| Note 1 - Organization and description of business | Generation
NEXT Franchise Brands, Inc. (formerly known as Fresh Healthy Vending International, Inc. and referred to herein collectively with
its subsidiaries as "we", the "Company", "our Company", or "GNext") operates through its
wholly-owned subsidiaries, Fresh Healthy Vending LLC ("FHV LLC"), The Fresh and Healthy Vending Corporation, FHV Acquisition
Corp. ("FHV Acquisition") and our newly formed subsidiaries, Reis & Irvys, Inc. (R&I),
19 Degrees, Inc. and Generation Next Vending Robots, Inc. as a franchisor, direct seller and owner and operator of frozen yogurt
Robots, healthy drink and snack vending machines and micro markets that feature cashless payment devices and remote monitoring
software. The Company uses in-house location specialists that are responsible for securing locations for its franchisees; additionally,
the Company has negotiated discounts with a national product distribution chain. The Company also operates its own frozen yogurt
equipment. Basis
of accounting The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") for interim financial information and with the rules and regulations
of the Securities and Exchange Commission ("SEC") for reporting on Form 10-Q. Accordingly, these unaudited condensed
consolidated statements do not include all of the information and disclosures required by GAAP or SEC rules and regulations for
complete consolidated financial statements. In the opinion of management, these unaudited condensed consolidated financial statements
reflect all adjustments (consisting solely of normal recurring nature) considered necessary for a fair presentation of the results
for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results
for the full year. These
unaudited condensed consolidated statements should be read in conjunction with the Company's filings with the SEC, including its
most recent annual report on Form 10-K for the fiscal year ended June 30, 2016 filed on October 5, 2016. Liquidity
and capital resources For
the six months ended December 31, 2016 we had a net loss totaling $5,130,404 with positive cash flows from operations totaling
$798,962. Our cash balance at December 31, 2016 was $368,010. Since the date of the closing of the FHV Acquisition, our sales
were less than anticipated and the resulting cash flows from franchise sales was not sufficient to cover expenditures associated
with our daily operations resulting in a substantial decrease in our cash balances. Also, we used cash on hand to retire liabilities
associated with the franchise rescissions. As of the filing date of the Form 10-Q, our Company has consumed the vast majority
of its available cash, including the cash proceeds from the sale of our common stock received in July of 2013 and the issuance
of several debt instruments. In order to ensure sufficient liquidity for our continuing operations, we will require additional
capital financing in the form of either debt or equity (or a combination thereof) financing. Management believes that it will
be able to obtain such financing on terms acceptable to the Company, although there can be no assurance that we will be successful. Our
current plans include research and development expenditures for the production of the next generation robots equipment, payments
required for the purchase of the intangible assets from Robofusion (previous owner of the frozen yogurt robots equipment intellectual
property) capital expenditures for the purchase of corporate-owned and operated frozen yogurt robots as well as the repurchase
of machines from franchisees opting to rescind their franchise agreements. Given our current cash position, we may be forced to
curtail our plans by delaying or suspending the production and purchase of frozen yogurt robots. Principles
of consolidation The
consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, FHV LLC, The Fresh and
Healthy Vending Corporation, FHV Acquisition, Corp. and its newly formed subsidiaries, Reis & Irvys, Inc., 19 Degrees,
Inc. and Generation Next Vending Robots, Inc. All significant intercompany accounts and transactions are eliminated. Use
of estimates The
preparation of our Company's financial statements requires our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial
statements and the reported amounts of revenues, costs and expenses during the reporting period. Actual results could differ significantly
from those estimates. Significant estimates include our provisions for bad debts, franchisee rescissions and refunds, legal estimates
and the valuation allowance on deferred income tax assets. It is at least reasonably possible that a change in the estimates will
occur in the near term. Revenue
recognition Our
primary revenue generating transactions come from the sale of franchises and vending machines and micro markets to the franchisees.
There are no franchise fees charged beyond the initial first year franchise fee. We receive ongoing fees and royalty payments
in the form of annual advertising fees and a percentage of either franchisees' revenues or gross margins on vending machine and
micro market sales. We have not recognized any revenues from the R&I franchises and do not expect to recognize any material
revenues from the R&I franchises this fiscal year. We
recognize revenues and associated costs in connection with franchises at the time that we have substantially performed or satisfied
all material services or conditions relating to the franchise agreement. We consider substantial performance to have occurred
when: 1) no remaining obligations are unfulfilled under the franchise agreement; 2) there is no intent to refund any cash received
or to forgive any unpaid amounts due from franchisees; 3) all of the initial services spelled out in the franchise agreement have
been performed; and 4) we have met all other material conditions or obligations. Revenues and expenses from product sales to franchisees
are roughly equivalent and are accounted for on a net basis in the accompanying condensed consolidated statements of operations
as agency sales, net. During fiscal 2015, the Company changed the process by which franchisees order products. Currently, all
franchisees order directly from our national distributor and the Company receives a commission of 5% on those purchases. We recognize
the commission when earned. The Company recognizes revenue on product sales of company-owned machines when products are purchased;
we receive electronic sales records on our company- owned units. We recognize royalty fees as revenue when earned. Advertising
fees are recorded as a liability until marketing expenditures are incurred. The
Company records the amount of a franchise sale, machines and franchise fees, as deferred revenue until the conditions above have
been met. Once the machines are installed, the Company records the corresponding machine and franchise fee as revenue, on a pro
rata basis based on the number of machines installed relative to the total machines purchased. The
Company records the value of company-owned machines and equipment as inventory when purchased. Once the machines are installed,
the machine value is transferred to fixed assets and depreciated over its useful life. It
is not our policy to allow for returns, discounts or warranties to our franchisees. Under certain circumstances, including as
the result of regulatory actions, our Company may become obligated to offer our franchisees amounts in rescission to reacquire
their existing franchises, including machines. Additionally, if our Company is unable to fulfill its obligations under a franchise
agreement we may, at our sole discretion, agree to refund or reduce part or all of a franchisee's payments or commitments to pay.
As of December 31, 2016 and June 30, 2016, the Company's provision for franchisee rescissions and refunds totaled $2,122,287 and
$1,844,176, respectively. There are warranties extended by the machine manufacturer and franchisees are responsible for making
any required machine repairs. To the extent the machines remain under warranty, our franchisees transact directly with the manufacturer
or its distributor. Franchise
contracts We
invoice franchisees in full at the time that we enter into contractual arrangements with them. Payment terms vary but usually
a significant portion of the contract's cash consideration (typically 40% of amounts due for vending machines plus 100% of the
initial franchise fees) is due at the time of signing, while remaining amounts outlined under the contract are generally due upon
our locating 50% of the sites for the vending machines and micro markets. A
typical ten unit franchise contract would include the following: Franchise
fee per machine: $1,250 Cost
per machine: $10,000 Total
franchise cost: $112,500 ($1,250 X 10 + $10,000 X 10) Initial
payment upon signing contract: $52,500 (100% of franchise fees of $12,500 + 40% of machine cost of $100,000) Upon
the signing of the contract, the Company records the initial payment of $52,500 to cash, with the remaining contract value of
$60,000 to accounts receivable and records the total contract value of $112,500 to deferred revenue. Amounts
invoiced to franchisees for which we have not met the criteria for revenue recognition as discussed above, are deferred until
such conditions are met. Therefore, these amounts are accounted for as accounts receivable, deferred costs, and customer advances
and deferred revenues, respectively in the accompanying condensed consolidated financial statements. As of December 31, 2016,
the Company had accounts receivable, deferred costs and customer advances and deferred revenues of $9,630,775, $364,315 and $18,534,339,
respectively. As of June 30, 2016, the Company had accounts receivable, deferred costs and customer advances, and deferred revenues
totaling $2,411,346, $394,563 and $8,062,982, respectively. Furthermore,
the Company has deferred revenue of $1,276,211 in excess of one year as of December 31, 2016 which consisted of the following:
amounts related to ongoing franchisees - $927,100; and amounts related franchisees requesting a hold on location procurement -
$349,111. As of June 30, 2016, deferred revenue in excess of one year aggregated $1,592,591. Deferred
revenue consisted of the following as of December 31, 2016 and June 30, 2016:
December
31, 2016 June
30, 2016
Vending
machines - new $ 1,694,537 $ 4,449,950
Vending
machines - used 98,217 282,887
Micro
markets - new 50,330 213,500
Franchise
fees 1,427,255 682,145
Frozen
yogurt robots 15,260,000 2,427,500
Other 4,000 7,000
$ 18,534,339 $ 8,062,982 Cash
and cash equivalents We
consider all investments with an original maturity of three months or less to be cash equivalents. When present, cash equivalents
primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose
cost equals fair market value. We had no cash equivalents at December 31, 2016 and June 30, 2016. We may maintain our cash and
cash equivalents in amounts that may, at times, exceed federally insured limits. At December 31, 2016, bank balances exceeding
federally insured limits aggregated $119,187. We have not experienced any losses with respect to cash, and we believe our Company
is not exposed to any significant credit risk with respect to our cash. Certain
states require the Company to maintain customer deposits in escrow accounts until the Company has substantially performed its
obligations. At December 31, 2016 and June 30, 2016, the Company had $199,267 and $208,767, respectively, maintained in escrow
accounts for this purpose. Accounts
receivable, net Accounts
receivable arise primarily from invoices for customer deposits, and product orders and are carried at their estimated collectible
amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customers (located throughout
North America, the Bahamas and Puerto Rico) deemed credit worthy. Ongoing credit evaluations are performed and potential credit
losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is
deemed uncollectible, the balance is charged to the allowance for doubtful accounts. Our allowance for doubtful accounts aggregated
$160,942 and 160,647 at December 31, 2016 and June 30, 2016, respectively. Inventories Inventories
consist of vending machines and micro markets held for sale, purchased food and beverages in Company-owned vending machines and
micro markets and vending machine parts held for resale, and is valued at the lower of cost or market, with cost determined using
the average cost method. Property
and equipment Property
and equipment consists primarily of computer and office equipment, software used in our operations and intangible intellectual
property acquired from Robofusion, Inc. (see Note 9). Property and equipment is carried at cost and depreciated using the straight-line
method over the estimated useful lives of the individual assets (generally five to ten years). Leasehold improvements are amortized
over the lesser of the term of the related lease or the estimated useful life of the asset (84 months). During fiscal 2016, the
Company offset the fully depreciated value of leasehold improvements associated with the prior lease aggregating $63,500 to leasehold
improvements and accumulated amortization. Costs incurred for maintenance and repairs are expensed as incurred and expenditures
for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives. Depreciation
and amortization expense for the three months ended December 31, 2016 and 2015 totaled $11,825 and $26,876 respectively. Depreciation
and amortization expense for the six months ended December 31, 2016 and 2015 totaled $20,990 and $54,929, respectively. The Company
no longer owns a corporate route for vending machines and micro markets. Impairment
of long-lived assets We
record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets' carrying amount. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the
estimated fair value of the assets. There were no impairments of long-lived assets for the six months ended December 31, 2016
and 2015, respectively. License
fee The
Company initially recorded $395,000 related to the exclusive license fee and purchase of frozen yogurt kiosks from Robofusion,
Inc. as a prepaid expense. In connection with the acquisition of the Robofusion intellectual property in December 2016, the Company
charged this amount to operations (see Note 9). Deferred
rent The
operating lease for our corporate office in San Diego, California contains provisions for future rent increases, leasehold improvement
allowances and rent abatements. We record monthly rent expense equal to the total of the payments due over the lease term, divided
by the number of months of the lease term. The difference between the rent expense recorded and the amount paid is credited or
charged to deferred rent, which is reflected as a separate line item in the accompanying condensed consolidated balance sheets.
Effective August 1, 2015, the Company entered into a new seven year lease agreement for its corporate operations and warehouse
facilities (see Note 7). Marketing
and advertising We
expense marketing and advertising costs as incurred. We have no existing arrangements under which we provide or receive marketing
and advertising services from others for any consideration other than cash. Marketing and advertising expense totaled $432,704
and $244,141 for the three months ended December 31, 2016 and 2015, respectively. For the six months ended December 31, 2016 and
2015, marketing and advertising expense totaled 924,577and 450,096, respectively Freight
costs and fees Outbound
freight charged to customers is recorded as revenue. The related outbound freight costs are considered period costs and charged
to cost of revenues. Valuation
of options and warrants to purchase common stock We
separately value warrants to purchase common stock when issued in connection with notes payable using the Black-Scholes quantitative
valuation method. The value of such warrants is recorded as a discount from the related notes payable and credited to additional
paid-in capital at the time of the issuance of the related notes payable. The value of the discount is applied to the note payable
and amortized over the expected term of the note payable using the interest method with the related accretion charged to operations. We
account for our share-based compensation as required by the Financial Accounting Standards Board ("FASB"), under authoritative
guidance ASC 718 on stock compensation, using the Black-Scholes quantitative valuation method. The resulting compensation expense
is recognized in the condensed consolidated financial statements on a straight-line basis over the vesting period from the date
of grant. Share
grants are measured using a fair value method with the resulting compensation cost recognized in the financial statements. Compensation
expense is recognized on a straight-line basis over the service period for the stock awards. Fair
value of financial instruments The
Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair
value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. Additionally, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized
and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements
involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date. Level
2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level
3 inputs are unobservable inputs for the asset or liability. The
Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in
and out of the levels of the fair value hierarchy, the Company elects to disclose the fair value measurement at the beginning
of the reporting period during which the transfer occurred. The
Company's financial instruments consisted of cash, cash in escrow, accounts receivable, accounts payable and accrued liabilities,
provision for franchisee rescissions and refunds, accrued personnel expenses, due to related party and notes payable. The estimated
fair value of these financial instruments approximate the carrying amount due to the short maturity of these instruments. The
recognition of the derivative values of convertible debt are based on the weighted-average Black-Scholes option pricing model. Derivatives
and Hedging In
April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features
in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial
statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting
for many convertible instruments with provisions that protect holders from a decline in the stock price. Each reporting period,
the Company evaluates whether convertible debt to acquire stock of the Company contains provisions that protect holders from declines
in the stock price or otherwise could result in modification of the conversion price under the respective convertible debt agreements.
The Company determined that the conversion feature in the convertible notes issued contained such provisions and recorded such
instruments as derivative liabilities (see Note 2). Net
loss per share Our
Company calculates basic earnings per share ("EPS") by dividing our net loss by the weighted average number of common
shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income
or net loss and comprehensive net loss applicable to common shareholders by the weighted average number of common shares outstanding
for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and
warrants are only included in the calculation of diluted EPS when their effect is dilutive. Total anti-dilutive stock options,
warrants, and shares issuable upon conversion of debt excluded from earnings per share totaled 8,262,051 and 3,449,761 at December
31, 2016 and 2015, respectively. Litigation
and franchise agreements From
time to time, we may become involved in litigation and other legal actions, including disagreements with franchisees that may
result in the termination or rescission of a franchise agreement and refund of all or a portion of amounts previously paid to
us. We estimate the range of liability related to any pending litigation or franchise agreement terminations or rescissions where
the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. If
a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to
at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information
available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. Estimated legal
costs expected to be incurred to resolve legal matters are recorded to the condensed consolidated balance sheets and statements
of operations. Our
Company is subject to state franchise registration and relationship laws, rules and regulations. Any violation of these laws,
rules or regulations could result in our Company being fined or prohibited from offering and selling franchises in the state.
See Note 5 ("Contingencies") of Notes to Condensed Consolidated Financial Statements and Part II, Item 1 ("Legal
Proceedings") of the Company's Form 10-Q for the quarterly period ended December 31, 2016 of which these Consolidated Financial
Statements form a part. New
accounting standards In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"),
which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle
and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing
U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using
either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each
prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative
effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).
We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have
not yet determined the method by which we will adopt the standard in fiscal 2019. In
August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements Going Concern
(Subtopic 205-40): Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"),
which provides principles and definitions for management that are intended to reduce diversity in the timing and content of disclosures
provided in footnotes. Under the standard, management is required to evaluate for each annual and interim reporting period whether
it is probable that the entity will not be able to meet its obligations as they become due within one year after the date that
financial statements are issued (or are available to be issued, where applicable). We are currently evaluating the impact of our
pending adoption of ASU 2014-15 on our consolidated financial statements and have not yet determined the method by which we will
adopt the standard in fiscal 2017. Management
does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material
effect on the accompanying financial statements. |
