Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (April 30, 2017), was approximately: $1,023,486 (5,386,771 shares were held by non-affiliates).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASE OF EQUITY SECURITIES
Market Information
Our common stock trades over-the-counter and is quoted on the OTC Pink under the symbol “SIGO.” The table below sets forth the high and low bid prices for our common stock as reflected on the OTC Pink for the last two fiscal years. Quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and do not necessarily represent prices at which actual transactions were affected.
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Common Stock
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|
Fiscal Year 2017
|
|
High
|
|
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Low
|
|
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First Quarter
|
|
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15.00
|
|
|
|
3.30
|
|
|
Second Quarter
|
|
|
4.75
|
|
|
|
0.10
|
|
|
Third Quarter
|
|
|
0.35
|
|
|
|
0.06
|
|
|
Fourth Quarter
|
|
|
2.25
|
|
|
|
0.20
|
|
|
Common Stock
|
|
Fiscal Year 2016
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
|
25.00
|
|
|
|
15.00
|
|
|
Second Quarter
|
|
|
30.00
|
|
|
|
16.00
|
|
|
Third Quarter
|
|
|
80.40
|
|
|
|
15.20
|
|
|
Fourth Quarter
|
|
|
30.00
|
|
|
|
10.00
|
|
Holders of Common Equity
As of October 31, 2017 there were 4,871,771 common shares outstanding. During the fiscal year 2017, the high and low sales prices of our common stock on the OTC Markets were $15 and $0.06, respectively, and we had 310 holders of record of our common stock.
Penny Stock Rules
Due to the price of our common stock, as well as the fact that we are not listed on Nasdaq or a national securities exchange, our stock is characterized as a “penny stock” under applicable securities regulations. Our stock therefore is subject to rules adopted by the SEC regulating broker-dealer practices in connection with transactions in penny stocks. The broker or dealer proposing to effect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.
Transfer Agent
Cleartrust, LLC is the transfer agent for our common stock. Their principal office of is located at 16540 Pointe Village Dr, Suite 205, Lutz, Florida 33558 and its telephone number is 813.235.4490.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Such forward-looking statements contained herein involve risks and uncertainties, including statements as to:
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|
·
|
our future operating results;
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|
·
|
our business prospects;
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|
|
·
|
our contractual arrangements and relationships with third parties;
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|
|
·
|
the dependence of our future success on the general economy;
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|
|
·
|
our possible financings; and
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|
|
·
|
the adequacy of our cash resources and working capital.
|
These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe,” “anticipate,” “expect,” “estimate” or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto, included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.
Going Concern
The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.
Historically, it has mostly relied upon internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.
Business of the Registrant
Sunset Island Group, Inc. is a Colorado corporation. The Company’s principal line of business is the cultivation of medical cannabis. The Company operates through its wholly owned subsidiary VBF Brands. VBF Brands owns and operates the licensed cannabis activities of the Company.
The Company has leased green house space in Northern California. The Company currently leases the following: greenhouse space of approximately 12,000 square feet; bare land of approximately 10,000 square feet that can rebuilt for greenhouse use; approximately 2,000 square feet of nursery greenhouse space; 1,200 square feet for drying and curing approximately 400 square feet used for manufacturing operations; approximately 500 square feet for its trimming activities; and approximately 300 square feet for its distribution
The Company currently is licensed by the State of California for the following activities:
|
License Type
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|
License Number
|
|
|
Cannabis Cultivation
|
|
TAL17-0000526
|
|
|
Cannabis Cultivation Nursery
|
|
TAL18-0008563
|
|
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Medical Use Manufacturing License
|
|
CDPH-T00000243
|
|
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Adult Use Manufacturing License
|
|
CDPH-T00000244
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|
|
Adult Use and Medicinal Distribution
|
|
C11-18-0000257-Temp
|
|
Operations
The Company operates through its wholly owned subsidiary VBF Brands. VBF Brands operated as a Nonprofit Mutual Benefit entity until December 21, 2017 when it was converted to a For Profit entity. Prior to December 21, 2017, VBF Brands operated as a collective under the Compassionate Use Act. Since VBF Brands was operating as a Nonprofit until December 21, 2017, the Company determined that it cannot book any revenue from the activities associated while it operated as collective under the Compassionate Use Act and as a non-profit. However, the Company will book the revenue generated by VBF Brands since December 21, 2017. The Company previously was operating through its subsidiary Battle Mountain Genetics; however, upon the conversion of VBF Brands to a for profit entity the Company has been operating all of its cannabis actives through VBF Brands.
Results Of Operations
There is limited historical financial information about us upon which to base an evaluation of our performance, as operations commenced on September 29, 2016. We are in the early stages of developing operations. We cannot guarantee that we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and possible cost overruns, such as increases in marketing costs, increases in administration expenditures associated with daily operations, increases in accounting and audit fees, and increases in legal fees related to filings and regulatory compliance.
The following summary of our results of operations should be read in conjunction with our financial statements for the year ended October 31, 2017 and the period from inception (September 29, 2016) through October 31, 2016, which are included herein.
Year Ended October 31, 2017 compared to Period from Inception September 29, 2016 through October 31, 2016
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Statement of Operations Data:
|
|
Year Ended
October 31,
2017
|
|
|
From Inception
September 29,
2016
Through
October 31,
2016
|
|
|
Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating expenses
|
|
|
690,688
|
|
|
|
10,030
|
|
|
|
680,658
|
|
|
Net loss
|
|
$
|
690,688
|
|
|
$
|
10,030
|
|
|
$
|
680,658
|
|
To date, we have not earned any revenues from operations.
During the year ended October 31, 2017, we incurred a net loss of $690,688, as compared to $10,030 for the period from Inception (September 29, 2016) through October 31, 2016 due to the increase in operation expenses.
Operating expense was $690,688 for the year ended October 31, 2017, increased by $680,658 from $10,030 for the comparative period. The increase in operating expenses is primarily due to the increase in labor, supplies and greenhouse lease related to the cultivation of medical cannabis with the operations commenced in March 2017.
Liquidity and Capital Resources
Working Capital
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
|
|
Balance Sheet Data:
|
|
2017
|
|
|
2016
|
|
|
Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,656
|
|
|
$
|
970
|
|
|
$
|
23,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
24,656
|
|
|
$
|
970
|
|
|
$
|
23,686
|
|
|
Total current liabilities
|
|
$
|
74,731
|
|
|
$
|
-
|
|
|
$
|
74,731
|
|
|
Working capital (deficiency)
|
|
$
|
(50,075
|
)
|
|
$
|
970
|
|
|
$
|
(51,045
|
)
|
As of October 31, 2017 and 2016, our cash was $24,656 and $970, respectively. Because we have not generated any revenues, we depend on proceeds from the sales of securities and loans to finance our operations.
As of October 31, 2017, we experienced a decrease in our working capital of $51,045, as compared to October 31, 2016. The decrease in working capital during the year ended October 31, 2017 was primarily from increase in current liabilities mainly due to increases in dividend payable and accounts payable and accrued liabilities.
Cash Flows
|
Cash Flow Data:
|
|
Year Ended
October 31,
2017
|
|
|
From Inception
September 29,
2016
Through
October 31,
2016
|
|
|
Changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows used in Operating Activities
|
|
$
|
(678,871
|
)
|
|
$
|
(10,030
|
)
|
|
$
|
(668,841
|
)
|
|
Cash Flows used in Investing Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cash Flows provided by Financing Activities
|
|
|
702,557
|
|
|
|
11,000
|
|
|
|
691,557
|
|
|
Net Increase in Cash During Period
|
|
$
|
23,686
|
|
|
$
|
970
|
|
|
$
|
22,716
|
|
Cash Flow from Operating Activities
For the year ended October 31, 2017, net cash used in operating activities was $678,871, related to net loss of $690,688, increased by a decrease in deposits of $14,000 and decreased by an increase in accounts payable and accrued liabilities of $25,817.
For the period from inception (September 29, 2016) through October 31, 2016, net cash used in operating activities was $10,030 related to net loss incurred during the period.
Cash Flow from Investing Activities
For the year ended October 31, 2017 and the period from inception (September 29, 2016) through October 31, 2016, we had no investing activities.
Cash Flow from Financing Activities
For the year ended October 31, 2017, net cash provided by financing activities was $702,557, mainly attributed to proceeds from issuance of promissory notes to a related party of $363,200, contribution to capital from an officer of the Company of $240,115 , proceeds from issuance of common shares of $84,000, proceeds from stock subscriptions of $50,000, proceeds from a related party of $7,173, offset by repayment of promissory notes to a related party of $33,000, dividend paid of $4,643 and repayment to a related party of $4,288.
For the period from inception (September 29, 2016) through October 31, 2016, net cash provided by financing activities was $11,000 related to proceeds from issuance of common shares.
Limited Operating History; Need for Additional Capital
If the Company is not able to raise or secure the necessary funds required to maintain our operations and fully execute our business, then the Company would be required to cease operations.
In the opinion of management, available funds will not satisfy our growth requirements for the next twelve months. We believe our currently available capital resources will allow us to begin operations and maintain its operation over the course of the next 12 months; however, our other expansion plans would be put on hold until we could raise sufficient capital.
Accounting and Audit Plan
In the next twelve months, we anticipate spending approximately $15,000 - $20,000 to pay for our accounting and audit requirements.
Going Concern
We have not attained profitable operations and are dependent upon obtaining financing to pursue any extensive exploration activities. These reasons raise substantial doubt for our auditors about our ability to continue as a going concern. Without realization of additional capital, it would be unlikely for us to continue as a going concern.
Dividend Policy
The Company has paid dividends on its Common Stock in the past. On August 30, 2017, the Company declared a cash dividend on its common stock of $0.001 per share, with a record date of September 15, 2017. As of October 30, 2017, the Company has paid $4,643 in dividends and recorded a dividend payable of $46,029.
Off-balance sheet arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies
We prepare our financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our financial statements.
While we believe that the historical experience, current trends and other factors considered support the preparation of our financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company's management believes that these recent pronouncements will not have a material effect on our company's financial statements.
Emerging Growth Company Status
We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act, commonly referred to as the JOBS Act. We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:
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|
·
|
not being required to comply with the auditor attestation requirements of section 404(b) of the Sarbanes-Oxley Act (we also will not be subject to the auditor attestation requirements of Section 404(b) as long as we are a “smaller reporting company,” which includes issuers that had a public float of less than $ 75 million as of the last business day of their most recently completed second fiscal quarter);
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|
|
·
|
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
|
|
|
·
|
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
|
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. In other words, an “emerging growth company” can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an “emerging growth company” or (ii) affirmatively and irrevocably opts out of the extended transition period provided in Securities Act Section 7(a) (2) (B). The Company has elected to take advantage of this extended transition period and, as a result, our financial statements may not be comparable to the financial statements of other public companies. Accordingly, until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a) (2) (B), upon the issuance of a new or revised accounting standard that applies to your financial statements and has a different effective date for public and private companies, clarify that we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.
Our Website
.
Our website can be found at www.sunsetislandgroup.com
Intellectual Property
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, as a smaller reporting company, as defined by Rule 229.10(f)(1), is not required to provide the information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and Reports of Independent Registered Public Accounting Firms are listed in the “Index to Consolidated Financial Statements” on page F-1 and included on pages F-2 through F-16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On or about August 24, 2018 The Board of Directors of Sunset Island Group (the "Company"), acting as the Company’s Audit Committee, announces that it has appointed BF Borgers, CPA PC (“Borgers”) as Sunset Island Group’s independent auditors for the 2017 and 2018 fiscal year, replacing Benjamin & Young, LLP ("B&Y").
This action effectively dismisses Benjamin & Young as the Company's independent auditor for the fiscal year ending October 31, 2017. Benjamin & Young did not issue any report on the Company's consolidated financial statements. For the period from May 16, 2017 (B&Y’s appointment) through to the date of this form 8-K, there were no substantial disagreements with Benjamin & Young, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, remain unresolved and there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
For the years ended October 31, 2016 and through the date of this form 8-K, neither the Company nor anyone acting on the Company's behalf has consulted the entity of Borgers regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, nor did the entity of Borgers provide advice to the Company, either written or oral, that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue.
The Board of Directors of Sunset Island Group (the "Company"), acting as the Company’s Audit Committee, announces that it has appointed Benjamin & Young, LLP ("B&Y") as Sunset Island Group’s independent auditors for the 2017 fiscal year, replacing Simon & Edward, LLP ("Simon"). B&Y’s address is 1100 N. Tustin Avenue, 2nd floor Anaheim, CA 92807
This action effectively dismisses Simon & Edward as the Company's independent auditor for the fiscal year ending October 31, 2017. The report of Simon & Edward on the Company's consolidated financial statements for the year ended October 31, 2016 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except that each such report included an explanatory paragraph raising substantial doubt about the Company’s ability to continue as a going concern and stated that the Company’s consolidated financial statements for the years ended October 31, 2016, respectively, were prepared assuming that we would continue as a going concern.
For the years ended October 31, 2016 through the date of this Form 8-K, there have been no disagreements with Simon & Edward on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to Simon & Edward’s satisfaction would have caused them to make reference to the subject matter of the disagreement in connection with their reports. For the years ended October 31, 2016 and through the date of this Form 8-K, there were no "reportable events" as that term is described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Rule 308(b) of Regulation S-K, which permits the Company to provide only management’s report in this Annual Report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
|
|
1.
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
2.
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
|
|
|
3.
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of October 31, 2017. Based on this assessment, management concluded that the Company did not maintain effective internal controls over financial reporting as a result of the identified material weakness in our internal control over financial reporting described below. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO (2013 framework). The COSO framework summarizes each of the components of a company's internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Identified Material Weakness
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.
Management identified the following material weakness during its assessment of internal controls over financial reporting as of October 31, 2017:
Independent Directors
: The Company intends to obtain at least 2 independent directors at its 2020 annual shareholder meeting. The cost associated to the addition in minimal and not deemed material.
No Segregation of Duties/
Ineffective controls over financial reporting: The company intends to hire additional staff members, either as employees or consultants, prior to October 31, 2020. These additional staff members will be responsible for making sure that information required to be disclosed in our reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported as and when required and will the staff members will have segregated responsibilities with regard to these responsibilities. The costs associated with the hiring the additional staff members will increase the Company's Sales, General and Administration (SG&A) Expense. It is anticipated the cost of the new staff members will be approximately $60,000 per year.
No audit committee
: After the election of the independent directors at the 2020 annual shareholder meeting, the Company expects that an Audit Committee will be established. The cost associated to the addition an audit committee are minimal and not deemed material.
Written Policies & Procedures
: We lack written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including revenue, cost of sales and inventory transactions, and preparing, reviewing and submitting SEC filings in a timely manner.
Controls
: A material weakness in internal control over financial reporting is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. The Company will need to hire additional staff to assist that the Company has sufficient controls in place. It is anticipated the cost of the new staff members will be approximately $60,000 per year.
Management’s Remediation Initiatives
As our resources allow, we will add financial personnel to our management team. We plan to prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions. We will also create an audit committee made up of our independent directors.
As of October 31, 2017, the Company has not taken any remediation actions to address these weaknesses in our controls even though they were identified during the year. The Company’s management expects, once it is in the financial position to do so, to hire additional staff in its accounting department to be able to segregate the duties. The Company expects that the expense will be approximately $60,000 per year which would allow the Company to hire new staff members.
(b) Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of October 31, 2017, that occurred during our fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2017 and 2016
NOTE 1 – DESCRIPTION OF BUSINESS
Our Company
Sunset Island Group, Inc. is a Colorado corporation. The Company’s principal line of business is the cultivation of medical cannabis. The Company has leased green house space in Northern California that has been approved for cannabis cultivation. The greenhouse is 12,000 square feet; however, the Company is currently operating on approximately 22,000 square feet. This includes the 12,000 square feet of greenhouse space which 10,000 square feet is used for cultivation and 2,000 us used as staging area for planting and harvesting. The Company is currently looking to expand to approximately 154,000 and has been in discussions with or current landlord about expanding to 154,000. Our landlord has over 750,000 square feet of space becoming available shortly. However, the company has recently begun to look at other locations that are nearby the current operations. The Company has agreed to acquire 6,000 square feet of a neighbor’s greenhouse and expects that the agreement to be in place October 1, 2017. The Company is currently in discussions to acquire the neighbors entire 34,000 and is looking an additional 100,000 square feet that is close to the current operations.
The Company operates the greenhouses in Monterrey County which allows permits for cannabis cultivation in greenhouses that where existing prior to January 1, 2016. The Company is working on filing its permit with the County. Originally, the County required all permits to be filed prior to August 12, 2017 for operations to continue to operate. However, the county revised the deadline to January 1, 2018. The Company’s landlord has filed its land use permit with the county which covers the Company’s operations and includes our CEO on the permit application. The company has begun its permit process with the County. Until the permit is approved, the Company operates under the medical cannabis laws of the State of California.
Additionally, the Company will be consulting and advising clients that operate in the medical marijuana business by providing clients a licensed manufacturing facility to produce products such as oils and edibles. However, the company is waiting for the State of California to finalize the licensing process and requirements for licensed manufacturing facilities before implementing this segment.
On January 29, 2018, the Company received its Distributor licenses from the State of California for Adult Use and Medicinal Use.
Reverse Merger
On October 17, 2016, the Company executed a reverse merger with Battle Mountain Genetics, Inc. On October 17, 2016, the Company entered into an Agreement whereby the Company acquired 100% of Battle Mountain Genetics, Inc, in exchange for 50,000,000 shares of Sunset Island Group common stock. Immediately prior to the reverse merger, there were 30,894 common shares outstanding and no shares of Preferred shares outstanding. After the reverse merger, the Company had 50,031,771 Common shares outstanding and no shares of Preferred shares outstanding.
Battle Mountain Genetics was incorporated in the State of California on September 29, 2016. Battle Mountain Genetics, Inc. was the surviving Company and became a wholly owned subsidiary of Sunset Island Group. Sunset Island Group had no operations, assets or liabilities prior to the reverse merger. The financial statements reflected in this 10-K as of October 31, 2016, represents the period September 29, 2016 (date of inception) to October 31, 2016.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles of the United States (“GAAP”).
Consolidation Policy
The audited consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Battle Mountain Genetics, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at the date acquired. As of October 31, 2017, and 2016, cash primarily consists of cash in bank. As of October 31, 2017 and 2016, cash was $24,656 and $970, respectively.
Basic and Diluted Net Loss Per Share of Common Stock
The Company has adopted ASC Topic 260,
“Earnings per Share,”
(“EPS”) which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
As at October 31, 2017, the Company has potentially 46,000,000 in dilutive securities, from outstanding Series A convertible preferred stock, which were excluded from the computation of diluted net loss per common share as the result of the computation was anti-dilutive.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents and related party payables that it will likely incur in the near future. The Company places its cash and cash equivalents with financial institutions of high credit worthiness. At times, its cash and cash equivalents with a particular financial institution may exceed any applicable government insurance limits. The Company’s management plans to assess the financial strength and credit worthiness of any parties to which it extends funds, and as such, it believes that any associated credit risk exposures are limited.
Financial Instruments
The Company follows ASC 820, “
Fair Value Measurements and Disclosures,
” which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of October 31, 2017. The carrying values of our financial instruments, including, cash and cash equivalents, accounts payable and accrued expenses; and dividend payable and due to related party approximate their fair values due to the short-term maturities of these financial instruments.
Related Parties
The Company follows ASC 850,
“Related Party Disclosures,”
for the identification of related parties and disclosure of related party transactions. See notes 4.
Income Taxes
We account for income taxes under ASC 740 “
Income Taxes
.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Revenue Recognition
The Company recognizes revenue in accordance with “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 requires that the criteria must be met before revenue can be recognized:
|
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1.
|
The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.
|
|
|
2.
|
The Company can identify each party’s rights regarding the goods or services to be transferred.
|
|
|
3.
|
The Company can identify the payment terms for the goods or services to be transferred.
|
|
|
4.
|
The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
|
|
|
5.
|
It is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession.
|
Research and Development Expenses
We follow ASC 730,
“Research and Development,”
and expense research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development.
Recently Issued Accounting Standards
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company's adoption date of Topic 606. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the effect ASU 2018-07 will have on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that the ASU will have on its consolidated financial statements.
In September 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-13,
“Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.”
The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. Both of the below entities may still adopt using the public company adoption guidance in the related ASUs, as amended. The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
In May 2014, the FASB issued some accounting standards update which modifies the requirements for identifying, allocating, and recognizing revenue related to the achievement of performance conditions under contracts with customers. This update also requires additional disclosure related to the nature, amount, timing, and uncertainty of revenue that is recognized under contracts with customers. This guidance is effective for fiscal and interim periods beginning after December 15, 2017 and is required to be applied retrospectively to all revenue arrangements. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In February 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-05,
“Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”
The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. Effective at the same time as the amendments in Update 2014-09, Revenue from Contracts with Customers (Topic 606). Therefore, public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the amendments in this Update to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the amendments in this Update to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. All other entities may apply the guidance earlier as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance earlier as of annual reporting periods beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance. An entity is required to apply the amendments in this Update at the same time that it applies the amendments in Update 2014-09. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.
In January 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”
These amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed 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. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Effective for public business entities that are SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business.”
This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018, however, early adoption is permitted with prospective application to any business development transaction.
Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
NOTE 3 – GOING CONCERN
The Company’s financial statements have been prepared in conformity with GAAP, which contemplates the Company’s continuation as a going concern. The Company incurred operating losses of $690,688 during the year ended October 31, 2017 and has an accumulated deficit of $751,390 as of October 31, 2017.
There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company, it may be required to curtail or cease its operations.
Due to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern. The accompanying unaudited interim financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
NOTE 4 – RELATED PARTY TRANSACTIONS
Note Payable
During the year ended October 31, 2017, the Company issued various 5% notes to Novus Group, for gross proceeds of $363,200. The notes are due on December 31, 2018 or December 31, 2019. The notes accrue interest at 0% for the initial nine months and then 5% on annual rate thereafter. During the year ended October 31, 2017, the Company repaid $33,000. As of October 31, 2017 and 2016, the notes payable was $330,200 and $0, respectfully. During the year ended October 31, 2017 and period ended October 31, 2016, the notes payable incurred no interest expense.
Due to Related Party
During the year ended October 31, 2017, the Company received advances from an officer of the Company at the amount of $7,173 and repaid to her at $4,288. The loans are due on demand and non-interest bearing. As of October 31, 2017 and 2016, due to the officer was $1,885 and $0, respectively.
Management Fees
During the year ended October 31, 2017 and 2016, the Company recorded management fees of $38,168 and $0, respectively.
NOTE 5 – DIVIDEND PAYABLE
On August 30, 2017, the Company filed with FINRA its corporate notice for the cash dividend. The record date for the dividend was September 15, 2017 at a rate of $0.001 per share with payment date of September 25, 2017.
During the year ended October 31, 2017, the Company declared dividend at $50,672 and distributed cash dividend at $4,643. As of October 31, 2017, the dividend payable was $46,029.
NOTE 6 – STOCKHOLDERS’ EQUITY
The Company filed Amended and Restated Articles of Incorporation with the Secretary of State of the State of Colorado, as follows:
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·
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Effective November 19, 2018, the Company designated 500,000 shares of Series C Preferred Stock.
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·
|
Effective March 14, 2018, the Company reduced the total number of authorized shares of stock of the Company to 42,000,000 shares. The total number of authorized shares of the Company is currently 15,000,000 shares of preferred stock and 27,000,000 shares of Common Stock.
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|
|
·
|
Effective September 7, 2017, the Company designated 8,000,000 shares of its Series B Preferred Stock.
|
|
|
·
|
Effective August 20, 2017, the Company amended the designated shares of Series A Preferred Stock to 4,600,000 shares.
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Preferred Stock
The Company has authorized 15,000,000 preferred shares with a par value of $0.0001 per share. The Board of Directors is authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes.
Series A Preferred Stock
The Company has designated 4,600,000 shares of Series A Convertible Preferred Stock. The Series A Preferred Stock may convert into Common Stock at a rate equal to 10 shares of common stock for each share of Series A Preferred stock. In the event that any cash dividend on the Common Stock is declared by the Board, the Board shall simultaneously declare a dividend for each share of Series A Preferred Stock in an amount equal to the product of (i) the per share dividend declared and to be paid in respect of each share of Common Stock and (ii) the amount of common stock the Series A Preferred Stock is convertible into under the designation.
On August 31, 2017, the Company finalized the cancelation of the 46,000,000 shares of common stock and issued 4,600,000 shares of its Series A Preferred Stock to its officers.
As at October 31, 2017 and 2016, the Company had 4,600,000 and 0 shares of Series A Preferred Stock issued and outstanding, respectively.
Series B Preferred Stock
The Company has designated 8,000,000 shares of Series B Preferred Stock, with a face value of $1.00 per share. The Series B Preferred Stock has no conversion right or no voting rights. The shareholders of the Series B Preferred will be entitled to $200 per pound that the Company harvested from its cultivation operations, which is divided by the outstanding shares of the Series B preferred shares.
As at October 31, 2017 and 2016, the Company had no shares of Series B Preferred Stock issued and outstanding.
Series C Preferred Stock
The Company has designated 500,000 shares of Series C Convertible Preferred Stock. The Series C Preferred Stock has no voting rights. The Series C Preferred Stock may convert into Common Stock at a rate equal to 10 shares of common stock for each share of Series C Preferred stock. In the event that any cash dividend on the Common Stock is declared by the Board, the Board shall simultaneously declare a dividend for each share of Series C Preferred Stock in an amount equal to the product of (i) the per share dividend declared and to be paid in respect of each share of Common Stock and (ii) the amount of common stock the Series C Preferred Stock is convertible into under the designation.
As at October 31, 2017 and 2016, the Company had no shares of Series C Preferred Stock issued and outstanding.
Common Stock
The Company has authorized 27,000,000 common shares with a par value of $0.0001 per share. Each common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.
During the year ended October 31, 2017 and 2016, the Company issued 1,340,000 and 4,000,000 common shares for proceeds of $134,000 and $11,000, respectively.
During the year ended October 31, 2017, the founders exchanged an aggregate of 46,000,000 shares of common stock for 4,600,000 shares of Series A Preferred stock.
As at October 31, 2017 and 2016, the Company had 4,871,771 and 50,031,771 shares of common stock issued and outstanding, respectively.
Additional paid in capital
During the year ended October 31, 2017, the Company’s officer contributed additional paid in capital in the amount of $240,115.
Subscriptions Received
On October 30, 2017, the Company received cash of $50,000 for the stock subscription at $0.10 per share and recorded this as subscriptions received – shares to be issued as of October 31, 2017. On November 1, 2017, 500,000 shares of common stock were issued.
NOTE 7 – PROVISION FOR INCOME TAXES
The Company provides for income taxes under ASC 740, “
Income Taxes.”
Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax basis of assets and liabilities and the tax rates in effect when these differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company’s financial statements for the years ended October 31, 2017 and period ended October 31, 2016, reflect certain effects of the Act which includes a reduction in the corporate tax rate from 34% to 21% as well as other changes.
The components of the Company’s deferred tax asset and reconciliation of income taxes computed at the statutory rate to the income tax amount recorded as of October 31, 2017 and 2016 are as follows:
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October 31,
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|
October 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net Operating loss carryforward
|
|
$
|
751,390
|
|
|
$
|
10,030
|
|
|
Effective tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
Deferred tax asset
|
|
|
157,792
|
|
|
|
2,106
|
|
|
Less: valuation allowance
|
|
|
(157,792
|
)
|
|
|
(2,106
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of October 31, 2017, utilization of the NOL carry forwards, which will begin to expire between 2031 and 2037, of approximately $700,718 for federal income tax reporting purposes, may be subject to an annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These ownership changes may limit the amount of the NOL carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.
Tax returns for the years ended 2011 through 2017 are subject to review by the tax authorities.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
On March 1, 2017, the Company executed a lease for 12,000 square feet green house space and 1,000 square of warehouse space expiring March 31, 2020. The monthly lease is a base amount of $7,000 per month, plus maintenance and improvement fees prorated for the Company’s portion of leased property as shared with other tenants and property owner. During the year ended October 31, 2017 and period ended October 31, 2016, we incurred total lease expenses of $89,622 and $0, respectively.
The Company has aggregate future minimum lease commitments as of October 31, 2017, as follows:
|
Year ending October 31,
|
|
|
|
|
2018
|
|
$
|
84,000
|
|
|
2019
|
|
|
84,000
|
|
|
2020
|
|
|
35,000
|
|
|
Total
|
|
$
|
203,000
|
|
NOTE 9 – SUBSEQUENT EVENTS
Subsequent to October 31, 2017 and through the date that these financials were approved to be issued, the Company had the following subsequent events:
On January 16, 2018, the Company issued a convertible promissory note at $220,000 principal amount. The note is repayable in six months and bears interest at 12% per annum. The note is convertible into common shares at the option of the holder at issuance based on the discounted (50% discount) lowest trading prices of the Company’s shares during 25 days prior to the conversion. On February 20, 2018, Auctus Fund was repaid for the loan and as such it is no longer outstanding and has been retired. The Company had the right to prepay the note at 135% nut negotiated the rate down to 125% plus 15,000 shares of restricted stock. The repayment amount was $276,627 plus 15,000 shares of restricted stock.
On February 14, 2018, the Company has executed an agreement with St George Investments for $4,245,000 with the initial tranche being $850,000. This note carries an original issuance discount of $385,000 and the Company agreed to pay financing fees of $10,000. The note is repayable in one year and bears interest at 10% per annum. The note is convertible into common shares after six months from the issuance based on the discounted (50% discount) lowest trading prices of the Company’s shares during 25 days prior to the conversion. This Note shall be comprised of thirteen (13) tranches (each, a “
Tranche
”), consisting of (i) an initial Tranche in an amount equal to $945,000.00 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (as defined in the Purchase Agreement) (the “
Initial Tranche
”), and (ii) twelve (12) additional Tranches, each in the amount of $275,000.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (each, a “
Subsequent Tranche
”). The Initial Tranche shall correspond to the Initial Cash Purchase Price, $85,000.00 of the OID and the Transaction Expense Amount, and may be converted into shares of Common Stock (as defined below) any time subsequent to the Purchase Price Date.
On February 20, 2018, the Company received the first tranche. As part of the initial tranche the Company repaid Auctus Fund.
On February 26, 2018, the Company’s Board of Directors approved a cash dividend. The record date for the dividend is March 31, 2018 at a rate of $0.001 per share.
On March 2, 2018. the Company has agreed to terms with REI Extracts regarding an extraction and distribution joint venture. Equipment has been ordered and is being shipped to the Company’s location in Salinas, California. The operations of the joint venture will be conducted under the Company’s licenses. Additionally, the Company has retained REI Extracts to provide consulting services related to cultivation and to provide a master grower. The new master grower has been working with the Company since January 2018. The grower will be paid based on the yield of sellable flower per bay. The incentive pay shall be paid as follows:
|
Harvested pounds per bay of sellable flower
|
|
Incentive Bonus
|
|
|
0-40
|
|
$0
|
|
|
40-60
|
|
$40 per pound in excess of 40 pounds
|
|
|
60-80
|
|
$70 per pound in excess of 40 pounds
|
|
|
80-100
|
|
$100 per pound in excess of 40 pounds
|
|
|
100+
|
|
$120 per pound in excess of 40 pounds
|
|
On November 30, 2018, the Company sold 333,000 shares of Series C Preferred Stock to Job Growing Inc. (“Job Growing”) for 50% of the profits of Job Growing. In the event that Job Growing either: (i) files a Registration Statement to become a reporting company under the Securities Exchange Act of 1934 which becomes effective, or (ii) is acquired by an unrelated third party, then Sunset Island Group has the right to buy a Fifty Percent (50%) equity interest in the Job Growing for One Dollar ($1.00).