NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2015
AND 2014
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed
consolidated financial statements of Crown Marketing and Subsidiaries (the “Company”) have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended September
30, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016.
Going Concern
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has
not generated significant revenues and has incurred recurring net losses. For the three months ended September 30, 2015, the Company
incurred a net loss of $693,021 and used cash to fund operating activities of $117,663, and at September 30, 2015, had a shareholders’
deficit of $660,391. These factors create substantial doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company's management plans to continue
as a going concern revolve around its ability to achieve profitable operations, as well as raise necessary capital to pay ongoing
general and administrative expenses of the Company. The ability of the Company to continue as a going concern is dependent on securing
additional sources of capital and the success of the Company's plan. There is no assurance that the Company will be successful
in raising the additional capital or in achieving profitable operations.
Our cash needs for the three months ended September
30, 2015 were primarily met by a note payable of $500,000 from a company owned by our majority shareholder. As of September 30,
2015, we had a cash balance of $441,590. Our majority shareholder is providing all of our working capital and will continue to
do so until at least June 30, 2016. We will require approximately $1 million and up to 12 months to complete remediation and building
refit prior to being able to re-lease our warehouse space to customers.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Okra Energy,
Crown Laboratory and Crown Mobile, Inc., a joint venture that is 50% owed by the Company (See Note 7). Intercompany transactions
and accounts have been eliminated in consolidation.
Estimates
The preparation of the
financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities
at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates
include accounting for potential liabilities and the assumptions made in valuing stock instruments issued for services. Actual
results could differ from those estimates.
Revenues
We derive our revenue from various sources,
including sales of hardware products, which include cellular phones, sim cards and personal computers.
The
Company also
markets and sells Chinese herbal and other remedies in the People’s Republic of China.
The Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue is recognized for hardware
product sales upon transfer of title and risk of loss to the customer. We record reductions to revenue for estimated product returns
and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on contractual return
rights, historical sales returns, analysis of credit memo data and other factors known at the time. If actual future returns and
pricing adjustments differ from past experience and our estimates, adjustments to revenue reserves may be required.
Inventories
Inventories are stated at the lower of cost
(first-in, first-out) or market value. At September 30, 2015, inventories consisted primarily of recent purchase of vaping devices
and related supplies which the Company began selling subsequent to September 30, 2015.
Fair Value Measurements
Fair value measurements are determined using
authoritative guidance issued by the FASB, with the exception of the application of the guidance to non-recurring, non-financial
assets and liabilities as permitted. Fair value is defined in the authoritative guidance as the price that would be received to
sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the
inputs used in measuring fair value into three broad levels as follows:
Level 1
—
Quoted
prices in active markets for identical assets or liabilities.
Level 2
—
Inputs,
other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3
—
Unobservable
inputs based on the Company's assumptions.
The Company is required
to use observable market data if available without undue cost and effort.
The Company’s financial instruments include cash and accounts
payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.
Loss per Share
Basic earnings (loss) per share are computed
by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings
(loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the three months
ended September 30, 2015 and 2014, as there are no potential shares outstanding that would have a dilutive effect.
Stock-Based Compensation
The Company periodically grants stock options
and warrants to employees and non-employees in non-capital raising transactions as compensation for services rendered. The Company
accounts for stock option and stock warrant grants to employees based on the authoritative guidance provided by the Financial Accounting
Standards Board where the value of the award is measured on the date of grant and recognized over the vesting period. The Company
accounts for stock option and stock warrant grants to non-employees in accordance with the authoritative guidance of the Financial
Accounting Standards Board where the value of the stock compensation is determined based upon the measurement date at either a)
the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option or warrant grants
are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Segment Information
At September 30, 2015,
the Company had three reportable operating segments. The Marketing segment leases an 180,000 square foot facility which it plans
to sublease. The Mobile segment distributes prepaid SIM cards and wireless phones. The Laboratory segment develops and markets
Chinese herbal and other remedies in the People’s Republic of China.
The chief operating decision-maker
(“CODM”) evaluates performance, makes operating decisions and allocates resources based on the operating income of
each segment. The reporting segments follow the same accounting polices used in the preparation of the Company’s condensed
consolidated financial statements. Segment asset disclosure is not used by the CODM as a measure of segment performance since the
segment evaluation is driven by income (loss) from operations. As such, segment assets are not disclosed in the notes to the accompanying
combined consolidated financial statements.
Summarized financial information by segment
for the three months ended September 30, 2015, based on the Company’s internal financial reporting system utilized by the
Company’s chief operating decision maker, follows:
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
Mobile
|
|
Laboratory
|
|
Consolidated
|
Sales
|
|
$
|
—
|
|
|
$
|
2,605
|
|
|
$
|
71,297
|
|
|
$
|
73,902
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
60,629
|
|
|
|
60,629
|
|
Gross profit
|
|
|
—
|
|
|
|
2,605
|
|
|
|
10,668
|
|
|
|
13,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense-related
|
|
|
147,692
|
|
|
|
—
|
|
|
|
—
|
|
|
|
147,692
|
|
Selling, general and administrative
|
|
|
530,954
|
|
|
|
9,435
|
|
|
|
8,579
|
|
|
|
548,968
|
|
Income (loss) from operations
|
|
$
|
(678,646
|
)
|
|
$
|
(6,830
|
)
|
|
$
|
2,089
|
|
|
$
|
(683,387
|
)
|
For the three
months ended September 30, 2015, no single customer accounted for 10% or more of sales. The Company had foreign sales of $2,605
to one person located in the Peoples Republic of China. All other sales were domestic sales. For the three months ended September
30, 2014, there was only one segment, the Marketing segment, which recorded no revenues, $147,692 of rent expense (related party),
$11,101 of selling, general, and administrative expenses, and a net loss of $158,793.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive
revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace
it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue
based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective
for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods
beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the
impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In August 2014, the FASB issued Accounting
Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which
provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15
requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within
one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise
substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual periods
ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating
the impact the adoption of ASU 2014-15 on the Company’s financial statements and disclosures.
In June 2014, the FASB issued Accounting Standards
Update No. 2014-12, Compensation – Stock Compensation. The pronouncement was issued to clarify the accounting for share-based
payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The
pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 will not have a
significant impact on the Company’s consolidated financial position or results of operations.
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires an entity to present
all deferred tax assets and liabilities as non-current in a classified balance sheet. This guidance allows for adoption on either
a prospective or retrospective basis. The update becomes is effective for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Early adoption is permitted. The adoption of ASU
2015-17 will not have a significant impact on the Company’s consolidated financial position or results of operations.
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease
liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual
reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating
the impact of ASU 2016-02 on the Company’s financial statements and disclosures. ASI 2016-02 will require the recording of
a significant lease asset and lease liability when the Company adopts this accounting standard in 2019.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or is not believed by management to have a material impact on the Company's present or future consolidated
financial statements.
NOTE 3 – RELATED PARTY TRANSACTIONS
NOTES PAYABLE
|
|
September 30,
2015
|
|
June 30,
2015
|
Note payable, interest at 12% per annum, secured by essentially all assets of the Company, due July 31, 2017. The lender is Temple CB LLC (“Temple”), a limited liability company controlled by Jay Hooper, the Company’s President and majority shareholder
|
|
$
|
506,635
|
|
|
$
|
—
|
|
Note payable to Jay Hooper, due on demand and bears interest at 4%.
|
|
|
10,000
|
|
|
|
10,000
|
|
Sub-total
|
|
|
516,635
|
|
|
|
10,000
|
|
Less notes payable, current portion
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable, non-current
|
|
$
|
506,635
|
|
|
$
|
—
|
|
ADVANCES
As of September 30, 2015 and June 30, 2015, $106,239 and $71,262, respectively,
was due to the Company’s President and majority shareholder, Mr. Jay Hooper, for advances made to the Company to pay for
operating expenses. The advances are non-interest bearing and are due on demand.
LEASE OBLIGATION
Through its subsidiary, Crown Laboratory Inc.,
the Company leases a warehouse in El Monte, California. The warehouse is owned by Temple CB LLC, (“Temple CB”), a single
member limited liability company owned by the Company’s President and majority shareholder. The Company plans to sublease
the warehouse but will require approximately $1 million and up to 12 months to complete remediation and a building refit prior
to being able to re-lease the warehouse building to customers.
The lease commenced
December 2, 2013, terminates May 31, 2020, and requires monthly lease payments of $30,000 beginning June 1, 2014. The monthly lease
payment increases to $40,000 on June 1, 2015, $50,000 on June 1, 2016, $60,000 on June 1, 2017, and $70,000 on June 1, 2019. The
lease includes a period of free rent from December 2, 2013 to May 31, 2014. The lease is an operating lease. The Company recognizes
rent expense on a straight-line basis over the entire lease period. During the three months ended September 30, 2015 and 2014,
the Company recorded $147,692 of rent expense for each period, respectively. As of September 30, 2015 and June 30, 2015, the Company
recorded a deferred lease obligation of $563,077 and $535,384, respectively. In August, 2015, the lease was assigned to and assumed
by Crown Laboratory, Inc. As of September 30, 2015 and June 30, 2015, the Company owed $20,000 and $400,000, respectively, under
this lease obligation. During the three months ended
September 30, 2015, the Company issued
500,000 shares of its Series A Preferred Stock to Temple CB in satisfaction of $500,000 of accrued rent (see Note 4).
At September 30, 2015, the Company’s
minimum operating lease commitments for the next five fiscal years are summarized below.
Years Ending June 30,
|
|
Amount
|
Remainder of 2016
|
$
|
370,000
|
2017
|
|
610,000
|
2018
|
|
730,000
|
2019
|
|
840,000
|
2020 and beyond
|
|
770,000
|
Total
|
$
|
3,320,000
|
NOTE 4
–
CONVERTIBLE,
REDEEMABLE PREFERRED STOCK
During the three
months ended
September 30, 2015, the Company’s Board of Directors authorized the creation
of a series of preferred stock consisting of 1,000,000 shares designated as Series A Preferred Stock (the “Series A”).
The Series A is entitled to a dividend of 4%, when and as declared, and is entitled to a liquidation preference of $1 per share
plus unpaid dividends.
The Series A is redeemable at the option of the Company at any time,
in whole or in part, at a price of $1.00 per share, plus 4% per annum thereupon from the date of issuance (the “Stated Value”).
In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary, the Series A shall be entitled to a preferential amount equal to the Stated Value, prior to the holders of common
stock receiving any distribution.
Each share of Series A is automatically converted on the
Conversion Date into a number of shares of common stock of the Company at the initial conversion rate (the “Conversion Rate”),
which shall be the Stated Value as of the date of conversion divided by the Market Price. The Market Price for purposes of this
Section 5 shall be equal to the average closing sales price of the Common Stock over the 5 previous trading days.
The Series A is also subject to adjustments
to the Conversion Rate. If the common stock issuable on conversion of the Series A is changed into the same or a different number
of shares of any other class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than
a subdivision or combination of shares provided for above), the holders of the Series A shall, upon its conversion, be entitled
to receive, in lieu of the common stock which the holders would have become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have been subject to receipt by the holders if they had exercised their
rights of conversion of the Series A immediately before that change.
During the three
months ended
September 30, 2015, the Company issued 500,000 shares of its Series A to Temple
CB, a single member LLC owned by the Company’s majority shareholder, in satisfaction of $500,000 of accrued rent (see Note
3). The Company plans to issue the remaining 500,000 authorized shares of its Series A preferred stock to Temple CB during the
second quarter of 2016 in satisfaction of additional accrued rent.
NOTE 5
–
SHAREHOLDERS
’
DEFICIT
During the three
months ended
September 30, 2015, the Company issued
75,000,000 shares of common stock to a consultant, which was valued at $525,000 based on the closing price of the Company’s
common stock on the date of the grant, and included in selling, general, and administrative expenses.
NOTE 6 – NON-CONTROLLING INTEREST
During 2015 the Company entered into a joint venture to create Crown
Mobile. Crown Mobile is in the business of selling mobile phones and sim cards and generated revenues of $2,605 during the three
months ended September 30, 2015 and makes up the Company’s Mobile Segment. The Company owns 50% of the joint venture while
two other owners own 35% and 15%, respectively. Based on the authoritative guidance of the FASB on consolidation, the Company determined
it should include Crown Mobile in its consolidated financial statements as a subsidiary since the Company has a controlling financial
interest and directs the operating activities of Crown Mobile. The non-controlling interest represents the minority stockholders’
share of 50% of the equity of Crown Mobile. On December 15, 2015, the Board of Directors of the Company approved the sale of the
Company’s interest in Crown Mobile for $25,000, which approximates the Company’s basis in Crown Mobile on that date.
The table below reflects a reconciliation of the equity attributable
to non-controlling interest:
|
|
For the
Three Months Ended
September 30, 2015
|
Beginning balance, June 30, 2015
|
|
$
|
5,442
|
|
Net loss of Crown Mobile attributable to non-controlling interest
|
|
|
(3,415
|
)
|
Ending balance, September 30, 2015
|
|
$
|
2,027
|
|