,652 |
|
9,691 |
| |||
Loss on disposal of property and equipment |
|
1,419 |
|
23,115 |
|
|
| |||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Accounts receivable |
|
932,147 |
|
839,954 |
|
(1,572,886 |
) | |||
Inventories |
|
402,986 |
|
(101,284 |
) |
368,908 |
| |||
Prepaid expenses and other assets |
|
(83,752 |
) |
65,846 |
|
(104,490 |
) | |||
Accounts payable |
|
(1,306,029 |
) |
226,414 |
|
390,918 |
| |||
Accrued expense and other liabilities |
|
(159,664 |
) |
21,853 |
|
537,662 |
| |||
|
|
|
|
|
|
|
| |||
Net cash used in operating activities |
|
(1,556,467 |
) |
(1,040,181 |
) |
(1,755,565 |
) | |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Purchases of property and equipment |
|
(109,253 |
) |
(223,021 |
) |
(207,282 |
) | |||
Acquisition of intangible assets |
|
(12,349 |
) |
(6,969 |
) |
(8,543 |
) | |||
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
|
(121,602 |
) |
(229,990 |
) |
(215,825 |
) | |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
(Repayments) advances on lines of credit, net |
|
(642,398 |
) |
(463,789 |
) |
250,631 |
| |||
Proceeds from issuance of term loan debt |
|
|
|
2,000,000 |
|
|
| |||
Proceeds from issuance of related party debt |
|
3,550,000 |
|
|
|
900,000 |
| |||
Cash paid for loan costs |
|
(85,524 |
) |
(123,804 |
) |
|
| |||
Repayments of long-term debt |
|
(272,594 |
) |
(79,990 |
) |
(21,322 |
) | |||
Repayments of capital lease obligations |
|
(46,993 |
) |
(45,154 |
) |
(42,750 |
) | |||
Repurchase of common stock |
|
(116,908 |
) |
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by financing activities |
|
2,385,583 |
|
1,287,263 |
|
1,086,559 |
| |||
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and cash equivalents |
|
707,514 |
|
17,092 |
|
(884,831 |
) | |||
Cash and cash equivalents, at beginning of year |
|
42,602 |
|
25,510 |
|
910,341 |
| |||
Cash and cash equivalents, at end of year |
|
$ |
750,116 |
|
$ |
42,602 |
|
$ |
25,510 |
|
|
|
|
|
|
|
|
| |||
Supplemental cash flow information: |
|
|
|
|
|
|
| |||
Cash paid for interest |
|
$ |
168,035 |
|
$ |
169,054 |
|
$ |
104,969 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
Capital assets acquired through capital lease |
|
$ |
|
|
$ |
|
|
$ |
64,352 |
|
Debt discount on debt issued with warrants |
|
$ |
|
|
$ |
408,000 |
|
$ |
462,221 |
|
Annual accrual of dividends |
|
$ |
321,527 |
|
$ |
297,710 |
|
$ |
275,657 |
|
See independent auditors report and accompanying notes to the financial statements.
RuMe Inc.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
RuMe Inc. (the Company or RuMe) was incorporated in the State of Delaware in December 2010. The Company manufactures, distributes and sells reusable bags and accessories for environmentally and socially-conscious consumers. The Company sells both directly to consumers and through retailers for whom the Company is a contract manufacturer, as well as its branded products into the promotion products industry.
Basis of Accounting and Presentation
The financial statements of the Company are prepared on the accrual basis of accounting and have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates
The preparation of the financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and those differences could be material.
The most significant estimates relate to accounts receivable reserves, inventory overhead allocations and reserves, accruals, estimated useful lives of property and equipment, and inputs used to derive the fair value of warrants issued in connection with debt and fair value of stock-based compensation awards.
Cash and Cash Equivalents
The Company considers cash and temporary investments with original maturities of three months or less, to be cash and cash equivalents. Cash and cash equivalents are generally maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the invoice amount. Accounts receivable are generally unsecured customer obligations that typically require payment within 30 days from the invoice date. Payments of accounts receivable are applied to the specific invoices identified on the customers remittance advice or, if unspecified, to the earliest unpaid invoices.
The allowance for doubtful accounts is based on managements assessment of the collectability of specific customer accounts and includes consideration of the creditworthiness and financial condition of those specific customers. The Company records an allowance to reduce the specific
RuMe Inc.
Notes to Financial Statements
receivables to the amount that is reasonably believed to be collectible. The Company also records an allowance for receivables based on multiple factors including historical experience with bad debts, the financial condition of the Companys customers, and the aging of such receivables. Amounts are considered past due based upon contractual terms. Accounts are written off when they are deemed uncollectible, based on managements judgement. At December 31, 2018 and 2017, the allowance for doubtful accounts was approximately $25,000 and $32,000, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, including provisions for obsolescence commensurate with known or estimated exposures, and consist primarily of components, packaging and finished products purchased for resale. Inventories are shown net of a valuation reserve of approximately $240,000 and $300,000 at December 31, 2018 and 2017, respectively. The cost of inventories includes purchased materials, direct and indirect labor, and manufacturing overhead costs. At December 31, 2018 and 2017, inventory includes purchased materials, some of which are saleable to customers. At December 31, 2018 and 2017, work-in-process inventories were de minimis.
The Company maintains reserves for excess and obsolete inventories to reflect inventories at the lower of its stated cost or net realizable value. The estimate for excess and obsolete inventories is based upon managements assumptions about future demand and market conditions. Based upon current market information, management believes the reserves for excess and obsolete inventory are adequate at December 31, 2018 and 2017.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which ranges from 3-7 years. Leasehold improvements are depreciated over the lesser of the related lease term or the estimated useful life of the asset. For the years ended December 31, 2018, 2017 and 2016, depreciation expense was approximately $235,000, $243,000, and $203,000 respectively. For the years ended December 31, 2018, 2017 and 2016, depreciation expense included in cost of sales was approximately $151,000, $137,000 and $102,000, respectively.
Intangible Assets
Intangible assets primarily consist of website and software development costs. The Company follows the provisions in the Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) 350-40, Internal-Use Software, for capitalizing software costs. Costs incurred during the application development stage are capitalized, and costs incurred during the preliminary project and the post-implementation stages are expensed as incurred. Capitalized software through December 31, 2018, represents costs paid to third parties for development activities. Capitalized software costs are amortized using a straight-line method over the estimated useful life of approximately 3 years. Amortization begins when the products are ready for their intended use. For the years ended December 31, 2018, 2017 and 2016, amortization expense was approximately $11,000, $25,000 and $23,000, respectively.
RuMe Inc.
Notes to Financial Statements
Impairment of Long-Lived Assets
ASC 360-10, Property Plant, and Equipment requires that long-lived assets, such as property and equipment and intangibles subject to amortization, be reviewed at least annually for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. Specifically, management projects undiscounted cash flows expected over the period to be benefited. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent managements best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. The Company determined that no impairment occurred as of December 31, 2018 and 2017.
Accrued Dividends
The Company accrues dividends in accordance with the amended and restated articles of incorporation. The Company is not obligated to pay such accruing dividends unless a liquidation event occurs, or other criteria are met, as defined. As such, accrued dividends are recorded as long-term in the accompanying balance sheets. Further, payment of accrued dividends maybe restricted by terms of loan agreements.
Revenue Recognition
On January 1, 2018, the Company adopted FASB ASC 606, Revenue from Contracts with Customers and all the related amendments (the new revenue standard) with respect to all contracts using the modified retrospective method. The Company accounts for revenue in accordance with the new revenue standard, which requires the Company to recognize revenue in a manner which depicts the transfer of goods or services to its customers at an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company sells both directly to consumers and through retailers for whom the Company is a contract manufacturer, as well as its branded products into the promotion products industry.
Prior to the adoption of the new standard, the Company recognized substantially all of its revenue from contracts with customers at a point in time, which was generally when the goods were shipped to or received by the customer, title and risk of ownership had passed, the price to the buyer was fixed or determinable and collectability was reasonably assured (net of estimated returns rebates, allowances and discounts).
Under the new revenue standard, the Company is required to recognize revenue over time for its product contract manufacturer services as the Companys performance does not create an asset with an alternative use to the Company and the entity has an enforceable right to payment for performance completed to date, at all times during the contract term if the customer terminates the contract for reasons other than the Companys nonperformance. However, the Company records revenue at a point in time for these transactions as the period of time between
RuMe Inc.
Notes to Financial Statements
processing an order and shipment are not significant, and timing of revenue recognition does not result in a material difference. Revenue for all other contracts with customers will continue to be recognized at a point in time, similar to the recognition prior to the adoption of the new revenue standard.
A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Most of the Companys contracts consists of single performance obligation arrangements for which the transaction price for a given product sold is equivalent to the price quoted for the product, net of any stated discounts or allowances applicable at a point in time.
The Company also derives revenue to a lesser extent from licensing of the RuMe trademarks with consideration in the form of sales-and usage-based royalties, from one customer contract that commenced in 2018. Revenue is recognized at the later of when (or as) the subsequent sale or usage occurs.
The Company has elected to exclude from measurement of the transaction price all taxes (e.g., sales, use, value added and certain excise taxes) that are assessed by a governmental authority in connection with a specific revenue-producing transaction and collected by the Company from the customer. Accordingly, the Company recognizes revenue net of sales taxes. The revenue and cost for freight and shipping is recorded when control over the sale of goods passes to the Companys customers.
The Company offers assurance-type warranties for its products and does not have any material separate performance obligations related to these warranties. The Companys historical rates of return are insignificant as a percentage of sales and, as a result, the Company does not record a reserve for returns at the time the Company recognizes revenue.
The Company has elected the practical expedient detailed at ASC 606-10-50-13, whereas revenue for unsatisfied performance obligations that will be billed in future periods has not been disclosed.
The Company does not have material amounts of contract assets. Applying the practical expedient in ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs include certain sales commissions and incentives, which are included in operating expenses, and are payable only when associated revenue has been collected and earned by the Company.
Contract liabilities consist of customer deposits and deferred revenue. The Company recognizes revenue when the performance obligation is satisfied. For the year ended December 31, 2018, the Company recognized revenue of approximately $36,000 related to the deferred revenue at January 1, 2018.
The Company did not record any adjustments to the financial statements as part of the adoption of ASC 606.
RuMe Inc.
Notes to Financial Statements
The following table summarizes the Companys revenue by source:
Year Ended December 31, |
|
2018 |
|
2017 |
|
2016 |
| |||
Product and contract manufacturing sales |
|
$ |
6,642,713 |
|
$ |
12,146,383 |
|
$ |
11,859,042 |
|
License revenue |
|
181,741 |
|
|
|
|
| |||
Shipping and handling |
|
88,014 |
|
199,678 |
|
489,547 |
| |||
Other |
|
35,342 |
|
268,899 |
|
211,741 |
| |||
Total sales, net |
|
$ |
6,947,810 |
|
$ |
12,614,960 |
|
$ |
12,560,330 |
|
Research and Development
Research and development costs are expensed as incurred.
Advertising
Advertising costs are expensed as incurred and total approximately $113,000, $895,000 and $1,340,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Income Taxes and Uncertain Tax Positions
The Company accounts for income taxes under ASC 740, Accounting for Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is required to the extent it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
ASC 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance related to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more likely than not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The Company performs a review of its material tax positions in accordance with recognition and measurement standards established by ASC 740. Based upon this review, the Company did not recognize any material uncertain tax positions for the years ended December 31, 2018, 2017 and 2016. The Companys tax returns for 2016 forward are subject to examination by the Internal Revenue Service and state taxing authorities. Penalties and interest, if any, would be reflected in operating expenses.
RuMe Inc.
Notes to Financial Statements
Deferred Loan Costs
Deferred loan costs have been capitalized on the accompanying balance sheets, and in accordance with GAAP, are presented as a reduction of the corresponding debt liability. Loan costs are amortized using the straight-line method (which approximates the effective interest method) over the term of the respective borrowing agreement, unless the debt obligation is terminated earlier, in which case the remaining costs are expensed in the period of termination. The Company incurred loan costs in connection with the senior line of credit and senior notes payable of approximately $86,000, $124,000 and $0 during the years ended December 31, 2018 2017 and 2016, respectively. Deferred loan costs, net of accumulated amortization, were approximately $55,000 and $93,000 at December 31, 2018 and 2017, respectively. Amortization of deferred loan costs for the years ended December 31, 2018, 2017 and 2016 was approximately $124,000, $30,000 and $0, respectively.
Deferred Rent Liability
For leases that contain escalations and free rent abatement, the Company records the total rent expense over the initial lease term on a straight-line basis. Any difference between minimum rent and straight-line rent is recorded as a liability within accrued expenses and other liabilities in the accompanying balance sheets.
Stock-Based Compensation
The Company follows standards established by ASC 718-10, Compensation- Stock Compensation (ASC 718), which requires that share-based payments be accounted for using a fair-value-based method. Accordingly, compensation cost for options are recognized on a straight-line basis over the requisite service (vesting) period for the entire award. The fair value of restricted stock awards is based on the estimated value of the Companys common stock on the date of the award.
Fair Value of Financial Instruments
The Company follows the accounting guidance prescribed in ASC 820, Fair Value Measurements and Disclosures (ASC 820) and ASC 825, Financial Instruments (ASC 825). Among other requirements, ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosure about the use of fair value to measure assets and liabilities. ASC 825 permits entities to choose, at specified election dates, to measure eligible items at fair value (the fair value option) and requires an entity to report in earnings at each subsequent reporting date those unrealized gains and losses on items for which the fair value option has been elected.
Fair value is a market-based measure considered from the perspective of a market participant that holds the asset or owes the liability, rather than an entity-specific measure. Therefore, when market assumptions are not readily available, the Companys own assumptions are set to reflect those that market participants would use in pricing the asset or liability on a measurement date. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
RuMe Inc.
Notes to Financial Statements
observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Companys assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
· Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities to which the Company has access at a measurement date;
· Level 2: Observable inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
· Level 3: Unobservable inputs for which little or no market data exists, and for which the Company must develop its own assumptions regarding the assumptions that market participants would use in pricing the asset or liability, including assumptions regarding risk.
Because of inherent uncertainties in the valuation of assets or liabilities for which there are no observable inputs, those estimated fair values may differ significantly from the values that may have been used had a ready market for the assets or liabilities existed.
The following summarizes the Companys fair value hierarchy:
|
|
December 31, 2017 |
| ||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock warrants issued in 2017 |
|
$ |
|
|
$ |
|
|
$ |
408,000 |
|
$ |
408,000 |
|
Total |
|
$ |
|
|
$ |
|
|
$ |
408,000 |
|
$ |
408,000 |
|
|
|
December 31, 2016 |
| ||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Stock warrants issued in 2016 |
|
$ |
|
|
$ |
|
|
$ |
462,221 |
|
$ |
462,221 |
|
Total |
|
$ |
|
|
$ |
|
|
$ |
462,221 |
|
$ |
462,221 |
|
See Note 11 for further information on stock warrants issued during the years ended December 31, 2017 and 2016. No stock warrants were issued during the year ended December 31, 2018.
RuMe Inc.
Notes to Financial Statements
New Accounting Pronouncements - Adopted in 2018
On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09 (Topic 606), Revenue from Contracts with Customers and all the related amendments (ASC 606 or the new revenue standard) to all contracts and elected the modified retrospective method. The results for periods before 2018 were not adjusted for the new revenue standard and the cumulative effect of the change in accounting was de minimis at the date of adoption.
In May 2017, the FASB issued ASU 2017-09, Compensation Stock Compensation (Topic 718) Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. The amendments are effective for all entities for annual periods beginning after December 15, 2017 and will be applied prospectively.
The Company adopted ASU 2017-09 on January 1, 2018, and the impact of adoption was de minimis.
New Accounting Pronouncements - Future Adoption
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820. The amendment will be effective for reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently assessing the impact of the ASU on its results of operations, cash flows and financial position.
In June 2018, the FASB adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer, or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted, but no earlier than the Companys adoption of ASC 606. The Company does not believe the adoption of this new accounting guidance will have a material impact on its results of operations, cash flows and financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which requires companies leasing assets to recognize on their balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on contracts longer than one year. The lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities for short-term leases. How leases are
RuMe Inc.
Notes to Financial Statements
recorded on the balance sheet represents a significant change from previous GAAP guidance in Topic 840. ASU 2016-02 maintains a distinction between finance leases and operating leases similar to the distinction under previous lease guidance for capital leases and operating leases. ASU 2016-02 is effective for fiscal periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its results of operations, cash flows and financial position.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
2. GOING CONCERN AND MANAGEMENTS PLAN
The Companys financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced significant losses, negative cash flows from operations, and has an accumulated deficit. These conditions raise substantial doubt as to the Companys ability to continue as a going concern.
The Companys ability to continue as a going concern is contingent upon its ability to increase sales of its products, attain profitable operations and raise additional capital to fund operations. Managements plan to attain profitability includes growth within contract manufacturing revenue, increasing effectiveness of online advertising and corresponding online revenues, executing strategic transactions, and restructuring of operations personnel and diversification of suppliers to reduce costs. There can be no assurances that the Company will be successful in these efforts or will be able to resolve its liquidity issues or attain profitability.
At various times in 2018, the Company received advances under its various senior and subordinated lending arrangements (see Notes 5 and 6). In 2019, the Company refinanced its senior lending arrangement with another lender, under a long-term basis (see Note 14).
Should the above plans not provide adequate funding for ongoing operations, the Company will be required to obtain additional capital which may or may not be available to the Company.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability of and classification of assets and the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
RuMe Inc.
Notes to Financial Statements
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
December 31, |
|
2018 |
|
2017 |
| ||
Printers and printing equipment |
|
$ |
726,245 |
|
$ |
672,724 |
|
Molds |
|
118,040 |
|
105,390 |
| ||
Office furniture, fixtures and equipment |
|
38,071 |
|
38,071 |
| ||
Computers and computer software |
|
112,845 |
|
90,452 |
| ||
Warehouse equipment |
|
129,000 |
|
110,289 |
| ||
Leasehold improvements |
|
70,500 |
|
70,500 |
| ||
|
|
1,194,701 |
|
1,087,426 |
| ||
Less accumulated depreciation |
|
(787,928 |
) |
(553,701 |
) | ||
Total property and equipment, net |
|
$ |
406,773 |
|
$ |
533,725 |
|
4. ACCRUED EXPENSES AND OTHER LIABLITIES
Accrued expenses and other liabilities consisted of the following as of:
December 31, |
|
2018 |
|
2017 |
| ||
Accrued salaries, bonus and benefits |
|
$ |
118,086 |
|
$ |
292,200 |
|
Deferred revenue and customer deposits |
|
12,369 |
|
47,474 |
| ||
Gift card liability |
|
65,393 |
|
64,859 |
| ||
Accrued trade payables and other |
|
592,320 |
|
559,225 |
| ||
Deferred rent liability |
|
119,480 |
|
103,554 |
| ||
|
|
|
|
|
| ||
Total accrued expenses and other liabilities |
|
$ |
907,648 |
|
$ |
1,067,312 |
|
5. SENIOR LINE OF CREDIT
The Company had a $2,000,000 operating line of credit with a financial institution, which expired on September 30, 2017. The line of credit bore interest at the prime rate plus 2.0%, payable monthly, was secured by all the Companys assets, and was subject to various financial and other covenants and was guaranteed the Companys majority investor for up to $1,000,000.
The operating line of credit was amended in September 2017 to reduce the amount available to borrow from $2,000,000 to $1,500,000, extend the maturity date to September 30, 2018 and modify the interest rate to a 30-day LIBOR rate plus 3.25%, payable monthly (5.75% at December 31, 2018). In addition, certain financial and other covenants that were not met through 2017 or at the September 2017 amendment date were waived. Amounts borrowed were subject to a borrowing base, based on certain qualified accounts receivable and inventory, as defined. The amendment also required the Company to reduce the outstanding balance to $0 for 30 consecutive days each fiscal year, beginning with the year ending December 31, 2018 (Resting Obligation).
RuMe Inc.
Notes to Financial Statements
In May 2018, the operating line of credit was again amended to reduce the outstanding balance to $1,375,000, further reduce the maximum available amount to borrow to $1,250,000 commencing on January 30, 2019 and extend the maturity date to April 30, 2019. The operating line of credit was secured by substantially all assets of the Company and an irrevocable standby letter of credit in the amount of $2,000,000, provided by the Companys majority investor on behalf of the Company.
At December 31, 2018, the outstanding balance was $858,203, less unamortized loan costs of $0 for a net carrying value of $858,203. At December 31, 2017, the outstanding balance was $1,500,601, less unamortized loan costs of $29,240 for a net carrying value of $1,471,361.
The Company failed to comply with virtually all of the covenant requirements and at times exceeded the maximum borrowings available and was not in compliance with certain covenants as of December 31, 2018 and 2017. As a result, the Company entered into a forbearance agreement with the creditor in both May 2018 and October 2018 (See Note 6).
In March 2019, the financial institution that provided the senior line of credit notified the Company that the debt was being called due to the Companys existing defaults. The senior line of credit was fully repaid and replaced with a new $500,000 senior credit facility with a new creditor in April 2019 (see Note 14).
6. DEBT
Senior Notes Payable
The Company has an equipment term note payable with a maturity date of October 1, 2019. The note payable bore interest at the prime rate plus 0.50% (6.00% at December 31, 2018) and was payable monthly through maturity. Principal repayments commenced on November 1, 2016 with 36 monthly principal repayments through maturity. The outstanding balance on the note payable was $73,314 and $156,908 at December 31, 2018 and 2017, respectively.
In September 2017, the Company added another term loan with a principal balance of $2,000,000 with the same lender that required interest payable monthly at the 30-day LIBOR rate plus 2.25% (4.60% at December 31, 2018), commencing October 31, 2017 through maturity on August 31, 2019. On or before January 17, 2018, the Company was required to make a $500,000 principal payment, and commencing on February 28, 2018, the term loan required monthly principal payments of $31,500, with a balloon payment due at maturity for the unpaid principal balance. The outstanding balance on the note payable at December 31, 2018 was $1,811,000, less a discount of $118,600 (see Note 11) and less unamortized loan costs of $59,392 for a net carrying value of $1,633,008. The outstanding balance on the note payable at December 31, 2017 was $2,000,000, less a discount of $327,422 and less unamortized loan costs of $64,326 for a net carrying value of $1,608,252. In addition, certain financial and other covenants were not met through the September 2017 amendment date and were waived.
RuMe Inc.
Notes to Financial Statements
The term loan was secured by substantially all assets of the Company and also secured by an irrevocable standby letter of credit in the amount of $2,000,000, provided by the Companys majority investor on behalf of the Company. In connection with the standby letter of credit requirement, the Company granted warrants to its majority investor (See Note 11).
In May 2018, the Company amended the term loan to increase the borrowed amount by $500,000 and reduce the required principal repayments from March 2018 through December 2018 from $31,500 to $15,750. Commencing January 2019, the Company was required to make monthly principal payments of $31,500, with a balloon payment due at maturity for the unpaid principal balance.
In connection with the May 2018 senior line of credit and senior term loan amendments, the Company and its creditor entered into a forbearance agreement for the Companys failure to meet its debt service coverage financial covenant at quarters ending December 31, 2017 and March 31, 2018 and as a result of receiving line of credit advances exceeding its January 31, 2018 borrowing base. Further, it was anticipated that the Company would be unable to comply with the Resting Obligation requirement of the senior line of credit at December 31, 2018. The Creditor had agreed to forbear from exercising its rights or remedies as a result of the Companys debt service coverage covenant default through March 31, 2019, and any default under the Resting Obligation requirement provided (1) there are no further defaults or events of defaults under the amended agreements, (2) the Company meets certain quarterly tangible net worth requirements commencing March 31, 2018 through March 31, 2019, as defined, and (3) the outstanding balance of the operating line of credit does not exceed $800,000 for 30 consecutive days during the period from the May 2018 amendment through March 2019. The Company has not complied with certain of these requirements.
In October 2018, the Company again amended the terms of its senior debt facilities to amend the borrowing base requirements and entered into yet another forbearance agreement. In addition to the defaults cited in the previous amendments, the Company had failed to comply with the term loan principal payment requirements. The creditor agreed to forbear from exercising its rights or remedies on the condition that its majority investor provide the Company with an additional $1 million in advances under the subordinated note payable, and a total of $1.6 million in advances under a subordinated revolving note payable prior to December 31, 2018. Further, the forbearance agreement required that (1) there are no further defaults or events of defaults under the amended agreements, (2) the Company meets certain quarterly tangible net worth requirements commencing June 30, 2018 through March 31, 2019, as defined, and (3) the outstanding balance of the operating line of credit does not exceed $800,000 for 30 consecutive days during the period from the October 2018 amendment through March 2019. The Company has not complied with certain of these requirements.
In March 2019, the financial institution that provided the senior note payable notified the Company that the debt was being called due to the Companys existing defaults. The senior note payable was fully repaid and replaced with a new $2.5 million senior credit facility with a new creditor in April 2019 (see Note 14).
RuMe Inc.
Notes to Financial Statements
Future scheduled payments of long-term debt, based on the new 2019 senior credit facility contractual maturities (see Note 14), are as follows:
Year Ended December 31, |
|
|
| |
2019 |
|
$ |
|
|
2020 |
|
|
| |
2021 |
|
2,500,000 |
| |
Total |
|
$ |
2,500,000 |
|
Related Party Debt
At December 31, 2018 and 2017, the outstanding balance of subordinated related party debt, including accrued interest, was as follows:
December 31, |
|
2018 |
|
2017 |
| ||
Subordinated related party note payable |
|
$ |
3,000,000 |
|
$ |
900,000 |
|
Subordinated related party note payable- accrued interest |
|
353,464 |
|
116,838 |
| ||
Subordinated related party revolving note payable |
|
1,450,000 |
|
|
| ||
Subordinated related party revolving note payable- accrued interest |
|
42,913 |
|
|
| ||
Total |
|
$ |
4,846,377 |
|
$ |
1,016,838 |
|
Subordinated note payable
In October 2016, the Company entered into a subordinated note payable with its majority investor for $900,000, originally maturing in October 2017. The subordinated note payable provides for interest at 10% per annum compounded quarterly made as payment-in-kind by adding to the principal balance outstanding. In connection with the subordinated note payable in October 2016, the Company also entered into a warrant agreement as discussed in Note 11.
In September 2017, the subordinated note payable was extended to September 2019. No additional warrants were issued with the extension.
At various times in 2018, the subordinated note payable was amended to allow for and fund additional advances of $2.1 million and to extend the maturity date to March 31, 2020. In April 2019, the subordinated note payable was amended to extend the maturity date to July 31, 2021 (see Note 14).
Subordinated delayed draw note payable
In September 2017, the Company entered into a subordinated delayed draw promissory note with its majority investor to borrow up to $2 million, as defined, and payable at maturity on September 22, 2018. Interest was charged at 10% per annum, compounded quarterly, payable on the first business day of each calendar quarter. To date, no amounts were advanced and the subordinated delayed draw promissory note has expired.
RuMe Inc.
Notes to Financial Statements
Subordinated delayed revolving note payable
In August 2018, the Company entered into a subordinated revolving note payable with its majority investor for up to $600,000. The subordinated revolving note payable provides for interest at 10% per annum compounded quarterly made as payment-in-kind by adding to the principal balance outstanding. In October 2018, the Company amended the subordinated revolving note payable, increasing the total amount available to be advanced to $1.6 million. In 2019, the Company again amended the subordinated revolving note payable, increasing the total amount available to be advanced to $2.2 million (see Note 14). The maturity date of the subordinated revolving note payable is currently March 31, 2021.
7. CAPITAL LEASE OBLIGATIONS
The Company has two equipment leases which qualified for capital lease treatment and provide for monthly payments ranging from approximately $1,500 to $2,700, expiring through January 2020.
Future minimum payments due under the capital leases are as follows:
Year Ending December 31, |
|
|
| |
2019 |
|
$ |
47,191 |
|
2020 |
|
727 |
| |
|
|
47,918 |
| |
Less amounts representing interest |
|
967 |
| |
Capital lease liability |
|
46,951 |
| |
Current portion |
|
46,951 |
| |
Capital lease liability, non-current portion |
|
$ |
|
|
At December 31, 2018 and 2017, property and equipment include gross assets acquired under capital leases of approximately $211,000. At December 31, 2018 and 2017, accumulated depreciation was approximately $171,000 and $125,000, respectively. For each of the years ended December 31, 2018, 2017 and 2016, depreciation expense was approximately $45,000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leased office space under various lease arrangements, which provided for monthly rent payments ranging from approximately $4,400 to $9,600 through June 2017. Total rent expense under this office lease amounted to approximately $48,000 and $104,000 for the years ended December 31, 2017 and 2016, respectively.
In May 2016, the Company executed a new office lease which provides for monthly rent payments ranging from approximately $21,000 to $29,000 plus common area maintenance charges through December 2023, which commenced in October 2016. A letter of credit for the
RuMe Inc.
Notes to Financial Statements
amount of $300,000, expiring in September 2019, was provided by the Companys majority investor as the initial security deposit. Total rent expense under this office lease amounted to approximately $285,000, $285,000, and $71,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Future minimum rental payments under the new office lease described above, are as follows:
Year Ended December 31, |
|
|
| |
2019 |
|
$ |
281,311 |
|
2020 |
|
295,034 |
| |
2021 |
|
308,756 |
| |
2022 |
|
322,479 |
| |
2023 |
|
336,201 |
| |
|
|
|
| |
|
|
$ |
1,543,781 |
|
Contingencies
The Company sources substantially all of its products internationally. Compliance with applicable U.S. and foreign laws and regulations, such as import and export requirements, anti-corruption laws, tax laws and foreign exchange controls increases the cost of doing business in foreign jurisdictions. The Companys financial condition and operating results also could be significantly affected by other risks associated with international activities including, but not limited to, economic and labor conditions, increased duties, tariffs, taxes and other costs, political instability and changes in the value of the U.S. dollar versus local currencies.
The Company is currently in the process of evaluating its domestic tax filings relating to employment tax obligations. As of the date the financial statements were available to be issued, management has determined that an unfavorable outcome is probable of occurring. As a result, the Company has recorded an accrual of approximately $51,000 as of December 31, 2018 and 2017. As more information becomes available or such obligations are settled, an adjustment to this estimate as of December 31, 2018 could occur and such adjustment could be material.
The Company is involved in various legal proceedings and claims from time to time, arising from the normal course of business activities. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Those provisions are reviewed at least annually and adjusted to reflect the impacts negotiations, estimated settlements, legal rulings, advice of legal counsel, insurance coverage and other information and events pertaining to a particular matter. In managements opinion, resolution of all current matters are not expected to have a material adverse impact on the Companys results of operations, cash flows, or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Companys future results of operations or cash flows, or both for a particular year.
RuMe Inc.
Notes to Financial Statements
Settlement Agreements
In May 2018, the Company and prior landlord entered into a settlement agreement for approximately $70,000, relating to disputed charges arising from damages, repairs and other administrative fees upon the Company vacating the premise in 2017. The settlement was payable in four monthly installments commencing from the execution date and shall accrue interest at the rate of 8% per annum until paid in full. As of December 31, 2017, $70,000 was included in accrued expenses and other liabilities in the accompanying balance sheets. Such amounts were paid in full by August 2018.
In May 2018, the Company and a former employee entered into a settlement agreement to resolve a dispute over bonuses owed from 2015 for $96,000. The settlement is payable as follows: $24,000 payable at execution of the settlement agreement, $24,000 by May 31, 2018, six monthly installment payments of $6,000 from June 2018 through November 2018 and one final payment of $12,000 prior to December 31, 2018. As of December 31, 2017, $96,000 was included in accrued expenses and other liabilities in the accompanying balance sheets. All amounts were paid, as required.
In September 2018, the Company and three former employees and founding shareholders entered into a settlement agreement to repurchase 8,687,501 common shares, and 3,517,032 of stock options for a combined amount of approximately $117,000. In connection with the settlement agreement, the Company entered into a consulting agreement with two of the former employees and founding shareholders that provides for installment payments not to exceed $175,000 through July 2019, as defined. As of December 31, 2018, $98,000 was included in accrued expenses and other liabilities in the accompanying balance sheets for the remaining payments owed under the agreement.
Concentrations
Customers
At December 31, 2018 two customers accounted for approximately 95% of total accounts receivable. For the year ended December 31, 2018, two customers accounted for approximately 56% and 11% of total sales, respectively.
At December 31, 2017 one customer accounted for approximately 66% of total accounts receivable. For the year ended December 31, 2017, two customers accounted for approximately 36% and 15% of total sales, respectively.
For the year ended December 31, 2016, two customers accounted for approximately 35% and 21% of total sales, respectively.
RuMe Inc.
Notes to Financial Statements
Vendors
The Company is dependent on its relationships with certain foreign suppliers, and the ability of those suppliers to provide products on a timely basis and on favorable pricing terms. During the years ended December 31, 2018, 2017 and 2016, three, one and two foreign suppliers accounted for approximately 67%, 50% and 70% of total product purchases, respectively. The loss of one of these suppliers or a significant reduction in product availability could have a material adverse effect on the Company; however, the Company believes that its relationships with its suppliers are satisfactory. The Company historically has not experienced inadequate supply from its foreign suppliers. Additionally, the implementation of more restrictive trade policies, including those related to tariffs and trade barriers, or renegotiation of existing trade agreements in the U.S. or countries of the Companys foreign suppliers could negatively impact the Companys business, results of operations and financial condition.
9. EQUITY
Amended Certificate of Incorporation
Based upon the amended and restated articles of incorporation, in September 2017, the total number of common and preferred stock that the Company is authorized to issue is 90,000,000 and 54,864,167, respectively. The authorized preferred stock by series is summarized as follows: 5,002,774 shares to be designated as Series A Preferred Stock; 2,500,924 shares to be designated as Series B Preferred Stock; 4,999,076 shares to be designated as Series B-1 Preferred Stock; and 42,361,393 shares to be designated as Series C Preferred Stock.
The Series A Preferred, Series B Preferred, Series B-1 Preferred and Series C Preferred are collectively referred to as Preferred Stock.
Dividend Provisions
The Company shall declare all dividends pro rata on the common stock and the Preferred Stock. The right to dividends on Series A, Series B and Series B-1 Preferred Stock shall be cumulative, and shall accrue whether or not declared, at an annual rate of 8.0% per annum. At December 31, 2018 and 2017, cumulative unpaid dividends accrued by the Company totaled $1,940,110, and $1,618,583, respectively, and such amounts are shown as a long-term liability in the accompanying balance sheets. Rights to dividends on the Series C Preferred Stock are not cumulative and no right shall accrue to these holders, unless declared, in accordance with the amended and restated articles of incorporation.
Voting
The holders of the common stock are entitled to one vote for each share of common stock. Each holder of the shares of Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares of Preferred Stock could be converted.
RuMe Inc.
Notes to Financial Statements
Conversion Provisions
Each share of Preferred Stock shall be convertible, at the option of the holder at any time, into fully-paid and non-assessable shares of common stock. The number of shares convertible shall equal the original issuance price divided by the conversion price (as defined) in effect at the time of conversion. The conversion price for the Series A Preferred Stock shall initially be $0.18. The conversion price for the Series B and B-1 Preferred Stock shall initially be $0.20. The conversion price for the Series C Preferred Stock shall initially be $0.14. Additionally, each share of Preferred Stock shall be automatically convertible into fully-paid and non-assessable shares of common stock upon a vote of the majority of voting powers, or public offering and sale of common stock at least five times greater than the conversion prices resulting in at least $25,000,000 of proceeds.
Adjustment of the Conversion Provisions
In the event the Company shall issue additional shares of common stock for less than the Series C Preferred Stock conversion price, the conversion price shall be reduced to the consideration per share received. In the event the Company shall issue additional shares of common stock for less than the Series A, Series B and/or Series B-1 Preferred Stock conversion price, the conversion price shall be reduced to a price based on a specific formula, as defined in the amended and restated articles of incorporation dated September 2017.
The financial statements do not reflect the fair value of the embedded features for the potential adjustment of the conversion price because the conversion instrument is not indexed to the Companys own stock.
Redemption Provisions
The Preferred Stock is not redeemable at the option of the holders.
Liquidation Preference
The Preferred Stock are subject to certain liquidation preferences, as defined in the amended and restated articles of incorporation, that results in the following order of preference: first to the Series C Preferred Stock holders equal to the original issue price (including all declared and unpaid dividends); second to the Series A, Series B and Series B-1 Stock equal to the original issuance price (including all unpaid accruing dividends); and lastly to the common stock holders.
10. STOCK OPTIONS
In 2011, the Company adopted an incentive stock option plan (the Plan) for management and key employees, which provided for the issuance of up to approximately 7.6 million shares of common stock. During June 2017, the Company increased the number of shares available to issue under the Plan to approximately 9.1 million shares of common stock. The Plan provides for the grant of the following stock awards: incentive stock options, non-statutory stock options, restricted and unrestricted stock awards. Under the terms of the Plan, options are granted at a
RuMe Inc.
Notes to Financial Statements
price not less than the estimated fair market value of the shares at the date of grant. The number and terms of options granted under the Plan are determined by the Board of Directors when granted. Options are exercisable for a period determined by the Board of Directors, generally not more than 10 years following the date of grant.
The Company estimates the fair value of each stock option using the Black-Scholes option pricing model under ASC 718 using the following assumptions for 2017 grants:
Year Ended December 31, 2017 |
|
|
|
Dividend yield |
|
0% |
|
Expected volatility |
|
32.82-33.02% |
|
Risk-free interest rates |
|
2.07-2.09% |
|
Expected term in years |
|
6.00 |
|
No awards were granted during the years ended December 31, 2018 or December 31, 2016.
Dividend Yield
The Black-Scholes valuation model includes a single expected dividend yield as an input. Historically, the Company has not issued any dividends.
Expected Volatility
The Company does not maintain an internal market for its shares. The Company uses the volatility of peer group public companies to estimate the volatility assumption used in the Black-Scholes option pricing model.
Risk-Free Interest Rates
The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the U.S. Treasury yield curve in effect at the time of the grant.
Expected Term of Option
The expected term of the awards granted represents the period of time the awards are expected to be outstanding.
Expected Forfeitures
The Company accounts for forfeitures as they occur, in accordance with adoption of ASU 2016-09.
RuMe Inc.
Notes to Financial Statements
A summary of stock options issued is presented below:
|
|
|
|
Weighted |
|
Weighted Average |
| |
|
|
|
|
Average |
|
Remaining Contract |
| |
|
|
Shares |
|
Exercise Price |
|
Term (In Years) |
| |
Outstanding at January 1, 2016 |
|
7,291,087 |
|
$ |
0.14 |
|
8.29 |
|
Granted |
|
|
|
|
|
|
| |
Expired/Forfeited |
|
|
|
|
|
|
| |
Outstanding at December 31, 2016 |
|
7,291,087 |
|
0.14 |
|
7.52 |
| |
Granted |
|
1,639,894 |
|
0.09 |
|
|
| |
Expired/Forfeited |
|
(645,088 |
) |
0.11 |
|
|
| |
Outstanding at December 31, 2017 |
|
8,285,893 |
|
0.13 |
|
6.93 |
| |
Granted |
|
|
|
|
|
|
| |
Expired/Forfeited |
|
(7,393,246 |
) |
0.14 |
|
|
| |
Outstanding at December 31, 2018 |
|
892,647 |
|
$ |
0.09 |
|
8.59 |
|
2018 |
|
446,324 |
|
$ |
0.09 |
|
8.59 |
|
The following table summarizes information about the Companys unvested options:
|
|
|
|
Weighted Average |
| |
|
|
|
|
Grant Date Fair |
| |
|
|
Unvested Shares |
|
Value |
| |
Unvested at January 1, 2016 |
|
2,540,079 |
|
$ |
0.010 |
|
Granted |
|
|
|
|
| |
Vested |
|
(1,172,344 |
) |
0.008 |
| |
Unvested at December 31, 2016 |
|
1,367,735 |
|
0.011 |
| |
Granted |
|
1,639,894 |
|
0.028 |
| |
Vested |
|
(1,618,668 |
) |
0.013 |
| |
Forfeited |
|
(645,088 |
) |
0.028 |
| |
Unvested at December 31, 2017 |
|
743,873 |
|
0.030 |
| |
Granted |
|
|
|
|
| |
Vested |
|
(297,550 |
) |
0.030 |
| |
Unvested at December 31, 2018 |
|
446,323 |
|
$ |
0.030 |
|
For the years ended December 31, 2018, 2017 and 2016, stock-based compensation expense was approximately $9,000, $13,000 and $10,000, respectively. The total unrecognized compensation cost related to non-vested stock options granted was approximately $13,000 as of December 31, 2018 and is expected to be recognized over a weighted-average period of approximately two years.
RuMe Inc.
Notes to Financial Statements
11. WARRANTS
In connection with the irrevocable standby letter of credit in the amount of $2 million obtained from the Companys majority investor on behalf of the Company, the Company granted a warrant to purchase 7,857,344 shares of Series C Preferred Stock to its majority investor. The warrant agreement was executed in September 2017, provides for an exercise price of $0.01 a share, and expires after 10 years.
In connection with the subordinated loan agreement entered into in October 2016, the Company granted a warrant to its majority investor to purchase 10,344,210 shares of Series C Preferred Stock. The warrant agreement was executed in October 2016, provides for an exercise price of $0.01 a share, and expires after 10 years.
The Company recorded a debt discount of approximately $408,000 and $462,000 for the warrants granted in 2017 and 2016, respectively, equal to the fair value of the warrants at date of issuance, based on a waterfall model, assuming the shares will be converted to common shares. The debt discounts are being amortized to interest expense using the effective interest method over the original term of the respective borrowing arrangement. For the years ended December 31, 2018, 2017 and 2016, amortization expense of the debt discounts were approximately $209,000, $436,000 and $107,000, respectively.
12. INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. This U.S. tax reform contains several key provisions including the reduction of the U.S. federal corporate income tax rate to 21% effective January 1, 2018, as well as a variety of other changes including the limitation of the tax deductibility of interest expense, acceleration of expending certain business assets, and reductions in the amount of executive pay that could qualify as a tax deduction. As a result of the change in the corporate tax rate, the Company remeasured its deferred taxes as of December 31, 2017 based on the rate at which they are expected to reverse in the future, and recorded a reduction in net deferred taxes of approximately $764,000 (offset by a full valuation allowance in the same amount). This remeasurement and interpretation of the new law is provision subject to clarifications of the provision of the new legislation and final calculations. Any future changes to the Companys provisional estimated impact on the U.S. tax reform will be reflected as a change in estimate in the period in which the change in estimate is made in accordance with Staff Accounting Bulletin No. 118 (SAB 118), Income Tax Accounting Implications of the Tax Cuts and Jobs Act. SAB 118 allows for remeasurement period of up to one year after the enactment date of the U.S. tax reform to finalize the recording of the related tax impacts.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Any differences between the statutory rate and the actual rate are the primarily the result of changes in the valuation allowance and other permanent differences.
RuMe Inc.
Notes to Financial Statements
The Company generated Federal net operating losses of approximately $1.8 million during the year ended December 31, 2018 and has cumulative net operating losses of approximately $6.9 million, which will expire, if not utilized, beginning in 2033. However, net operating losses generated in 2018 forward do not expire but may only be used against taxable income to 80%.
Further, certain limitations may apply to the amount of net operating losses that can be used to offset future taxable income due to certain ownership changes, as defined in Section 382 of the Internal Revenue Code.
Net operating losses often result in deferred tax benefits in accordance with GAAP. However, in assessing the ability to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on the uncertainty of the realization of certain benefits at this time, the Company has provided for a full valuation allowance against the deferred tax assets.
Significant components of the Companys net deferred income taxes are as follows:
December 31, |
|
2018 |
|
2017 |
| ||
Non-current deferred tax assets (liabilities): |
|
|
|
|
| ||
Allowance for bad debt expense and inventory reserves |
|
$ |
65,400 |
|
$ |
81,900 |
|
Accrued expenses |
|
42,100 |
|
73,100 |
| ||
Other |
|
12,500 |
|
12,500 |
| ||
Intangible assets and other |
|
92,900 |
|
(13,000 |
) | ||
Property and equipment |
|
(6,400 |
) |
(28,800 |
) | ||
Net operating losses |
|
1,705,000 |
|
1,260,200 |
| ||
Total non-current deferred taxes, net |
|
1,911,500 |
|
1,385,900 |
| ||
Valuation allowance |
|
(1,911,500 |
) |
(1,385,900 |
) | ||
Net deferred taxes |
|
$ |
|
|
$ |
|
|
For the years ended December 31, 2018, 2017 and 2016, the Company did not recognize significant interest or penalties resulting from income taxes.
13. RELATED PARTY TRANSACTIONS
The Company has debt and equity transactions with the majority investor that are described in Notes 6, 9 and 11.
The majority investor has provided guarantees and letters of credit on the Senior credit facilities and the operating lease as described in Notes 5, 6 and 8. The majority investor has received warrants for some of those guarantees as described in Note 11.
RuMe Inc.
Notes to Financial Statements
The majority investor receives reimbursement for travel and other incidental costs related to its work with the Company which was minimal for all periods presented.
During 2018, the Company entered in to a consulting arrangement with former executives who are also founding shareholders as described in Note 8.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through November 15, 2019, which is the date the financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements, other than the events disclosed below.
Senior Note Payable and Line of Credit
In March 2019, the financial institution that provided the senior line of credit and senior note payable (discussed in Notes 5 and 6) notified the Company that the outstanding debt was being called due to the Companys existing defaults.
Effective April 26, 2019, the Company entered into a new senior credit facility agreement with a different financial institution to refinance the existing senior line of credit and senior note payable in default and to repay $600,000 of the related party revolving note payable. The new senior credit facility provides for $3,000,000 in amounts available to borrow, of which $500,000 is in the form on an operating line of credit and $2,500,000 in the form on a note payable. The new senior credit facility provides for monthly interest payments charged at the greater of the Federal Funds Rate plus 0.5% (as defined) or Prime, and principal amounts outstanding are due at maturity on April 26, 2021. The new senior credit facility agreement is secured by substantially all assets of the Company and an irrevocable standby letter of credit and is subject to various covenants.
As a result of the new senior credit facility agreement, the Company and the majority investor entered into a subordination agreement with the senior lender, which restricts payment of the various related party notes described in Note 6, until the senior credit facility has been paid in full, as defined.
Subordinated Notes Payable
In April 2019, the subordinated note payable was amended to extend the maturity date to July 31, 2021.
In March and October 2019, the Company amended the subordinated delayed revolving note payable to increase the total amount available to borrow to $2.2 million and extended the maturity date to March 2021.
In August 2019, the company entered into another subordinated note payable agreement for $400,000, payable in February 2020.