NOTE 1 – BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
Interim Financial Reporting
While the information presented in the accompanying interim financial statements is unaudited, it includes all adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"). These interim financial statements have adjustments related to the accounting for a reverse acquisition completed on February 3, 2014. The acquired company did not exist at the end of this three month period in 2013 and therefore, no comparative data is reflected for the period ending March 31, 2013 or at the audit period ending December 31, 2013. For the Company Frontier Beverage Company, Inc. (the “Company”), all adjustments are of a normal, recurring nature. Interim financial statements and the notes thereto do not contain all of the disclosures normally found in year-end audited financial statements and these Notes to Financial Statements are abbreviated and contain only certain disclosures related to the three month period ended March 31, 2014. It is suggested that these interim financial statements be read in conjunction with our audited financial statements and related notes for the year ended December 31, 2013 included in our Form 10-K filed with the Securities Exchange Commission on April 16, 2014. Operating results for the period from January 13, 2014 (date of inception) through ended March 31, 2014 are not necessarily indicative of the results that can be expected for the period from January 13, 2014 (date of inception) through December 31, 2014.
Basis of presentation and going concern uncertainty
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern, which is dependent upon the Company's ability to establish itself as a profitable business. At March 31, 2014, the Company has an accumulated deficit of $1,219,660 and has incurred net income of $62,067. The Company’s ability to continue in business is dependent upon obtaining sufficient financing or attaining profitable operations. However, there can be no assurance that management will be successful in obtaining additional funding or in attaining profitable operations, and therefore, these matters raise substantial doubt about the Company's ability to continue as a going concern. These unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties, nor do they include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should the Company be unable to continue in operation.
Change of Control
On July 1, 2013, an unrelated third party acquired an aggregate of 15,978,000 shares of Common Stock of the Company constituting approximately 85% of the Company’s issued and outstanding Common Stock.
On October 9, 2013, the Company entered into share exchange agreement to acquire 100% of the issued and outstanding share capital with Gallant Acquisition Corp. (GAC) the 100% owner of all of the issued and outstanding share capital of 22 Social Club Productions (22 SCP) and its subsidiaries, Blue 22 Entertainment and Appquest, Inc. for 140,000,000 common shares of the Company and 5,000,000 shares of common stock of the Company to Appquest, Inc. Effectively, GAC held 89% of the issued and outstanding common shares of the Company and the transaction has been accounted for as a reverse merger, where 22 SCP is deemed to be the acquirer and the surviving entity for accounting purposes.
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
On December 31, 2013, the Company sold 30% shares of 22 Social Club Productions, Inc. to GAC, a related party in return of 100,000,000 restricted common shares from the share exchange agreement entered into on October 9, 2013. GAC held 30% of the outstanding common shares after this transaction.
On February 3, 2014, the Company entered into a stock purchase agreement receiving 90% of Dance Broadcast Systems, Inc. from Vinyl Groove Productions, Inc., and issuing 10,000 Series A Preferred shares with a voting privilege of 66.67% of all outstanding shares regardless of the number of common shares outstanding, to Vinyl Groove Productions, Inc. The transaction has been accounted for as a reverse merger where Dance Broadcast Systems, Inc. is deemed to be the acquirer and the surviving entity for accounting purposes.
The transaction is accounted for using the purchase method of accounting. As a result of the recapitalization and change in control, Dance Broadcast Systems, Inc. is the acquiring entity in accordance with ASC 805, Business Combinations. Accordingly, the historical financial statements are those of Dance Broadcast Systems, Inc., the accounting acquirer, immediately following the consummation of the reverse merger. Dance Broadcast Systems, Inc. was incorporated on January 13, 2014.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of March 31, 2014, which consist of convertible instruments and rights to shares of the Company’s common stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.
Financial Instruments
The Company’s balance sheet includes certain financial instruments. The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments and their expected realization.
ASC 820 Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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•
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
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•
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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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•
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
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Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2013. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include accounts payable, accrued compensation and accrued expenses. As of March 31, 2014, the Company has determined that the only asset or liability measured at fair value is the derivative instrument related to an anti-dilution provision contained in Convertible Notes and valued using level 3 inputs.
Commitments and Contingencies
The Company follows ASC 450-20
, Loss Contingencies
, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of March 31, 2014.
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional standards for “Accounting for Derivative Instruments and Hedging Activities”.
Professional standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.
NOTE 2 – STOCKHOLDERS DEFICIT
The Company is authorized to issue up to 500,000,000 shares of common stock at $0.001 par value per share ("Common Stock") and 100,000,000 shares of preferred stock at $0.001 par value per share (“Preferred Stock”). As of March 31, 2014, the Company had 217,081,000 shares of Common Stock and 10,000 shares of Series A Convertible Preferred Stock issued and outstanding. Holders of Common Stock are entitled to one vote per share and are to receive dividends or other distributions when and if declared by the Company's Board of Directors. None of our Common Stock is subject to outstanding options or rights to purchase, nor do we have any issued and outstanding securities that are convertible into our Common Stock. We have not agreed to register any of our stock. We do not currently have in effect an employee stock option plan.
Holders of Series A Convertible Preferred Stock are entitled to 66.67% of the voting rights of the Company regardless of the number of common shares outstanding. These shares are eligible to receive dividends or other distributions when and if declared by the Company’s Board of Directors.
In February 2014, the Company issued 8,250,000 restricted common shares for services with a value of $31,600.
In March 2014, the Company issued 15,000,000 restricted common shares as escrow for a loan.
In March 2014, the Company issued 30,300,000 restricted common shares for the settlement of $40,000 of payables and recorded a loss on the settlement of debt of $60,430 during the period fom January 13, 2014 (date of inception) through March 31, 2014.
In March 2014, the Company issued 5,000,000 restricted common shares for services with a value of $19,000.
In March 2014, the company issued 1,000,000 restricted common sharesvalued at $4,100 for payment of accounts payable of $1,500 and recorded a loss on the settlement of debt of $2,600 during the period fom January 13, 2014 (date of inception) through March 31, 2014.
Additional shares were issued and are discussed in Note 3 – RELATED PARTIES.
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 3 – RELATED PARTIES
During the three months ended March 31, 2014, the Company received no funds from related parties.
In March 2014, the Company issued to officers and directors, and a prior officer a total of 25,750,000 restricted common shares valued ar $103,700 for the settlement of $87,500 of accrued wages and a loss on debt settlement of $16,200.
Mr. Coogan, an officer of the Company, waived any other salary or accruals for this quarter with the receipt of shares. His balance is $43,000.
Mr. Bailey, a former officer and director received an excess of value for his shares for which the Company took the charge above and his balance is $0.
Mr. Jamison, a officer of the Company, received shares for his services with Frontier and his wage accruals from 22 Social Club, Inc. His balance with Frontier Beverage Company , Inc. is $0.
NOTE4 – CONVERTIBLE NOTES PAYABLE
At March 31, 2014 convertible notes payable consisted of the following:
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March 31, 2014
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Convertible notes payable
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$
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250,339
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Unamortized debt discount
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(9,302)
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Total
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$
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241,037
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As of the date of reverse merger, the Company had balance of $240,339 in the convertible notes payable, conversion price being fixed at $0.005 per share.
On October 9, 2013, the convertible notes agreement was amended to allow conversion into shares of common stock at 50% discount to the lowest bid of stock’s market price during the last 20 days prior to conversion date.
The Company identified embedded derivatives related to the amended Convertible Promissory Note entered into on October 9, 2013. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value of $240,369 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
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Dividend yield:
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-0-
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%
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Expected volatility
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100
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%
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Risk free rate:
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0.05
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%
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The initial fair value of the embedded debt derivative of $240,369 was allocated with accumulated deficit as part of recapitalization effect.
The fair value of the described embedded derivative of $439,676 at March 31, 2014 was determined using the Black Scholes Model with the following assumptions:
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
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Dividend yield:
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-0-
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%
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Expected volatility
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313
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%
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Risk free rate:
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0.05
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%
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At March 31, 2014, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $236,655 for the period from January 13, 2014 (date of inception) through ended March 31, 2014.
Note issued on March 10, 2014:
On March 10, 2014, the a convertible note agreement was entered into for a total of $50,000 due on January 5, 2015 with an interest of 8% per annum and a draw against that note was received of $10,000. The agreement allows conversion into shares of common stock at 50% discount to the average of the three lowest intraday trading prices during the 15 days prior to conversion date.
The Company identified embedded derivatives related to the amended Convertible Promissory Note entered into on March 10, 2014. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Convertible Promissory Note, the Company determined a fair value of $17,807 of the embedded derivative. The fair value of the embedded derivative was determined using the Black Scholes Model based on the following assumptions:
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Dividend yield:
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-0-
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%
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Expected volatility
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274
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%
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Risk free rate:
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0.12
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%
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The initial fair value of the embedded debt derivative of $17,807 was allocated as a debt discount up to the proceeds of the note ($10,000) with remained ($7,807) charged to operations during the period ended March 31, 2014 as interest expense.
During the period ended March 31, 2014, the Company amortized debt discount of $698 to current period operations as an interest expense.
The fair value of the described embedded derivative of $16,843 at March 31, 2014 was determined using the Black Scholes Model with the following assumptions:
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Dividend yield:
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-0-
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%
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Expected volatility
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273
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%
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Risk free rate:
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0.13
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%
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At March 31, 2014, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $244 for the period from January 31, 2014 (date of inception) through ended March 31, 2014.
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of March 31, 2014:
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Fair Value Measurements at March 31, 2014 using:
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March 31,
2014
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Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs (Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Liabilities:
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Debt Derivative liabilities
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$
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456,519
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-
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-
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$
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456,519
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The debt derivative liabilities is measured at fair value using quoted market prices and estimated volatility factors based on historical prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 2014:
FRONTIER BEVERAGE COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
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Debt
Derivative
Liability
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Balance, at inception
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$
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-
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Balance of debt derivatives at note issuances in Frontier pre-merger
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676,331
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Initial fair value of debt derivatives at note issuances
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17,087
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Mark-to-market at March 31, 2014
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-Embedded debt derivatives
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(236,899
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)
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Balance, March 31, 2014
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$
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456,519
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Net gain for the period included in earnings relating to the liabilities held at March 31, 2014
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$
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236,899
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Level 3 Liabilities are comprised of bifurcated convertible debt features on convertible notes.
NOTE 6– SUBSEQUENT EVENTS
We have evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available to be issued, and did not have any material recognizable subsequent events, other than the following:
On April 28, 2014, the Company issued 8,000,000 restricted common shares for services with a value of $17,600.