Notes
to Consolidated Financial Statements
For the Years Ended December 31, 2019 and
2018
NOTE
1 – BACKGROUND
Organization
Cruzani,
Inc. (“Cruzani” or the “Company”) is currently evaluating strategic options. We have divested ourselves
of our current assets and are currently performing due diligence on a wide variety of alternatives. Most recently, we were 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.
On
July 8, 2019, Mr. Dickson entered into a Securities Purchase Agreement (“Purchase Agreement”) with Conrad Huss to
sell 5,000,000 shares of Series C Preferred and 5,000 shares of Series B preferred Stock held by Mr. Dickson. As a result, Mr.
Huss acquired the right to vote 99.06 % of the voting control of the Company. The Series B Preferred Stock is also convertible
into common stock which, in the aggregate, would represent up to .01% of the outstanding common stock after the conversion. The
Series B Preferred Stock is also convertible into common stock which, in the aggregate, would represent up to 99.05% of the outstanding
common stock after the conversion.
On
July 8, 2019, Everett Dickson, who had been the sole officer of the Company, resigned as an officer of the Company, and Conrad
Huss was appointed the Interim President and Chief Executive Officer of the Company. Mr. Huss is the sole beneficial owner of
5,000,000 and 5,000 shares of Series B and C Preferred Stocks, respectively. Mr. Dickson also resigned as a director of the Company,
effective on July 8th, 2019. Mr. Dickson’s resignation was not the result of any disagreement with the management of the Company
Business
Cruzani,
Inc. is currently evaluating various strategic options to engage in.
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
The
Company currently has no cash on hand or other assets
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, 2019 or 2018.
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, 2019. 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 for the year ended December 31, 2018. 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
At
December 31, 2018, the Company had 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 the funds will not likely
be recovered, and wrote them off during the year ended December 31, 2019.
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, 2019 and 2018, 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 fulfil 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 $79,575,663, and a net loss for the year ended December 31, 2019 of $1,587,531. However, the Company
only used approximately $118,000 to conduct its operations as detailed in the Statement of Cash flows. 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 – OTHER CURRENT ASSET AND DEPOSITS ON ACQUISITION
The
balances of Other current asset and Deposits on acquisition are as follows:
|
|
2019
|
|
|
2018
|
|
Other Current Asset
|
|
|
-
|
|
|
$
|
339,813
|
|
Deposits on acquisition
|
|
|
-
|
|
|
|
85,392
|
|
|
|
$
|
-
|
|
|
$
|
425,205
|
|
Accounts
receivable related to The Company’s aborted acquisition in Supreme Sweets, Inc.
The
deposits on acquisition were for the purchase of the Recipe Food Company. During 2019, the Company put forth another $17,140 towards
this venture. It did not come to fruition and the entire amount was written off.
Loss on Other Current asset
|
|
$
|
339,813
|
|
|
|
|
|
|
Loss on Deposit on acquisition
|
|
|
102,552
|
|
|
|
|
|
|
Loss on Other Current asset and deposit
|
|
$
|
442,365
|
|
See
Note 1- BACKGROUND for more detail.,
NOTE
5 – LOANS PAYABLE
The
loan payable balances are as follows:
|
|
Rate
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Loan 1
|
|
|
1
|
%
|
|
$
|
27,000
|
|
|
$
|
27,000
|
|
Loan 2
|
|
|
1
|
%
|
|
|
3,000
|
|
|
|
3,000
|
|
Loan 3
|
|
|
8
|
%
|
|
|
64,000
|
|
|
|
39,000
|
|
Loan 4
|
|
|
8
|
%
|
|
|
160,500
|
|
|
|
155,400
|
|
Total
|
|
|
|
|
|
$
|
254,500
|
|
|
$
|
224,400
|
|
Above
notes are past due as of the issuance of these financial statements.
NOTE
6 – CONVERTIBLE NOTES
The
following table summarizes the convertible notes as of December 31, 2019:
Note Holder
|
|
Date
|
|
Maturity
Date
|
|
Interest
|
|
|
Balance
December 31,
2018
|
|
|
Additions
|
|
|
Conversions /
Transfers
|
|
|
Balance
December 31, 2019
|
|
Third party individual
|
|
7/25/13
|
|
12/31/16
|
|
|
12
|
%
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Adar Bays, LLC
|
|
2/11/16
|
|
2/11/17
|
|
|
24
|
%
|
|
|
68,004
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,004
|
|
GW Holdings Group, LLC
|
|
5/17/16
|
|
5/17/17
|
|
|
24
|
%
|
|
|
24,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,000
|
|
Travel Data Solutions
|
|
11/18/17
|
|
11/30/19
|
|
|
10
|
%
|
|
|
150,000
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
100,000
|
|
GW Holdings Group, LLC
|
|
3/16/18
|
|
3/15/19
|
|
|
24
|
%
|
|
|
36,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,750
|
|
Travel Data Solutions
|
|
1/18/2019
|
|
1/31/20
|
|
|
10
|
%
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Device Corp.
|
|
Various
|
|
|
|
|
|
|
|
|
140,831
|
|
|
|
|
|
|
|
(140,831
|
)
|
|
|
-
|
|
Livingston Asset Management
|
|
7/19/19
|
|
3/31/20
|
|
|
10
|
%
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Oasis
Capital, LLC (previously called L2 Capital, LLC)
|
|
various
|
|
various
|
|
|
24
|
%
|
|
|
882,014
|
|
|
|
22,776
|
|
|
|
(33,149
|
)
|
|
|
871,641
|
|
Oasis Capital LLC
|
|
10/1/19
|
|
10/1/20
|
|
|
10
|
%
|
|
|
-
|
|
|
|
4,000
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,801,599
|
|
|
$
|
47,776
|
|
|
$
|
(223,980
|
)
|
|
$
|
1,729,395
|
|
|
|
|
|
Less debt discount
|
|
|
|
(209,029
|
)
|
|
|
|
|
|
|
|
|
|
|
(35,547
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,592,570
|
|
|
$
|
47,776
|
|
|
$
|
(223,980
|
)
|
|
$
|
1,693,848
|
|
The embedded conversion options of the Company’s convertible
debentures summarized in Note 5, and its convertible preferred Series E stock. contain conversion features that qualify for embedded
derivative classification. The fair value of these liabilities is 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:
Balance at December 31, 2017
|
|
$
|
409,948
|
|
Addition of new derivative liabilities
|
|
|
1,127,281
|
|
Change in fair value of embedded conversion option
|
|
|
(708,663
|
)
|
Derecognition of derivatives upon settlement of convertible notes
|
|
|
(394,642
|
)
|
Balance at December 31, 2018
|
|
|
433,924
|
|
Addition of new derivative liabilities
|
|
|
194,547
|
|
Change in fair value of embedded conversion option
|
|
|
42,821
|
|
Derecognition of derivatives upon settlement of convertible preferred stock
|
|
|
(218,904
|
)
|
Derecognition of derivatives upon settlement of convertible notes
|
|
|
(79,783
|
)
|
Balance at December 31, 2019
|
|
$
|
472,605
|
|
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 of its derivatives:
|
|
Expected
Volatility
|
|
|
Risk-free
Interest Rate
|
|
|
Expected
Dividend Yield
|
|
|
Expected Life
(in years)
|
At December 31, 2018
|
|
|
335.58
|
%
|
|
|
2.45
|
%
|
|
|
0
|
%
|
|
0.25 – 0.45
|
At December 31, 2019
|
|
|
291.74
|
%
|
|
|
1.92
|
%
|
|
|
0
|
%
|
|
0.25 – 0.50
|
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, 2018
|
|
|
335.58
|
%
|
|
|
2.45
|
%
|
|
|
0
|
%
|
|
|
0.25 – .45
|
|
At December 31, 2019
|
|
|
291.74
|
%
|
|
|
1.92
|
%
|
|
|
0
|
%
|
|
|
0.25 – .50
|
|
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, 2019 and 2018.
|
|
Fair value at
December 31,
2019
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
472,605
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
472,605
|
|
Warrants
|
|
$
|
280,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280,438
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
433,924
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
433,924
|
|
Warrants
|
|
$
|
280,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
280,438
|
|
NOTE
7 – 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, 2019,
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 totalled
$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
|
|
|
22,669,092
|
|
|
$
|
.0011
|
|
|
$
|
.0014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding, December 31, 2018
|
|
|
22,669,092
|
|
|
$
|
0.0011
|
|
|
$
|
0.0014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding, December 31, 2019
|
|
|
22,669,092
|
|
|
$
|
0.0011
|
|
|
$
|
0.0014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
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
12/31/2019
|
|
|
Weighted Average
Remaining
Contractual
Life
|
|
|
Weighted
Average Exercise
Price
|
|
$
|
0.001 – 0.0071
|
|
|
|
22,669,092
|
|
|
|
3.69 years
|
|
|
$
|
0.0011
|
|
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
8 – COMMON STOCK
During
the twelve months ended December 31, 2019, the company issued shares of common stock as follows:
L2
Capital, LLC converted $33,149 of principal into 16,660,864 shares of common stock.
Device
Corp. converted $9,700 and $1,050 of principal and interest, respectively, into 12,500,000 shares of common stock. The loans from
Device Corp have no specific terms of conversion and have therefore not been classified as convertible. The shares were valued
on the date of conversion at the closing stock price, for a loss on conversion of debt of $46,250.
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 financial statements have been retroactively adjusted to reflect the reverse stock split.
NOTE
9 – 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, 2019, and December 31, 2018, 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, 2019, and December 31, 2018, 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. As of December 31, 2019, and December 31, 2018, there are 5,000,000
and 5,000,000 shares of Series C preferred stock outstanding, respectively.
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. As of December 31, 2019, and December 31, 2018, there are 125,000
and 125,000 shares of Series D preferred stock outstanding, respectively.
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 Series E are mandatorily
redeemable after twelve months, and therefore have been classified as mezzanine equity.
On July 1, 2018, the Company entered into
a Stock Purchase Agreement with Device Corp. (“Device”) whereby Device will purchase up to $250,000 Series E preferred
stock for $1 per share. As of December 31, 2019, the Company has received $166,331 for the purchase of the Series E. Originally,
these purchases were recorded as debt because the Preferred shares were not issued. As of the Balance sheet date and the date of this report, these
shares have not been issued to the Purchaser. As such, the Company feels these securities should be classified as Mezzanine equity
until they are fully issued.
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. As of December 31, 2019, and December 31, 2018, there are 34,985 and 53,000 shares
of Series E preferred stock outstanding, respectively. As of December 31, 2019, the Company fair valued its Series E preferred
stock derivative liability at $40,000.
During the twelve months ended December
31, 2019, Geneva Roth Remark Holdings converted 18,01515 Series E preferred shares into 194,438,842 shares of common stock.
During
the third quarter of the 2019 fiscal year, Mr. Huss sold $15,000 worth of Series E preferred to other investors.
NOTE
10 – RELATED PARTY TRANSACTIONS
During
the twelve months ended December 31, 2018, the Company issued 5,000,000 shares of its Series C Preferred stock to Everett Dickson,
the Company’s former CEO for services rendered. The stock was valued based on the services performed for total non-cash
expense of $120,000.
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 has been credited to accrued compensation. Mr. Dickson’s employment was terminated
effective June 30, 2019 due to the change of control. For the six months ended June 30, 2019, he was paid $16,000. As of December
31, 2019, $112,000 has been credited to accrued compensation.
On
July 8, 2019, the Company executed an employment agreement with Conrad Huss, the new CEO. The agreement is effective for three
months with a salary of $10,000 per month. As of December
31, 2019, $30,000 has been credited to accrued compensation.
NOTE
11 – INCOME TAX
In
accordance with ASC 740, we are required to recognize the impact of an uncertain tax position in the consolidated financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. An uncertain tax position
will not be recognized if it has less than a 50% likelihood of being sustained upon examination by the tax authorities. We had
no unrecognized tax benefits from uncertain tax positions as of December 31, 2019 and 2018. It is also our policy, in accordance
with authoritative guidance, to recognize interest and penalties related to income tax matters in interest and other expense in
our Statements of Operations.
Deferred
income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount
of deferred tax assets that, based on available evidence, are not expected to be realized. As a result of our cumulative losses,
management has concluded that a full valuation allowance against our net deferred tax assets is appropriate.
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.
The
provision for income taxes on our loss from continuing operations for the fiscal years ended December 31, 2019 and 2018 are as
follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Book net income
|
|
$
|
(1,587,530
|
)
|
|
$
|
(2,744,020
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Change in Fair value of derivatives
|
|
|
(19,557
|
)
|
|
|
(708,663
|
)
|
Loss on receivables
|
|
|
442,365
|
|
|
|
-
|
|
Loss on issuance of convertible preferred stock
|
|
|
194,547
|
|
|
|
-
|
|
Loss on convertible notes
|
|
|
46,250
|
|
|
|
1,962,197
|
|
Gain on extinguishment of debt
|
|
|
(492,016
|
)
|
|
|
-
|
|
Taxable net income
|
|
|
(1,415,941
|
)
|
|
|
(1,490,486
|
)
|
Change in Valuation allowance
|
|
|
370,056
|
|
|
|
389,539
|
|
Income tax expense based on taxable net income
|
|
|
(370,056
|
)
|
|
|
(389,539
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
Note:
The marginal tax rate is calculated as follows:
Statutory rate
|
|
|
|
|
|
|
Federal income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Incremental New York State rate
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
Impact of Federal rate on New York State rate
|
|
|
-1.4
|
%
|
|
|
-1.4
|
%
|
Marginal income tax rate
|
|
|
26.1
|
%
|
|
|
26.1
|
%
|
As
percentages of net income, the following are the components of tax expense:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Book net income
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Less:
|
|
|
|
|
|
|
|
|
Change in Fair value of derivatives
|
|
|
1.2
|
%
|
|
|
0.7
|
%
|
Loss on receivables
|
|
|
-27.9
|
%
|
|
|
-16.1
|
%
|
Loss on issuance of convertible preferred stock
|
|
|
-12.3
|
%
|
|
|
-7.1
|
%
|
Loss on convertible notes
|
|
|
-2.9
|
%
|
|
|
-1.7
|
%
|
Gain on extinguishment of debt
|
|
|
31.0
|
%
|
|
|
17.9
|
%
|
Taxable net income
|
|
|
89.2
|
%
|
|
|
93.7
|
%
|
Change in Valuation allowance
|
|
|
-23.3
|
%
|
|
|
-9.7
|
%
|
Income tax expense based on taxable net income
|
|
|
23.3
|
%
|
|
|
9.7
|
%
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
At
December 31, 2019, the Company had net operating loss carry forwards of approximately $8,380,000 that may be offset against future
taxable income from the year 2020 to 2039. No tax benefit has been reported in the December 31, 2019 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. Our operating loss carry forwards may be limited as to use in future
years due to the transfer of preferred securities from our former Chief Executive to our current Chief Executive, Conrad R
Huss. 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 2013.
NOTE
12 – 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.
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 a motion to dismiss. The judge granted a motion to dismiss, and the plaintiff’s
deadline to appeal has passed, thus concluding the matter.
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, 2019 and December 31, 2018.
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, 2019,
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.
NOTE
13 – SUBSEQUENT EVENTS
Management
has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the
financial statements were issued and has determined that no material subsequent events exist other than the following.
Subsequent
to December 31, 2019, Oasis Capital, LLC loaned the Company $9,200, to cover general operating costs.
Subsequent to December
31, 2019, the Company issued 121,276,346 shares for the extinguishment of convertible debt.
Subsequent to December 31, 2019, the Company
issued $125,000 in notes for consulting services and $15,600 in notes for general corporate purposes.