UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the quarterly period ended September 30, 2020

 

[_]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ____________ to ____________

 

Commission file number:  333-226801

 

TEO Foods Inc.

(Exact name of small business issuer as specified in its charter)

 

Nevada	47-1209532
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

Blvd. Insurgentes 19801 unit. 4D

Tijuana, B.C. 22216

(Address of principal executive offices)

 

(619) 758-1973

(Registrants telephone number, including area code)

_____________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company; See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company” or “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

[_]

large accelerated filer

[_]

accelerated filer

[_]

non-accelerated filer

[X]

smaller reporting company

[X]

emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to extend the transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

 

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

 

As of November 23, 2020, there were 12,622,245 shares of the registrant’s common stock outstanding.  

 

 

Contents

		Page
		Number
PART I	FINANCIAL INFORMATION	3
Item 1	Interim Consolidated Financial Statements September 30, 2020	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations and Comprehensive (Loss) Income	4
	Consolidated Statements of Stockholders’ Deficit	5
	Consolidated Statements of Cash Flows	6
	Notes to the Interim Consolidated Financial Statements	7-13
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4	Controls and Procedures	17
PART II	OTHER INFORMATION	18
Item 1	Legal Proceedings	18
Item1A	Risk Factors	18
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3	Defaults Upon Senior Securities	18
Item 4	Mine Safety Disclosures	18
Item 5	Other Information	18
Item 6	Exhibits	18
SIGNATURES		19

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1 - Interim Consolidated Financial Statements September 30, 2020

 

TEO Foods, Inc.

CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2020				2019
Assets		(Unaudited)
Current assets
Cash and cash equivalents		$	110,169			$	194,864
Accounts receivable, net			68,872				10,463
License and royalty income receivable			5,649				—
Inventories, net			35,373				164,229
Related party receivables , net			16,788				—
Taxes receivable, net			364,115				446,972
Prepaid and other assets			12,338				67,749
Total current assets			613,304				884,277
Property and equipment , net			37,361				87,117
Royalty Agreement			31,929				—
Total assets		$	682,594			$	971,394
Liabilities and stockholders' (deficit)
Current liabilities
Accounts payable and accrued expenses		$	878,035			$	828,755
Related party payables			274				274
License fee payable - related party			648,000				693,000
Notes payable			100,000				100,000
Convertible note payable - current portion			220,000				220,000
Total current liabilities			1,846,309				1,842,029
Total liabilities			1,846,309				1,842,029
Commitments and contingencies
Stockholders' (deficit)
Preferred stock, $0.001 par value, 10,000,000
shares authorized, 9,022,900 shares issued
and outstanding		$	9,023			$	9,023
Common stock , $0.001 par value, 490,000,000
shares authorized, 12,622,245 shares  issued
and outstanding, respectively			12,623				12,623
Additional paid -in-capital			277,229				277,229
Accumulated deficit			(1,660,475	)			(1,285,459	)
Other comprehensive income			197,885				115,949
Total stockholders' deficit			(1,163,715	)			(870,635	)
Total liabilities and stockholders' deficit		$	682,594			$	971,394

 

 

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

 

 

 

TEO Foods, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

		For the Nine Months  Ended								For the Three Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Sales		$	322,695			$	1,771,889			$	28,625				472,473
Cost of sales			(281,415	)			(1,467,209	)			(32,420	)			(437,113	)
Gross profit			41,280				304,680				(3,795	)			35,360
Operating expense
Payroll			175,833				380,206				36,494				102,180
General and administrative			103,918				295,178				50,366				70,666
Rent and lease			61,622				79,624				20,226				23,827
Professional fees			51,480				92,852				18,725				25,695
Advertising and marketing			1,507				40,191				38				(5,226	)
Depreciation			9,769				14,403				2,450				5,474
Total operating expenses			404,129				902,454				128,299				222,616
Operating loss			(362,849	)			(597,774	)			(132,094	)			(187,256	)
Other income (expense)
Licensing and royalty income			13,432				—				5,630				—
Interest income			238				—				84				—
Interest expense			(19,363	)			(52,389	)			(6,483	)			(5,066	)
Gain on bargain purchase			—				222,217				—				—
Other income (expense)			(14,474	)			161,631				(1,714	)			(86,371	)
Total other income (expense)			(20,167	)			331,459				(2,483	)			(91,437	)
Net  income (loss) before income taxes			(383,016	)			(266,315	)			(134,577	)			(278,693	)
Income tax expense			—				(26,230	)			—				—
Net income (loss)			(383,016	)			(292,545	)			(134,577	)			(278,693	)
Other comprehensive income (loss)
Foreign currency translation adjustment			81,936				138,842				(33,869	)			84,262
Comprehensive (income) loss		$	(301,080	)		$	(153,703	)		$	(168,446	)		$	(194,431	)
Earnings (loss) per common share -
Basic		$	(0.030	)		$	(0.015	)		$	(0.011	)		$	(0.013	)
Diluted			n/a				n/a				n/a				n/a
Weighted average common
shares outstanding - basic			12,622,245				19,972,337				12,622,245				21,622,245
shares outstanding - diluted			n/a				n/a				n/a				n/a

 

 

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

 

 

 

 TEO Foods Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended September 30,
		2020				2019
Cash flows from operating activities
Net loss		$	(383,016	)		$	(292,545	)
Adjustments to reconcile net loss to net
Cash used in operations:
Depreciation expense			9,769				14,403
Provision for bad debt			(162,903	)			—
Gain on bargain purchase			—				(222,217	)
Changes in operating assets and liabilities:
Accounts receivable			123,784				129,665
Royalty and licensing income receivable			(5,649	)			—
Receivable from related parties			(16,788	)			(68,180	)
Inventories			128,856				159,884
Tax receivables			82,856				(278,382	)
Prepaid and other assets			55,411				(20,520	)
Accounts payable and accrued expenses			49,280				654,777
Deferred tax liability			—				26,230
Net cash provided (used) in operating activities			(118,400	)			103,115
Cash flows from investing activities
Cash received in Targa acquisition			—				6,504
Purchase of property and equipment			(3,231	)			(32,309	)
Net cash provided (used) in investing activities			(3,231	)			(25,805	)
Cash flows from financing activities
Proceeds from issuance of common stock			—				7,500
Proceeds from convertible notes payable			—				120,000
Principal reduction in convertible notes payable			—				(50,000	)
Payment of deemed dividend to Teo Inc. for license			(45,000	)			(159,000	)
Net cash (used) in financing activities			(45,000	)			(81,500	)
Effect of foreign currency exchange translation			81,936				138,842
Net decrease for period		$	(84,695	)		$	134,652
Cash at beginning of period			194,864				2,139
Cash at end of period		$	110,169			$	136,791
Disclosure of non-cash investment and finance activities
Elimination of convertible notes by offset against notes receivables		$	—			$	739,110
Conversion of preferred shares into common		$	—			$	360,824
Property and Equipment exchanged for royalty agreement		$	31,929			$	—

 

 

 

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

 

 

 

TEO Foods, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)

 

 

																		Additional
		Preferred Stock								Common Stock								Paid-in				Accumulated				Comprehensive
		Shares				Amount				Shares				Amount				Capital				deficit				Gain( loss)				Total
Nine Months Ended September 30, 2019
Balance - December 31, 2018			9,022,900			$	9,023				10,334,745			$	10,335				47,017			$	(1,030,694	)			—			$	(964,319	)
Stock issued in Targa acquisition			—				—				2,250,000				2,250				222,750				—				—				225,000
Stock issued for cash			—				—				37,500				38				7,462				—				—				7,500
Foreign currency translation adjustments			—				—				—				—				—				—				29,330				29,330
Net income for the three - months ended March 31, 2019			—				—				—				—				—				98,673				—				98,673
Balance -March 31, 2019			9,022,900				9,023				12,622,245				12,623				277,229				(932,021	)			29,330				(603,816	)
Foreign currency translation adjustments			—				—				—				—				—				—				25,350				25,350
Net income- for the three months ended June 30, 2019			—				—				—				—				—				(112,525	)			—				(112,525	)
Balance - June 30, 2019			9,022,900			$	9,023				12,622,245			$	12,623			$	277,229			$	(1,044,546	)		$	54,680			$	(690,991	)
Foreign currency translation adjustments			—				—				—				—				—				—				84,162				84,162
Net income - for the three months ended September 30, 2019			—				—				—				—				—				(278,693	)			—				(278,693	)
Balance -September 30, 2019			9,022,900			$	9,023				12,622,245			$	12,623			$	277,229			$	(1,323,239	)		$	138,842			$	(885,522	)
Nine Months Ended September 30, 2020
Balance - December 31, 2019			9,022,900			$	9,023				12,622,245			$	12,623			$	277,229			$	(1,285,459	)		$	115,949			$	(870,635	)
Foreign currency translation adjustments			—				—				—				—				—				—				(25,751	)			(25,751	)
Net loss - for the three months ended March 31, 2020			—				—				—				—				—				(146,150	)			—				(146,150	)
Balance -March 31, 2020			9,022,900				9,023				12,622,245				12,623				277,229				(1,431,609	)			90,198				(1,042,536	)
Foreign currency translation adjustments			—				—				—				—				—				—				141,556				141,556
Net loss - for the three months ended June 30, 2020			—				—				—				—				—				(94,289	)			—				(94,289	)
Balance -June 30, 2020			9,022,900			$	9,023				12,622,245			$	12,623			$	277,229			$	(1,525,898	)		$	231,754				(995,269	)
Foreign currency translation adjustments			—				—				—				—				—				—				(33,869	)			(33,869	)
Net loss - for the three months ended September 30, 2020			—				—				—				—				—				(134,577	)			—				(134,577	)
Balance -September 30, 2020			9,022,900			$	9,023				12,622,245			$	12,623			$	277,229			$	(1,660,475	)		$	197,885			$	(1,163,715	)

 

 

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

 

 

 

TEO Foods Inc.

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

 

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

 

TEO Foods Inc. (“Company”) was incorporated in the state of Nevada on December 27, 2012. On December 29, 2017, the Company filed an amendment to its articles of incorporation increasing its authorized capital to a total of 500,000,000 shares consisting of 490,000,000 shares designated as Common Stock, par value $0.001 per share, and 10,000,000 shares designated as Preferred Stock, par value $0.001 per share.

 

The Company’s principal activity is to produce and sell food packaged products for retail sale in the frozen, refrigerated and shelf stable categories. The Company has a license to use the TEO name and logo on food products it sells and to apply the TEO pasteurization/sterilization processes to its products for improved shelf life and safety.

 

Effective January 1, 2019, the Company executed a Stock Purchase Agreement (“SPA”) with NERYS USA Inc. (“Nerys USA”). The Company issued the closing payments as described in Note 4. Pursuant to the terms of the SPA, Commercial Targa S.A. de C.V. (“Targa”) became a wholly owned subsidiary of the Company.

 

In January 2020, the Company created BC TEO Foods S.A. de C.V. (“BC TEO Foods”), a new 100% owned subsidiary in Mexico. The Company is in the process of setting up new production facilities to be operated by this subsidiary.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to form 10-Q and Article 8 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. Notes to the unaudited consolidated financial statements that would substantially duplicate the disclosure contained in the audited consolidated financial statements for the fiscal year ending December 31, 2019 have been omitted. These interim consolidated financial statements are condensed and should be read in conjunction with audited consolidated financial statements and the footnotes thereto for the fiscal year ended December 31, 2019 included in the Company’s 10-K as filed with the Securities and Exchange commission on May 29, 2020. The Company consolidates the financial statements of its wholly-owned subsidiaries and all intercompany transactions and account balances have been eliminated in consolidation.

 

All amounts referred to in the notes to the consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments and other short-term investments with a maturity date of three months or less, when purchased, to be cash equivalents.

 

Foreign Currency Translation

The Company subsidiary’s primary functional currency is the Mexican peso, but it’s reporting currency is the U.S. dollar. The balance sheet accounts are translated at exchange rates in effect at the end of the period and income statement accounts are translated at average exchange rates for the period. Translation gains and losses are included as a separate component of stockholders’ deficit.

 

Accounts Receivable

Accounts receivable are reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The allowance for doubtful accounts at September 30, 2020 and December 31, 2019 were $363,765 and $475,287, respectively.

 

Inventory and Cost of Sales

Inventories are stated at the lower of cost or realizable value, using the average cost method. When an impairment indicator suggests that the carrying amounts of inventories might not be recoverable, the Company reviews such carrying amounts and estimates the net realizable value based on the most reliable evidence available at that time. An impairment loss is recorded if the net realizable value is less than the carrying value. Impairment indicators considered for these purposes are, among others, obsolescence, decrease in market prices, damage and a firm commitment to sell.

 

 

 

Property and Equipment

Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.

 

Impairment of Long-Lived and Intangible Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluate whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company uses market quotes, if available, or an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. The Company did not recognize impairment on its long-lived assets during the periods ended September 30, 2020 or 2019. Identified intangible assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company’s only intangible asset consist of the royalty agreement discussed in Note 8.

 

Beneficial Conversion Feature of Convertible Notes Payable

The Company considers whether a beneficial conversion feature ("BCF") exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note. The BCF of a convertible note is a reduction of the carrying amount of the convertible note, as a debt discount, and is credited to additional paid-in-capital. Such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

 

A contingent beneficial conversion feature in a convertible note payable with conversion terms that change upon the occurrence of a future event (ex: fair value of the underlying stock declines after the note issuance date) is recognized when the contingency is resolved. As of September 30, 2020, the Company has not recognized any beneficial conversion features on its convertible debt.

 

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). Revenue is recognized when a customer obtains control of promised goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the company expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount:

 

i.

Identification of the promised goods in the contract;

 

ii.

Determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract;

 

iii.

Measurement of the transaction price, including the constraint of variable consideration;

 

iv.

Allocation of the transaction price of the performance obligations; and

 

v.

Recognition of revenue when (or as) the Company satisfies each performance obligation.

 

The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods and services it transfers to the customer. Once a contract is determined to be within the scope of Topic 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligations when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customers at a point in time typically upon delivery. The Company primarily sells packaged food products to its customers. The Company’s performance obligation is satisfied when the goods have been delivered, which is at a point in time.

 

Use of Estimates

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

 

Fair Value of Financial Instruments

Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.

 

Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

● Level 1: Quoted prices in active markets for identical assets or liabilities that the organization has the ability to access at the reporting date.

● Level 2: Inputs other than quoted prices included in Level 1, which are either observable or that can be derived from or corroborated by observable data as of the reporting date.

● Level 3: Inputs include those that are significant to the fair value of the asset or liability and are generally less observable from objective resources and reflect the reporting entity's assumptions about the assumptions market participants would use in pricing the asset or liability.

The Company's financial instruments consist of advances from related party, notes payable, convertible notes payable and license fee payable. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to the short-term nature of the respective instruments.

 

Loss Per Share of Common Stock

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period.  The calculation of diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Securities with anti-dilutive effects on net earnings (loss) per share are excluded. As of September 30, 2020, none of the convertible preferred shares or convertible debt were included in the calculation of diluted weighted average shares as they were anti-dilutive.

 

As of September 30, 2020, preferred shares convertible to 90,229,000 common shares were included in the diluted weighted average shares; however, notes convertible into a maximum of 4,710,000 common shares were excluded from the calculation of loss per common share as the notes are anti-dilutive.

 

Accounting Pronouncements Recently Adopted and Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”. Under this new guidance, lessees (including lessees under leases classified as finance leases, which are to be classified based on criteria similar to that applicable to capital leases under current guidance, and leases classified as operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under current guidance, operating leases are not recognized on the balance sheet. However, the new guidance permits companies to make an accounting policy election not to apply the recognition provisions of the new guidance to short term leases (leases with a lease term of 12 months or less that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). If this election is made, lease payments under short term leases will be recognized on a straight-line basis over the lease term. The Company has adopted the new guidance effective January 1, 2019: however, there was no impact to the financial statements.

 

NOTE 3 – GOING CONCERN

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has suffered recurring losses from operations and has insufficient working capital as of September 30, 2020 to develop its business plan and meet its obligation of the next 12 months. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the Company's ability to obtain necessary equity or debt financing to continue operations, and ultimately the Company's ability to generate profit from sales of packaged food products. These consolidated financial statements do not include any adjustments to classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company plans to obtain funds for operations through continued financial support from its stockholders, debt and private offerings of its equity.

 

NOTE 4 – STOCK PURCHASE AGREEMENT

 

On July 30, 2018, the Company entered into a SPA with NERYS USA Inc. to purchase all of the issued and outstanding equity of Commercial Targa S.A. de C.V. ("Targa"). The Company acquired Targa to expand its operations with the sale of packaged food products.

 

Effective January 1, 2019, the transaction closed with an adjusted purchase price consisting of $160,000 in cash, $220,000 and $552,000 in secured convertible promissory notes and 11,250,000 common shares valued at $.10 per share. In addition, an earn-out provision was added which, if certain conditions are met, would require an additional secured convertible promissory note of $310,000 and the issuance of an additional 3,750,000 common shares.

 

In May of 2019, the SPA was amended resulting in the earn-out provision being eliminated, the $220,000 (which had a principal balance remaining of $170,000) and $552,000 secured convertible notes payable, plus accrued interest, issued as part of the purchase price being assigned to Targa in exchange for an equal reduction of amounts owed to Targa by Nerys USA. In addition, Nerys USA assumed and settled an account payable balance due from Targa against amounts Targa owed to Nerys USA.

 

 

 

The assignment of the Nerys notes to Targa resulted in a $722,000 reduction in the convertible notes payable and reduction in liabilities for the accrued interest transferred of $17,110. This also resulted in an equal reduction of $739,110 of Related Party Receivable and Notes Receivable due to Targa from Nerys USA. In addition, $360,824 of Related Party Payables to Nerys USA were offset against Related Party Receivables from Nerys USA to Targa.

 

The Company entered into a Release Back Agreement effective December 31, 2019, whereby certain brands acquired pursuant to the SPA with NERYS USA were transferred back in exchange for cancellation of nine million common shares the Company originally issued pursuant to the SPA currently held by the transferee.

 

Due to the state of operations of Targa, along with the economic impact of U.S. tariffs, the Company believes it has acquired Targa for less than the estimated fair value of its net assets. In accordance with ASC 805, Business Combinations, the Company has conducted an evaluation to determine the fair value of Targa’s identifiable assets acquired and based on that evaluation the estimated fair value was $2,515,364 ($6,504 in cash, $1,992,112 in receivables, $382,237 in inventory, $21,833 in prepaid and other assets and $112,678 in property and equipment). This evaluation includes allowances for obsolete inventory, related party receivables that have become doubtful, non-related party receivables that have become doubtful, and tax credits that have become doubtful.

 

The Company did not assign additional value on customer relationships and know-how. Evaluation of the relationships indicated that they were in jeopardy at the time of acquisition and post-acquisition operations were necessary to stabilize existing placements. Evaluation of know-how existing at the time of acquisition did not identify any unique or proprietary processes.

 

The identifiable liabilities were $1,125,835 ($637,754 in accounts payable and accrued expenses and $488,081 in related party payables), resulting in a net value of $1,389,529. The purchase price was modified by subsequent amendments and the resulting consideration had an estimated fair value of $1,157,000. The resulting consideration consisted of cash, promissory notes and common shares. The Company has recorded a bargain purchase gain on the acquisition of Targa totaling $232,529, which is included in other income (expense) on the consolidated statements of operations and comprehensive income.

 

The Company has reviewed its procedures used to identify and measure the assets acquired, the liabilities assumed and the consideration transferred and concluded that the procedures followed and the resulting measurements were appropriate. The Company also performed a review and determined that the business combination did not include any transactions that should be accounted for separately from the business combination. 

 

NOTE 5 – INVENTORY

 

Inventories consists of raw materials and finished goods located in the Company’s warehouse in Tijuana, Mexico. At September 30, 2020 and December 31, 2019 Inventories were $35,373 and $164,229, respectively, which includes an allowance of approximately $0 and $111,320 for obsolescence and shrinkage as of September 30, 2020 and December 31, 2019, respectively.

 

NOTE 6 – TAX RECEIVABLES

 

Tax Receivables represent credits from the Mexican taxing authority. Targa has accumulated IVA tax payments that exceeded its IVA tax liabilities over the past several years. The Company has applied for refunds of these accumulated overpayments and began receiving the first refunds in September of 2019. The net tax receivable balance at September 30, 2020 and December 31, 2019 of $364,115 and $446,972, respectively is net of a reserve for the possible uncollectable portion of the tax credits totaling $136,164 and $175,599, respectively.

 

NOTE 7 – PROPERTY AND EQUIPMENT

 

At September 30, 2020 and December 31, 2019, property and equipment consisted of the following:

 

		2020				2019
Furniture and fixtures		$	356			$	1,810
Machinery and equipment			56,474				65,709
Transportation equipment			12,953				39,274
			69,783				106,793
Less accumulated depreciation			(32,422	)			(19,676
		$	37,361			$	87,117

 

Depreciation expense for the three months ended September 30, 2020 and 2019 was $2,450 and $5,474, respectively. The estimated useful lives of fixed assets range from 3 to 10 years.

 

 

 

 

NOTE 8 – ROYALTY AND LICENSE AGREEMENT

 

On September 30, 2017, the Company entered into a Master Agreement with TEO Inc. ("TEO"). TEO is the founder and majority controlling shareholder of the Company. The Master Agreement provides the Company a license to use the TEO name and logo on food products it sells and to apply TEO's pasteurization/sterilization processes to its products for improved shelf life and safety. Additional provisions provide the Company production rights to TEO's pasteurizer/sterilizer and rights to lease its own system when certain sales/production increase. Pursuant to the master agreement, the Company agreed to pay an initial $1 million fee in installments with $100,000 due on September 30, 2018, $300,000 due on December 31, 2018 and the remaining $600,000 due in 12 equal monthly payments with the first payment due on January 31, 2019. TEO Inc. has agreed to maintain the license through December 31, 2019 and accrue and accept payments due as funds are available. Commencing January 1, 2020, a use/royalty and service fee of 5.5% of the Company's gross revenue for food sales processed using TEO's intellectual property is payable quarterly.  The ongoing licensing is maintained by meeting minimum annual use/royalty and service fees. The Company may pay for the difference between the actual use and the minimum to maintain the license. The annual minimum is listed as follows:

 

Year				Minimum Service Fee
	2020			$	500,000
	2021				750,000
	2022				1,000,000
	Thereafter				Increase 10% per year

As a result of TEO being the majority shareholder of the Company and TEO's basis in the license being $0, the Company recorded a deemed dividend of $1 million for the initial fee payable to TEO. As of September 30, 2020, and December 31, 2019, the outstanding balance of the license fee payable was $648,000 and $693,000, respectively. For the nine months ended September 30, 2020 and 2019, the Company made payments toward the license of $45,000 and $48,000, respectively.

 

NOTE 9 – NOTES PAYABLES

 

On July 31, 2018, the Company issued a note for $100,000 in principal bearing interest at 8% maturing on October 31, 2018. This note was subsequently amended to extend the maturity date to December 31, 2020. As of September 30, 2020, and December 31, 2019, the outstanding principal balance of the note was $100,000.

 

On December 10, 2018, the Company issued a note for $34,000 in principal bearing interest at 8% maturing on June 10, 2019. This note was subsequently amended to extend the maturity date to December 31, 2019. The note and accrued interest were fully paid in 2019.

 

Interest charged to operations for the nine months ended September 30, 2020 and 2019 totaled $6,000 and $8,040, respectively. Accrued interest at September 30, 2020 and December 31, 2019 which is included in the balance of accounts payable and accrued expenses totaled $14,679 and $8,679, respectively.

 

Convertible Note Payable

 

On June 28, 2018, the Company issued a note for $100,000. The note is for a two-year term and bears an 8% interest rate, due at maturity. The note is convertible into common shares at a 20% discount to the 30-day average bid price of the Company's common shares, as may be quoted on the OTCQB, OTCQX or listing on a national stock exchange, but at no rate lower than $0.20 per share.

 

On November 20, 2018 the Company issued a note for $220,000. The note was for a two-year term and bore an 8% interest rate, due at maturity. The note was convertible into common shares at a 20% discount to the 30-day average bid price of the Company's common shares, as may be quoted on the OTCQB, OTCQX or listing on a national stock exchange, but at no rate lower than $0.20 per share. In February of 2019, the Company made a payment on the principal of $50,000 and in May of 2019, the note was settled (see Note 4).

 

On January 31, 2019 the Company issued a note for $552,000. The note was for a two-year term and bore an 8% interest rate, due at maturity. The note was convertible into common shares at a 20% discount to the 30-day average bid price of the Company's common shares, as may be quoted on the OTCQB, OTCQX or listing on a national stock exchange, but at no rate lower than $0.20 per share. In May of 2019, the note was settled (see Note 4).

On February 4, 2019, the Company entered into a purchase agreement with one investor for the purchase of up to an aggregate of $350,000 in convertible notes payable in three payments commencing with the first in the amount of $120,000 on February 4, 2019, the second on April 1, 2019 in the amount of $110,000 and the third on June 1, 2019 in the amount of $120,000. The investor did not make the second purchase on April 1, 2019 or the third purchase on June 1, 2019. The purchase provisions of the agreement have expired with only the first purchase executed. The $120,000 note purchased in February can be converted to common stock at $0.20 per share or the 30-day average bid price of the Company's common shares, as may be quoted on the OTCQB, OTCQX or listing on a national stock exchange, but at no rate lower than $0.20 per share and converts automatically upon certain conditions. The note bears no interest until September 30, 2019 and then bears 8% interest, if not converted to common stock. The note matures on September 30, 2020.

As of September 30, 2020 and 2019, there is not a quoted bid price available as the Company’s shares are not listed on any exchanges. As the minimum conversion rate at the time of issuance is greater than or equal to the current stock value based on other similar transactions, these notes are not deemed to have an embedded derivative associated with them.

 

The principal balance of convertible debt at September 30, 2020 and December 31, 2019 amounted to $220,000 which matured on June 30, 2020. Interest charged to operations for the nine months ended September 30, 2020 and 2019 totaled $13,200 and $17,483, respectively. Accrued interest at September 30, 2020 and December 31, 2019, which is included in the balance of accounts payable and accrued expenses, totaled $30,116 and $16,916, respectively.

 

NOTE 10 – EQUITY

 

Preferred Stock

 

Each share of Class A Preferred Stock may be converted by the holder upon request of the holder into 10 shares of common stock. Each holder is entitled to 100 votes for each share of Class A Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Company for their action or consideration. The holders are entitled to dividends, if any, as declared by the Company and participate pari passu with the common stock of the Company at the conversion rate.

  

NOTE 11 - INCOME TAXES

 

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The U.S. federal income tax rate is 21%.

 

The provision for Federal income tax consists of the following September 30, 2020 and 2019:

 

Federal income tax (expense) benefit attributable to:		September 30, 2020				September 30, 2019
Current Operations		$	80,433			$	(55,926	)
Less: valuation allowance			(80,433	)			55,926
Net provision for Federal income taxes		$	—			$	—

 

The cumulative tax effect at the expected rate of 21% of significant items comprising our net deferred tax amount is as follows:

 

Deferred tax asset attributable to:		September 30, 2020				December 31, 2019
Net operating loss carryover		$	104,870			$	24,436
Less: valuation allowance			(104,870	)			(24,436	)
Net deferred tax asset		$	—			$	—

 

At September 30, 2020, the Company had net operating loss carry forwards of approximately $499,379 that may be offset against future taxable income. No tax benefit has been reported in the September 30, 2020 or December 31, 2019 consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

 

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.

 

ASC 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 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 includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes. As of September 30, 2020 and 2019, the Company had no accrued interest or penalties related to uncertain tax positions.

 

 

 

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

The Company has various related party receivables and payables derived from normal operating activities. These balances are non-interest bearing and are periodically settled as cash flow permits.

 

In addition, at September 30, 2020 and December 31, 2019, the Company had revolving receivables from related parties of $398,840 and $356,798, respectively. The Company established a reserve for uncollectable related party trade receivables September 30, 2020 and December 31, 2019 of $398,840 and $356,798, respectively.

 

As of September 30, 2020 and December 31, 2019, the Company had notes receivable from related parties of $264,029 and $555,116, respectively. The Company established a reserve for uncollectable related party notes receivables as of September 30, 2020 and December 31, 2019 of $264,029 and $555,116, respectively.

 

Master License Agreement

 

On September 30, 2017, the Company entered into a Master Agreement with TEO, the founder and majority controlling shareholder of the Company. See Note 8.

 

NOTE 13 –ROYALTY AND LICENSE AGREEMENT

 

Effective April 1, 2020, the Company entered into an agreement whereby it assigned half and licensed half of the Nerys Brand for cheese products in Mexico, along with certain production equipment and facilities that the Company did not intend to transfer to its new facility for production, to a third party. In exchange, the Company receives a portion of net revenue from all products sold, which includes bulk meats and other products, by the acquirer, a royalty on all NERYS cheese products sold in Mexico of $0.01 per pound and will also receive five percent of the proceeds of any sale of the related acquirer’s business.

 

As of September 30, 2020, the Company has received a total of $13,431 in licensing and royalty revenue from this agreement.

 

The Company valued the royalty agreement at the book value of the assets transferred of $31,929, which approximates the fair value and is recorded as an intangible asset on the balance sheet.

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with FASB ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. As of September 30, 2020 and December 31, 2019, the Company is not aware of any contingent liabilities that should be reflected in the financial statements.

 

NOTE 15 – CONCENTRATIONS

 

Cash Deposit

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At September 30, 2020 and December 31, 2019, no cash balances exceeded the federally insured limit.

 

NOTE 16 - SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events for recognition and disclosure through November 23, 2020 which is the date the financial statements were available to be issued. No other matters were identified affecting the accompanying consolidated financial statements and related disclosures.

 

 

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management's Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto. The Management's Discussion and Analysis may contain “forward-looking statements.” Any statements that are not statements of historical fact are forward-looking statements.

 

These statements are based on the current expectations, forecasts, and assumptions of our management and are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements are sometimes identified by language such as “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects,” “future” and similar expressions and may also include references to plans, strategies, objectives, and anticipated future performance as well as other statements that are not strictly historical in nature.

 

The risks, uncertainties, and other factors that could cause our actual results to differ materially from those expressed or implied in this Quarterly Report on Form 10-Q include:

 

	●		our ability to successfully develop and sell our products;
	●		our ability to obtain additional financing at favorable rates to maintain and develop our operations;
	●		competitive conditions in our industry; and
	●		the ability to attract and retain key personnel.

 

There may be other factors that may cause our actual results to differ materially from the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. Readers should carefully consider this information as well as the risks and other uncertainties described in our other filings made with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions, and estimates only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements in this Quarterly Report on Form 10-Q, whether as a result of new information, future events or circumstances, or otherwise.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified the following accounting policies that we believe are key to an understanding of our financial statements. These are important accounting policies that require management’s most difficult, subjective judgments.

 

Beneficial Conversion Feature of Convertible Notes Payable

The Company considers whether a beneficial conversion feature ("BCF") exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note. The BCF of a convertible note is a reduction of the carrying amount of the convertible note, as a debt discount, and is credited to additional paid-in-capital. Such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

 

A contingent beneficial conversion feature in a convertible note payable with conversion terms that change upon the occurrence of a future event (ex: fair value of the underlying stock declines after the note issuance date) is recognized when the contingency is resolved. As of September 30, 2020, the Company has not recognized any beneficial conversion features on its convertible debt.

  

Accounting Pronouncements Recently Adopted and Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”. Under this new guidance, lessees (including lessees under leases classified as finance leases, which are to be classified based on criteria similar to that applicable to capital leases under current guidance, and leases classified as operating leases) will recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under current guidance, operating leases are not recognized on the balance sheet. However, the new guidance permits companies to make an accounting policy election not to apply the recognition provisions of the new guidance to short term leases (leases with a lease term of 12 months or less that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). If this election is made, lease payments under short term leases will be recognized on a straight-line basis over the lease term. The Company has adopted the new guidance effective January 1, 2019: however, there was no impact to the financial statements.

 

 

 

Overview

 

The Company was incorporated in the state of Nevada on December 27, 2012 but did not commence operations until September of 2017.

 

The Company intends to produce and sell packaged food products for retail in the frozen, refrigerated and shelf stable categories. The Company has a license to use the TEO name and logo on food products it sells and to apply the TEO pasteurization/sterilization processes to its products for improved shelf life and safety.

 

The Company intends to sell packaged food products under our brands in the refrigerated meal and meal component categories. The initial markets are domestically and in Mexico. We are also utilizing our production capacities to co-pack for other brands sold domestically and in Mexico.

 

Effective January 1, 2019, we completed an acquisition of Commercial Targa S.A. De C.V. ("Targa") and several brands of products which included the NERYS brand primarily sold in Mexico. Targa is located in Tijuana Mexico and produces and sells products in Mexico which include the NERYS line of imported California cheese products, along with the acquired brands of frozen pizzas, various pasta meals and other products sold in the major stores such as Wal-Mart, Soriana, Calimax, Smart & Final, OXXO and others.

 

In the acquired facility, we remodeled the cheese processing area, revised production processes, removed and replaced some obsolete equipment at the facility in Mexico. These improvements resulted in our being able to achieve higher food safety certifications, which were required by Walmart and OXXO in 2019.

 

At year-end 2019, we divested the pizza and pasta brands back to their creator in exchange for cancellation of the purchase equity paid.

The Company created a new subsidiary, BC TEO Foods S.A de C.V., in January 2020, which is operating new facilities where we have moved our cold processing and packaging equipment. The new facilities have been remodeled for higher productivity and to achieve a high food safety certification in support of access to global markets.

Effective April 1, 2020, we exchanged certain production equipment and facilities that we did not intend to transfer to the new facility for production or continue to use thereafter. We transferred the lease of the old production suite and licensed the Nerys Brand for cheese products in Mexico. In exchange we receive a royalty on the NERYS cheese products sold in Mexico, a portion of net revenue from all products and five percent of the proceeds of any sale of the business.

We transferred the TEO Pasteurizer/Sterilizer to the new facilities in Mexico for final R&D and validation for production. We have occupied two adjoining building units beginning in September 2020 and have been preparing to place the sterilizer near the processing and packaging operations.

We have new co-packing business beginning in the new facilities which is diverse from cheese processing. This new business is for new USA customers for products that will be shipped to the USA.

We will continue to develop our packaged products for initial retail placements in Mexico. We expect the expanding co-packing operations will also support production planning, formulation, equipment and supply lead times, testing, validation, branding and sales of new trayed meal products for a limited regional new product offering in 2021. This assumes that we are able to secure additional capital to purchase the necessary equipment, supplies (trays, film, carton/print materials, etc.), retain consultants/staff and provide for other costs of production.

 

We have received equity and debt investments both from insiders and from private investors. As we expand operational activities, we may continue to experience operating losses and/or negative cash flows from operations and may be required to obtain additional financing to fund operations. There can be no assurance that we will be able obtain additional financing, if at all, or upon terms that will be acceptable to us.

 

Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to, an evolving business model and the management of growth.

 

To address these risks we must, among other things, implement and successfully execute our business and marketing strategy and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

 

 

 

 

Results of Operations

 

Results of Operations for the Three Months Ended September 30, 2020 and 2019

 

During the three-month periods ended September 30, 2020 and 2019, the Company had $28,625 and $472,473 in sales revenue, respectively. The change in revenue was the result of the elimination of products and services that were not profitable or sold in volumes sufficient to support the logistics cost of distributing from the Companies remote warehouses that were used in 2019 and eliminated by year end 2019. The change was also the result of the licensing and royalty agreement where the direct sales of the Nerys branded cheese products in Mexico were transferred. During the three-month periods ended September 30, 2020 and 2019, the Company had $5,630 and $0 in licensing and royalty revenue, respectively. The Company was able to sell some expiring inventory at a loss which negatively impacted the cost of goods.

 

During the three-month periods ended September 30, 2020 and 2019, we had general and administrative expenses of $50,366 and $70,666, respectively. Payroll expenses were $36,494 and $102,180 during the three-month periods ended September 30, 2020 and 2019, respectively. These expenses were reduced throughout the time between the periods by reducing consultants and administrative staff but are expected to increase as we have begun to add production staff for operations in the new facility. Rent and lease expenses were $20,226 and $23,827 for the three-month periods ended September 30, 2020 and 2019, respectively. Rent and lease expected to increase due to the addition of two new building units in September 2020. Depreciation expenses were $2,540 and $5,474 for the three-month periods ended September 30, 2020 and 2019, respectively.

 

Interest expense was $6,483 and $5,066 for the three-month periods ended September 30, 2020 and 2019, respectively. This interest primarily related to notes payable.

 

The Company's net loss for the three-month periods ended September 30, 2020 and 2019 was $134,577 and $278,693, respectively. The reductions in losses relates to the elimination of operations and expenses related to products and services that were not profitable.

 

Results of Operations for the Nine Months Ended September 30, 2020 and 2019

 

During the nine-month periods ended September 30, 2020 and 2019, the Company had $322,695 and $1,771,889 in sales revenue, respectively. The change in revenue was the result of the elimination of products and services that were not profitable or sold in volumes sufficient to support the logistics cost of distributing from the Companies remote warehouses that were used in 2019 and eliminated by year end 2019. The change was also the result of the licensing and royalty agreement where the direct sales of the Nerys branded cheese products in Mexico were transferred. During the nine-month periods ended September 30, 2020 and 2019, the Company had $13,432 and $0 in licensing and royalty revenue, respectively.

 

During the nine-month periods ended September 30, 2020 and 2019, we had general and administrative expenses of $103,918 and $295,178, respectively. Payroll expenses were $175,833 and $380,206 during the nine-month periods ended September 30, 2020 and 2019, respectively. These expenses were reduced throughout the time between the periods by reducing consultants and administrative staff. Rent and lease expenses were $61,622 and $79,624 for the nine-month periods ended September 30, 2020 and 2019, respectively. Rent and lease expected to increase due to the addition of two new building units in September 2020. Depreciation expenses were $9,769 and $14,403 for the nine-month periods ended September 30, 2020 and 2019, respectively.

 

Interest expense was $19,363 and $52,389 for the nine-month periods ended September 30, 2020 and 2019, respectively. This interest primarily related to notes payable. The decrease was due to notes being satisfied.

 

The Company's net loss for the nine-month periods ended September 30, 2020 and 2019 was $383,016 and $292,545, respectively. The primary difference between the nine-month periods was that in 2019 a $222,217 gain on bargain purchase of Targa was recognized.

 

The Company experienced significant loss of sales during and prior to the first quarter of 2019 which continued through the second quarter of 2019 primarily resulting from the 20% to 25% tariffs Mexico placed on imports of cheese produced in the USA in retaliation for the tariff the USA placed on steel imported from Mexico to the USA. The Company lost most of its food service customers and some retail sales as a result. This precipitated the need to close the remote warehouses due to the reduced volumes shipping to food service customers.

We transferred the TEO Pasteurizer/Sterilizer to the new facilities in Mexico for R&D and validation for production. We have occupied two adjoining building units beginning in September 2020 and have been preparing to place the sterilizer near the processing and packaging operations.

We have new co-packing business beginning in the new facilities which is diverse from cheese processing. This new business is for new USA customers for products that will be shipped to the USA.

We will continue to develop our packaged products for initial retail placements in Mexico. We expect the expanding co-packing operations will also support production planning, formulation, equipment and supply lead times, testing, validation, branding and sales of new trayed meal products for a limited regional new product offering in 2021. This assumes that we are able to secure additional capital to purchase the necessary equipment, supplies (trays, film, carton/print materials, etc.), retain consultants/staff and provide for other costs of production.

 

Expenses are expected to increase as our operations develop and we begin to provide services and introduce new products into the market.

 

 

 

 

Liquidity and Capital Resources

 

As of September 30, 2020, we had total assets of $682,595 and total liabilities of $1,846,309. As of December 31, 2019, we had total assets of $971,394 and total liabilities of $1,842,029. During the nine-month periods ended September 30, 2020 and 2019, the Company paid $45,000 and $159,000, respectively, toward the current portion of the license fee payable.

 

Net cash used from financing activities for the nine-month periods ended September 30, 2020 and 2019 was $3,231 and $25,805, respectively. The amounts are primarily property and equipment purchases.

 

Over the next twelve months, we believe that we will require additional capital and anticipated funds from operations to further develop and sustain our operations. The Company will need to seek additional financing to expand operations and create revenue with the introduction of its products to the market. The TEO license requires future payments and royalty payments on related revenue.

 

We believe that we will need to raise an additional $1,000,000 over the next 12 months and intend to seek additional investment through a private or a public equity offering. We will use the proceeds to cover our product development, auditing and accounting costs, licensing, necessary equipment, supplies (trays, film, carton/print materials, etc.), retain consultants/staff, provide for other costs of production and other working capital needs.

 

There can be no assurance that we will be able obtain additional financing, if at all or upon terms that will be acceptable to us. There can be no assurance of when, if ever, our operations become profitable.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements or financing activities with special purpose entities. 

 

Going Concern

 

The Company financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has suffered recurring losses from operations and has insufficient working capital as of September 30, 2020. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the Company's ability to obtain necessary equity or debt financing to continue operations, and ultimately the Company's ability to generate profit from sales of packaged food products. These financial statements do not include any adjustments to classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company plans to obtain fund for operations through continued financial support from its stockholders, debt and private offerings of its equity.

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

 

Not required for Smaller Reporting Companies.

 

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act reports is (1) recorded, processed, summarized and reported within the periods specified in the Commission’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal control systems, no matter how well designed and operated, have inherent limitations.  Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented.  Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

Management will continue to review and make any changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing improvements in policies and procedures. We are committed to a proper internal control environment and will continue to implement measures to improve the Company’s internal control over financial reporting in response to our continued operational development.

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II - OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

No disclosure required.

 

Item 1A - Risk Factors

 

Not required for Smaller Reporting Companies.

 

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

 

No disclosure required.

 

Item 3 - Defaults Upon Senior Securities

 

No disclosure required.

 

Item 4 – Mine Safety Disclosures

 

No disclosure required.

 

Item 5 - Other Information

 

No disclosure required.

 

Item 6 - Exhibits

Index to Exhibits

 

Exhibit No.		Description
31.1*		Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2*		Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1*		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document.
101.SCH**		XBRL Taxonomy Extension Schema Document.
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document.

*   Filed herewith

** Furnished herewith

+   Each of these Exhibits constitutes a management contract, compensatory plan, or arrangement.

 

 

 

SIGNATURES

 

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

 

	TEO Foods Inc.
Date:  November 23, 2020	By:	/s/ Jeffrey H. Mackay
		Jeffrey H. Mackay, CEO and President
		Principal Executive Officer

 

 

Date:  November 23, 2020	By:	/s/ John O’Keefe
		John O’Keefe, Chief Financial Officer
		Principal Financial Officer