Washington, D.C. 20549
The number of shares outstanding of the
registrant’s $0.001 par value Common Stock as of January 3, 2017, was 300,000,000 shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 - ORGANIZATION
BUSINESS
Cabinet Grow, Inc. (the “Company”
or “CG-NV”) began operations in California in 2008, doing business as Universal Hydro (“Hydro”). Prior
to April 2014, the Company was a sole proprietorship owned by its’ former chief operating officer and stockholder. On April
28, 2014, the Company registered with the Secretary of State of California as Cabinet Grow, Inc. (CG-CA), and all of the business,
assets and liabilities of Hydro were assigned to CG-CA. On May 14, 2014, the Company filed Articles of Incorporation with the Nevada
Secretary of State. On May 15, 2014, CG-CA merged with CG-NV, with CG-NV being the surviving entity. All references herein to CG
or the Company refer to CG-NV, CG-CA and Hydro.
On November 24, 2015, the Company announced
as a result of a working capital deficiency the Company has significantly reduced operations, including the layoff of all non-executive
employees and has stopped taking new orders from customers.
On December 31, 2015, the Company agreed to
purchase a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company
(“
Quasar
”), from Tonaquint, Inc., a Utah corporation (“
Seller
”). The Company has agreed to
purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000 pursuant
to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”). Quasar and the Seller are
related parties to Chicago Venture Partners, L.P. (“CVP”), the Company’s main lender (See Note 4).
The Company paid for the Purchase by delivering
to Seller at the closing a Secured Promissory Note (the “
Note
”). The Note is secured by the Company’s
pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement (the “
Pledge Agreement
”)
and by a first position Deed of Trust, Security Agreement and Financing Statement in favor of Seller encumbering certain real property
owned by Quasar
(the “
Trust Deed
,” and together with the Purchase Agreement, the Note, the Pledge Agreement,
and all other documents entered into in conjunction therewith, the “
Purchase Documents
”).
In conjunction with the Purchase, other than
the sale of 3 cabinets in January 2016, the Company ceased its prior business as a manufacturer and distributor of cabinet-based
horticultural systems. The Company now operates in the land leasing business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are prepared
in accordance with Generally Accepted Accounting Principles in the United States of America.
EMERGING GROWTH COMPANY
We qualify as an “emerging
growth company” under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage
of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
USE OF ESTIMATES
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments
with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Substantially all individuals pay in advance
of their product being shipped. During the year ended December 31, 2015, the Company occasionally shipped product with payment
terms of 30 to 60 days to retailers. For these shipments, the Company records accounts receivable from amounts due from its customers
upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables
are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an
amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the
collectability of the accounts and prior loss experience. For the years ended December 31, 2015 and 2014, management’s evaluation
did not require any allowance for uncollectible receivables.
INVENTORY
Inventory is valued at the lower of cost or
market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving
inventory is made based on management analysis or inventory levels and future sales forecasts. Based on management’s analysis
as of December 31, 2015, the Company recorded a write down of the remaining inventory of $31,598 (included in cost of sales for
the year ended December 31, 2015). Inventory of $48,761 as of December 31, 2014, was comprised of raw materials.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment
when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on events and
changes in circumstances, during the year ended December 31, 2015, the Company reviewed the carrying amount of leasehold improvements
and other equipment and determined that the carrying amount may not be recoverable and accordingly recognized an impairment loss
of $43,022 for the year ended December 31, 2015.
PROPERTY AND EQUIPMENT
Property and equipment are stated
at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives of the assets. The estimated
useful lives of property and equipment are as follows:
Manufacturing equipment
|
10 years
|
Office equipment and furniture
|
7 years
|
Computer hardware and software
|
3 years
|
The Company's land, property and equipment
and leasehold improvements consisted of the following at December 31, 2015 and 2014:
|
|
2015
|
|
2014
|
Furniture and Equipment
|
|
$
|
3,318
|
|
|
$
|
26,937
|
|
Manufacturing equipment
|
|
|
826
|
|
|
|
7,396
|
|
Software
|
|
|
2,912
|
|
|
|
15,830
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
33,503
|
|
Land
|
|
|
180,000
|
|
|
|
—
|
|
Accumulated depreciation
|
|
|
(4,373
|
)
|
|
|
(13,026
|
)
|
Balance
|
|
$
|
182,683
|
|
|
$
|
70,640
|
|
In December 2015, based upon the Company having
ceased its prior business as a manufacturer and distributor of cabinet-based horticultural systems, the Company wrote off $43,022
(included in operating expenses for the year ended December 31, 2015) of fixed assets, including $34,849 of leasehold improvements.
Depreciation expense of $28,958 and $10,798 was recorded during each of the years ended December 31, 2015 and 2014.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria are met (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue during the period in which the product is shipped. When the Company has received payment
from a customer the amount received is shown as customer deposits until it is shipped and invoiced. As of December 31, 2015, customer
deposits were $2,500.
SHIPPING AND HANDLING
Shipping and handling costs billed to customers
are recorded in sales. For the years ended December 31, 2015 and 2014, shipping and handling costs billed to customers was $66,918
and $65,207, respectively. Shipping costs incurred by the Company of $60,305 and $73,775 for the years ended December 31, 2015
and 2014, respectively, are recorded in cost of sales.
RESEARCH AND DEVELOPMENT
Expenditures for research and development
are charged to expense as incurred. Such expenditures amount to $23,780 and $33,977 for the years ended
December 31, 2015 and 2014, respectively.
ADVERTISING
The Company records advertising costs as incurred.
For the years ended December 31, 2015 and 2014, advertising expense was $279,700 and $250,177, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under
a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value,
distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting
entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received
to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information
generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers
the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity
to identify transactions that are not orderly.
The highest priority is given to unadjusted
quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Financial instruments are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
The three hierarchy levels are defined
as follows:
Level 1 – Quoted prices
in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices
for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations
that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect
the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that
applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in
the credit default swap market.
The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts
of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate
market interest rates of these instruments. The Company’s derivative liability (conversion option and warrant derivative)
is valued using the level 3 inputs. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
The following table represents the Company’s
financial instruments that are measured at fair value on a recurring basis as of December 31, 2015 and December 31, 2014 for each
fair value hierarchy level:
December 31, 2015
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,648,255
|
|
|
$
|
1,648,255
|
|
December 31, 2014 (Restated)
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
581,373
|
|
|
$
|
581,373
|
|
INCOME TAXES
Prior to May 2014,
the Company was organized as a sole proprietorship and was not subject to income taxes. Rather, the Company’s sole
stockholder was subject to income taxes on the Company’s taxable activity. In May 2014, the Company became subject
to income taxes and will be subject to Federal and State income taxes as a corporation.
The Company accounts for income taxes in accordance
with ASC 740-10, Income Taxes. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects,
calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a deferred tax
asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest
and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid,
any interest or penalties.
Uncertain tax positions are measured and recorded
by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be
recognized or continue to be recognized.
EARNINGS PER SHARE
The Company reports earnings (loss) per share
in accordance with ASC 260, "Earnings per Share." Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities
outstanding during the period. During the years ended December 31 2015 and 2014, 199,917857 and 9,117,500 shares of common stock,
respectively, underlying convertible debt and warrants have been excluded from the computation diluted earnings per share because
they are antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued
by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or
future financial statements.
NOTE 3 – PURCHASE CONCENTRATION AND
CONCENTRATION OF CREDIT RISK
CASH
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company maintains cash balances at one financial institution,
which is insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts.
PURCHASES
During the year ended December 31, 2015 and 2014, the Company made
significant purchases from three suppliers as follows:
Supplier
|
|
Percent of
Purchases
2015
|
|
Percent of
Purchases
2014
|
|
Accounts Payable
Balance as of
December 31, 2015
|
|
A
|
|
|
|
29
|
%
|
|
|
25
|
%
|
|
$
|
3,247
|
|
|
B
|
|
|
|
20
|
%
|
|
|
18
|
%
|
|
$
|
10,410
|
|
|
C
|
|
|
|
18
|
%
|
|
|
13
|
%
|
|
$
|
—
|
|
NOTE 4 – CONVERTIBLE NOTES PAYABLE
2014 Convertible Notes
In May and June 2014 (the “May and June
2014 Notes”), the Company issued 3 convertible promissory notes, each in the amount of $22,000. The Company received proceeds
of $60,000 in the aggregate. Each of the May and June 2014 Notes matured on the six month anniversary of its issuance date, carried
interest at 10% and contained a 9.1% original issue discount (“OID”). The OID was amortized over the earlier of the
conversion of the note or the maturity date. The holders of the note can convert the notes into shares of common stock at any time
from the date of issuance to maturity at $0.20 per share. In December 2014, the Company received conversion notices from the holders
of the May and June 2014 Notes and accordingly, recorded the conversion of $66,000 of principal and $4,177 of accrued and unpaid
interest of the three convertible promissory notes and 352,242 shares of common stock to be issued at a conversion price of $0.20
per share. The shares were issued in January 2015.
2015 Convertible Notes
The Company issued three convertible promissory
notes to investors other than CVP, in August 2015 (the “August 2015 Notes”) in the amounts of $86,250, $11,500 and
$46,000, respectively. The Company received proceeds of $75,000, $10,000 and $40,000. The August 2015 Notes mature on the six month
anniversary of its issuance date, carries interest at 10% and contained a 10% original issue discount (“OID”). The
Company recorded the OID of $18,750 as a discount to the Note, to be amortized to interest expense over the life of the Note. Each
of the holders of the August 2015 Notes can convert the note into shares of common stock at any time from the date of issuance
to maturity at $0.20 per share. Accordingly, the Company received a conversion notice from each holder of the August 2015 Notes
and issued in the aggregate 718,750 shares of restricted common stock. The company valued and recorded an initial derivative liability
of $168,930 using the Black Scholes valuation methodology of which $125,000 was recorded as a discount to the August Notes and
the remaining $43,930 was recorded as expense. Upon conversion of the August Notes the Company reclassified $168,930 of the derivative
liability to additional paid in capital.
On September 30, 2015, (the “September
2015 Note”) the Company issued a convertible promissory note in the amount of $5,750. The Company received proceeds of $5,750.
The September 2015 Note matures on the six month anniversary of its issuance date and carries interest at 10%. The holder of the
September 2015 Note can convert the note into shares of common stock at any time from the date of issuance to maturity at $0.20
per share. On September 30, 2015, the Company received a conversion notice from the holder of the September 2015 Note to convert
the note amount into 28,750 shares of restricted common stock. The shares were certificated on October 27, 2015. The company valued
and recorded an initial derivative liability of $6,877 using the Black Scholes valuation methodology of which $5,750 was recorded
as a discount to the September Note and the remaining $1,127 was recoded as expense. Upon conversion of the September Note the
Company reclassified $6,877 of the derivative liability to additional paid in capital.
On October 26, 2015, (the “October 2015
Note”) the Company issued a convertible promissory note in the amount of $11,500. The Company received proceeds of $10,000.
The October 2015 Note matures on the six month anniversary of its issuance date, carries interest at 10% and contained a 10% OID.
The Company recorded the OID of $1,500 as a discount to the Note, to be amortized to interest expense over the life of the Note.
The holder of the October 2015 Note can convert the note into shares of common stock at any time from the date of issuance to
maturity at $0.20 per share. On October 26, 2015, the Company received a conversion notice from the holder of the October 2015
Note to convert the note amount into 57,500 shares of restricted common stock. The shares were certificated on October 27, 2015.
The company valued and recorded an initial derivative liability of $13,773 using the Black Scholes valuation methodology of which,
$10,000 was recorded as a discount to the October Note and the remaining $3,773 was recorded as expense. Upon conversion of the
October Note the Company reclassified $13,773 of the derivative liability to additional paid in capital.
CHICAGO VENTURE PARTNERS, RELATED PARTY
Convertible Note
On June 3, 2014, the Board authorized the Company
to enter into a Securities Purchase Agreement (“SPA”) with Chicago Venture Partners, L.P. (“CVP”). Pursuant
to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory Note in the principal amount of $1,657,500 (the
“Note”).
On June 6, 2014, the Company executed the SPA
with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500 (which includes CVP’s legal expenses
in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000 paid in cash on June 11, 2014 (the “Closing
Date”), two $250,000 secured promissory notes and two $250,000 promissory notes (the “Investor Notes”), aggregating
$1,000,000, bearing interest at the rate of 10% per annum. The Investor Notes are due 30 months from the Closing Date and may be
prepaid, without penalty. Advances received, OID charged and deferred financing costs incurred to CVP are as follows:
Date
|
|
Funded
Amount
|
|
OID
|
|
Other
|
|
Convertible
Note Issued
|
|
6/11/14
|
|
$
|
500,000
|
|
|
$
|
50,000
|
|
|
$
|
7,500
|
|
|
$
|
557,500
|
|
|
10/15/14
|
|
|
62,500
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
68,750
|
|
|
11/17/14
|
|
|
62,500
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
68,750
|
|
|
12/19/14
|
|
|
35,000
|
|
|
|
3,500
|
|
|
|
—
|
|
|
|
38,500
|
|
|
Balances 12/31/14
|
|
|
|
660,000
|
|
|
|
60,000
|
|
|
|
7,500
|
|
|
|
733,500
|
|
|
3/18/15
|
|
|
65,000
|
|
|
|
6,500
|
|
|
|
—
|
|
|
|
71,500
|
|
|
4/14/15
|
|
|
22,500
|
|
|
|
2,250
|
|
|
|
—
|
|
|
|
24,750
|
|
|
4/23/15
|
|
|
25,500
|
|
|
|
2,550
|
|
|
|
—
|
|
|
|
28,050
|
|
|
5/20/15
|
|
|
30,000
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
33,000
|
|
|
6/22/15
|
|
|
20,000
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
22,000
|
|
|
9/21/15
|
|
|
45,000
|
|
|
|
4,500
|
|
|
|
7,500
|
|
|
|
57,000
|
|
|
November 2015
|
|
|
|
28,886
|
|
|
|
2,889
|
|
|
|
—
|
|
|
|
31,775
|
|
|
12/9/15
|
|
|
—
|
|
|
|
—
|
|
|
|
270,057
|
|
|
|
270,057
|
|
|
December 2015
|
|
|
|
6,250
|
|
|
|
625
|
|
|
|
—
|
|
|
|
6,875
|
|
|
Balances 12/31/15
|
|
|
$
|
928,136
|
|
|
$
|
92,814
|
|
|
$
|
285,057
|
|
|
$
|
1,306,007
|
|
The funded amounts in November and December
2015, were made directly to various vendors from CVP. The Company has recorded only the funded amounts and the associated costs
as convertible notes payable and has also not recorded the $643,177 remaining balance of the Investor Notes issued by CVP to the
Company.
On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from the current noteholder regarding the December 2015 installment payment. Pursuant
to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,057.
The Note bears interest at the rate of 10%
per annum. All interest and principal must be repaid on the date that is 30 months after the Closing Date. The Note may be converted
at the option of the holder, on the date that is six months from the Trading Date (defined in the Purchase Agreement as the date
on which the Common Stock is first trading on an Eligible Market, but in any event the Company shall cause its Common Stock to
be trading on an Eligible Market within nine months of the Closing Date of June 11, 2014) or at any time thereafter at a conversion
price of $0.1976. The conversion price is equal to $6,500,000 divided by 33,000,000 (the amount of fully diluted shares of Common
Stock of the Company on the date the Company filed its’ Registration Statement). If the holder funds $1,500,000 and elects
to convert the Note into Common Stock, the number of shares issuable upon conversion will be 8,287,500. In the event the Company
elects to prepay all or any portion of the Company Note, the Company is required to pay to CVP an amount in cash equal to 125%
multiplied by the sum of all principal, interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued
and unpaid interest under the Company Note into 253,846 shares of common stock. The Company also reduced derivative liabilities
for the fair value of the conversion of $70,658 and reclassified the amount to additional paid in capital.
Initially, the Company determined that the
conversion feature of the convertible note did not meet the criteria of an embedded derivative and therefore the conversion feature
was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price and
no active market for the Company’s common stock. Since the convertible note included an embedded conversion feature that
did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether it meets the definition
of a beneficial conversion feature (“BCF”) within the scope of ASC 470-20, “Debt with Conversion and Other Options”,
and determined that a BCF existed. From January 1, 2015, through July 12, 2015, representing the date prior to the Company becoming
a public company, the Company received $163,000 in new funding and increased the Note by $179,300 (including $16,300 of OID) and
recorded a discount on the Note in the amount of $179,300, to be amortized to interest expense over the life of the Note The Company
became trading as a public Company on July 13, 2015, and on that date the Company determined that the conversion feature of the
Note represented an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly,
on July 13, 2015, the Note was not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated
from the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments for
the fundings of the Note that occurred prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated
balance sheet with the corresponding amount recorded as a discount to the Note. Such discount is being amortized from the date
of issuance to the maturity date of the Note. The change in the fair value of the liability for derivative contracts are recorded
in other income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet. The embedded feature included in the Note resulted in an additional initial debt discount of $233,500
and initial derivative liability of $1,474,840 and an initial derivative liability expense of $1,241,340 was recorded.
Additionally,
from July 13, 2015, through the year ended December 31, 2015, the Company received or was the beneficiary of $105,137 in new fundings
or direct payments to vendors from CVP and increased the Company Note by $123,151 including $18,014 of OID, to be amortized to
interest expense over the life of the Note. The Company recorded an initial derivative liability of $151,535, a discount against
the Note in the amount of $98,900, to be amortized into interest expense over the term of the Note and an initial derivative liability
expense of $52,635. Lastly, as described above, the Company was in default of the Note and incurred a default penalty of $270,057.
The Company recorded an initial discount to reflect the derivative liability associated with the default, in the amount of $205,431.
Amortization of the Note discount for the year ended December 31, 2015 was $579,980.
The carrying amount of the Note as of December
31, 2015 and 2014, was $774,820 and $357,478, respectively, net of unamortized discounts of $531,187 and $376,022, respectively.
As security for the Note, the Company’s
CEO and COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). The pledge expired upon the shares of
common stock of the Company being publicly traded and listed or designated for quotation on any of The New York Stock Exchange,
NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board, the OTCQX,
or the OTCQB.
Pursuant to the terms of the Note, the Company
was required to deliver the Installment Amount (as defined in the Note) on or before each Installment Date (as defined in the Note)
until the Note was repaid. The Company failed to deliver the Installment Amount in June 2015, July 2015 and August 2015 (each,
a “Breach” and collectively, the “Breaches”). Each such Breach would constitute a separate event of default
pursuant to the terms of the Note if so declared by the Lender.
On September 10, 2015, the Company entered
into a forbearance and standstill agreement (the “Forbearance and Standstill Agreement”) with CVP and Matt Lee and
Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing remedies under the Note.
Pursuant to the terms of the Forbearance and
Standstill Agreement, CVP agreed to refrain and forbear from exercising and enforcing its remedies with respect to the Breaches
until the earliest occurrence of (a) any breach of the Forbearance and Standstill Agreement, or (b) any event of default after
the effective date of the Forbearance and Standstill Agreement other than the Breaches. Assuming that no additional events of default
occur under the Note and no breaches of the Forbearance and Standstill Agreement occur, CVP agreed, for a period of 90 days from
September 10, 2015 (the “Standstill Period”), that it will not seek to convert any portion of the outstanding balance
of the Note without the Company’s prior written consent, nor will the Company be required to deliver any Installment Amount
to CVP during the Standstill Period.
In addition, CVP agreed that for a period of
180 days following September 10, 2015 (the “Modified Conversion Period”), CVP’s conversion price shall be equal
to $0.40 per share, and that during the Modified Conversion Period, CVP will not made any conversions without the Company’s
prior written consent. Also, any conversion amount applicable to any CVP conversion made during the Modified Conversion Period
will automatically be applied toward and reduce the next Installment Amount due and payable to CVP. Upon conclusion of the Modified
Conversion Period, CVP’s conversion rights set forth in the Note shall revert to the terms and conditions set forth in Note.
Pursuant to the terms of the Forbearance and
Standstill Agreement, the next Installment Date will be the date that is 90 days from the date of the Forbearance and Standstill
Agreement and each subsequent Installment Date will be on the same day of each month thereafter until the Note’s maturity
date. In addition, the Installment Amount due on the next three Installment Dates shall be equal to $50,000.
The Company agreed that so long as the Note
remains outstanding and the warrant issued to CVP in connection with the Note is not fully exercised or expired pursuant to its
terms, the Company will not (i) issue any new shares of Class A preferred stock, (ii) issue any debt, (iii) issue other securities
that have redemption rights, rights of first refusal, preemptive rights or similar rights not associated with the Company’s
common stock, or (iv) consummate any transaction pursuant to Section 3(a)(9) or 3(a)(10) of the Securities Act of 1933, as amended,
equity line of credit or financing arrangement or other transaction that involves issuing securities convertible into Company common
stock with a conversion price that varies with the market price of the common stock, without CVP’s prior written consent.
CVP granted to the Company the right to repurchase
the Note, the Warrant and the other transaction documents for $978,500 within 90 days of September 10, 2015. CVP also agreed to
pay to the Company $5,000, which payment will constitute a partial payment of the Investor Notes. The Company agreed to pay CVP
$7,500, which shall be added to and included as part of the outstanding balance of the Note.
A summary of the convertible note payable balance as of December
31, 2015 and 2014 is as follows:
|
|
2015
|
|
2014
|
Beginning balance
|
|
$
|
733,500
|
|
|
$
|
-0-
|
|
Convertible notes-newly issued
|
|
|
463,450
|
|
|
|
799,500
|
|
Debt default penalty
|
|
|
270,057
|
|
|
|
—
|
|
Conversion of convertible notes
|
|
|
(161,000
|
)
|
|
|
(66,000
|
)
|
Unamortized discount
|
|
|
(531,187
|
)
|
|
|
(376,022
|
)
|
Total
|
|
$
|
774,820
|
|
|
$
|
357,478
|
|
WARRANT
The Company also issued a five year warrant
to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid prices
in the 20 trading days immediately after becoming public (the “Market Price”). Since the Company was not public and
could not determine the Market Price, based on the current discounted cash flow valuation, the Company initially estimated that
CVP can purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share. As of December 31, 2015, based on
the Market Price, the Company estimated the number of shares that CVP can purchase to be 1,636,362.
Accounting Standard Codification “ASC”
815 –
Derivatives and Hedging
, which provides guidance on determining what types of instruments or embedded
features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating
the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the
accounting for warrants issued by the Company. As the detachable warrants issued with the Note do not have fixed settlement provisions
because their exercise prices may be lowered if the Company issues securities at lower prices in the future, we have concluded
that the warrants are not indexed to the Company’s stock and are to be treated as derivative liabilities.
The warrants were
valued using the Black-Scholes option pricing model. In order to calculate the fair value of the warrants, certain assumptions
were made regarding components of the model, including the closing price of the underlying common stock, risk-free interest rate,
volatility, expected dividend yield, and expected life. Changes to the assumptions could cause significant adjustments to valuation.
Since the Company was not public, an estimated a volatility factor utilizing an average of comparable published volatilities of
peer companies was utilized. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant
for treasury securities of similar maturity. The warrants associated with the Note were initially valued and recorded a derivative
liability of $577,100 using the Black-Scholes valuation methodology and the Company also recorded an initial derivative liability
expense of $77,100 and a discount to the Note of $500,000. Amortization of the warrant discount for the years ended December 31,
2015 and 2014, was $376,022 and $123,968, respectively.
On December 31, 2014, the Company revalued
the warrant at $581,373 using the Black- Scholes option pricing model and recorded an additional derivative liability expense
of $4,273 for the year ended December 31, 2014. On December 31, 2015, the Company revalued the warrant at $13,700 using the Black-
Scholes option pricing model and recorded a credit to derivative liability expense of $567,673 for the year ended December 31,
2015 and reduced the derivative liability on the balance sheet as of December 31, 2015.
NOTE 5 – DERIVATIVE LIABILITIES
A summary of the convertible note and derivative
activity for the year ended December 31, 2015, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liability expense
|
|
|
|
|
Initial
Fair Value
|
|
|
|
Change
in Fair Value
|
|
|
|
Conversions
|
|
|
|
Other
day 1 discounts
|
|
|
|
Initial
Note discount
|
|
|
|
Amortization
|
|
|
|
Initial
expense
|
|
|
|
Fair
Value Change
|
|
CVP Warrant
|
|
|
|
|
|
|
(567,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(376,022
|
)
|
|
|
|
|
|
|
(567,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CVP 1/1-7/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,300
|
|
|
|
163,000
|
|
|
|
(79,745
|
)
|
|
|
0
|
|
|
|
|
|
CVP 7/3/15
|
|
|
1,474,840
|
|
|
|
(300,144
|
)
|
|
|
|
|
|
|
—
|
|
|
|
233,500
|
|
|
|
(81,989
|
)
|
|
|
1,241,340
|
|
|
|
(300,144
|
)
|
CVP 7/13-12/31
|
|
|
151,535
|
|
|
|
63,051
|
|
|
|
(70,659
|
)
|
|
|
18,014
|
|
|
|
98,900
|
|
|
|
(28,852
|
)
|
|
|
52,635
|
|
|
|
63,051
|
|
CVP Default
|
|
|
205,431
|
|
|
|
110,501
|
|
|
|
|
|
|
|
|
|
|
|
205,431
|
|
|
|
(13,371
|
)
|
|
|
0
|
|
|
|
110,501
|
|
Aug Note
|
|
|
175,807
|
|
|
|
|
|
|
|
(175,807
|
)
|
|
|
18,750
|
|
|
|
10,750
|
|
|
|
(149,500
|
)
|
|
|
45,057
|
|
|
|
—
|
|
Sept Note
|
|
|
6,877
|
|
|
|
|
|
|
|
(6,877
|
)
|
|
|
—
|
|
|
|
5,750
|
|
|
|
(5,750
|
)
|
|
|
1,127
|
|
|
|
—
|
|
Oct Note
|
|
|
13,773
|
|
|
|
|
|
|
|
(13,773
|
)
|
|
|
1,500
|
|
|
|
10,000
|
|
|
|
(11,500
|
)
|
|
|
3,773
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,021,387
|
|
|
|
(694,265
|
)
|
|
|
(260,240
|
)
|
|
|
54,564
|
|
|
|
806,376
|
|
|
|
(707,925
|
)
|
|
|
1,378,058
|
|
|
|
(694,265
|
)
|
The change in the fair value of the liability
for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each
quarter, with the offset to the derivative liability on the balance sheet.
A summary of the derivative liability balance as of December 31,
2015 is as follows:
Beginning Balance
|
|
$
|
581,373
|
|
Initial Derivative Liability
|
|
|
2,021,387
|
|
Fair Value Change
|
|
|
(694,265
|
)
|
Reduction for conversions
|
|
|
(260,240
|
)
|
Ending Balance
|
|
$
|
1,648,255
|
|
The fair value on July 13, 2015 (the going
public date) and the commitment dates for the Note fundings from July 13, 2015 through December 31, 2015, and the re-measurement
date for the Company’s derivative liabilities were based upon the following management assumptions:
|
|
|
Commitment Date
|
|
|
|
Re-Measurement Date
|
Expected dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
94%-554%
|
|
|
|
519
|
%
|
Expected term
|
|
|
.88-1.35 years
|
|
|
|
.88 years
|
|
Risk free interest
|
|
|
.38%-.59%
|
|
|
|
.56
|
%
|
Since the Company did not have a sufficient trading history, an
estimated a volatility factor utilizing an average of comparable published volatilities of peer companies was utilized.
NOTE 6 – RELATED PARTY TRANSACTIONS
NOTE PAYABLE, STOCKHOLDER
For the years ended December 31, 2015 and 2014,
a stockholder loaned the Company various amounts for Company expenses. Included in the advances and repayments that follow is the
activity from several credit cards that are in the name of the stockholder but were used for Company purposes. The terms of the
note include an interest rate of 15% per annum and monthly payments beginning May 15, 2014 of $1,500 through March 15, 2015 and
the balance due in a balloon payment on or before April 15, 2015. Interest expense of $950 and $898 was recorded for the years
ended December 31, 2015 and 2014, respectively. As of December 31, 2015, accrued and unpaid interest of $3,625 is included in accounts
payable and accrued liabilities, stockholders. The activity for the years ended December 31, 2015 and 2014 is as follows:
|
|
2015
|
|
2014
|
Beginning balance
|
|
$
|
6,168
|
|
|
$
|
57,744
|
|
Advances
|
|
|
6,314
|
|
|
|
52,748
|
|
Payments
|
|
|
—
|
|
|
|
(104,324
|
)
|
Ending balance
|
|
$
|
12,482
|
|
|
$
|
6,168
|
|
NOTE PAYABLE, RELATED PARTY
On December 31, 2015, the Company agreed to
purchase a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company
(“
Quasar
”), from Tonaquint, Inc., (“Tonaquint”) a Utah corporation (“
Seller
”).
Tonaquint is a related party to CVP as the same person is the control person of both Tonaquint and CVP. The Company has agreed
to purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000 pursuant
to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”).
The Company paid for the Purchase by delivering
to Seller at the closing a Secured Promissory Note (the “
Note
”). The Note is secured by the Company’s
pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement (the “
Pledge Agreement
”)
and by a first position Deed of Trust, Security Agreement and Financing Statement in favor of Seller encumbering certain real property
owned by Quasar
(the “
Trust Deed
,” and together with the Purchase Agreement, the Note, the Pledge Agreement,
and all other documents entered into in conjunction therewith, the “
Purchase Documents
”).
Also on December 31, 2015, Quasar entered into
a one year lease of the property to Miller Fabrication, LLC (“Miller”). Miller is controlled by the same individual
as Tonaquint and CVP.
The Company accounted for the transaction as
an asset acquisition since it did not qualify as a business combination under ASC 805-10 and has been accounted for as a regular
asset purchase.
OTHER RELATED PARTY MATTERS
For the years ended December 31, 2015 and 2014,
the Company paid its’ officers and former the following amounts:
|
|
2015
|
|
2014
|
Chief Executive Officer (“CEO”)
|
|
$
|
59,576
|
|
|
$
|
53,828
|
|
Chief Operating Officer (“COO”)
|
|
|
51,234
|
|
|
|
54,151
|
|
Chief Financial Officer (“CFO”)
|
|
|
55,650
|
|
|
|
39,000
|
|
Total
|
|
$
|
166,460
|
|
|
$
|
146,979
|
|
As of December 31, 2015 the Company owed $19,924,
$28,266 and $21,850 to the CEO, former COO and former CFO, respectively, for accrued and unpaid fees, and accordingly $70,040
is included in accounts payable and accrued liabilities, stockholders, on the December 31, 2015, balance sheet. Currently, Mr.
May is the sole officer.
On May 14, 2014, effective as of May 1, 2014,
the Board authorized the Company to engage the services of Venture Equity, LLC (“Venture Equity”). Mr. Barry Hollander,
the sole member of Venture Equity, was also named the Company’s Chief Financial Officer. The Company has agreed to compensate
Venture Equity $5,000 per month and issued 1,500,000 shares of the Company’s common stock, 750,000 shares of common stock
immediately vested and 750,000 shares of common stock vested on November 15, 2014. The Company recorded an expense of $150,000,
included in salaries and management fees for the year ended December 31, 2014, ($0.10 per share), based upon the Company’s
internal valuation on a discounted cash flow basis.
On May 7, 2015, the Board approved increases
to the salaries of each of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)
and Chief Operating Officer (“COO”) from $5,000 per month to $8,000 per month. The increases will only be paid when
and if the cash flow of the Company is sufficient.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
Beginning January 1, 2011, the Company (through
its then COO) leased approximately 1,850 square feet of office and manufacturing space in an industrial complex in Irvine California.
The initial lease term expired July 31, 2012. Since that date through July 2014 the Company was on a month to month basis of $2,138.
Effective August 1, 2014, the Company moved into a 4,427 square foot facility under a new lease agreement, in the same industrial
complex. The Company entered into a 26 month lease, pursuant to which, there is no base rent for the first two months, beginning
October 1, 2014, the monthly lease is $4,870 plus CAM charges of $354 and rent increases to $5,091 on October 1, 2015 for the final
twelve months. The Company is straight lining the 24 months costs over the 26 month term of the lease. Rent expense was $60,404
and $38,850 for the years ended December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, the company
allocated $20,767 and $15,540, respectively, of rent expense to cost of goods sold for the space utilized in manufacturing and
$39,637 and $23,310 is included in general and administrative expenses for the years ended December 31, 2015 and 2014, respectively.
Effective February 19, 2016, the Company entered
into a sublease with an unaffiliated third party, whereby, pursuant to the sublease Company is receiving $5,500 per month through
September 30, 2016.
Effective April 15, 2015, the Company entered
into a two month Investor Relations Consulting Agreement (the “Agreement”) with Hayden IR (“Hayden”). Pursuant
to the Agreement, on April 15, 2015, the Company issued 12,500 shares of common stock and 12,500 additional shares of common stock
were issued on May 15, 2015. The Company valued the shares at $0.40 per share (based on the most recent sale price of the Company’s
common stock) and has included $10,000 in stock compensation expense for the year ended December 31, 2015.
On August 3, 2015, the Board of Directors of
the Company authorized the engagement of Hayden effective August 1, 2015 (the “Effective Date”), for a twelve month
period. Pursuant to the Agreement, the Company has agreed to, include among other matters, the issuance of 100,000 restricted shares
of common stock to vest over the term of the Agreement as follows, 25,000 upon execution of the Agreement 50,000 shares on the
90
th
day from the Effective Date and 25,000 shares on the 180
th
day from the Effective Date of the Agreement,
subject to the Agreement being in effect as of each applicable vesting date. Hayden shall not have registration rights, and the
shares may be sold subject to Rule 144. The Company valued the shares at $0.40 per share (based on the most recent sale price of
the Company’s common stock) and has included $40,000 in stock compensation expense for the year ended December 31, 2015.
Additionally Hayden will be compensated $6,000 per month, which can be paid at the Company’s discretion in cash, or by the
issuance of 10,000 shares of restricted common stock and $2,000 cash. Accordingly, the Company issued 30,000 shares of common stock,
certificated on October 27, 2015 and has included $10,500 in stock compensation expense for the year ended December 31, 2015.
On July 21, 2015, the Company entered into
a Consulting Agreement (the “Consulting Agreement”) with BMA Securities, LLC (the “Consultant”). Pursuant
to the Consulting Agreement, the Consultant, on a non-exclusive basis, will provide consulting services to the Company as a financial
advisor for a six month period. The Consulting Agreement automatically renews for successive six month periods unless terminated
by either party 60 days prior to the end of the initial successive term. Pursuant to the Consulting Agreement, the Company issued
350,000 shares of restricted common stock on July 16, 2015 for the initial six month term. The Company valued the shares at $0.40
per share (based on the most recent sale price of the Company’s common stock) and recorded $140,000 of stock compensation
expense for the year ended December 31, 2015.
NOTE 8 – STOCKHOLDERS’ EQUITY
COMMON STOCK
On May 14, 2014, the Board of Directors (the
“Board”) authorized the Company to enter into a consulting agreement with Makena Investment Advisors, LLC (“Makena”).
Pursuant to the agreement, Makena will assist the Company in advisory services and registration statement preparation related to
being a public company. Pursuant to the filing of the S-1, the Company has issued Makena 1,500,000 shares of the Company’s
common stock for the services. The share are fully vested and non-assessable. For the year ended December 31, 2014, the Company
recorded an expense of $150,000 ($0.10 per share) for the issuance, based upon the Company’s internal valuation on a discounted
cash flow basis.
Also on May 14, 2014, effective as of May 1,
2014, the Board authorized the Company to engage the services of Venture Equity. The Company has agreed to compensate Venture Equity
$5,000 per month and issued 1,500,000 shares of the Company’s common stock, 750,000 shares of common stock immediately vested
and 750,000 shares of common stock vested on November 15, 2014. See note 6.
On December 26, 2014, the Company received
Conversion notices from the holders of the May and June 2014 Notes and recorded 352,242 shares of common stock to be issued in
satisfaction of $66,000 of principal and $4,177 of accrued and unpaid interest at a conversion price of $0.20 per share. The shares
were certificated in January 2015.
The Company’s Registration Statement
on Form S-1 with the SEC became effective on December 22, 2014. On December 27, 2014, the Company sold 100,000 shares of common
stock and received $40,000. During the year ended December 31, 2015, the Company sold 502,000 shares of common stock and received
$200,800.
On July 24, 2015, the Company agreed to issue
75,000 shares of common stock to a consultant. The Company valued the shares at $0.40 per share (based on the most recent sale
price of the Company’s common stock). Accordingly, $30,000 is included in stock compensation expense for the year ended December
31, 2015.
During the year ended December 31, 2015, the
Company issued 155,000 shares of stock to Hayden (See Note 7).
On July 16, 2015, CVP converted $50,000 of
accrued and unpaid interest under the Company Note into 253,846 shares of common stock.
On July 21, 2015, the Company issued 350,000
shares of restricted common stock to BMA (see Note 7).
On July 21, 2015, 17,500 shares of common stock
were issued equal in value to an aggregate of $7,000 per month to two employees as part of their compensation. Accordingly, $7,000
is included in stock compensation expense for the year ended December 31, 2015.
On July 21, 2015, the Company agreed to issue
75,000 shares of common stock to a consultant. The Company valued the shares at $0.013 per share. Accordingly, $975 is included
in stock compensation expense for the year ended December 31, 2015.
On July 24, 2015, the board of directors of
the Company approved the granting of 1,323,500 shares of restricted common stock to employees, including 750,000 shares awarded
to the Company’s CFO. The Company valued the shares at $0.40 per share (based on the most recent sale price of the Company’s
common stock) and has included $529,400 in stock compensation expense for the year ended December 31, 2015.
On August 4, 26, and 28, 2015, the Company
issued 431,250, 57,500 and 230,000, respectively, of restricted shares of common stock upon the conversion from the holders of
the August 2015 Notes of $143,750. The shares were issued at $0.20 per share.
On October 27, 2015, the Company issued 28,750
shares of restricted common stock upon the conversion of the September 2015 Note of $5,750, and 57,500 shares of restricted common
stock upon the conversion of the October 2015 Note of $11,500.
On October 27, 2015, 46,250 shares of common
stock were issued equal in value to an aggregate of $18,500 to two employees as part of their compensation. Accordingly, $18,500
is included in stock compensation expense for the year ended December 31, 2015.
CLASS A PREFERRED STOCK
On June 3, 2014, the Company’s Board
of Directors adopted and approved the Class A Preferred Stock Certificate of Designation, establishing the terms, conditions and
relative rights of the Class A Preferred Stock, including that the holders of the Class A Preferred Stock (the “Class A Holders”)
shall have limited voting rights and powers compared to the voting rights and powers of holders of Common Stock and other series
of Preferred Stock. The Class A Holders shall be entitled to notice of any shareholders meeting in accordance with the Bylaws of
the Corporation, and shall be entitled to vote, but only with respect to the following matters (collectively, the “Class
A Voting Matters”): (i) the appointment and/or removal of any member of the Company’s board of directors, (ii) any
matter related to or transaction (or series of transactions) pursuant to which the Company would sell or license all or substantially
all of its assets or the stockholders of the Company would sell all or substantially all of their shares of the Company’s
stock or where the Company would merge with or into any other entity, (iii) causing the Company to register its Common Stock for
trading pursuant to the Securities Exchange Act of 1934, as amended, including by filing a Registration Statement on Form S-1 with
the Securities Exchange Commission and filing and obtaining FINRA approval of a Form 15c2-11, and (iv) with respect to any matter
involving a transaction whereby the Company will become part of or merge into an existing public company. For so
long
as Class A Preferred Stock is issued and outstanding, the holders of Class A Preferred Stock shall vote together as a single class
with the holders of the Corporation’s Common Stock and the holders of any other class or series of shares entitled to vote
with the Common Stock, with the holders of Class A Preferred Stock being entitled to fifty-one percent (51%) of the total votes
on
only Class A Preferred Voting Matters regardless of the actual number of
shares of Class A Preferred Stock then outstanding, and the holders of Common Stock and any other shares entitled to vote being
entitled to their proportional share of the remaining 49% of the total votes based on their respective voting power for any Class
A Preferred Voting Matter. The Board also approved the issuance of 50 shares each of the Class A Preferred Stock to the Company’s
Chief Executive Officer and Chief Operating Officer. The issued shares of the Class A Preferred Stock were valued at $428,000 based
primarily on management’s estimate of the fair value of the control features embedded in the Class A preferred stock, and
is included in salaries and management fees for the year ended December 31, 2014.
WARRANTS
The Company issued a five year warrant to CVP
to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid prices in the
20 trading days immediately after becoming public (the “Market Price”). Since the Company was not public and could
not determine the Market Price, based on the current discounted cash flow valuation, the Company initially estimated that CVP can
purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share. As of December 31, 2015 and 2014, based on
the Market Price, the Company estimated the number of shares that CVP can purchase to be 1,636,362 and 1,500,000, respectively.
NOTE 9 – INCOME TAXES
Deferred income taxes reflect the net tax effects
of operating loss and tax credit carry forwards and temporary differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible. Due to the uncertainty of the Company’s
ability to realize the benefit of the deferred tax assets, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2015 and 2014.Differences between the statutory rate and the effective rate I primarily due to the full valuation
allowance on the deferred tax assets.
As of December 31, 2015, the Company had a
tax net operating loss carry forward of approximately $2,707,000. Any unused portion of this carry forward expires in 2030. Utilization
of this loss may be limited in the event of an ownership change pursuant to IRS Section 382.
NOTE 10 – GOING CONCERN
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As of December 31, 2015 and 2014 the Company had an accumulated
deficit of $5,185,787 and $1,717,505 and as of December 31, 2015, a working capital deficit of $2,901,562. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Management’s
Plans
As a result of a working capital deficiency
the Company ceased its prior business as a manufacturer and distributor of cabinet-based horticultural systems operations, including
the layoff of all non-executive employees and has stopped taking new orders from customers. Management of the Company is exploring
various alternatives, however, no agreements have been reached, other than on December 31, 2015, the Company agreed to purchase
a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company (“
Quasar
”),
from Tonaquint, Inc., a Utah corporation (“
Seller
”). The Company has agreed to purchase the Membership Interest
from the Seller for a purchase price of $180,000.00 pursuant to the terms of a Membership Interest Purchase Agreement. The Company
now operates in the land leasing business.
NOTE 11 – SUBSEQUENT EVENTS
On March 18, 2016,
the Board of Directors (the “Board”) of the Company, acting pursuant to a Majority Consent of Stockholders, approved
an amendment to the Articles of Incorporation (the “Amended and Restated Articles”) to among other matters, clarify
that of the 310,000,000 shares of authorized capital stock of the Company, 300,000,000 shares are designated as common stock and
10,000,000 shares are designated as preferred stock, and to clarify that of the 10,000,000 shares of preferred stock, 100 have
been designated as Class A Preferred Stock. Additionally, the Board has the authority to create and designate the rights and preferences
of, additional series of preferred stock, without further stockholder approval. The Board also approved a resolution giving the
Board the authority to effect between a 1:10 and a 1:250 consolidation of the outstanding common stock at any time before December
31, 2016, and to leave the authorized shares of common stock unchanged at 300,000,000. On May 2, 2016, the Company filed the Amended
and Restated Articles with the Nevada Secretary of State. On December 30, 2016, the Board authorized a consolidation, whereby every
250 shares of the Company’s common stock would be consolidated into 1 share. The consolidation will become effective upon
approval from the required regulatory authorities.
On April 29, 2016, CVP and Tonaquint sold and
transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint SPA and related Purchase documents to
The Dove Foundation (“Dove”).
On May 17, 2016, the Company received notification
that Dove has waived the 9.99% ownership limitation contained in the CVP Note, thereby creating a potential change in control of
the Company.
On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from the current noteholder regarding the December 2015 and January 2016 installment
payments. Pursuant to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%,
and added $270,057 to the outstanding balance for the December 2015 default and $344,654 was added to the outstanding balance for
the January 2016 default. The lender also increased the base interest rate from 10% to the default interest rate of 22% per annum.
Also on July 27, 2016, the holder of the note sent the Company a conversion notice to issue 262,944,662 shares of common stock
in exchange for the cancellation of $920,306 of interest and principal due.
On August 5, 2016, in two private transactions,
Dove purchased in the aggregate, 100 shares of Class A Preferred Stock from two shareholders (50 shares each), representing 100%
of the issued and outstanding Class A Preferred Stock.
In accordance with ASC 855-10 the Company
has analyzed its’ operations subsequent to December 31, 2015, to the date these financial statements were issued and has
determined that it does not have any material subsequent events to disclose in these financial statements, other than the events
described above.
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