NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2017
1.
Organization – Nature of Operations
The
Chron Organization, Inc. (the “Company” or “CHRO”) was incorporated under the laws of the State of Nevada
on July 28, 1999. On March 24, 2016 FINRA (Financial Industry Regulatory Authority, Inc.) approved the name and CUSIP change from
USA Restaurant Funding, Inc. to The Chron Organization, Inc. (OTCQB: CHRO). The Company amended its Articles of Incorporation
to change its name to “The Chron Organization, Inc.”, to reflect the change in direction of the Company’s business
to smart home technologies and the next generation in energy utility services.
During
the twelve months ended December 31, 2016 the Company formed a wholly owned subsidiary, Zen Technologies, Inc. The business platform
is a combined by the offering of energy services and smart controls. The business model is based upon the belief that these two
aspects, combined with an increasing commercial demand for more sustainable business practices will continue to be burgeoning
trends. The Company offers a unique value proposition to commercial, industrial, and municipal customers whereby the offer is
a means to reduce utility expenses through energy-efficient and smart control products and services. In addition to these services
the Company will also provide electricity needs to its customer base through its retail electricity provider subsidiary.
2.
Summary of Significant Accounting Policies
Principals
of Consolidation –
The accompanying consolidated financial statements include the accounts of The Chron Organization,
Inc. and its wholly owned subsidiaries Zen Technologies, Inc. and Zen Energy, Inc. All significant intercompany transactions and
balances have been eliminated.
Use
of Estimates
– The preparation of financial statements in conformity with generally accepted accounting principles in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting periods. Key estimates in the accompanying financial statements include, among
others, revenue recognition, allowances for doubtful accounts, valuation of long-lived assets, and deferred income tax asset valuation
allowances.
The
financial statements are presented on the basis of the Company’s ability to continue as a going concern. See further information
in Note 3.
Going Concern
.
Cash
and Cash Equivalents
– The Company considers all highly-liquid investments with a maturity of three months or less,
when purchased, to be cash equivalents.
Prepaid
Expenses
– As of September 30, 2017 and December 31, 2016 prepaid expenses totaled $50,824 and $40,750, respectively.
The balance of prepaid expenses consists of business insurance and rent related expenses.
Fair
Value of Financial Instruments -
The Company calculates the fair value of its assets and liabilities which qualify as financial
instruments and includes this information in the notes to consolidated financial statements when the fair value is different than
the carrying value of those financial instruments. The estimated fair value of accounts receivable, prepaid and other current
assets, and accounts payable and accrued expenses approximate the carrying amounts due to the relatively short maturity of these
instruments. The carrying value of short- and long-term debt also approximates fair value since these instruments bear market
rates of interest. None of these instruments are held for trading purposes.
Basic
and Diluted Net Loss per Common Stock –
Basic net loss per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods
when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their
inclusion would be anti-dilutive. The dilutive shares outstanding at September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Related party convertible promissory notes
|
|
|
58,333,333
|
|
|
|
64,333,333
|
|
Related Party Warrants
|
|
|
32,166,667
|
|
|
|
32,166,667
|
|
Convertible promissory notes
|
|
|
194,633,333
|
|
|
|
25,000,000
|
|
Warrants
|
|
|
19,161,000
|
|
|
|
10,000,000
|
|
Diluted shares outstanding
|
|
|
303,961,000
|
|
|
|
131,500,000
|
|
Income
Taxes –
The Company estimates its current tax position together with its future tax consequences attributable to temporary
differences resulting from differing treatment of items, such as depreciation and other reserves for tax and accounting purposes.
These temporary differences result in deferred tax assets and liabilities. Management must then assess the likelihood that its
deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable
temporary differences. To the extent management believes that recovery is unlikely, management establishes a valuation allowance
against these deferred tax assets. Significant judgment is required in determining the Company’s provision for income taxes,
its deferred tax assets and liabilities, and any valuation allowance recorded against its deferred tax assets. At September 30,
2017 and December 31, 2016, the Company has recorded a full valuation allowance against its net deferred tax assets due to the
uncertainty these assets will be used in the future.
Revenue
Recognition
- The Company recognizes sales, which include shipping fees where applicable, net of estimated returns, at the
time the customer takes possession of merchandise or receives services. When the Company collects payments from customers prior
to the transfer of ownership of merchandise or the performance of services, the amounts received are generally recorded as deferred
sales. They are included in other current liabilities on the consolidated balance sheets, until the sale or service is completed.
The Company reserves for estimated sales returns based on historical trends in merchandise returns, net of the estimated net realizable
value of merchandise inventories to be returned and any estimated disposition costs. Amounts collected from members, which under
common trade practices are referred to as sales taxes, are recorded on a net basis.
Software
Development Costs –
The Company capitalizes certain expenditures to the development of its software application. Capitalization
begins when technological feasibility is established. Capitalized costs are amortized using the straight-line method over the
estimated useful life of the developed product.
Beneficial
Conversion Feature -
The Company accounts for convertible notes payable in accordance with the guidelines established by
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
Topic 470-20, Debt with Conversion and Other Options, Emerging Issues Task Force (“EITF”) 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF 00-27,
Application of Issue No 98-5 To Certain Convertible Instruments. The Beneficial Conversion Feature (“BCF”) of a
convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate
of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a
convertible note when issued and records the estimated fair value of any warrants issued with those convertible notes.
Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is
resolved.
The
BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the warrants, if applicable, and
as a discount on the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which
are credited to mezzanine equity. The value of the proceeds received from a convertible note is then allocated between the conversion
features and warrants and the debt on an allocated fair value basis. The allocated fair value is recorded in the financial statements
as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible
note (or to the conversion date of the note, if sooner) and is charged to interest expense.
Classification
-
The Company had classified the beneficial conversion feature of the convertible notes as mezzanine equity
on the consolidated balance sheets as the stock was contingently redeemable. Upon the occurrence of certain change in control
events that are outside the Company’s control, including liquidation, sale or transfer of the Company, holders of the convertible
preferred stock could cause redemption for cash. Pursuant to ASC 480-10-S99-3A, the SEC finds that a BCF should be separated from
a convertible instrument and recorded in additional paid-in capital. However, Company’s filing with the SEC should present
BCF as mezzanine equity in order to distinguish them from permanent equity. The balance sheet reflects the redeemable equity instruments
as mezzanine equity separate from permanent equity.
In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). This update is intended
to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability
to continue as a going concern within one year of the date of issuance of the entity’s financial statements and to provide
related footnote disclosures in certain circumstances. This guidance is effective for fiscal years ending after December 15, 2016
and for interim periods thereafter. The Company adopted ASU 2014-15 as of the required effective date of December 31, 2016. The
Company performed a working capital analysis as of December 31, 2016 to determine whether or not this disclosure was appropriate
and included the additional disclosure in Note 3 – Going Concern.
When
evaluating the Company’s ability to meet its obligations, Management considered the current financial condition, including
liquidity sources at the date that the financial statements were issued, the Company’s conditional and unconditional obligations
due or anticipated within one year after the date that the financial statements were issued, funds necessary to maintain the Company’s
operations considering its current financial condition, and other conditions and events, when considered in conjunction with the
items pervious mentioned, that may adversely affect its ability to meet its obligations. The Company has concluded that there
is substantial doubt about its ability to continue as a going concern for the periods ended September 30, 2017 and the year ended
December 31, 2016 as discussed in Note 3 – Going Concern.
3.
Going Concern
Based on an analysis by the Company under
ASU 2014-15, the Company has concluded that there is substantial doubt about its ability to continue as a going concern within
one year of the date of these financial statements. Consequently, the Company’s financial statements for the nine months
ended September 30, 2017 and twelve months ended December 31, 2016 have been prepared on a going concern basis, which contemplates
the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported
a net loss of $2,164,422 and $1,104,795 for the nine months ended September 30, 2017 and 2016, respectively, and an accumulated
deficit of $4,493,312 for the nine months ended September 30, 2017, and $2,328,890 for the twelve months ended December 31, 2016.
At September 30, 2017 and December 31, 2016, the Company had a working capital deficit of $1,562,863 and $529,476, respectively,
and negative cash flow from continuing operating activity of $1,459,590 and $856,557, respectively, for the nine months ended
September 30, 2017, and 2016.
The
Company’s ability to continue as a going concern may be dependent on the success of management’s plan. The financial
statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
During
the 2017 fiscal year, the Company intends to continue its efforts to raise funds to support its efforts through the sale of equity
and/or debt securities. During the nine months ended September 30, 2017, the Company has raised $1,531,050 from sales of its common
stock, preferred stock, and notes payable.
To
the extent the Company’s operations are not sufficient to fund the Company’s capital requirements, the Company may
attempt to enter into a revolving loan agreement with financial institutions or attempt to raise capital through the sale of additional
capital stock or through the issuance of debt. At the present time, the Company does not have a revolving loan agreement with
any financial institution.
4.
Notes Payable
On
March 29, 2017, the Company entered into a promissory note agreement (the “March 2017 Promissory Note”) with a third-party
in the amount of $40,000. The promissory note carries an interest rate of 10% per annum and has a maturity date of May 15, 2017.
The principal balance of the Note Payable at September 30, 2017 was $40,000, and accrued interest was $1,995. As additional consideration
for entering into the Note, the Company issue to the third-party note holder a warrant for the purchase of 1,000,000 shares of
common stock in the Company, exercisable at two cents ($0.02) per share for a period of one year from the date of issue (the “Warrant”).
The
Company determined the fair value of the warrant which resulted in a debt discount of $5,576 which was recorded as a reduction
in carrying value of the March 2017 Promissory Note. During the nine months ended September 30, 2017 a charge to debt discount
in the amount of $2,482 was expensed through interest expense. The debt discount balance at September 30, 2017 was $3,193.
5.
Related Party Convertible Promissory Note
As
of September 30, 2017, and December 31, 2016, the Company had an outstanding related party convertible promissory note of $174,000
and $193,000, respectively, with a maximum availability of $200,000 (the “Related Party Convertible Promissory Notes”).
See Note 8.
Related Party Transactions.
On
November 20, 2015, the Company issued a Convertible Promissory Note to a related party (the “Related Party Convertible Promissory
Note”). The Related Party Convertible Promissory Note accrues interest at a rate of 2% per annum. The principal balance
under the Related Party Convertible Promissory Note at September 30, 2017 and December 31, 2016 was $174,000, and accrued interest
was $6,799 and $3,944, respectively, and is due on September 30, 2018.
The
Holder of the Related Party Convertible Promissory Note has the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The Related Party Convertible Promissory Note can be converted
by the Holder in part from time to time after the issuance date by submitting notice of conversion. The November 2015 Related
Party Convertible Promissory Note is convertible at a $0.003 per share conversion price.
The
Related Party Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $155,650
which was recorded as a reduction in carrying value of the Related Party Convertible Promissory Note and offset in mezzanine equity.
During the nine months ended September 30, 2017 and the twelve months ended December 31, 2016 a charge to debt discount in the
amount of $1,986 and $143,011, respectively and was expensed as interest expense. At September 30, 2017 and December 31, 2016,
the debt discount was $0 and $1,986, respectively.
In
connection with the Related Party Convertible Promissory Note, the Holder was issued a total of 32,166,667 warrants
exercisable at $0.05 expiring in November 2020 (the “Warrants”). The Company determined the fair value of the
warrants which resulted in a debt discount of $37,366 which was recorded as a reduction in carrying value of the Related
Party Convertible Promissory Note and offset in mezzanine equity. During the nine months ended September 30, 2017 and twelve
months ended December 31, 2016 a charge to debt discount in the amount of $2,672 and $4,695 and was expensed through interest
expense, respectively. The balance at September 30, 2017 and December 31, 2016 was $0 and $2,672, respectively.
Related
Party Convertible Promissory Note Summary
The
fair value of the embedded beneficial conversion features and the fair value of the warrants underlying the Related Party Convertible
Promissory Notes were calculated pursuant to the Black-Scholes Model. The following table summarizes the carrying value of the
Convertible Promissory Notes as of September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Related Party 2015 Convertible Promissory Note
|
|
$
|
193,000
|
|
|
$
|
193,000
|
|
Paydown of Related Party 2015 Convertible Promissory Note
|
|
|
(19,000
|
)
|
|
|
|
|
Less: debt discount
|
|
|
-
|
|
|
|
(1,986
|
|
Warrants
|
|
|
-
|
|
|
|
(2,672
|
|
Total net carrying value
|
|
$
|
174,000
|
|
|
$
|
188,342
|
|
6.
Convertible Promissory Notes and Warrants
On
September 6, 2016, the Company issued a Convertible Promissory Note totaling $300,000 to a third-party (the “September 2016
Convertible Promissory Note”). The September 2016 Convertible Promissory Note matures on September 5, 2018, and accrues
interest at a rate of 10% per annum. As of September 30, 2017, and December 31, 2016, the outstanding principal was $300,000.
The accrued interest balance at September 30, 2017 and December 31, 2016 was $36,986 and $14,795, respectively.
The
Holder of the Convertible Promissory Note has the right to convert all or any part of the outstanding principal and accrued interest
to shares of common stock of the Company. The Convertible Promissory Note can be converted by the Holder in part from time to
time after the issuance date by submitting notice of conversion. The September 2016 Convertible Promissory Note is convertible
at the option of the Holder into that number of shares of the Company’s common stock determined by dividing such principal
amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as seventy percent (70%) of the volume weighted
average price over the prior ten (10) day trading period from the date of notice of conversion, but in no event shall the Conversion
price be less than $0.02.
The
September 2016 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $158,688
which was recorded as a reduction in carrying value of the September 2016 Convertible Promissory Note and offset in mezzanine
equity. A charge to debt discount in the amount of $12,734 and $25,621 was expensed through interest expense during the nine months
ended September 30, 2017 and twelve months ended December 31, 2016, respectively. At September 30, 2017 and December 31, 2016,
the debt discount was $89,144 and $133,067, respectively.
In
connection with the September 2016 Convertible Promissory Note, the Holder was issued 6,000,000 warrants exercisable at $0.05
expiring in September 2018 (the “Warrants”). The Company determined the fair value of the warrants which resulted
in a debt discount of $30,117, recorded as a reduction to the carrying value of the September 2016 Convertible Promissory Note
and offset in mezzanine equity. The balance of the fair value of the warrants at September 30, 2017 and December 31, 2016 was
$16,918 and $25,254, respectively.
On
November 25, 2016, the Company issued two Convertible Promissory Notes totaling $200,000 to third-parties (the “November
2016 Convertible Promissory Notes”). The November 2016 Convertible Promissory Notes mature on November 24, 2017, and accrues
interest at a rate of 10% per annum. As of September 30, 2017, and December 31, 2016, the outstanding principal was $200,000.
The accrued interest balance at September 30, 2017 and December 31, 2016 was and $16,437 and $1,644, respectively.
The
Holders of the November 2016 Convertible Promissory Notes have the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The November 2016 Convertible Promissory Notes can be converted
by the Holders in part from time to time after the issuance date by submitting notice of conversion. The November 2016 Convertible
Promissory Notes are convertible at the option of the Holder into that number of shares of the Company’s common stock determined
by dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as seventy percent
(70%) of the volume weighted average price over the prior ten (10) day trading period from the date of notice of conversion, but
in no event shall the Conversion price be less than $0.02.
The
November 2016 Convertible Promissory Notes contained beneficial conversion features which resulted in a debt discount of $99,123
which was recorded as a reduction in carrying value of the November 2016 Convertible Promissory Notes and offset in additional
mezzanine equity. During the nine months ended September 30, 2017 and twelve months ended December 31, 2016 a charge to debt discount
in the amount of $31,355 and $4,130 was expensed through interest expense, respectively. At September 30, 2017 and December 31,
2016, the debt discount was $63,638 and $94,993, respectively.
In
connection with the November 2016 Convertible Promissory Notes, the Holders were issued 4,000,000 warrants exercisable at $0.05
expiring in November 2019 (the “Warrants”). The Company determined the fair value of the warrants which resulted in
a debt discount of $13,409, recorded as a reduction to the carrying value of the November 2016 Convertible Promissory Note and
offset in mezzanine equity. The balance of the fair value of the warrants at September 30, 2017 and December 31, 2016 was $8,609
and $12,850, respectively.
On
March 17, 2017, the Company issued a Convertible Promissory Notes totaling $82,500 to a third-party (the “March 2017 Convertible
Promissory Note”). The March 2017 Convertible Promissory Note matures on March 17, 2018, and accrues interest at a rate
of 12% per annum. As of September 30, 2017, the outstanding principal was $82,500. The accrued interest balance at September 30,
2017 was $5,235. In addition, the Company recorded an original issued discount in the amount of $7,500 as interest expense.
The
Holder of the March 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and
accrued interest to shares of common stock of the Company. The March 2017 Convertible Promissory Note can be converted by the
Holder in part from time to time after the issuance date by submitting notice of conversion. The March 2017 Convertible Promissory
Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined by
dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of $0.03
or sixty percent (60%) of the lowest closing price over the prior ten (10) day trading period from the date of notice of conversion,
but in no event shall the Conversion price be less than $0.001.
The
March 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $38,308
which was recorded as a reduction in carrying value of the March 2017 Convertible Promissory Note and offset in in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $17,193 through interest expense. At
September 30, 2017, the debt discount was $21,115.
In
connection with the March 2017 Convertible Promissory Note, the Holder was issued 500,000 warrants exercisable at $0.03 expiring
in March 2020 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a debt discount
of $2,951 recorded as a reduction to the carrying value of the March 2017 Convertible Promissory Note and offset in mezzanine
equity. The balance of the fair value of the warrants at September 30, 2017 was $2,273.
On
April 25, 2017, the Company issued a Convertible Promissory Notes totaling $82,500 to a third-party (the “April 2017
Convertible Promissory Note”). The April 2017 Convertible Promissory Note matures on April 25, 2018, and accrues
interest at a rate of 12% per annum. As of September 30, 2017, the outstanding principal was $82,500. The accrued interest
balance at September 30, 2017 was $3,254. In addition, the Company recorded an original issued discount in the amount of
$7,500 as interest expense.
The
Holder of the April 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and
accrued interest to shares of common stock of the Company. The April 2017 Convertible Promissory Note can be converted by the
Holder in part from time to time after the issuance date by submitting notice of conversion. The April 2017 Convertible Promissory
Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined by
dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of $0.05
or sixty percent (60%) of the lowest closing price over the prior ten (10) day trading period from the date of notice of conversion,
but in no event shall the Conversion price be less than $0.001.
The
April 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $55,632
which was recorded as a reduction in carrying value of the April 2017 Convertible Promissory Note and offset in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $16,999 through interest expense. At
September 30, 2017, the debt discount was $38,633.
In
connection with the April 2017 Convertible Promissory Note, the Holder was issued 500,000 warrants exercisable at $0.05 expiring
in April 2020 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a debt discount
of $632 recorded as a reduction to the carrying value of the April 2017 Convertible Promissory Note and offset in in mezzanine
equity. The balance of the fair value of the warrants at September 30, 2017 was $564.
On
May 31, 2017, the Company issued a Convertible Promissory Notes totaling $46,000 to a third-party for a purchase price of $40,000
(the “May 2017 Convertible Promissory Note”). The May 2017 Convertible Promissory Note matures on May 31, 2018, and
accrues interest at a rate of 5% per annum. On August 23, 2017 the Company paid The May 2017 Convertible Note in the amount of
$46,000, with accrued interest of $535. In addition, the Company paid a prepayment penalty of $16,287.
The
May 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $32,398 which
was recorded as a reduction in carrying value of the April 2017 Convertible Promissory Note and offset in in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $32,298 through interest expense. At
September 30, 2017, the debt discount was $0.
In
connection with the May 2017 Convertible Promissory Note, the Holder was issued 920,000 warrants exercisable at $0.05 expiring
in April 2022 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a debt discount
of $1,732 recorded as a reduction to the carrying value of the April 2017 Convertible Promissory Note and offset in in mezzanine
equity. The balance of the fair value of the warrants September 30, 2017 was $0.
On
June 20, 2017, the Company issued a Convertible Promissory Notes totaling $187,000 to a third-party for a purchase price of $170,000
(the “June 2017 Convertible Promissory Note”). The June 2017 Convertible Promissory Note matures on June 20, 2018,
and accrues interest at a rate of 12% per annum. As of September 30, 2017, the outstanding principal was $187,000. The accrued
interest balance at September 30, 2017 was $6,148. In addition, the Company recorded an original issued discount in the amount
of $18,700 as interest expense.
The
Holder of the June 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal and
accrued interest to shares of common stock of the Company. The June 2017 Convertible Promissory Note can be converted by the Holder
in part from time to time after the issuance date by submitting notice of conversion. The June 2017 Convertible Promissory Note
are convertible at the option of the Holder into that number of shares of the Company’s common stock determined by dividing
such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of $0.03 or sixty
percent (60%) of the lowest closing price over the prior twenty (20) day trading period from the date of notice of conversion,
but in no event shall the Conversion price be less than $0.001.
The
June 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $131,332
which was recorded as a reduction in carrying value of the April 2017 Convertible Promissory Note and offset in in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $7,098 through interest expense. At
September 30, 2017, the debt discount was $124,234.
In
connection with the June 2017 Convertible Promissory Note, the Holder was issued 500,000 warrants exercisable at $0.03 expiring
in June 2020 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a debt discount
of $6,665 recorded as a reduction to the carrying value of the June 2017 Convertible Promissory Note and offset in additional
paid in capital. The balance of the fair value of the warrants at September 30, 2017 was $6,544.
On
July 28, 2017, the Company issued a Convertible Promissory Notes totaling $200,000 to a third-party for a purchase price of $195,000
(the “July 28, 2017 Convertible Promissory Note”). The July 28, 2017 Convertible Promissory Note matures on April
28, 2018, and accrues interest at a rate of 10% per annum. As of September 30, 2017, the outstanding principal was $200,000. The
accrued interest balance at September 30, 2017 was $3,288. In addition, the Company recorded an original issued discount in the
amount of $5,000 as interest expense.
The
Holder of the July 28, 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The July 28, 2017 Convertible Promissory Note can be converted
by the Holder in part from time to time after the issuance date by submitting notice of conversion. The July 28, 2017 Convertible
Promissory Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined
by dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of
$0.04 or sixty percent (60%) of the lowest closing price over the prior twenty (20) day trading period from the date of notice
of conversion, but in no event shall the Conversion price be less than $0.001.
The
July 28, 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $136,699
which was recorded as a reduction in carrying value of the July 28, 2017 Convertible Promissory Note and offset in additional
paid in capital. During the nine months ended September 30, 2017 a charge to debt discount in the amount of $30,378 through interest
expense. At September 30, 2017, the debt discount was $106,321.
In
connection with the July 28, 2017 Convertible Promissory Note, the Holder was issued 666,000 warrants exercisable at $0.03 expiring
in July 2022 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a debt discount
of $3,366 recorded as a reduction to the carrying value of the June 2017 Convertible Promissory Note and offset in mezzanine equity.
The balance of the fair value of the warrants at September 30, 2017 was $3,255.
On
July 31, 2017, the Company issued a Convertible Promissory Notes totaling $125,000 to a third-party for a purchase price of $107,500
(the “July 31, 2017 Convertible Promissory Notes”). The July 31, 2017 Convertible Promissory Notes matures on July
31, 2018, and accrues interest at a rate of 8% per annum. As of September 30, 2017, the outstanding principal was $125,000. The
accrued interest balance at September 30, 2017 was $1,644. In addition, the Company recorded an original issued discount in the
amount of $17,500 as interest expense.
The
Holder of the July 31, 2017 Convertible Promissory Notes have the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The July 31, 2017 Convertible Promissory Note can be converted
by the Holder in part from time to time after the issuance date by submitting notice of conversion. The July 31, 2017 Convertible
Promissory Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined
by dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as a price of sixty
percent (60%) of the lowest closing price over the prior twenty (20) day trading period from the date of notice of conversion,
but in no event shall the Conversion price be less than $0.001.
The
July 31, 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $87,931
which was recorded as a reduction in carrying value of the July 31, 2017 Convertible Promissory Notes and offset in mezzanine
equity. During the nine months ended September 30, 2017 a charge to debt discount in the amount of $14,454 through interest expense.
At September 30, 2017, the debt discount was $73,477.
In
connection with the July 31, 2017 Convertible Promissory Notes, the Holder was issued 5,000,000 warrants exercisable at $0.035
expiring in July 2020 (the “Warrants”). The Company determined the fair value of the warrants which resulted in a
debt discount of $37,069 recorded as a reduction to the carrying value of the July 31, 2017 Convertible Promissory Note and offset
in mezzanine equity. The balance of the fair value of the warrants at September 30, 2017 was $35,038.
Additionally,
the Company issued a $25,000 convertible promissory note in connection with the July 31, 2017 Convertible Notes, a Financial Advisory
Agreement (the “FAA July 2017 Convertible Note), The FAA Note has an annual interest rate of ten percent (10%) and is due
on July 31, 2018. The Holder has the right, at any time, to convert all or a portion of the note into shares of common stock of
the Company at the conversion price. The per shares conversion price is equal to the lesser of $0.03 or the lowest per share trading
price for the 20-day trading period multiplied by sixty-percent (60%); however, the conversion shall not be less than $0.001.
The
July FAA July 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of
$16,667 which was recorded as a reduction in carrying value of the FAA July 2017 Convertible Note and offset in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $2,740 through interest expense. At
September 30, 2017, the debt discount was $13,927.
On
July 31, 2017, the Company issued a Convertible Promissory Note totaling $105,000 to a third-party for a purchase price of $100,000
(the “July 31, 2017 Convertible Promissory Note”). The July 31, 2017 Convertible Promissory Note matures on July 31,
2018, and accrues interest at a rate of 10% per annum. As of September 30, 2017, the outstanding principal was $105,000. The accrued
interest balance at September 30, 2017 was $1,726. In addition, the Company recorded an original issued discount in the amount
of $5,000 as interest expense.
The
Holder of the July 28, 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The July 28, 2017 Convertible Promissory Note can be converted
by the Holder in part from time to time after the issuance date by submitting notice of conversion. The July 28, 2017 Convertible
Promissory Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined
by dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of
$0.03 or sixty percent (60%) of the lowest closing price over the prior twenty (20) day trading period from the date of notice
of conversion, but in no event shall the Conversion price be less than $0.001.
The
July 31, 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of $70,000
which was recorded as a reduction in carrying value of the July 31, 2017 Convertible Promissory Note and offset in mezzanine equity.
During the nine months ended September 30, 2017 a charge to debt discount in the amount of $11,507 through interest expense. At
September 30, 2017, the debt discount was $58,493.
On
September 20, 2017, the Company issued a Convertible Promissory Note totaling $110,000 to a third-party for a purchase price of
$105,000 (the “September 2017 Convertible Promissory Note”). The September 2017 Convertible Promissory Note matures
on June 20, 2018, and accrues interest at a rate of 10% per annum. As of September 30, 2017, the outstanding principal was $110,000.
The accrued interest balance at September 30, 2017 was $301. In addition, the Company recorded an original issued discount in
the amount of $5,000 as interest expense.
The
Holder of the September 2017 Convertible Promissory Note have the right to convert all or any part of the outstanding principal
and accrued interest to shares of common stock of the Company. The September 2017 Convertible Promissory Note can be converted
by the Holder in part from time to time after the issuance date by submitting notice of conversion. The September 2017 Convertible
Promissory Note are convertible at the option of the Holder into that number of shares of the Company’s common stock determined
by dividing such principal amount and accrued interest by the Conversion Rate. The Conversion Rate is defined as the lower of
$0.02 or sixty percent (60%) of the lowest closing price over the prior twenty (20) day trading period from the date of notice
of conversion, but in no event shall the Conversion price be less than $0.001.
The
September 2017 Convertible Promissory Note contained a beneficial conversion feature which resulted in a debt discount of
$73,333 which was recorded as a reduction in carrying value of the September 2017 Convertible Promissory Note and offset in
mezzanine equity. During the nine months ended September 30, 2017 a charge to debt discount in the amount of $2,009 through
interest expense. At September 30, 2017, the debt discount was $71,324.
Convertible
Promissory Note Summary
The
fair value of the embedded beneficial conversion features and the fair value of the warrants underlying the Convertible Promissory
Notes were calculated pursuant to the Black-Scholes Model. The following table summarizes the carrying value of the Convertible
Promissory Note as of September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Convertible Promissory Note
|
|
$
|
1,417,000
|
|
|
$
|
500,000
|
|
Less: debt discount
|
|
|
(632,310
|
)
|
|
|
(228,059
|
)
|
Warrants
|
|
|
(72,720
|
)
|
|
|
(38,105
|
)
|
Total net carrying value
|
|
$
|
711,970
|
|
|
$
|
233,836
|
|
7.
Income Taxes
No
provision for federal income taxes has been recognized for the nine months ended September 30, 2017 and twelve months ended December
31, 2016, as the Company has a net operating loss carry forward for income tax purposes available in each period. Additionally,
it is uncertain if the Company will have taxable income in the future, so a valuation allowance has been established for the full
value of net tax assets. The deferred tax asset consists of net operating loss carry forwards and the Company has no deferred
tax liabilities.
At
September 30, 2017 and December 31, 2016, the Company has net operating loss carry forwards of $1,527,726 and $713,387, respectively
for federal income tax purposes. This net operating loss carry forwards may be carried forward in varying amounts until 2036 and
may be limited in their use due to significant changes in the Company’s ownership.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,527,726
|
|
|
$
|
713,387
|
|
Less: valuation allowance
|
|
|
(1,527,726
|
)
|
|
|
(713,387
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has valued its net deferred tax asset at zero with a valuation allowance due to the substantial doubt taxable income will
be generated in the future to utilize the deferred tax asset.
8.
Related Party Transactions
During
the twelve months ended December 31, 2016, the Company issued the Chairman of the Board a convertible promissory note, (the “Related
Party Convertible Promissory Note”) in an amount up to $200,000 along with 32,166,667 warrants. The note accrues interest
at 2% per annum. The issuance of the financial instruments was made in the ordinary course of business, and were given fair market
treatment. The Related Party Convertible Promissory Note matures on December 31, 2017. See Note 5.
Related Party Convertible
Promissory Note.
Additionally,
the Company merged with a company controlled by related parties. See following Note 9.
Merger.
9.
Merger
On
July 1, 2016, the Company exchanged 165,000,000 shares of the Company’s unregistered shares of common stock for 100%
of the outstanding common stock of Chron Energy, Inc. (“CEI”), a Nevada corporation to related parties
(consisting of the company’s Chief Compliance Officer and an LLC managed by the Company’s President). CEI
possessed intellectual property and strategic relationships (the “Assets”) that are integral to the
Company’s entrance into the home automation and retail electric provider markets. Generally, the total acquisition
consideration price would be allocated to the assets acquired and liabilities assumed based on their estimated fair values.
The excess of the purchase price over the total of estimated fair values assigned to tangible and identifiable intangible
assets acquired and liabilities assumed would then be recognized as goodwill. At the date of merger, CEI had no liabilities
and the Assets had no carrying value on the books. Since the acquisition was with related parties, no increase in the
carrying value of the Assets or goodwill can be realized on the books of the Company.
There
was no change of control of the Company as a result of the Merger. See above Note 8
. Related Party Transitions
.
10.
Shareholder Deficit
March
2, 2017, the Company amended Articles Five and Seven of the corporation’s Amended and Restated Articles of Incorporation.
Article
Five was amended to set the aggregate number of shares which the Corporation shall have the authority to issue at 1,500,000,000
shares, of which 1,450,000,000 shares shall be Class A Common Stock, par value $.001 per share (the “Class A Common Stock”),
10,000,000 shares shall be Class B Common Stock, par value $.001 per share (the “Class B Common Stock”) and 40,000,000
shares shall be Preferred Stock, par value $.001 per share (the “Preferred Stock”) of which, 2,000,000 shares are
designated as “Series A Preferred Stock”. The rights, preferences and restrictions for the Series A Preferred Stock
are set forth in the new Article Five, Section C which includes the following:
|
1.
|
DESIGNATION
OF SERIES. (a) There shall be a series of the Preferred Stock of the Corporation which shall be designated as the “Series
A Preferred Stock,” $0.001 par value, and the number of shares constituting such series shall be Two million (2,000,000).
Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease
shall reduce the number of shares of Series A Preferred Stock to a number less than that of the shares then outstanding. The
Series A Preferred Stock shall have the rights, preferences, restrictions and other terms relating to such series of preferred
stock as set forth in the Certificate of Designation of Preferences, Rights and Limitations of Series A Preferred Stock attached
hereto as Exhibit A and incorporated herein by reference.
|
|
|
|
|
2.
|
DIVIDENDS.
The holders of Series A Preferred Stock shall not be entitled to receive dividends paid on the Common Stock.
|
|
|
|
|
3.
|
LIQUIDATION
PREFERENCE. The holders of Series A Preferred Stock shall not be entitled to any liquidation preference.
|
|
|
|
|
4.
|
VOTING.
Except as otherwise expressly set forth herein or as required by law, the holders of the Series A Preferred Stock shall not
entitle the holders thereof to vote on any matter submitted for shareholder action, and the consent of the holders thereof
shall not be required for the taking of any corporate action.
|
|
|
|
|
5.
|
CONVERSION
RIGHTS. The holders of the shares of Series A Preferred Stock shall have the right to convert the Series A Preferred Stock
into Class A Common Stock at the rate of ten (10) common shares for each preferred share (10-1 conversion rate) (the “Conversion
Right”). The holder of the Series A Preferred Stock shall be entitled to exercise the Conversion Right one year from
purchase date of the Series A Preferred Stock.
|
|
|
|
|
6.
|
REDEMPTION
RIGHTS; REDEMPTION. To the extent not prohibited by law, all or a portion of the then-outstanding shares of Series A Preferred
Stock may be redeemed by the Corporation for a period of one year from the date of issuance at an amount equal to one hundred
thirty percent (130%) of the original issue price.
|
Article
Seven was amended by deleting the existing Article Seven and adding a new Article 7 as follows:
Rights
of Holders of Common Stock. The following rights, powers, privileges and restrictions, qualifications, and limitations apply to
the Common Stock.
(a)
General
. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by
the rights, powers and privileges of the holders of the Series A Preferred Stock.
(b)
Voting
. The holders of the Class A Common Stock are entitled to one vote for each share of Class A Common Stock held at
all meetings of stockholders (and written actions in lieu of meetings) and the holders of the Class B Common Stock are entitled
to 200 votes for each share of Class B Common Stock held at all meetings of stockholders (and written actions in lieu of meetings).
Unless required by law, there shall be no cumulative voting. The number of authorized shares of Common Stock may be increased
or decreased (but not below the number of shares thereof then outstanding) by (in addition to any vote of the holders of one or
more series of Series A Preferred Stock that may be authorized by the Board) the affirmative vote of the holders of shares of
capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of
the Corporation entitled to vote. Further, holders of the Common Stock shall have no right to vote on the designations, preferences,
limitations and relative or other rights of the Series A Preferred Stock or any series thereof (collectively, the “Preferences”),
or on any amendment, alteration or repeal of the Preferences or the Series A Preferred Stock, at any time, whether before or after
the issuance thereof.
Issuances
of Class A Common Stock, par value $0.001:
During
the nine months ended September 30, 2017, the Company received $429,050 in cash and issued 69,447,477 shares of its Class A Common
Stock and issued 3,600,000 shares of Class A Common Stock as compensation for thrird-party services rendered.
Issuances
of Series A Preferred Stock, par value $0.001:
During
the nine months ended September 30, 2017, the Company issued a total of 500,000 shares of its Series A Preferred Stock to third
parties for cash consideration totaling $125,000.
In
July 2017, the Board of Directors approved and a written consent of a majority of the shareholders ratified the Company’s
2017 Equity Incentive Plan which provides for stock options, grants and other stock incentives to officers, directors, consultants
and employees. The Board has granted options totaling of 8,400,000 incentive stock options to employees of the Company at an exercise
price of $0.02 per share. The options vest 50% at the one-year anniversary of the grant with the balance vesting at the second
anniversary of the grant. Additionally, the Company granted 15,000,000 shares of class A common stock to its Chief Compliance
Officer at an exercise price at par value $0.001 per share).
Non-controlling
interest in subsidiary:
The
Company entered into a securities purchase agreement in February 2017 with a third party. The Company sold one percent (1%) minority
interest of Zen Energy, Inc, a wholly owned subsidiary of the Company. The Company sold 1,000 shares of the Zen Energy, Inc. at
no par value at a purchase price of twenty dollars ($20.00) per share, representing one percent 1% of the issued and outstanding
shares of common stock of Zen Energy. The proceeds were received during the nine months ended September 30, 2017 and are currently
classified as subscription liabilities.
11.
Contingencies
In
the ordinary course of conducting its business, the Company may be subject to loss contingencies including possible disputes and
lawsuits. Management believes that any outcome of such contingences will not have a material impact on the Company’s financial
position or results of future operations.
12.
Subsequent Events
On
October 2, 2017 (the “Original Issue Date”) the Company entered into and closed on the transaction set forth in the
Loan Agreement (the “Vista Loan Agreement”) it entered into with Vista Capital Investments, LLC (“Vista”)
for the sale of the Company’s 20% original issue discount convertible notes in the aggregate principal amount of $220,000
and issue commitment shares in the amount of seven million five hundred thousand (2,722,500) restricted common shares in the Company.
Pursuant to the Vista Loan Agreement, the Company issued to vista upon closing for a purchase price of $220,000: (i) 20% Original
Issue Discount 8% Convertible Note (the “Vista” 20% OID Notes”) in the principal amount of $220,000 (the “Note”);
and (ii) security purchase agreement to issue 2,722,500 shares of the Company’s common stock. The maturity date of the 20%
OID Note is October 2, 2019. The holder of the Vista 20% OID Notes has the right, at any time, to convert all or a portion of
the principal amount of the note into shares of common stock of the Company at the conversion price. The per share conversion
price is the lowest per share trading price for the 20-day trading period immediately prior to the conversion date multiplied
by sixty-percent (60%); however, the conversion shall not be less than $0.01. The Vista 20% OID Notes may be prepaid at any time,
within the 90 day period immediately following the Issuance Date, the Company shall have the option, upon 10 business days’
notice to Holder, to pre-pay the entire remaining outstanding principal amount of this Note in cash, provided that (i) the Company
shall pay the Holder 135% of the Outstanding Balance, (ii) such amount must be paid in cash on the next business day following
such 10 business day notice period, and (iii) the Holder may still convert the note to the terms at all times until such prepayment
amount has been received in full.
The
Company agreed to satisfy the current public information requirements under SEC Rule 144(c), among other things. The Vista 20%
OID Notes are not convertible to the extent that (a) the number of shares of our common stock beneficially owned by the holder
and (b) the number of shares of our common stock issuable upon conversion of the Vista 20% OID Notes or otherwise would result
in the beneficial ownership by holder of more than 4.9% of the Company’s then outstanding common stock. This ownership limitation
can be increased or decreased by the holder upon 61 days notice to the Company. Further, the holder of the Vista 20% OID Notes
may not convert the note if such conversion would cause the holder’s beneficial ownership of the Company’s outstanding
common stock to exceed 9.9%.
Registration
Rights Agreement. The Company also entered into a Registration Rights Agreement with Vista dated as of October 2, 2017 as required
pursuant to the terms of the Vista Loan Agreement (the “Vista Registration Rights Agreement”). The Vista Registration
Rights Agreement requires the Company to, among other things, use commercially reasonable efforts to: (1) file a registration
statement covering Vista’s resale of the common stock underlying the Vista 20% OID Notes within ninety (90) days following
the Original Issue Date. If the Company fails to comply with the registration requirements or a registration statement ceases
to be effective or fails to be usable for its intended purpose, the Company is obligated to pay Vista liquidated damages.
On
October 18, 2017 an Information Statement was furnished to the holders of shares of Class A common stock, par value $0.001 per
share (“Class A Common Stock”) of The Chron Organization, Inc., a Nevada corporation (the “Company”),
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulation 14C,
in connection with the approval of the actions described below taken by unanimous written consent of the board of directors of
the Company and by written consent of the holders of a majority of the voting power of the issued and outstanding capital stock
of the Company to amend the following:
1.
|
Amend
our articles of incorporation, as amended and restated (the “Restated Articles”), to change our corporate name
from The Chron Organization, Inc. to Zenergy Brands, Inc. (the “Name Change”); and
|
|
|
2.
|
Amend
our Restated Articles to increase our authorized common stock from 1,450,000,000 shares to 1,700,000,000 shares, $0.001 par
value per share, which such shares shall be issuable on such terms and conditions as the Board of Directors may determine
from time to time (the “Share Increase”).
|
|
|
[Include
disclosure on Crown Bridge financing here and in Item 5]
On
November 7, 2017 the Company filed a Form S-1 registration statement. The prospectus relates to the offer and sale of up to
56,676,580 shares of our Class A common stock, par value $0.001 (the “Common Stock”), by the selling stockholders
(each, a “Selling Stockholder” and collectively, the “Selling Stockholders”). Included in this amount
are 5,756,579 shares of our Common Stock that we are registering for resale by Bellridge Capital, LP
(“Bellridge”). These shares were issued to Bellridge as a commitment fee under an equity line in the amount of
$2,500,000 (the “Equity Line”) established by the Bellridge Securities Purchase Agreement, as more fully
described in this prospectus. Also included in this amount are up to 50,000,001 shares of Common Stock that were registered
for resale by certain Selling Stockholders that are issuable to such Selling Stockholders upon conversion of certain
convertible promissory notes and upon exercise of a warrant to purchase up to 920,000 shares of Common Stock (the
“Warrants”).