NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(UNAUDITED)
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, 2016, the Company announced
as a result of a working capital deficiency the Company has significantly reduced its’ cabinet making 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
”). Quasar and the Seller are
related parties to Chicago Venture Partners, L.P. (“CVP”), and the Company’s main lender (See Note 3). 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
”). Quasar’s sole
asset is a certain parcel of real property located in Midland Texas (the “Quasar Property”).
Also on December 31, 2015, the Company
entered into a one year lease agreement with a related party tenant for the Quasar Property. Pursuant to the agreement, the
tenant will pay $1,000 per month and the tenant is responsible for all operating costs of the Quasar Property including real
estate taxes. After the initial term, the lease is renewable on a month to month basis until terminated, with either party
required to notify the other party thirty days in advance of terminating the lease.
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 (presented as discontinued operations for the three and six months ended June 30, 2016 and 2015) and began
operations in the land leasing business.
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 became effective on March 9, 2017. All share amounts for all
periods presented have been retroactively adjusted to reflect the Reverse Split.
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 Dove 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%, or $270,056
for the December default (included in the December 31, 2015, balances) and $344,654 for the January default. The Lender also increased
the interest rate to 22% per annum pursuant to the default.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to
present the financial position, results of operations and cash flows for the stated periods have been made. Except as described
below, these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included
in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s annual
report for the year ended December 31, 2016 on Form 10-K. Interim results of operations for the three months ended March 31, 2017
are not necessarily indicative of future results for the full year. Certain amounts from the 2016 period have been reclassified
to conform to the presentation used in the current period.
EMERGING GROWTH COMPANY
We qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012 (the “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 of 1933, as amended (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 GAAP 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.
DISCONTINUED OPERATIONS
On December 31, 2015, the Company’s Board
of Directors approved the purchase of certain real property as described in Note 1. As a result of the purchase, the Company’s
prior business operations have been (re)classified as discontinued operations on a retrospective basis for all periods presented
herein.
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
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 three months ended March
31, 2017, and for the year ended December 31, 2016, management’s evaluation did not require any allowance for uncollectible
receivables.
LAND, 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 property and equipment consisted of the following
at March 31, 2017 and December 31, 2016:
|
|
March
31,
2017
|
|
December
31,
2016
|
Equipment
|
|
$
|
826
|
|
|
$
|
826
|
|
Manufacturing equipment
|
|
|
—
|
|
|
|
3,318
|
|
Computers and software
|
|
|
2,912
|
|
|
|
2,912
|
|
Land
|
|
|
180,000
|
|
|
|
180,000
|
|
Accumulated depreciation
|
|
|
(3,442
|
)
|
|
|
(5,407
|
)
|
Balance
|
|
$
|
180,296
|
|
|
$
|
181,649
|
|
Depreciation expense for the three months ended
March 31, 2017 and 2016, was $111 and $259, respectively. During the three months ended March 31, 2017, the Company disposed of
$3,318 of manufacturing equipment, and recorded a loss on disposal of fixed assets of $1,242.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue
Recognition.” ASC 605 requires that the following 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 from leased property during the month the tenant is responsible for payment. Revenues from
the sale of cabinets are included in net loss from discontinued operations for all periods presented herein.
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 March 31, 2017 and December 31, 2016 for each
fair value hierarchy level:
March 31, 2017
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
8,344,691
|
|
|
$
|
8,344,691
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,225,803
|
|
|
$
|
1,225,803
|
|
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 (LOSS) 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. For the periods ending March 31, 2017 and 2016, 1,808,278 and 968,960 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 consolidated financial statements.
NOTE 3 – CONVERTIBLE NOTES PAYABLE
THE DOVE FOUNDATION, RELATED PARTY
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 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 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 included 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.
A summary of the convertible note payable balance as of March 31,
2017 and December 31, 2016 is as follows:
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
1,229,360
|
|
|
$
|
1,306,007
|
|
Convertible notes-newly issued
|
|
|
31,852
|
|
|
|
205,434
|
|
Debt default penalty
|
|
|
—
|
|
|
|
344,654
|
|
Payments of convertible notes
|
|
|
—
|
|
|
|
(36,750
|
)
|
Conversions of convertible notes
|
|
|
—
|
|
|
|
(589,985
|
)
|
Ending balance
|
|
$
|
1,261,212
|
|
|
$
|
1,229,360
|
|
The newly issued funded amounts for the three
months ended March 31, 2017 were made directly to various vendors by or on behalf of Dove and includes $2,896 of OID. The Company
has also not recorded the remaining balance of the Investor Notes issued by CVP to the Company.
As security for the Note, the Company’s
CEO and former COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). On August 5, 2016, Dove acquired
all of the Class A Preferred Stock.
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.
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 Dove 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%, or $270,056 for the
December 2015 default and $344,654 for the January 2016 default. The Lender also increased the interest rate to 22% per annum pursuant
to the default. Also on July 27, 2016, Dove sent the Company a conversion notice to issue 1,051,779 shares of common stock in exchange
for the cancellation of $920,306 of interest and principal due. Immediately after the conversion Dove owned approximately 87.6%
of the common stock of the Company.
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 132,000 (the amount of fully diluted shares of Common Stock of the Company on
the date the Company filed its’ Registration Statement). 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 1,015 shares of common stock.
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. During the year ended December 31, 2015, and prior to the Company becoming a public company,
the Company received $163,000 in new funding and recorded a BCF expense in the amount of $163,000. The Company began 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. The discount was 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.
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 24,000 shares of common stock, with an exercise price of $50.00 per share. As of March 31, 2017, and December
31, 2016, based on the Market Price, the Company estimated the number of shares that can be purchased to be 6,545.
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.
On March 31, 2017, the Company revalued the warrant at $25,410 using the Black- Scholes option pricing model
and recorded a derivative liability expense for the three months ended March 31, 2017, and increased the derivative liability
by $12,975 on the balance sheet as of March 301, 2017.
NOTE 4 –DERIVATIVE
LIABILITIES
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 March 31, 2017
and December 31, 2016 is as follows:
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
1,225,803
|
|
|
$
|
1,648,255
|
|
Initial derivative liability
|
|
|
48,918
|
|
|
|
509,969
|
|
Fair value change
|
|
|
7,069,970
|
|
|
|
(846,370
|
)
|
Reduction for debt payments/conversions
|
|
|
|
|
|
|
(1,778,971
|
)
|
Ending balance
|
|
$
|
8,344,691
|
|
|
$
|
1,225,803
|
|
The fair value on the commitment dates for
the Note fundings from January 1, 2017 through March 31, 2017, 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
|
|
|
305%-356
|
%
|
|
|
356
|
%
|
Expected term
|
|
|
.25 years
|
|
|
|
.25 years
|
|
Risk free interest
|
|
|
.50%-.76
|
%
|
|
|
.76
|
%
|
NOTE 5 – RELATED PARTY TRANSACTIONS
As of March 31, 2017 the Company owed $14,424,
$27,623 and $16,350 to the CEO, former COO and former CFO, respectively, for accrued and unpaid fees, of these amounts $30,774
is included in accounts payable and accrued liabilities, stockholders, and $27,623 is included in liabilities of discontinued operations
on the March 31, 2017, balance sheet.
NOTE PAYABLE, STOCKHOLDER
The Company’s former COO loaned the Company
various amounts for Company expenses. The Company recorded interest expense of $246 for the three months ended March 31, 2017,
and 2016, respectively. As of March 31, 2017 and December 31, 2016, the former COO was owed accrued interest of $4,856
and $4,610, respectively, which is included in liabilities of discontinued operations on the balance sheets presented herein.
As of March 31, 2017 and December 31, 2016, the loan balance was $12,482, which is also included in liabilities of discontinued
operations.
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, and therefore is a related party to the Company. After the initial term, the lease is
renewable on a month to month basis until terminated, with either party required to notify the other party thirty days in
advance of terminating the lease.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
Effective August 1, 2014, the Company moved
into a 4,427 square foot facility under a new lease agreement, in an industrial complex in Irvine California. 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
was straight lining the 24 months costs over the 26 month term of the lease through December 31, 2015, and in January 2016, the
Company realized as an expense the remainder of the lease and recorded a liability (included in liabilities of discontinued operations).
Effective February 19, 2016, the Company entered into a sublease with an unaffiliated third party, whereby, pursuant to the sublease
Dove received $36,750 during the year ended December 31, 2016. The Company reduced the Dove convertible note for the proceeds
and reduced rent expense. Net rent expense was $33,502 for the three months ended March 31, 2016, and is included in loss from
discontinued operations. For public reporting purposes and corporate correspondences regarding such, the Company utilizes the
office address of a company controlled by our former CFO in West Palm Beach, FL at no charge.
NOTE 7 – STOCKHOLDERS’ EQUITY
COMMON STOCK
On March 18, 2016,
the Board of Directors 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. On May 2, 2016, the Company filed the Amended and Restated Articles with the Nevada
Secretary of State. 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 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 become effective on March 9, 2017.
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. 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.
WARRANTS
In June 2014, 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 24,000 shares of common stock, with an exercise price of $50.00 per share. As of March 301, 2017, and December
31, 2016, based on the Market Price, the Company estimated the number of shares that can be purchased to be 6,545.
NOTE 8 – DISCONTINUED OPERATIONS
In December 2015, the Company’s board
of directors approved the purchase of certain real property and completed the purchase on December 31, 2015. In January 2016, the
Company ceased its’ prior business activity of marketing, manufacturing and selling horticulture cabinets.
ASC 205-20 “Discontinued Operations”
establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported
in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results. As a result, the Company’s results of operations have been reclassified as discontinued
operations on a retrospective basis for all periods presented. Accordingly, the assets and liabilities of this component are separately
reported as “assets and liabilities of discontinued operations” as of March 31, 2017, and December 31, 2016. The results
of operations of this component, for all periods, are separately reported as “discontinued operations”.
A reconciliation of the major classes of line
items constituting the loss from discontinued operations, net of income taxes as is presented in the Consolidated Statements of Operations
for the three months ended March 31, 2017, and 2016 are summarized below:
|
|
Three months ended March 31,
|
|
|
2017
|
|
2016
|
Sales
|
|
$
|
—
|
|
|
$
|
7,350
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Rent
|
|
|
—
|
|
|
|
33,502
|
|
General and administrative
|
|
|
—
|
|
|
|
2,849
|
|
Other
|
|
|
—
|
|
|
|
(4,079
|
)
|
Total operating expenses
|
|
|
—
|
|
|
|
32,272
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
net of income taxes
|
|
$
|
—
|
|
|
$
|
(24,922
|
)
|
The Company did have any assets of discontinued operations as of
March 31, 2017 and December 31, 2016.The following table presents the reconciliation of carrying amounts of major classes of liabilities
of the Company classified as discontinued operations in the consolidated balance sheets at March 31, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Carrying amounts of major classes of liabilities
included as part of discontinued operations
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
68,778
|
|
|
$
|
67,680
|
|
Accounts payable and accrued expenses, stockholders
|
|
|
27,623
|
|
|
|
37,190
|
|
Note payable, stockholder
|
|
|
12,482
|
|
|
|
12,482
|
|
Total current liabilities included in the liabilities of discontinued operations
|
|
$
|
108,883
|
|
|
$
|
117,352
|
|
NOTE 9 – GOING CONCERN
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As of March 31, 2017 and December 31, 2016, the Company had
an accumulated deficit of $15,106,046 and $7,873,328 and as of March 31, 2017, a working capital deficit of $10,143,683. 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. 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
”).
Quasar (prior to the purchase) and Tonaquint are related parties to CVP, the Company’s main lender. The Company has agreed
to 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 Company now operates in the land leasing business.
NOTE 10 – SUBSEQUENT EVENTS
In accordance with
ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2017 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.