Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2018 and 2017
NOTE
1 – BACKGROUND
Organization
Cruzani,
Inc. (“Cruzani” or the “Company”) is a franchise development company that builds and represents popular
franchise concepts, and other related businesses, throughout the United States as well as international markets. The Company was
originally formed as a limited liability company on February 5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws
of the State of Oklahoma. On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity
from a limited liability company to a corporation under the name Harcom Productions, Inc. On January 25, 2010, Articles of Merger
were filed with the State of Oklahoma merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the
name of the corporation was changed to US Highland, Inc. US Highland, Inc. was a recreational power sports Original Equipment
Manufacturer (“OEM”), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand
and for other OEMs. During 2017, the Company exited the recreational power sports OEM and leisure activity vehicles markets.
On
June 29, 2018, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to change its name to
Cruzani, Inc. The name change is subject to approval by the Financial Industry Regulatory Authority (known as “FINRA”).
On
June 30, 2018, Supreme Sweets Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, and the Company
(collectively, the “Company”) entered into an asset purchase agreement (the “Asset Purchase
Agreement”) with Supreme Sweets Inc. and 2498411 Ontario, Inc., as sellers (collectively, the “Seller”),
pursuant to which in exchange for CAD $200,000 and a twenty percent (20%) interest in Oventa, Inc., the Company agreed
to acquire the trade secret assets of Seller upon the terms and subject to the conditions set forth in the Asset Purchase
Agreement. A second closing occurred on July 31, 2018, pursuant to which the Company acquired the furniture,
fixtures and equipment of Seller in exchange for CAD $100,000. Seller is engaged in the business of preparing delicious
snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie and gluten-free
alternatives. The Asset Purchase Agreement included a provision, pursuant to which the Company could unwind the transaction
if certain milestones were not achieved. The milestones contemplated in the Asset Purchase Agreement were not met, and
accordingly, on December 31, 2018, by written notice to the Seller, the Company unwound the transaction. The
capital injected into Oventa, Inc., however, has been secured pursuant to financing statements filed on behalf of the
Company, and the Company expects to receive a return of its injected capital of approximately US $339,813 during
the calendar year 2019.
Collectability is based on claims filed for cash that was paid.
On
September 27, 2018, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”)
with Sandrea Gibson, as seller (the “Seller”), and Recipe Food Co., as the target (the “Target”), pursuant
to which in exchange for up to CAD $237,000, the Company agreed to acquire 80% of the issued and outstanding stock of the
Target from the Seller upon the terms and subject to the conditions set forth in the Stock Purchase Agreement. Seller is engaged
in the business of preparing and serving delicious, healthy meals on a counter-service basis with high quality ingredients, including
low calorie alternatives. Difficulties integrating the Target into the Company group, which forced the Company to cease injecting
additional capital into the Target. The Target is currently on the market for disposition to a third-party buyer on an arms-length
basis, which the Company can undertake due to its supermajority ownership.
Business
Cruzani,
Inc. is a restaurant development company that builds and represents the quick-service food industry utilizing quality menu items
of value in modern dining rooms, and other related businesses, throughout the United States as well as international markets,
with an emphasis on food and wellness. Our Management team picks up and coming concepts with growth potential. With little territory
available for the older brands we bring fresh innovative brands to our consumers that have great potential. All of our brands
are unique in nature as we focus on niche markets that are still in need of developing.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
Company’s
consolidated
financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations
of Credit Risk
We
maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually
monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not
exposed to any significant credit risk on cash. As of December 31, 2018, all of the Company’s other current asset and deposits on acquisition are
expected to be returned to the Company.
Cash
equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents for the year ended December 31, 2018 or 2017.
Reclassifications
Certain
reclassifications have been made to the prior year financial information to conform to the presentation used in the financial
statements for the year ended December 31, 2018.
There is no net effect as the result of these reclassifications.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
Supreme
Sweets Acquisition Corp
. and TruFood Provisions Co. All financial information has been prepared in conformity with accounting
principles generally accepted in the United States of America. All significant intercompany transactions and balances have been
eliminated.
The subsidiaries have had has been no significant net activity.
Receivables
The Company has other current assets of
$339,813 (Note 1) as a result of it’s now terminated purchase agreement with Supreme Sweets Acquisition Corp, and deposits
on acquisition of $85,392 (Note 1) from its stock purchase agreement with Recipe Food Co. The Company has evaluated the collectability
of both assets and concluded that all funds will likely be recovered.
Fair
value of financial instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for
identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined
by Paragraph 820-10-35-37 are described below:
Level
1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.
The
carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate
their fair value because of the short maturity of those instruments. The Company’s notes payable approximates the
fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company
for similar financial arrangements at December 31, 2018.
Income
taxes
The
Company follows Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect for the fiscal year in which the differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than
not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Income in the period
that includes the enactment date.
The
Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”) with regards
to uncertainty income taxes. Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to
be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of
being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest
and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material
adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.
Stock-based
Compensation
We
account for equity-based transactions with nonemployees under the provisions of ASC Topic No. 505-50,
Equity-Based Payments
to Non-Employees
(“ASC 505-50”). ASC 505-50 establishes that equity-based payment transactions with nonemployees
shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever
is more reliably measurable. The fair value of common stock issued for payments to nonemployees is measured at the market price
on the date of grant. The fair value of equity instruments, other than common stock, is estimated using the Black-Scholes option
valuation model. In general, we recognize the fair value of the equity instruments issued as deferred stock compensation and amortize
the cost over the term of the contract.
We
account for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718,
Compensation—Stock
Compensation,
which requires all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation
expense and credited to additional paid-in capital over the period during which services are rendered.
Net
income (loss) per common share
Basic
net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding
during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares
of common stock and potentially outstanding shares of common stock during the period. The Company’s diluted loss per share
is the same as the basic loss per share for the years ended December 31, 2018 and 2017, as the inclusion of any potential shares
would have had an anti-dilutive effect due to the Company generating a loss.
Recently
issued accounting pronouncements
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
. This ASU makes targeted amendments to the accounting for employee share-based payments. This guidance
is to be applied using various transition methods such as full retrospective, modified retrospective, and prospective based on
the criteria for the specific amendments as outlined in the guidance. The guidance is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2016. The Company adopted this ASU and it did not have a material
impact its financial position and results of operations.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The ASU requires that a lessee recognize the assets and
liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to
make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class
of underlying asset not to recognize lease assets and lease liabilities. This new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption
is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The Company adopted this ASU and it did not have a material impact its
financial position and results of operations.
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“Topic 606”), which updated through
several revisions and clarifications since its original issuance and supersedes previous revenue recognition guidance. This
guidance introduces a new principles-based framework for revenue recognition, requiring an entity to recognize revenue representing
the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects
to receive in exchange for those goods or services. The update also requires new qualitative and quantitative disclosures, beginning
in the quarter of adoption, regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations,
and assets recognized from costs incurred to obtain or fulfill a contract. The update may be applied using one of two prescribed
transition methods: retrospectively to the prior reporting period presented (full retrospective method), or retrospectively with
the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective
method. The Company adopted this ASU and it did not have a material impact its financial position and results of operations.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments
(“ASU
2016-15”), which eliminates the diversity in practice related to classification of certain cash receipts and payments in
the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This new guidance will be effective
for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years and early adoption
is permitted, including adoption in an interim period. The Company adopted this ASU and it did not have a material impact its
financial position and results of operations.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”),
which provides guidance that will require that a statement of cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts
generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance will
be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years and
early adoption is permitted, including adoption in an interim period. The Company adopted this ASU and it did not have a material
impact its financial position and results of operations.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. This new guidance will be effective for annual reporting periods beginning after December
15, 2017, including interim periods within those periods. The Company adopted this ASU and it did not have a material impact its
financial position and results of operations.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350)
. This ASU simplifies the subsequent
measurement of goodwill by eliminating the second step of the goodwill impairment test, which required computing the implied fair
value of goodwill. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount
by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. This new guidance will be effective January 1, 2020. The Company is
currently evaluating the provisions of this guidance and assessing its impact on the Company’s consolidated financial statements
and disclosures.
In
May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.
This
ASU clarifies an entity’s ability to modify the terms or conditions of a share-based payment award presented. An entity
should account for the effects of a modification unless all the following are met: the fair value of the modified award has not
changed from the fair value on the date of issuance; the vesting conditions of the modified award are the same as the vesting
conditions of the original award immediately before the original award is modified; and, the classification of the modified award
as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the
original award is modified. This new guidance will be effective for annual reporting periods beginning after December 15, 2017,
including interim periods within those periods. The Company adopted this ASU and it did not have a material impact its financial
position and results of operations.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. This ASU clarifies the recognition, measurement, and
effect on earnings per share of certain freestanding equity-classified financial instruments that include down round features
affect entities that present earnings per share in accordance with the guidance in Topic 260,
Earnings Per Share
. When
determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature
no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The
amendments also clarify existing disclosure requirements for equity-classified instruments. This new guidance will be effective
for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. The Company has
elected to early adopt this ASU and as a result outstanding warrants were not accounted for as a derivative.
The
Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material
impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE
3 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles
which contemplate continuation of the Company as a going-concern basis. The going concern basis assumes that assets are realized,
and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements.
The Company has incurred recurring losses from operation and does not currently have revenue generating operations. The Company
has an accumulated deficit of $77,988,132, and a net loss for the year ended December 31, 2018 of $2,744,020, of which approximately
$1.8mil was non-cash expense related to the Company’s convertible notes. The Company’s ability to continue as a going
concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or
equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property assets.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management
is currently pursuing a business strategy which includes raising the necessary funds to finance the Company’s development and
marketing efforts.
NOTE
4 – LOANS PAYABLE
The
loan payable balances are as follows:
|
|
Rate
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Loan 1
|
|
|
1
|
%
|
|
$
|
27,000
|
|
|
$
|
27,000
|
|
Loan 2
|
|
|
1
|
%
|
|
|
3,000
|
|
|
|
3,000
|
|
Loan 4
|
|
|
8
|
%
|
|
|
39,000
|
|
|
|
111,000
|
|
Loan 5
|
|
|
8
|
%
|
|
|
155,400
|
|
|
|
190,000
|
|
Loan 6
|
|
|
5
|
%
|
|
|
-
|
|
|
|
100,000
|
|
Total
|
|
|
|
|
|
$
|
224,400
|
|
|
$
|
431,000
|
|
Above
notes are past due as of the issuance of these financial statements.
NOTE
5 – CONVERTIBLE NOTES
The
following table summarizes the convertible notes as of December 31, 2018:
Note Holder
|
|
Date
|
|
Maturity Date
|
|
Interest
|
|
|
Balance
December 31,
2017
|
|
|
Additions
|
|
|
Conversions / Transfers
|
|
|
Balance
December 31,
2018
|
|
Third party individual
|
|
7/25/13
|
|
12/31/16
|
|
|
12
|
%
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Union Capital, LLC
|
|
2/11/16
|
|
2/11/17
|
|
|
24
|
%
|
|
|
80,190
|
|
|
|
-
|
|
|
|
(80,190
|
)
|
|
|
-
|
|
Adar Bays, LLC
|
|
2/11/16
|
|
2/11/17
|
|
|
24
|
%
|
|
|
79,163
|
|
|
|
-
|
|
|
|
(11,159
|
)
|
|
|
68,004
|
|
GW Holdings Group, LLC
|
|
5/17/16
|
|
5/17/17
|
|
|
24
|
%
|
|
|
59,400
|
|
|
|
-
|
|
|
|
(35,400
|
)
|
|
|
24,000
|
|
Travel Data Solutions
|
|
10/30/17
|
|
10/30/19
|
|
|
10
|
%
|
|
|
25,000
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
Travel Data Solutions
|
|
11/18/17
|
|
11/30/19
|
|
|
10
|
%
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
150,000
|
|
GW Holdings Group, LLC
|
|
3/16/18
|
|
3/15/19
|
|
|
8
|
%
|
|
|
-
|
|
|
|
36,750
|
|
|
|
-
|
|
|
|
36,750
|
|
Device Corp
|
|
various
|
|
various
|
|
|
8
|
%
|
|
|
-
|
|
|
|
140,831
|
|
|
|
-
|
|
|
|
140,831
|
|
L2 Capital, LLC
|
|
various
|
|
various
|
|
|
8
|
%
|
|
|
-
|
|
|
|
882,014
|
|
|
|
-
|
|
|
|
882,014
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
818,753
|
|
|
$
|
1,134,595
|
|
|
$
|
(151,749
|
)
|
|
$
|
1,801,599
|
|
|
|
|
|
Less debt discount
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(209,029
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
818,753
|
|
|
|
|
|
|
|
|
|
|
$
|
1,592,570
|
|
The
embedded conversion options of the Company’s convertible debentures contain conversion features that
qualify for embedded derivative classification. The fair value of these liabilities are re-measured at the end of every reporting
period and the change in fair value is reported in the statement of operations as a gain or loss on derivative financial instruments.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of the period
|
|
$
|
409,948
|
|
|
$
|
402,881
|
|
Addition of new derivative liabilities
|
|
|
1,127,281
|
|
|
|
-
|
|
Change in fair value of embedded conversion option
|
|
|
(708,663
|
)
|
|
|
44,084
|
|
Derecognition of derivatives upon settlement of convertible notes
|
|
|
(394,642
|
)
|
|
|
(37,017
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
433,924
|
|
|
$
|
409,948
|
|
The
Company uses Level 3 inputs for its valuation methodology for its conversion option liabilities as their fair values were determined
by using the Binomial option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s
common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life.
Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As,
required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following
table shows the assumptions used in the calculations:
|
|
Expected Volatility
|
|
|
Risk-free
Interest Rate
|
|
|
Expected
Dividend Yield
|
|
|
Expected Life
(in years)
|
At December 31, 2017
|
|
|
335
|
%
|
|
|
1.39
|
%
|
|
|
0
|
%
|
|
0.25 – 2.50
|
At December 31, 2018
|
|
|
335.58
|
%
|
|
|
2.45
|
%
|
|
|
0
|
%
|
|
0.25 - .45
|
The
carrying amount of the Company’s financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate
their fair value because of the short maturity of those instruments. The Company’s notes payable approximates the
fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company
for similar financial arrangements at December 31, 2018 and 2017.
|
|
Fair value at
December 31,
2018
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
433,924
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
433,924
|
|
Warrants
|
|
$
|
280,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280,438
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
409,948
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
409,948
|
|
Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
6 – WARRANTS
In
connection with the issuance of the convertible note (the “Note”) with L2 Capital, LLC (“L2”) and funding
of the initial tranche of $50,000 on the Note, the Company also issued a common stock purchase warrant to purchase up to 381,905
shares of the Company’s common stock pursuant to the terms therein as a commitment fee. At the time that each subsequent
tranche under the Note is funded by L2 in cash, then on such funding date, the warrant shares shall immediately and automatically
be increased by the quotient of 100% of the face value of the respective tranche and 110% of the VWAP of the common stock on the
Trading Day (as defined in the Note) immediately prior to the funding date of the respective tranche. As of December 31, 2018,
the Company had received multiple tranches for which it issued warrants to purchase shares of the Company’s common stock.
These
warrants have a variable exercise price per the above and expire in five years. The aggregate fair value of the
warrants, which was allocated against the debt proceeds totaled $280,438 based on the Black Scholes Merton pricing model
using the following estimates: exercise price ranging from $0.001 – 0.0071, 2.80% – 2.94% risk free rate, 252.42
– 258.24% volatility and expected life of the warrants of 5 years. The fair value was credited to additional paid in
capital and debited to debt discount to be amortized over the term of the loan.
A
summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:
|
|
Shares available
to purchase with
warrants
|
|
|
Weighted
Average
Price
|
|
|
Weighted
Average
Fair Value
|
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
22,669,092
|
|
|
$
|
0. 0011
|
|
|
$
|
0.0014
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding, December 31, 2018
|
|
|
22,669,092
|
|
|
$
|
0. 0011
|
|
|
$
|
0.
0014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
22,669,092
|
|
|
$
|
0. 0011
|
|
|
$
|
0.
0014
|
|
The
Company uses Level 3 inputs for its valuation methodology for its conversion option liabilities as their fair values were determined
by using the Binomial option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s
common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life.
Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As,
required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following
table shows the assumptions used in the calculations:
Range of Exercise Prices
|
|
|
Number Outstanding
12/31/2018
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted
Average Exercise
Price
|
|
$
|
0.001 – 0.0071
|
|
|
|
22,669,092
|
|
|
4.69 years
|
|
$
|
0.0011
|
|
NOTE
7 – COMMON STOCK
On
July 13, 2017, the Company issued 1,489,449 shares of common stock to settle $8,800 of principal and $1,924 of interest on a debt
conversion with a significant shareholder of the Company.
During
the year ended December 31, 2018, the Company issued 56,169,737 shares of common stock to settle $259,547 of principal and $19,870
of accrued interest on its convertible notes.
On
November 20, 2018, the Company and its stockholders approved a 1 for 20 reverse stock split. The reverse stock split was deemed
effective by the
Financial Industry Regulatory Authority (“FINRA”) on January
10, 2019. All shares throughout these financail statements have been retroactively adjusted to reflect the reverse stock split.
NOTE
8 – PREFERRED STOCK
Series
A Convertible Preferred Stock
, has a par value of $0.01, may be converted at the holder’s election into shares of
common stock at the conversion rate of ten shares of common stock for one share of Series A Preferred Stock. Each share is
entitled to 10 votes, voting with the common stock as a single class, has liquidation rights of $2.00 per share and is not entitled
to receive dividends. As of December 31, 2018 and 2017, there are 3,381,520 and 3,381,520 shares of series A preferred stock outstanding,
respectively.
Series
B Convertible Preferred Stock
, has a par value of $0.01, may be converted at the holder’s election into shares of
common stock at the conversion rate of 4,000 shares of common stock for one share of Series B Preferred Stock. Each share
is entitled to 4,000 votes, voting with the common stock as a single class, has liquidation rights of $0.01 per share and is not
entitled to receive dividends. As of December 31, 2018 and 2017, there are 5,000 and 5,000 shares of series B preferred stock
outstanding, respectively.
Series
C Convertible Preferred Stock
, has a par value of $0.01, may be converted at the holder’s election into shares of
common stock at the conversion rate of 400 shares of common stock for one share of Series C Preferred Stock. Each share is
entitled to 400 votes, voting with the common stock as a single class, has liquidation rights of $0.01 per share and is entitled
to receive four hundred times the dividends declared and paid with respect to each share of Common Stock. See Note 9 for related
party preferred stock issuance. As of December 31, 2018 and 2017, there are 5,000,000 and 0 shares of series C preferred stock
outstanding, respectively. During the year ended December 31, 2018, the Company issued 5,000,000 shares of its Series C Preferred
stock to Everett Dickson, the Company’s CEO for services rendered. The stock was valued based on the services performed for
total non-cash expense of $120,000.
Series
D Convertible Preferred Stock
, has a par value of $0.0001, may be converted at a ratio of the Stated Value plus dividends
accrued but unpaid divided by the fixed conversion price of $0.0015, which conversion price is subject to adjustment. Series D
is non-voting, has liquidation rights to be paid in cash, before any payment to common or junior stock, 140% of the Stated Value
($2.00) per share plus any dividends accrued but unpaid thereon and is entitled to 8% cumulative dividends.
On July 23, 2018, the Company granted 125,000
shares of Series D preferred stock to L2. The stock was issued as commitment shares in connection to the Equity Purchase Agreement
dated July 23, 2018. The stock is not effective until the full commitment amount has been met or the agreement is terminated. The
shares were valued at $0.15, based upon estimated loan fees, for total non-cash expense of $18,750. As of December 31, 2018 and
2017, there are 125,000 and 0 shares of series D preferred stock outstanding, respectively. As of December 31, 2018, the full commitment
amount has been met.
Series E Convertible Preferred Stock
,
has a par value of $0.001, and a stated value of $1.00 per share, subject to adjustment. The shares of Series E Convertible Preferred
Stock can convert at a conversion price that is equal to the amount that is 61% of the lowest trading price of the Company’s
common stock during the 20 trading days immediately preceding such conversion. The shares of Series E Convertible Preferred Stock
are subject to redemption by the Company at its option from the date of issuance until the date that is 180 days therefrom, subject
to premium that ranges from 120% to 145%, increasing by 5% during each 30-day period following issuance. Series E carries a 12%
cumulative dividend, which will increase to 22% upon an event of default, is non-voting, and has liquidation rights to be paid
in cash, before any payment to common or junior stock. The Company has elected to early adopt ASU 2017-11 and as a result the Series
E were not accounted for as a derivative The Series E are mandatorily -redeemable after twelve months, and therefore have been
classified as mezzanine equity.
On September 19, 2018, the Company entered
into a Stock Purchase Agreement with Geneva Roth Remark Holdings, Inc. (“Geneva”) whereby Geneva will purchase 53,000
shares of Series E preferred stock for $53,000. This transaction was completed in October when the Series E designation was completed,
and the funds were received. As of December 31, 2018, and 2017, there are 53,000 and 0 shares of series E preferred stock outstanding,
respectively.
NOTE
9 – RELATED PARTY TRANSACTION
During
the year ended December 31, 2018, the Company issued 5,000,000 shares of its Series C Preferred stock to Everett Dickson, the
Company’s CEO for services rendered. The stock was valued based on the services performed for total non-cash expense of
$120,000. In addition, per the terms of Mr. Dickson’s employment agreement he is to be compensated $120,000 per year.
For the year ended December 31, 2018, he was paid $52,000, and $68,000 had been credited to accrued compensation. For the year
ended December 31, 2017 Mr. Dickson deferred all payments and accruals for compensation.
NOTE
10 – INCOME TAX
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The Company has evaluated Staff Accounting Bulletin No. 118 regarding the impact of the decreased
tax rates of the Tax Cuts & Jobs Act. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment. The U.S. federal income tax rate of 21% is being used from 2018 due to the new tax law recently
enacted.
Net
deferred tax assets consist of the following components as of December 31:
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
1,546,200
|
|
|
$
|
6,758,513
|
|
Related party accrual
|
|
|
14,300
|
|
|
|
-
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(1,560,500
|
)
|
|
|
(6,758,513
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income
from continuing operations for the period ended December 31, due to the following:
|
|
2018
|
|
|
2017
|
|
Book loss
|
|
$
|
(576,200
|
)
|
|
$
|
(238,164
|
)
|
Accretion
|
|
|
-
|
|
|
|
61,443
|
|
Other nondeductible expenses
|
|
|
435,000
|
|
|
|
(99,909
|
)
|
Related party accruals
|
|
|
14,300
|
|
|
|
|
|
Valuation allowance
|
|
|
126,900
|
|
|
|
276,630
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
At
December 31, 2018, the Company had net operating loss carry forwards of approximately $7,363,000 that may be offset against future
taxable income from the year 2019 to 2038. No tax benefit has been reported in the December 31, 2018 financial statements since
the potential tax benefit is offset by a valuation allowance of the same amount.
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for Federal Income tax
reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may
be limited as to use in future years. With few exceptions, the Company is no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for years before 2012.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
During the normal course of business, the
Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case
in accordance with FASB ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement
strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and
can be reasonably estimated, it establishes the necessary accruals. As of December 31, 2018, the Company is not aware of any contingent
liabilities that should be reflected in the financial statements.
On February 13, 2017, Baum Glass &
Jayne PLLC (“Plaintiff”) obtained a default judgment against the Company in the amount of $27,083.74. Plaintiff has
not attempted enforced collection. The amount was included in accounts payable as of December 31, 2018 and 2017.
On June 20, 2018, GW Holdings Group, Inc.
(“GW”) filed a lawsuit against the Company, in which GW alleges that the Company breached two Stock Purchase Agreements
that GW entered into with the Company. On July 11, 2018, the Company filed a motion to dismiss which was granted by the court on
March 13, 2019. A notice of appeal filed by GW is pending. As of December 31, 2018, the Company has a note payable balance of $60,750
due to GW. Since GW’s original complaint has been dismissed and no further action has been taken by the court, no additional
liability has been accrued.
On September 21, 2018, Pro Drive Outboards,
LLC (“Pro-Drive”) filed a lawsuit against the Company, in which Pro-Drive alleges that the Company breached a contract
that Pro-Drive entered into with the Company. Pro-Drive is seeking damages in excess of $500,000. The Company has filed an answer,
including the defenses of defective service of process and statute of limitations, and the case is currently pending. Because
this case has not progressed beyond a motion to dismiss and any pending outcome is currently unknown the Company has not accrued
any amount related to this lawsuit.
NOTE
12 – SUBSEQUENT EVENTS
In
accordance with ASC 855-140,
Subsequent Events,
the Company analyzed its operations subsequent to December 31, 2018, through
the date the financial statements were available to be issued and has determined that there are no material subsequent events
to disclose in these financial statements other than the following.
On
November 20, 2018, the Company and its stockholders approved a 1 for 20 reverse stock split. The reverse stock split was deemed
effective by the Financial Industry Regulatory Authority (“FINRA”) on January 10, 2019. All shares throughout these
financial statements have been retroactively adjusted to reflect the reverse stock split.
On
January 15, 2019
, the Company entered into a Stock Purchase Agreement with Geneva
Roth Remark Holdings, Inc. (“Geneva”) whereby Geneva will purchase 53,000 shares of Series E preferred stock for $53,000.
On
January 18, 2019, the Company executed a promissory note with Travel Data Solutions LLC for $35,000. The note bears interest at
10%, and matures on January 31, 2020. Commencing on January 31, 2019 and on the last day of each month thereafter, the Company
shall pay to the Holder Three Thousand Two Hundred Eight dollars and Thirty-Three cents ($3,208.33) of which Two Thousand Nine
Hundred Sixteen Dollars and Sixty-Six cents ($2,916.66) represents payment towards the outstanding Principal Amount and Two Hundred
Nineteen Dollars and Sixty-Six cents ($219.66) represents accrued interest thereon.
On
February 7, 2019, effective as of December 31, 2018, the Company terminated the Asset Purchase Agreement with Supreme Sweets
Inc. and 2498411 Ontario, Inc (Note 1). The Company is pursuing recovery of the amounts owed in accordance with the Asset
Purchase Agreement and termination thereof.
Subsequent
to the year ended December 31, 2018, the Company issued 29,160,864 shares of common stock to settle $42,849 of principal and $1,050
of accrued interest on its convertible notes.