UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from ____________ to ____________
Commission file number:
(Exact name of small business issuer as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices)
(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. ☒
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).
☒
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 | ☐ | smaller reporting company |
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
☒
As of November 19, 2021, there were shares of the registrant’s common stock outstanding.
| |
Contents
| Page | ||
| Number | ||
| PART I | FINANCIAL INFORMATION | 3 |
| Item 1 | Interim Consolidated Financial Statements September 30, 2021 | 3 |
| Consolidated Balance Sheets | 3 | |
| Consolidated Statements of Operations and Comprehensive (Loss) Income | 4 | |
| Consolidated Statements of Cash Flows | 5 | |
| Consolidated Statements of Stockholders’ Deficit | 6 | |
| Notes to the Interim Consolidated Financial Statements | 7-14 | |
| Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15-18 |
| Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 18 |
| Item 4 | Controls and Procedures | 19 |
| PART II | OTHER INFORMATION | 19 |
| Item 1 | Legal Proceedings | 19 |
| Item1A | Risk Factors | 19 |
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
| Item 3 | Defaults Upon Senior Securities | 19 |
| Item 4 | Mine Safety Disclosures | 19 |
| Item 5 | Other Information | 19 |
| Item 6 | Exhibits | 19 |
| SIGNATURES | 20 | |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements September 30, 2021
TEO Foods, Inc.
CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| License and royalty income receivable | ||||||||
| Inventories, net | ||||||||
| Taxes receivable, net | ||||||||
| Prepaid and other assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Royalty Agreement | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders' (deficit) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| License fee payable - related party | ||||||||
| Notes payable | ||||||||
| Convertible note payable | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders' deficit | ||||||||
| Preferred stock, $ | ||||||||
| Common stock , $ par value, shares authorized, and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Other comprehensive income | ( | ) | ||||||
| Total stockholders' deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders' deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
TEO Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| For the Nine Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ( | ) | ||||||||||||||
| Operating expense | ||||||||||||||||
| Payroll | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Rent and lease | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Licensing and royalty income | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (expense) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss) income before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive (loss) income | ||||||||||||||||
| Foreign currency transaction adjustment | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share - | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common | ||||||||||||||||
| shares outstanding – basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
TEO Foods Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net Cash used in operations: | ||||||||
| Depreciation expense | ||||||||
| Provision for bad debt | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Licensing and royalty income receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Tax receivables | ||||||||
| Prepaid and other assets | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash (used) in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Net cash (used) in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of promissory notes | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Capital contribution as a result of Targa disposal, net of cash | ( |
) | ||||||
| Payment of deemed dividend to Teo Inc. for license | ( |
) | ( |
) | ||||
| Net cash provided by (used) in financing activities | ( |
) | ||||||
| Effect of foreign currency exchange translation | ||||||||
| Net change for period | ( |
) | ( |
) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ |
| Supplement Information: | ||||||||
| Cash paid for: | ||||||||
| Income taxes | $ | $ |
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
TEO Foods, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (Unaudited)
| Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | deficit | Gain(loss) | Total | |||||||||||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Balance - December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Capital contribution for disposal of Targa | — | — | ||||||||||||||||||||||||||||||
| Stock issued for cash | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ||||||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net (loss) income | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
TEO Foods Inc.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
TEO Foods Inc. (“Company”) was incorporated in the state of Nevada on December 27, 2012.
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.
In January 2020, the Company created BCTEO Foods S.A. de C.V. (“BC TEO Foods”), a new 100% owned subsidiary in Mexico. BCTEO Foods is the operating entity in Mexico and holds all facilities leases.
Effective January 1, 2021, the Company terminated its operation of Commercial Targa S.A. de C.V. (“Targa”) and disposed of it as a subsidiary. The Company determined that the Targa entity was of no functional or economic value and its remaining liabilities exceeded its assets. The Company does not anticipate any material impact to operations resulting from the disposal of the Targa entity. See Note 4.
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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020 have been omitted. 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.
| 7 |
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, 2021 and December 31, 2020 was approximately, $
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 evaluates 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, 2021 or 2020. 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 consists 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, 2021, the Company has
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; |
| 8 |
| 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. The Company provides manufacturing services for packaged food and other products. The Company’s performance obligation is satisfied for services when the services are completed or the related products have been delivered, which is at a point in time. The Company receives revenue from a licensing and royalty agreement and the licensee incurs fees based on their sales to their customers, which occurs when the products are delivered. The Company’s performance obligation related to these agreements is satisfied at the point in time when the products are delivered.
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.
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, 2021, 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, 2021, preferred shares convertible to common shares were included in the diluted weighted average shares; however, notes convertible into a maximum of common shares were excluded from the calculation of loss per common share as the notes are anti-dilutive.
| 9 |
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, 2021 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 – DISPOSAL OF SUBSIDIARY ENTITY
Effective January 1, 2021, the Company terminated its operation of Targa and disposed of it as a subsidiary as a transfer of the Company owned Targa stock to its CEO. As a result and in consideration, all intercompany balances have been forgiven, waived and released.
The disposal resulted in the removal of the following assets and liabilities from the consolidated balance sheet on the date of disposal:
| Cash | $ | |||
| Accounts Receivable | $ | |||
| Inventory | $ | |||
| Intercompany Account | $ | |||
| Tax Receivable | $ | |||
| Prepaid and Equipment | $ | |||
| Payables | $ | ( | ) |
The net liabilities disposed was $
As this was a transaction between common controlled
entities, the Company booked a capital contribution of $
| 10 |
NOTE 5 – INVENTORY
Inventory consists of raw materials
and finished goods located in the Company’s warehouse in Tijuana, Mexico. At September 30, 2021 and December 31, 2020, inventories
were $
NOTE 6 – TAX RECEIVABLES
Tax receivables represent credits from the
Mexican taxing authority. The Company’s Mexican subsidiaries have accumulated IVA tax payments that exceeded its IVA tax liabilities.
The Company periodically applies for refunds of these accumulated overpayments. These overpayments are also available to the Company to
offset future IVA liabilities. The net tax receivable balance at September 30, 2021 and December 31, 2020 of $
NOTE 7 – PROPERTY AND EQUIPMENT
At September 30, 2021 and December 31, 2020, property and equipment consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Furniture and fixtures | $ | $ | ||||||
| Machinery and equipment | ||||||||
| Transportation equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation expense for the nine months
ended September 30, 2021 and 2020 was $
| 11 |
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, 2021 and accrue and accept payments due as funds are available. TEO Inc. has agreed to extend the start date to January 1, 2022 of the use/royalty and service fee of 5.5% of the Company's gross revenue for food sales processed using TEO's intellectual property. 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 | ||||
| 2022 | $ | 500,000 | |||
| 2023 | 750,000 | ||||
| 2024 | 1,000,000 | ||||
| Thereafter | |||||
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 $
NOTE 9 – NOTES PAYABLE
On July 31, 2018, the Company issued
a note for $
Convertible Note Payable
On June 28, 2018, the Company
issued a note for $
On February 4, 2019, the Company issued a note
for $
On May 5, 2021, the Company issued
a note for $
On June 1, 2021, the Company issued
a note for $
On June 2, 2021, the Company issued
a note for $
On July 12, 2021, the Company issued a note
for $
As of September 30, 2021 and 2020, 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, 2021 and December 31, 2020 amounted to $
| 12 |
NOTE 10 – EQUITY
Preferred Stock
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
The provision for Federal income tax consists of the following September 30, 2021 and 2020:
| Federal income tax (expense) benefit attributable to: | September 30, 2021 | September 30, 2020 | ||||||
| Current Operations | $ | $ | ||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| 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, 2021 | December 31, 2020 | ||||||
| Net operating loss carryover | $ | |
$ | |||||
| Less: valuation allowance | ( |
) | ( |
) | ||||
| Net deferred tax asset | $ | $ | ||||||
At September 30, 2021, the Company
had net operating loss carry forwards of approximately $
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 consolidated statements of operations in the provision for income taxes. As of September 30, 2021 and 2020, the Company had no accrued interest or penalties related to uncertain tax positions.
| 13 |
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. These payables may include accrued compensation to officers. As of September 30, 2021, $78,100 was owed to the CEO and $0 at December 31, 2020.
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 AGREEMENTS
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, 2021, the Company has
received a total of $
The Company valued the royalty agreement
at the book value of the assets transferred of $
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, 2021 and December 31, 2020, the Company is not aware of any contingent liabilities that should be reflected in the financial statements.
At September 30, 2021, the Company had
three leases on commercial units that are contiguous in the same building located in Tijuana Mexico and comprising approximately 38,000
square feet total. The leases are 12 month leases with option to renew for additional 12 month periods. The total rents are approximately
$
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, 2021 and December 31, 2020,
NOTE 16 - SUBSEQUENT EVENTS
In October of 2021, the Company sold a total of
Common shares to four individuals and an entity at a price of $ per share for total of $
The Company has evaluated subsequent events for recognition and disclosure through November 19, 2021 which is the date the consolidated financial statements were available to be issued. No other matters were identified affecting the accompanying consolidated financial statements and related disclosures.
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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, 2021, the Company has not recognized any beneficial conversion features on its convertible debt.
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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.
The Company created 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.
The TEO Pasteurizer/Sterilizer is in our Mexico facility for final R&D and validation for production near the processing and packaging operations.
We have begun to develop our co-packing business. We are developing operating capabilities diverse from cheese processing. We have started several new projects which we believe will develop into recurring production orders. Our co-packing business is targeting USA customers for products that will be shipped to the USA.
We will continue to develop our products and services. We expect that expanding co-packing operations will also support production planning, formulation, equipment and supply lead times, testing, validation, branding and sales of new products for a limited regional new product offering in 2022. 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 to 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.
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Results of Operations
Results of Operations for the Three Months Ended September 30, 2021 and 2020
During the three-month period ended September 30, 2021 and 2020, the Company had $21,516 and $28,625 in sales revenue, respectively. During the three-month period ended September 30, 2021 and 2020, the Company had $6,652 and $5,630 in licensing and royalty revenue, respectively. The new production facility became operational in February 2021, additional facilities and equipment are being added to expand production opportunities.
During the three-month period ended September 30, 2021 and 2020, we had general and administrative expenses of $9,710 and $50,366, respectively. Payroll expenses were $11,275 and $36,494 during the three-month period ended September 30, 2021 and 2020, respectively. These expenses were reduced throughout the time between the periods by reducing consultants and administrative staff but are expected to increase as we continue to add production staff for operations. Rent and lease expenses were $35,946 and $20,226 for the three-month period ended September 30, 2021 and 2020, respectively. Rent and lease expenses increased due to the addition of two new building units in September 2020. Depreciation expenses were $2,648 and $2,450 for the three-month period ended September 30, 2021 and 2020, respectively. Professional fees were $33,545 and $18,725 for the three-month period ended September 30, 2021 and 2020, respectively.
Interest expense was $8,837 and $6,483 for the three-month period ended September 30, 2021 and 2020, respectively. This interest primarily related to notes payable.
The Company's net loss for the three-month period ended September 30, 2021 and 2020 was $73,863 and $134,577, respectively. The losses in 2020 benefitted from the elimination of operations and expenses related to products and services that were not profitable. The losses in 2021 were impacted by additional lease expenses and professional fees.
Results of Operations for the Nine Months Ended June 30, 2021 and 2020
During the nine-month period ended September 30, 2021 and 2020, the Company had $67,047 and $322,695 in sales revenue, respectively. The change was 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 period ended September 30, 2021 and 2020, the Company had $19,611 and $13,432 in licensing and royalty revenue, respectively. Revenue increased over the first quarter of 2021 due to expanding production operations. We believe that production opportunities we have been doing pilot runs and product development for will result in our ability to continue to expand operations.
During the nine-month period ended September 30, 2021 and 2020, we had general and administrative expenses of $29,587 and $103,918, respectively. Payroll expenses were $33,174 and $175,833 during the nine-month period ended September 30, 2021 and 2020, respectively. These expenses were reduced throughout the time between the periods by reducing consultants and administrative staff but are expected to increase as we continue to add production staff for operations. Rent and lease expenses were $118,326 and $61,622 for the nine-month period ended September 30, 2021 and 2020, respectively. Rent and lease increased due to the addition of two new building units in September 2020. Depreciation expenses were $7,601 and $9,769 for the nine-month period ended September 30, 2021 and 2020, respectively. Professional fees were $146,227 and $51,480 for the nine-month period ended September 30, 2021 and 2020, respectively.
Interest expense was $22,822 and $19,363 for the nine-month period ended September 30, 2021 and 2020, respectively. This interest primarily related to notes payable.
The Company's net loss for the nine-month period ended September 30, 2021 and 2020 was $273,907 and $383,016, respectively. The losses in 2020 benefitted from the elimination of operations and expenses related to products and services that were not profitable. The losses in 2021 were impacted by additional lease expenses and professional fees.
Expenses are expected to increase as our operations develop and we begin to provide services and introduce new products into the market.
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Liquidity and Capital Resources
As of September 30, 2021, we had total assets of $182,326 and total liabilities of $1,248,765. As of December 31, 2020, we had total assets of $270,480 and total liabilities of $1,889,126. During the nine-month period ended September 30, 2021 and 2020, the Company paid $2,800 and $45,000, respectively, toward the current portion of the license fee payable.
Net cash used in investing activities for the nine-month period ended September 30, 2021 and 2020 was $6,959 and $3,231, respectively. Net cash provided and (used) from financing activities for the nine-month period ended September 30, 2021 and 2020 was $146,051 and ($45,000), respectively. The difference is primarily due to sales of equity and the issuance of promissory notes for the nine-month period ended September 30, 2021 and 2020 of $152,000 and $0, respectively.
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’s 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, 2021. 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 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.
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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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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
In February of 2021, the Company sold a total of 250,000 common shares to an entity at a price of $0.20 per share for total of $50,000 in cash. Transaction did not involve any underwriters, any underwriting discounts or commissions, or any public offering. Transaction was exempt from registration under the Securities Act of 1933, as amended (the “Act”) by virtue of Section 4(a)(2) of the Act. The cash proceeds were used for general corporate purposes.
In October of 2021, the Company sold a total of 87,212 common shares to four individuals and an entity at a price of $0.20 per share for total of $17,442 in cash. Transactions did not involve any underwriters, any underwriting discounts or commissions, or any public offering. Transactions were exempt from registration under the Securities Act of 1933, as amended (the “Act”) by virtue of Section 4(a)(2) of the Act. The cash proceeds were used for general corporate purposes.
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
| 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** | Inline XBRL Instance Document. | |
| 101.SCH** | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 is formatted in Inline XBRL | |
* Filed herewith
** Furnished herewith
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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 19, 2021 | By: | /s/ Jeffrey H. Mackay | |
| Jeffrey H. Mackay, CEO and President | |||
| Principal Executive Officer | |||
| Date: November 19, 2021 | By: | /s/ John O’Keefe | |
| John O’Keefe, Chief Financial Officer | |||
| Principal Financial Officer |
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