UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
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CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of report (Date of earliest event reported) September 4, 2015 (October 24, 2014)
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MINERCO RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA | 333-156059 | 27-2636716 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
800 Bering Drive
Suite 201
Houston, TX 77057
(Address of principal executive offices, including zip code.)
(888) 473-5150
(Registrant’s telephone number, including area code)
Not applicable.
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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¬ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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¬ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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¬ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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¬ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.01. Completion of Acquisition or Disposition of Assets
On October 27, 2014, Minerco Resources, Inc. (“the Registrant”) filed a Current Report on Form 8-K (the “Original Current Repot”) reporting that, on October 24, 2014, the Registrant completed the acquisition of all of the outstanding membership interests in Avanzar Sales and Distribution, LLC, a California limited liability company pursuant to a Membership Interest purchase agreement dated October 24, 2014, as amended. The Registrant was required to file the financial statements and pro forma financial information required pursuant to Item 9.01(a) and (b) of Form 8-K by amendment to the Original Current Report. This Amendment No. 1 to the Original Current Report contains the required financial statements and pro forma financial information which was not available at the time the Original Current Report was filed.
Item 9.01. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
(i) Audited balance sheets of Avanzar Sales and Distribution, LLC as of July 31, 2014 and 2013, and the related statements of operations, statement of changes in member’s equity (deficit), and statements of cash flows of Avanzar Sales and Distribution, LLC for the years then ended, and the notes related thereto, including the Report of Independent Registered Public Accounting Firm, issued by Malone Bailey, LLP, dated September 2, 2015. (Said audited financial statements of Avanzar Sales and Distribution, LLC are attached as Exhibit 99.1 to this Form 8-K/A and are incorporated herein by reference.)
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined balance sheets of the Registrant and Avanzar Sales and Distribution, LLC as of July 31, 2014 and 2013. The unaudited pro forma combined statements of operations for the year ended July 31, 2014 and 2013 that give effect to the Registrant’s acquisition of Avanzar Sales and Distribution, LLC, are attached as Exhibit 99.2 to this Form 8-K/A and are incorporated herein by reference.
(d) Exhibits
The following exhibits are being filed as part of this Report.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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Exhibit | Document Description | Form | | Date | Number | Filed herewith |
99.1 | Avanzar Financials for the years ending July 31, 2014 and 2013 | | | | | X |
99.2 | Pro Forma Financial Information | | | | | X |
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.
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| MINERCO RESOURCES, INC. | |
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9/3/2015 | By: | /s/ V. Scott Vanis | |
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The unaudited interim financial statements of Avanzar Sales and Distribution, LLC. follow. All currency references in this report are to U.S. dollars unless otherwise noted.
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| | Index |
Report of Independent Registered Public Accounting Firm | | |
Balance Sheets | | |
Statements of Comprehensive Loss | | |
Statements of Cash Flows | | |
Statements of Members’ Deficit | | |
Notes to Financial Statements | | |
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of
Avanzar Sales and Distribution, LLC
Brea, California
We have audited the accompanying balance sheets of Avanzar Sales and Distribution, LLC (the “Company”), as of July 31, 2014 and 2013 and the related statements of comprehensive loss, member's deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurances about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration over of internal control over financial reporting as a basis for design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts of disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statements presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avanzar Sales and Distribution, LLC as of July 31, 2014 and 2013 and the results of their operations and their cash flows for years then ended in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements the Company’s present financial situation raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MALONEBAILEY LLP
www.malonebailey.com
Houston, Texas
September 2, 2015
Avanzar Sales and Distribution, LLC
Balance Sheets
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| July 31, 2014 | | July 31, 2013 |
ASSETS | | | |
Current Assets | | | |
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Cash | $ | — |
| | $ | 24,623 |
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Accounts Receivable, net | 293,273 |
| | 414,320 |
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Inventory | 294,454 |
| | 274,431 |
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Prepaid Expense | 6,280 |
| | 10,600 |
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Total Current Assets | 594,007 |
| | 723,974 |
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Other Assets | | | |
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Investments | 26,875 |
| | 10,000 |
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Property and Equipment, net | 147,802 |
| | 191,527 |
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Total Assets | $ | 768,684 |
| | $ | 925,501 |
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LIABILITIES AND MEMBERS’ DEFICIT | | | |
Current Liabilities | | | |
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Accounts payable and accrued liabilities | $ | 1,275,852 |
| | $ | 1,016,762 |
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Notes Payable | 180,958 |
| | 184,970 |
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Capital Lease Obligations, Current | 45,660 |
| | 56,021 |
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Line of Credit | 134,190 |
| | 5,708 |
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Total Current Liabilities | 1,636,660 |
| | 1,263,461 |
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Capital Lease Obligations, Noncurrent | 38,849 |
| | 84,060 |
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Total Liabilities | 1,675,509 |
| | 1,347,521 |
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Members’ Deficit | | | |
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Member Contributions | 85,470 |
| | 81,017 |
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Accumulated Other Comprehensive Loss | (73,125 | ) | | — |
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Accumulated deficit | (919,170 | ) | | (503,037 | ) |
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Total Members’ Deficit | (906,825 | ) | | (422,020 | ) |
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Total Liabilities and Members’ Deficit | $ | 768,684 |
| | $ | 925,501 |
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The accompanying notes are an integral part of these financial statements
Avanzar Sales and Distribution, LLC
Statements of Operations and Other Comprehensive Loss
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Twelve months Ended July 31, 2014 | |
Twelve months Ended July 31, 2013 |
Sales: | | | | |
Products | | $ | 2,040,360 |
| | $ | 1,781,206 |
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Services | | 357,606 |
| | 274,211 |
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Total Sales | | 2,397,966 |
| | 2,055,417 |
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Cost of Goods Sold | | 1,630,661 |
| | 1,382,551 |
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Gross Profit | | 767,305 |
| | 672,866 |
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Operating Expenses: | | | | |
Depreciation Expense | | 43,724 |
| | 43,181 |
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General and Administrative | | 1,096,402 |
| | 899,720 |
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Total Operating Expenses | | 1,140,126 |
| | 942,901 |
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Other Income (Expenses): | | | | |
Interest Expense | | (50,985 | ) | | (25,497 | ) |
Other Expense | | 7,673 |
| | — |
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Total Other Expenses | | (43,312 | ) | | (25,497 | ) |
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Net Loss | | (416,133 | ) | | (295,532 | ) |
Other Comprehensive Loss | | | | |
Unrealized Loss on Investments | | (73,125 | ) | | — |
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Total Other Comprehensive Loss | | (73,125 | ) | | — |
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Net Comprehensive Loss | | $ | (489,258 | ) | | $ | (295,532 | ) |
The accompanying notes are an integral part of these financial statements
Avanzar Sales and Distribution, LLC
Statements of Cash Flows
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| | Twelve months Ended July 31, 2014 | | Twelve months Ended July 31, 2013 |
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Cash Flows from Operating Activities | | | | |
Net Loss | | $ | (416,133 | ) | | $ | (295,532 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
Depreciation | | 43,724 |
| | 43,181 |
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Bad Debt Expense | | 142,690 |
| | 33,323 |
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Changes in operating assets and liabilities: | | | | |
Accounts Receivable | | (111,642 | ) | | (330,967 | ) |
Inventory | | (20,023 | ) | | (135,663 | ) |
Prepaid Expenses | | 4,320 |
| | (400 | ) |
Accounts Payable and Accrued Liabilities | | 259,090 |
| | 674,675 |
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Net Cash Used in Operating Activities | | (97,974 | ) | | (11,383 | ) |
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Cash Flows from Financing Activities | | | | |
Proceeds from notes payable | | 20,000 |
| | 104,970 |
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Repayments of notes payable | | (24,012 | ) | | — |
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Net Proceeds from Line of Credit | | 128,482 |
| | 5,708 |
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Member Contributions | | 70,753 |
| | 74,089 |
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Member Distributions | | (66,300 | ) | | (71,939 | ) |
Repayments of Capital Lease Obligations | | (55,572 | ) | | (77,581 | ) |
Net Cash Provided by Financing Activities | | 73,351 |
| | 35,247 |
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Net Change in Cash | | (24,623 | ) | | 23,864 |
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Cash, Beginning of Period | | 24,623 |
| | 759 |
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Cash, End of Period | | $ | — |
| | $ | 24,623 |
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Supplemental Disclosures of Cash Flow Information | | | | |
Cash Paid for Interest | | $ | 50,985 |
| | $ | 25,497 |
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Noncash Operating and Investing Activities | | | | |
Shares of Alkame Received for Accounts Receivable | | $ | 90,000 |
| | $ | — |
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Available for Sale Investment Write Down | | $ | 73,125 |
| | $ | — |
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Noncash Investing and Financing Activities | | | | |
Purchase of Vehicle in Exchange for Capital Lease Obligation | | $ | — |
| | $ | 22,806 |
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The accompanying notes are an integral part of these financial statements
Avanzar Sales and Distribution, LLC
Statements of Members' Deficit
Years ended July 31, 2013 and 2014
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| CAPITAL | ACCUMULATED DEFICIT | ACCUMULATED OTHER COMPREHENSIVE LOSS | TOTAL |
Balance, July 31, 2012 | $ | 78,867 |
| $(207,505) | $ | — |
| $(128,638) |
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Member Contributions | 74,089 |
| — |
| — |
| 74,089 |
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Member Distributions | (71,939) |
| — |
| — |
| (71,939) |
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Net Loss | — |
| (295,532) |
| — |
| (295,532) |
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Balance, July 31,2013 | 81,017 |
| (503,037) |
| — |
| (422,020) |
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Member Contributions | 70,753 |
| — |
| — |
| 70,753 |
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Member Distributions | (66,300) |
| — |
| — |
| (66,300) |
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Net Loss | — |
| (416,133) |
| — |
| (416,133) |
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Unrealized Loss on Investments | — |
| — |
| (73,125) |
| (73,125) |
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Balance, July 31,2014 | $ | 85,470 |
| $ | (919,170 | ) | $ | (73,125 | ) | $ | (906,825 | ) |
The accompanying notes are an integral part of these financial statements
Avanzar Sales and Distribution, LLC
Notes to Financial Statements
1. Nature of Operations
Avanzar Sales and Distribution, LLC (the “Company”) was formed on April 15, 2009, as a Limited Liability Company in the State of California. The Company is a beverage and snack distributor and broker in the Southern California region. The Company’s fiscal year end is July 31.
2. Summary of Significant Accounting Policies
Basis of Presentation. These financial statements and notes are presented in accordance with accounting principles generally accepted in the United States.
Cash and Cash Equivalents. The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
Trade Accounts Receivable. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We review the need for an allowance for doubtful accounts quarterly based on historical experience with each customer and the specifics of each arrangement. Allowances for doubtful accounts were $119,296 and $24,735 as of July 31, 2014 and 2013, respectively.
Inventories. Inventories consists of finished goods which are valued at the lower of cost or market using the first-in, first-out method. An allowance for inventory obsolescence is recognized for slow-moving parts inventory depending on the length of time the related items have been outstanding.
Investments. Investments include available-for-sale securities. The net unrealized gains or losses on available-for-sale securities are recorded as a component of accumulated other comprehensive income, net of income taxes.
Property and Equipment. Property, plant and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives. Upon the retirement or disposition of property and equipment, the related cost and accumulated depreciation or amortization are removed, and a gain or loss is recorded. Leased property meeting certain capital lease criteria is capitalized, and the net present value of the related lease payments is recorded as a liability. Amortization of assets under capital leases is recorded using the straight-line method over the shorter of the estimated useful lives or the lease terms. Maintenance, repairs and minor renewals or betterments are charged to expense as incurred.
Long-Lived Assets. Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the estimated fair value of the asset or asset group. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amounts or their estimated fair values less costs to sell and are not depreciated.
Revenue Recognition. The Company recognizes revenue when persuasive evidence exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonable assured. This typically occurs when the product is delivered for our distribution business. Sales are recorded net of discounts and rebates, sales taxes and estimated returns and allowances. The Company estimates the reduction to sales and cost of sales for returns based on current sales levels and the Company’s historical return experience. The Company’s reserve for sales returns and allowances was not material as of July 31, 2014 and 2013, respectively.
Vendor Incentives. The Company receives incentives in the form of reductions to amounts owed and/or payments from vendors related to cooperative advertising allowances, volume rebates and other promotional considerations. Many of these incentives are negotiated on an annual basis or less (short-term). Cooperative advertising allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an offset to cost of goods sold, when the cost is incurred.
The Company offsets vendor payables with vendor receivables upon settling the accounts on a monthly basis. During 2014, the Company offset $238,072 accounts receivable and payable. No Accounts were offset during 2013.
Use of Estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, accounts payable, notes payable and capital lease obligations and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
◦Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
◦Level 2 - Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
◦Level 3 - Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about the assumptions market participants would make and significant to the fair value.
The carrying values reflected in the balance sheets for cash and cash equivalents, trade accounts receivable, and other current assets, accounts payable, and other current liabilities approximate their fair values because of the short maturity of these instruments.
Income Taxes. The Company is treated a partnership for tax purposes. Therefore, no provision or liability for federal income taxes has been included in the financial statements.
The Company recognizes the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. The amount of tax benefit recorded, if any, is limited to the amount that is greater than 50 percent likely to be realized upon settlement with the taxing authority (that has full knowledge of all relevant information). Accrued interest, if any, related to uncertain tax positions is included as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating income or loss. The Company does not have any uncertain tax positions as of any of the periods presented. The Company did not incur interest and penalties for any period presented.
Tax years 2012 through 2014 remain subject to examination by US jurisdictions.
Comprehensive Loss. Accounting Standards Coficiation 220, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. For the years ended July 31, 2014, the Company had unrealized loss on available-for-sale securities totaling $73,125 that represent a comprehensive loss and, therefore, has included a schedule of comprehensive loss in the financial statements.
Recent Account Pronouncements. The adoption of recently issued accounting pronouncements are not expected to have a material effect on the Company's future reported financial position or results of operations.
3. Property and Equipment, Net
Property and equipment consists of the following as of July 31,
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| | 2014 | | 2013 |
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Leased property | | $ | 266,018 |
| | $ | 266,018 |
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Accumulated Depreciation | | (118,216) |
| | (74,491) |
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Property and Equipment, net | | $ | 147,802 |
| | $ | 191,527 |
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During 2014 and 2013, depreciation expense was $43,724 and $43,181, respectively.
4. Investments
We own equity securities which were received as payment totaling $90,000 for a broker agreement dated December 24, 2013, which we account for as available-for-sale securities. As of July 31, 2014, the fair value of the securities has to be adjusted to $16,875 and $0. Unrealized loss for the years ended July 31, 2014 for this investment totals $73,125. Additionally, we own a 50% equity stake in a brand purchased for $10,000 in 2011. The brand has not yet been released commercially and as of July 31, 2014 and 2013, it is valued at $10,000. In April 2015, management evaluated the realization of the investment as a result of certain conditions affecting the brand. Management concluded that the investment was impaired and wrote it off.
5. Debt
Notes Payable
Avanzar received proceeds from various unrelated third parties. The notes bear interest at 8% and 12% per annum, mature between August 31, 2015 and December 31, 2015 and are not secured by any collateral. The total principal due as of July 31, 2014 and 2013 is $180,958 and $184,970 respectively. A schedule of the notes payable are below:
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Principal at 7/31/2014 | Principal at 7/31/2013 |
| Interest Rate |
| Maturity |
$ | 20,000 |
| $ | 20,000 |
| 8 | % | February 28, 2015 |
$ | 20,000 |
| $ | 20,000 |
| 8 | % | February 28, 2015 |
$ | 10,000 |
| $ | 10,000 |
| 8 | % | February 28, 2015 |
$ | 20,000 |
| $ | 20,000 |
| 8 | % | February 28, 2015 |
$ | 49,970 |
| $ | 49,970 |
| 12 | % | August 31, 2015 |
$ | 10,000 |
| $ | 10,000 |
| Non-interest bearing |
| On Demand |
$ | 20,000 |
| $ | 20,000 |
| 8 | % | December 31, 2015 |
$ | 10,988 |
| $ | 35,000 |
| Non-interest bearing |
| On Demand |
$ | 20,000 |
| $ | — |
| 8 | % | February 28, 2015 |
$ | 180,958 |
| $ | 184,970 |
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The notes are convertible into membership units of the Company at the election of the note holder. The conversion rate is one units per dollar of principal. The Company does not expect that any of the note holders will convert into membership units of the company.
The notes payable that were due on February 28, 2015 have not been repaid and are now due on demand.
On August 26, 2014, the Company repaid one of the notes payable in the principal amount of $20,000. On March 1, 2015, the Company repaid one of the notes payable in the principal amount of $20,000.
Line of Credit
On May 27, 2014, Avanzar entered a line of credit with BFS West Capital for a maximum of $168,000. The line of credit bears interest at 50.65% per annum, matures August 2015 and is secured by all personal property of the Company. As of July 31, 2014, the balance due totals $134,190.
6. Commitments
Capital Lease Obligations
On November 2011, the Company leased vehicles for four and five years with monthly payments of $5,531. We have assessed the leases and deem them to be capital leases. At July 31, 2014, total future minimum payments is as follows:
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2015 | | $ | 58,750 |
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2016 | | 40,917 |
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2017 | | 1,114 |
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Total Minimum Lease Payments | | $ | 100,781 |
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Less: Interest | | $ | 16,272 |
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Present Value of Minimum Lease Payments | | $ | 84,509 |
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Capital Lease Obligation, Current | | $ | 45,660 |
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Capital Lease Obligation, Noncurrent | | $ | 38,849 |
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7. Transactions with Related Parties
During 2013, the Company received loans from one of its members totaling $35,000, which are included in notes payable in the accompanying balance sheets. At July 31, 2014 and 2013, there was $10,988 and $35,000 outstanding, respectively. The note are non-interest bearing and due on demand.
As of July 31, 2014 and 2013, the Company owes one of its members $15,383 and $13,586, respectively, for advances made to the Company which are due are non-interest bearing and due on demand.
8. Members' Capital
From inception until December 31, 2013, there were 1,529,676 member units outstanding. On January 1, 2014, the 150,024 new membership units to three additional members of which 93,744 units were for consideration for services and 56,280 units were an incentive to lend the Company funds.
During 2014, the Company granted two employees to receive 3.35% and 2.23% of the Company in consideration for their services. The grants have a two year service requirements. Compensation expense for 2014 was deemed to be immaterial.
During 2014, the Company issued equity warrants for the equivalent of 3.35% of the fair value of the Company to a noteholder as incentive to lend the Company funds. The resulting additional paid in capital in connection with the warrants was deemed to be immaterial.
9. Going Concern
These 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. During the period ended July 31, 2014, the Company incurred a net loss of $416,133 during the year ended July 31, 2014, and as of that date, the Company’ had a working capital deficit of $1,042,653 and its total liabilities exceeded its total assets by $906,825. Those factors create an uncertainty about 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 members, the ability of the Company to obtain necessary equity and debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company intends to fund operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending July 31, 2014.
10. Subsequent Events
On October 24, 2014, the Company entered into an Agreement (the “Membership Interest Purchase Agreement”) with Level 5 Beverage Company, Inc. (“Level 5"), to sell thirty percent (30%) equity position and fifty-one percent (51%) voting interest for the Purchase Price of $500,000 with an option to acquire an additional twenty-one percent (21%) interest and Second Option to acquire up to seventy-five percent (75%) of the Company. The acquisition was accounted for in accordance with Accounting Standard Codification 805, Business Combinations. On February 10, 2015, the initial acquisition initiated in October, 2014 was completed. On March 24, 2015, Level 5 exercised the Initial Purchase Option to acquire an additional twenty-one percent (21%). The consideration payable by Level 5 in connection with the exercise of the initial purchase options to be acquired totals Four Hundred Thousand Dollars ($400,000), of which Two Hundred Thousand Dollars ($250,000) has been paid and the remaining balance of One Hundred Thousand Dollars ($150,000), will be payable as follows: additional payments in amounts of at least Twenty-five Thousand Dollars ($25,000) payable every 30 days until the aggregate of Four Hundred Thousand U.S Dollars ($400,000) is paid in full no later than
December 31, 2015. On April 30, 2015, Level 5 exercised the Second Purchase Option to acquire an additional twenty-four percent (24%). The consideration payable to the existing members of the Company for the Second Purchase Option to be acquired shall be an aggregate of One Million Seventy Hundred Fifty Thousand Dollars ($1,750,000). The Company issued 336,543 shares of its Class C Preferred membership units pursuant to the exercise of the Second Purchase Option to the six (6) existing members of the Company.
Index to Pro Forma Condensed Combined Financial Statements
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| | Index |
Pro Forma Condensed Combined Balance Sheets as of July 31, 2014 | | |
Pro Forma Condensed Combined Statement of Operations as of July 31, 2014 | | |
Notes to the Pro Forma Condensed Combined Financial Statements | | |
3
5
Minerco Resources, Inc.
Pro Forma Condensed Combined Balance Sheet
(unaudited)
|
| | | | | | | | | | |
| July 31, 2014 (Acquiree) | | July 31, 2014 (Acquiror) | | Pro Forma Adjustments | | Pro Forma Combined |
ASSETS | | | | | | | |
Cash | — |
| | 304,104 |
| | | | 304,104 |
|
Accounts Receivable | 293,273 |
| | — |
| | | | 293,273 |
|
Inventory | 294,454 |
| | — |
| | | | 294,454 |
|
Prepaid Expense | 6,280 |
| | 602,482 |
| | | | 608,762 |
|
Current Assets | 594,007 |
| | 906,586 |
| | | | 1,500,593 |
|
Other Assets | | | | | | | — |
|
Investments | 26,875 |
| | — |
| | | | 26,875 |
|
Property and Equipment, net | 147,802 |
| | — |
| | | | 147,802 |
|
Intangible Assets | — |
| | 105,000 |
| | | | 105,000 |
|
Total Assets | 768,684 |
| | 1,011,586 |
| | | | 1,780,270 |
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | |
|
|
Current Liabilities | | | | | | |
|
|
Accounts payable and accrued liabilities | 1,275,852 |
| | 195,446 |
| | | | 1,471,298 |
|
Loan Payable | 180,958 |
| | 25,000 |
| | | | 205,958 |
|
Accounts Payable – Related Party | — |
| | 63,955 |
| | | | 63,955 |
|
Capital Lease Obligations, current | 45,660 |
| | — |
| | | | 45,660 |
|
Line of Credit | 134,190 |
| | — |
| | | | 134,190 |
|
Convertible debt, net unamortized discount $124,149 | — |
| | 181,240 |
| | | | 181,240 |
|
Derivative liabilities | — |
| | 650,135 |
| | | | 650,135 |
|
Total Current Liabilities | 1,636,660 |
| | 1,115,776 |
| | | | 2,752,436 |
|
Capital Lease Obligations, Noncurrent | 38,849 |
| | — |
| | | | 38,849 |
|
Long-term Debt | — |
| | 1,000,000 |
| | | | 1,000,000 |
|
Total Liabilities | 1,675,509 |
| | 2,115,776 |
| | | | 3,791,285 |
|
Stockholders’ Deficit | | | | | | |
|
|
Series A Preferred stock, $0.001 par value, 25,000,000 shares authorized, 15,000,000 outstanding at July 31, 2014 | — |
| | 15,000 |
| | | | 15,000 |
|
Series B Preferred stock, $0.001 par value, 2,000,000 shares authorized, 436,000 outstanding at July 31, 2014 | — |
| | 436 |
| | | | 436 |
|
Common stock, $0.001 par value, 3,500,000,000 shares authorized, 2,443,428,123 outstanding at July 31, 2014 | — |
| | 2,443,428 |
| | | | 2,443,428 |
|
Additional paid-in capital | 85,470 |
| | 16,839,811 |
| | | | 16,925,281 |
|
Accumulated Other Comprehensive Income (Loss) | (73,125 | ) | | — |
| | | | (73,125 | ) |
Accumulated deficit | (919,170 | ) | | (20,359,884 | ) | | | | (21,279,054 | ) |
Total Parent's Stockholders’ Deficit | (906,825 | ) | | (1,061,209 | ) | | | | (1,968,034 | ) |
Noncontrolling Interest | — |
| | (42,981 | ) | | | | (42,981 | ) |
Total Stockholders' Deficit | (906,825 | ) | | (1,104,190 | ) | | | | (2,011,015 | ) |
Total Liabilities and Stockholders’ Deficit | 768,684 |
| | 1,011,586 |
| | | | 1,780,270 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
Minerco Resources, Inc.
Pro Forma Condensed Combined Statements of Operations
(unaudited)
|
| | | | | | | | | | | | |
| July 31, 2014 Avanzar Sales and Distributions, LLC (Acquiree) | |
July 31, 2014 Minerco (Acquiror) | |
Pro Forma Adjustments | |
Pro Forma Combined |
Sales: | | | | | | | |
Products | 2,040,360 |
| | 12,381 |
| | — |
| | $ | 2,052,741 |
|
Services | 357,606 |
| | | | — |
| | $ | 357,606 |
|
Total Sales | 2,397,966 |
| | 12,381 |
| | — |
| | $ | 2,410,347 |
|
Cost of Goods Sold | 1,630,661 |
| | 10,193 |
| | — |
| | 1,640,854 |
|
Gross Profit (Loss) | 767,305 |
| | 2,188 |
| | — |
| | 769,493 |
|
| | | | | | | |
Depreciation | 43,724 |
| | — |
| | — |
| | 43,724 |
|
General and Administrative | 1,096,402 |
| | 871,988 |
| | — |
| | 1,968,390 |
|
Total Operating Expenses | 1,140,126 |
| | 871,988 |
| | — |
| | 2,012,114 |
|
| | | | | | | |
Other Income (Expenses): | | | | | | | |
Interest Expense | (50,985 | ) | | (123,634 | ) | | — |
| | (174,619 | ) |
Contract Termination Fees | 7,673 |
| | — |
| | — |
| | 7,673 |
|
Gain on Settlement of Debt | — |
| | 246 |
| | — |
| | 246 |
|
Gain/(Loss) on Derivative Liability | — |
| | (7,983,507 | ) | | — |
| | (7,983,507 | ) |
Gain/(Loss) on Debt Exchange for Equity | — |
| | (2,651,839 | ) | | — |
| | (2,651,839 | ) |
Accretion of discount on convertible notes | — |
| | (990,184 | ) | | — |
| | (990,184 | ) |
Total Other Expenses | (43,312 | ) | | (11,748,918 | ) | | — |
| | (11,792,230 | ) |
Net Income (Loss) | (416,133 | ) | | (12,618,718 | ) | | — |
| | (13,034,851 | ) |
Unrealized Loss on Investments | (73,125 | ) | | — |
| | — |
| | (73,125 | ) |
Total Comprehensive Loss | (489,258 | ) | | (12,618,718 | ) | | — |
| | (13,107,976 | ) |
Net Loss Per Common Share – Basic and Diluted | | | (0.01 | ) | | | | (0.01 | ) |
Weighted Average Common Shares Outstanding | | | 1,854,746,508 |
| | | | 1,854,746,508 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
Minerco Resources, Inc.
Notes to the Pro Forma Condensed Combined Financial Statements
Note 1 Background Information
On October 24, 2014, through its subsidiary, Level 5 Beverage Company, Inc. ("Level 5"), Minerco Resources, Inc. ("the Company") entered into an Agreement (the “Membership Interest Purchase Agreement”) with Avanzar Sales and Distribution, LLC ("Avanzar") to purchase a thirty percent (30%) equity position and fifty-one percent (51%) voting interest for the Purchase Price of $500,000 with an option to acquire an additional twenty-one percent (21%) interest and Second Option to acquire up to seventy-five percent (75%) of Avanzar. The acquisition broadens the Company’s base in the beverage industry through vertical integration. The acquisition was accounted for in accordance with ASC 805, Business Combinations. On February 10, 2015, the Company completed the initial acquisition initiated in October, 2014. On March 24, 2015, Level 5 exercised its Initial Purchase Option to acquire an additional twenty-one percent (21%). The consideration payable by Level 5 to Avanzar for the Initial Purchase Option to be acquired is an aggregate of Four Hundred Thousand Dollars ($400,000), of which Two Hundred Thousand Dollars ($250,000) has been paid and the remaining balance of Two Hundred Thousand Dollars ($150,000), will be payable as follows: additional payments in amounts of at least Twenty-five Thousand Dollars ($25,000) payable every 30 days until the aggregate of Four Hundred Thousand U.S Dollars ($400,000) is paid in full no later than December 31, 2015. On April 30, 2015, Level 5 exercised Second Purchase Option to acquire an additional twenty-four percent (24%). The consideration payable to the existing members of Avanzar for the Second Purchase Option to be acquired shall be an aggregate of One Million Seventy Hundred Fifty Thousand Dollars ($1,750,000). The Company issued 336,543 shares of its Class C Preferred stock pursuant to the exercise of the Second Purchase Option to the six (6) existing members of Avanzar.
The pro forma condensed combined financial statements should be read in conjunction with the historical financial statements and accompanying notes of Avanzar and the historical consolidated financial statements and accompanying notes of Minerco Resources, Inc., included in our annual report in Form 10-K for the fiscal year ended July 31, 2014.
Note 2 Basis of Pro Forma Presentation
The unaudited pro forma condensed combined balance sheets and statements of operations as of July 31, 2014, are based on the historical financial statements of the Company and Avanzar, after giving effect to the Company’s acquisition of Avanzar on October 24, 2014, (initial 8-K was filed on October 24, 2014). The pro forma financial statements give effect to the merger as if it had occurred on July 31, 2014, with the resulting pro forma effects shown for the periods listed above.
In determining the valuation of goodwill, the Company is applying Accounting Standard Codifications 805, Business Combinations (“ASC 805”). The acquisition method of accounting is used for all business combinations and for an acquiror to be identified for each business combination. ASC 805 defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.
ASC 805 requires an entity:
|
| | |
| ● | to record separately from the business combination the direct costs, where previously these costs were included in the total allocated cost of the acquisition. |
|
| | |
| ● | to recognize the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date, at their fair values as of that date. |
|
| | |
| ● | to recognize as an asset or liability at fair value for certain contingencies, either contractual or non-contractual, if certain criteria are met. |
|
| | |
| ● | to recognize contingent consideration at the date of acquisition, based on the fair value at that date. |
The Company has made significant assumptions and estimates in determining the preliminary estimated purchase price and the preliminary allocation of the estimated purchase price in the unaudited pro forma condensed combined financial statements. These preliminary estimates and assumptions are subject to change as we finalize our purchase price assessment and the valuation of the intangible assets acquired. These changes could result in material variances between our future financial results and the amounts presented in these unaudited pro forma condensed combined financial statements, including variances in fair values recorded, as well as expenses and cash flows associated with these items.
The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of our consolidated results of operations or financial position that would have been reported had the Avanzar acquisition been completed as of the dates presented, and should not be taken as a representation of our future consolidated results of operations or financial position.
Note 3 Acquisition of Avanzar and Allocation of Purchase Price
Avanzar is a consumer beverage and snack distributor and broker in Southern California.
Effective February 10, 2015, Avanzar closed its sale under the terms of a Membership Interest Purchase Agreement initiated in October 2014 with Level 5. A 30% equity stake and 51% voting interest in Avanzar were acquired for approximately $500,000.
The estimated sales price for the Company represents preliminary fair value estimates at the date of acquisition. Goodwill includes a preliminary estimate for the value of certain insurance contracts. These intangibles will be identified and valued for purposes of presenting intangible assets outside of the presentation for goodwill.
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