Amended Quarterly Report (10-q/a)

Date : 09/26/2019 @ 10:03AM
Source : Edgar (US Regulatory)
Stock : Sunset Island Group, Inc. (PN) (SIGO)
Quote : 0.15  0.0 (0.00%) @ 9:00PM

Amended Quarterly Report (10-q/a)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2018

 

or

 

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________

 

Commission File Number 333-214643

 

SUNSET ISLAND GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

82-0884850

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

20420 Spence Road, Salinas, CA

 

93908

(Address of principal executive offices)

 

(Zip Code)

 

(424) 239-6230

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x YES      ¨ NO

 

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.

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

x

Smaller reporting company

x

Emerging growth company

x

 

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      x NO

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. ¨ YES      ¨ NO

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

5,386,771 shares of common stock as of July 1, 2019

 

 
 
 
 

  

EXPLANATORY NOTE

 

This Amendment No. 1 (“Amendment No. 1”) to the Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2018 of Sunset Island Group (the “Company”) filed with the Securities and Exchange Commission on August 27, 2019 (the “Form 10-Q”), is to amend Part I (Item 1) with the updated Financial Statements and related information as reviewed by the Independent Registered Public Accounting Firm per the requirements of Form 10-Q.

 

In addition to amending Item 1 of Part I with updated Financial Statements, this Amendment makes general revisions to the disclosures contained in Item 2 of Part I, Item 5 of Part II and amends Item 6 of Part II to include new certifications being provided with this Amendment pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 
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TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

4

 

Item 2.

Management's Discussion and Analysis of Financial Condition or Plan of Operation

 

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

23

 

Item 4.

Controls and Procedures

 

23

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

24

 

Item 1A.

Risk Factors

 

24

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

Item 3.

Defaults Upon Senior Securities

 

24

 

Item 4.

Mine Safety Disclosures

 

24

 

Item 5.

Other Information

 

24

 

Item 6.

Exhibits

 

24

 

SIGNATURES

 

25

 

 
3
 
 

 

PART I - FINANCIAL INFORMATION

 Item 1. Financial Statements

 

Sunset Island Group, Inc.

Condensed Consolidated Balance Sheets

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$ 2,740

 

 

$ 24,656

 

Total Current Assets

 

 

2,740

 

 

 

24,656

 

 

 

 

 

 

 

 

 

 

Deposit

 

 

14,000

 

 

 

14,000

 

Total Assets

 

$ 16,740

 

 

$ 38,656

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$ 18,240

 

 

$ 25,817

 

Accrued interest - related party

 

 

497

 

 

 

-

 

Dividend payable

 

 

46,029

 

 

 

46,029

 

Due to related party

 

 

2,885

 

 

 

2,885

 

Convertible note, net of unamortized discount of $33,123

 

 

136,877

 

 

 

-

 

Current portion of notes payable - related party

 

 

157,200

 

 

 

-

 

Total Current Liabilities

 

 

361,728

 

 

 

74,731

 

 

 

 

 

 

 

 

 

 

Notes payable - related party

 

 

272,200

 

 

 

330,200

 

Total Liabilities

 

 

633,928

 

 

 

404,931

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 15,000,000 shares authorized;

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, 4,600,000 shares designated, 4,600,000 shares issued and outstanding

 

 

460

 

 

 

460

 

Series B Preferred Stock, 8,000,000 shares designated, no shares issued and outstanding

 

 

-

 

 

 

-

 

Series C Convertible Preferred Stock, 500,000 shares designated, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common Stock, par value $0.0001, 27,000,000 shares authorized, 5,371,771 and 4,871,771 shares issued and outstanding, respectively

 

 

537

 

 

 

487

 

Additional paid in capital

 

 

463,403

 

 

 

334,168

 

Subscriptions received - shares to be issued

 

 

-

 

 

 

50,000

 

Accumulated deficit

 

 

(1,081,588 )

 

 

(751,390 )

Total Stockholders’ Deficit

 

 

(617,188 )

 

 

(366,275 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

 

$ 16,740

 

 

$ 38,656

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 
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Sunset Island Group, Inc.

Condensed Consolidated Statements of Operations

(Unaudited) 

 

 

 

Three Months Ended

 

 

 

January 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Labor

 

 

184,978

 

 

 

-

 

Supplies

 

 

27,575

 

 

 

-

 

General and administrative expenses

 

 

42,547

 

 

 

980

 

Lease

 

 

54,930

 

 

 

-

 

Lab testing

 

 

250

 

 

 

-

 

Utilities

 

 

3,467

 

 

 

-

 

Professional fees

 

 

2,036

 

 

 

-

 

 Total Operating Expenses

 

 

315,783

 

 

 

980

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(315,783 )

 

 

(980 )

 

 

 

 

 

 

 

 

 

Other Expenses

 

 

 

 

 

 

 

 

Interest expense

 

 

(14,415 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (330,198 )

 

$ (980 )

 

 

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$ (0.06 )

 

$ (0.00 )

Weighted average number of common shares outstanding

 

 

5,371,771

 

 

 

50,031,771

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 
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Sunset Island Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the three months ended January 31, 2018 and 2017

(Unaudited) 

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Common Stock

Subscription

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Received

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - October 31, 2017

 

 

4,600,000

 

 

 

460

 

 

 

4,871,771

 

 

 

487

 

 

 

334,168

 

 

 

50,000

 

 

 

(751,390 )

 

 

(366,275 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for cash

 

 

-

 

 

 

-

 

 

 

500,000

 

 

 

50

 

 

 

49,950

 

 

 

(50,000 )

 

 

-

 

 

 

-

 

Beneficial conversion feature

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,444

 

 

 

-

 

 

 

-

 

 

 

9,444

 

Contribution

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

69,841

 

 

 

-

 

 

 

-

 

 

 

69,841

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(330,198 )

 

 

(330,198 )

Balance - January 31, 2018

 

 

4,600,000

 

 

$ 460

 

 

 

5,371,771

 

 

$ 537

 

 

$ 463,403

 

 

$ -

 

 

$ (1,081,588 )

 

$ (617,188 )

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Common Stock

Subscription

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Received

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - October 31, 2016

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ -

 

 

$ (10,030 )

 

$ 970

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(980 )

 

 

(980 )

Balance - January 31, 2017

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ -

 

 

$ (11,010 )

 

$ (10 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 
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Sunset Island Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended

 

 

 

January 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net loss

 

$ (330,198 )

 

$ (980 )

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

11,321

 

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

(7,577 )

 

 

-

 

Accrued interest - related party

 

 

497

 

 

 

-

 

Net Cash Used in Operating Activities

 

 

(325,957 )

 

 

(980 )

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Bank overdraft

 

 

-

 

 

 

10

 

Repayment of promissory notes - related party

 

 

99,200

 

 

 

-

 

Contribution

 

 

69,841

 

 

 

-

 

Proceeds from convertible note

 

 

135,000

 

 

 

-

 

Net Cash Provided by Financing Activities

 

 

304,041

 

 

 

10

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(21,916 )

 

 

(970 )

Cash and cash equivalents, beginning of period

 

 

24,656

 

 

 

970

 

Cash and cash equivalents, end of period

 

$ 2,740

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ -

 

 

$ -

 

Cash paid for taxes

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Non-cash financing transactions:

 

 

 

 

 

 

 

 

Common stock issued

 

$ 50,000

 

 

$ -

 

Beneficial conversion feature

 

$ 9,444

 

 

$ -

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 
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Sunset Island Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Sunset Island Group, Inc. (“SIGO” or the “Company”) was originally incorporated in the State of Colorado on September 29, 2005 as Gulf West Property, Inc. On October 25, 2005 the Company changed its name to Titan Global Entertainment, Inc. On May 7, 2008, the Company changed its name to Sunset Island Group, Inc.

 

Our business and corporate address is 20420 Spence Road, Salinas CA 93908, our phone number is (424) 239-6230. Our corporate website is www.sunsetislandgroup.com.

 

We have one subsidiary, VBF Brands, Inc. (“VBF Brands”), a California, corporation.

 

Our Business

 

The Company operates its cannabis growing, cultivation, manufacturing and distribution business 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 operated its cultivation business through its former wholly owned subsidiary Battle Mountain Genetics, Inc. (“BMG”); however, upon the conversion of VBF Brands to a for profit entity the Company transitioned the operation of all of its cannabis actives through VBF Brands and BMG ceased active operations.

 

Share Exchange

 

BMG was incorporated in the State of California on September 29, 2016. On October 17, 2016, the Company entered into an agreement whereby it acquired 100% of the issued and outstanding shares of capital stock of BMG in exchange for 50,000,000 shares of SIGO common stock.

 

Prior to the share exchange SIGO had no assets, liabilities or operations; following the share exchange SIGO operated BMG as a wholly owned subsidiary. Immediately prior to the share exchange with BMG’s shareholders, there were 30,894 shares of SIGO Common Stock outstanding and no shares of SIGO Preferred Stock outstanding. After the share exchange, the Company had 50,031,771 Common shares outstanding and no shares of Preferred Stock outstanding.

 

Divestiture of Battle Mountain Genetics, Inc.

 

During December 2017, the Company divested itself of BMG by transferring all of the issued and outstanding shares of BMG, to T.J. Magallanes a former officer and director of the Company, in exchange for 3,036,000 of Mr. Magallanes’ SIGO Series A Preferred shares. 

 

 
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation of Interim Financial Statements

 

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended January 31, 2018 are not necessarily indicative of the results that may be expected for the year ending October 31, 2018. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year 2017 have been omitted. This report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended October 31, 2017 included in the Company’s 10-K as filed with the Securities and Exchange Commission on March 25, 2019.

 

Consolidation Policy

 

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, VBF Brands, 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 accounting principles generally accepted in the United States 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 January 31, 2018 and October 31, 2017, cash primarily consists of cash in bank. As of January 31, 2018 and October 31, 2017, cash was $2,740 and $24,656, 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 January 31, 2018, 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.

 

 
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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 January 31, 2018. 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.

 

 
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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:

 

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.

 

Leasehold improvements

 

The company subleases land shared with other larger farms. In addition to fixed monthly lease payments, the Company is required to pay a proportionate share of costs incurred for upgrades benefiting all lots. Expenditures for repairs and maintenance and betterments for improvements shared with neighboring properties, are charged to rent expense as incurred.

 

For the three months ended January 31, 2018 and 2017, additional leasehold costs included in rent expense were $33,930 and $0, respectively.

 

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.

 

 
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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.

 

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.

 

 
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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 are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not established any source of revenue to cover its operating costs, and it does not have sufficient cash flow to maintain its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company expects to develop its business and thereby increase its revenue. However, the Company would require sufficient capital to be invested into the Company to acquire the properties to begin generating sufficient revenue to cover the monthly expenses of the Company. Until the Company is able to generate revenue, the Company would be required to raise capital through the sale of its stock or through debt financing. Management may raise additional capital 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.

 

To this date the Company has relied on the sale of securities to finance its operations and growth. The Company expects to continue to fund the Company through debt and securities sales and issuances until the Company generates enough revenues through the operations. These transactions will initially be through related parties, such as the Company’s officers and directors.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Notes Payable

 

During the three months ended January 31, 2018, the Company issued multiple 5% notes to a related party, for gross proceeds of $99,200. The notes are due on December 31, 2019. The notes accrue interest at 0% for the initial nine months and then 5% on annual rate thereafter.

 

 
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During the year ended October 31, 2017, the Company issued a total of twenty-six (26) 5% notes to Novus Group, a related party, for gross proceeds of $363,200 (together the “Novus Notes”). The Novus Notes contained maturity dates of December 31, 2018 and December 31, 2019 respectively. The Novus Notes accrue interest at 0% for the initial nine months and 5% on annual rate thereafter.

 

As of January 31, 2018 and October 31, 2017, the notes payable were $272,200 and $330,200, respectively and the current portion of notes payable were $157,200 and $0, respectively. During the three months ended January 31, 2018, the Novus Notes payable incurred interest expense of $497.

 

Due to Related Party

 

During the period beginning January, 2017 and ending in October, 2017, Valerie Baugher, an officer of the Company lent to the Company, pursuant to seven (7) total advancements, an aggregate of $7,173 for use as working capital (collectively the “Officer Loans”). The Officer Loans are due on demand and non-interest bearing. As of January 31, 2018 and October 31, 2017, the total remaining due to the officer was $2,885.

 

NOTE 5 – CONVERTIBLE NOTE

 

The Company had the following principal balance under its convertible note outstanding as of January 31, 2018:

 

 

 

January 31,

 

 

 

2018

 

Convertible Notes - originated in December 2017

 

$ 170,000

 

Less debt discount and debt issuance cost

 

 

(33,123 )

 

 

 

136,877

 

Less current portion of convertible note payable

 

 

(136,877 )

Long-term convertible note payable

 

$ -

 

 

On December 8, 2017, the Company issued a $170,000 convertible promissory note to St. George Investments, LLC. The note is repayable in seven (7) months and bears interest at 10% per annum. The note is convertible into Common shares at the option of the holder at issuance at $0.90 per share of common stock.

 

As of the filing of this interim financial statement, the note is in default and is accruing interest at a rate of 22%. The note is now convertible at a price which is the lower of $0.90 per share and the market price on any applicable date of conversion.  Certain other reset provisions and potential true up policies are in effect which may materially increase the number of Common shares to be delivered upon conversion.

 

The Company recognized amortization expense related to the debt discount and debt issuance cost of $11,321 for the three months ended January 31, 2018, which is included in interest expense in the statements of operations.

 

For the three months ended January 31, 2018, the interest expense on the convertible note was $2,597. As of January 31, 2018, the accrued interest payable was $2,597.

 

NOTE 6 – DIVIDEND PAYABLE

 

On August 22, 2017, the Company declared a dividend, in the aggregate amount of $50,672, payable to the Common shareholders. On August 30, 2017, the Company filed with FINRA its corporate notice for a cash dividend. Of the total amount of the declared dividend, the amount of $4,463 was paid out to the Common shareholders. As of January 31, 2018 and October 31, 2017, the aggregate dividend payable to Common and Series A Preferred shareholders was $46,029.

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

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. Each Series A Preferred shareholder is entitled to vote, on par with the Common shareholders, one (1) vote for each share of Common Stock into which a Series A Preferred share may be converted. 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.

 

As at January 31, 2018 and October 31, 2017, the Company had 4,600,000 shares of Series A Preferred Stock issued and outstanding.

 

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 January 31, 2018 and October 31, 2017, the Company had no shares of Series B Preferred Stock issued and outstanding.

 

 
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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. Each Series C Preferred shareholder is entitled to vote, on par with the Common shareholders, one (1) vote for each share of Common Stock into which a Series C Preferred share may be converted. 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 January 31, 2018 and October 31, 2017, the Company had no shares of Series C Preferred Stock issued and outstanding.

 

Common Stock

 

As a result of an amendment to the Company’s Articles of Incorporation filed with the Colorado Secretary of State’s office on March 14, 2018, SIGO 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 three months ended January 31, 2018, the Company issued 500,000 shares of common stock for $50,000 recorded as subscription received at October 31, 2017.

 

As at January 31, 2018 and October 31, 2017, the Company had 5,371,771 and 4,871,771 shares of Common Stock issued and outstanding, respectively.

 

Additional Paid in Capital

 

During the three months ended January 31, 2018, the Company’s officer contributed additional paid in capital in the amount of $69,841.

 

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 base lease amount is $7,000 per month. Any amounts expended by the Landlord for maintenance, repairs or improvements deemed to be our responsibility are added to our monthly lease amount as additional rent. During the three months ended January 31, 2018, we incurred total lease expenses of $54,930.

 

The Company has aggregate future minimum lease commitments as of January 31, 2018, as follows:

 

Year ending October 31,

 

 

 

2018

 

$ 63,000

 

2019

 

 

84,000

 

2020

 

 

35,000

 

Total

 

$ 182,000

 

 

NOTE 9 – SUBSEQUENT EVENTS

 

On February 1, 2018, the Company issued to Auctus Funds, LLC (“Auctus”) a convertible promissory note for $220,000 (the “Auctus Loan” or the “Auctus Note”). The Auctus Note is repayable in six months, from issuance, and bears interest at 12% per annum. The Auctus 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 Common shares during 25 days prior to the conversion. The Company had the right to prepay the note at 135% but negotiated the rate down to 125% plus 15,000 shares of restricted Common stock. On February 20, 2018, the Company repaid the Auctus Loan in full and as such it is no longer outstanding and has been retired. The repayment amount was $276,627 plus 15,000 shares of restricted Common stock.

 

 
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On February 13, 2018, the Company executed a purchase agreement (the “Purchase Agreement”) and attendant promissory note, with St George Investments for $4,245,000 (the “St. George Loan” or the “St. George Note”) with the initial tranche of the St. George Loan being $945,000. The St. George Loan carries an original issuance discount (“OID”) of $385,000 and the Company agreed to pay financing fees of $10,000. The St. George Note is repayable one (1) year from issuance and bears interest at 10% per annum. The St. George Note is convertible into Common shares after six (6) months from the issuance based on the discounted (50% discount) lowest trading prices of the Company’s Common shares during 25 days prior to the conversion. The full amount of the St. George Loan shall be comprised of thirteen (13) tranches (each, a “Tranche”), consisting of (i) the initial Tranche in an amount equal to $945,000 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of the St. George 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, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of the St. George Note and the other Transaction Documents (each, a “Subsequent Tranche”).

 

In conjunction with the initial tranche from the St. George Note, the Company was provided with warrants to purchase up to 211,883 shares of common stock. The warrants to purchase common stock are equivalent to $472,500 divided by the market price of the Company stock on the note issuance date for the initial tranche. The warrants are exercisable at $1.90 per share within five years from the note issuance date.

 

On February 20, 2018, the Company received the Initial Tranche from St. George Investments, less $85,000 of the total OID, for net proceeds of $850,000. As part of the Initial Tranche, the Company repaid Auctus Loan. The total repayment amount of the Auctus Loan was $276,627 and 15,000 shares of common stock.

 

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 agreed to terms with REI Extracts regarding an extraction and distribution joint venture conducted under the Company’s licenses. To carry out the purposes of the joint venture, REI delivered equipment to SIGO’s facilities to conduct extraction tests. Additionally, REI Extracts also provided consulting services related to cultivation and provided a master grower. The new master grower originally began working with the Company in January 2018. The Company agreed to pay the grower based on the yield of sellable flower per warehouse bay, 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

 

In December, 2018, SIGO and REI Extracts mutually agreed to terminate their joint venture. All equipment delivered by REI Extracts was removed by REI Extracts and the Company ceased utilizing the master grower provided by REI Extracts.

 

On November 30, 2018, pursuant to a purchase agreement entered into by and between SIGO and Job Growing, Inc. (“Job Growing”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Job Growing, in exchange for the rights to 50% of the net profits of Job Growing. In the event that Job Growing either: (i) files a registration statement, with the Securities and Exchange Commission (the “SEC”), to become a reporting company under the Securities Exchange Act of 1934; or (ii) is acquired by an unrelated third party, then SIGO has the right to buy a fifty percent (50%) equity interest in Job Growing for the additional consideration of one and no/100 dollar ($1.00).

 

On September 17, 2019 Job Growing notified the Company of its intent to terminate the agreement between Job Growing and the Company effective immediately.

 

On August 15, 2019, the Company received a true up notice from Job Growing to issue 576,091 shares of Series C Preferred Stock to Job Growing valued at $633,700, pursuant to the terms of the purchase agreement signed on November 30, 2018. 

 

On January 15, 2019, BMG was fined approximately $35,000 for not having Worker's Compensation insurance for the months of January 2018 - April 2018.  The Company believes this is a fine owed by BMG and is not a liability due to the Company, as we transferred ownership of BMG during December 2017, to T.J. Magallanes, the Company's former CEO (see Note 1). VBF Brands, the Company's operating entity, has worker’s compensation and was not subject to the fine.  The Company ceased operating BMG in December 2017.

 

On February 11, 2019, , pursuant to a purchase agreement entered into by and between SIGO and Cicero Travel Group, Inc. (“Cicero Travel”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Cicero Travel, in exchange for the rights to receive 33% of the net profits of Cicero Travel, 19% of the issued and outstanding shares of the common stock of Cicero Travel and the right to purchase an additional 14% of the issued and outstanding shares of the common stock of Cicero Travel.

 

On August 19, 2019, the Company received a true up notice from Cicero Travel to issue 486,672 shares of Series C Preferred Stock to Cicero Travel valued at $593,740, pursuant to the terms of the purchase agreement signed on February 11, 2019.  The Company believes the true up notice is without merit, that Cicero Travel has not met its obligations under the purchase agreement and SIGO intends to cancel the previously issued shares of Series C Preferred Stock and will not be issuing any additional shares of Series C Preferred Stock to Cicero Travel.

 

 
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Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our interim unaudited consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly 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 such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

 

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.

 

As used in this quarterly report, the terms “we”, “us”, “our” and “our company” mean Sunset Island Group, Inc. and our wholly owned subsidiary, VBF Brands, Inc., a California corporation, unless otherwise indicated.

 

General Overview

 

Sunset Island Group, Inc. (“SIGO” or the “Company”) was originally incorporated in the State of Colorado on September 29, 2005 as Gulf West Property, Inc. On October 25, 2005 the Company changed its name to Titan Global Entertainment, Inc. On May 7, 2008, the Company changed its name to Sunset Island Group, Inc.

 

Our business and corporate address is 20420 Spence Rd., Salinas, CA 93908, our phone number is (424) 239-6230. Our corporate website is www.sunsetislandgroup.com/.

 

Until December 31, 2017, we operated our business through our then wholly owned subsidiary, Battle Mountain Genetics, Inc., a California corporation (“BMG”). The Company currently conducts its business operations through its wholly owned subsidiary VBF Brands, Inc. ("VBF Brands" or “VBF”). 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 pursuant to California’s Compassionate Use Act. Upon the conversion of VBF Brands to a for profit entity the Company began operating all of its cannabis related business through VBF Brands and BMG ceased active operations. One hundred percent of the issued and outstanding shares of BMG’s capital stock was transferred, in December, 2017 to T.J. Magallanes, a former officer and director of SIGO.

 

We have one subsidiary, VBF Brands, Inc., a California, corporation.

 

We have never declared bankruptcy, been in receivership, or involved in any kind of legal proceeding.

 

Our Current Business

 

Our principal line of business is the growing, cultivation, production and distribution of medical cannabis.

 

The Company leases greenhouse space in Northern California. The Company currently leases the following: greenhouse space of approximately 12,000 square feet; vacant land of approximately 10,000 square feet that can developed for greenhouse use; and 2,400 square feet for drying, curing, manufacturing, trimming and distribution activities.

 

 
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Federal Regulation

 

The Company, by and through VBF (a wholly owned subsidiary) engages in the direct growth, cultivation, harvesting and distribution of cannabis containing psychoactive amounts of the THC molecule, for use in the medicinal cannabis industry

 

Cannabis is illegal under federal law and is a “Schedule 1” drug under the Controlled Substances Act (21 U.S.C. § 811) (the “CSA”). As a Schedule 1 drug, cannabis is viewed as being highly addictive and having no medical value. The United States Drug Enforcement Agency (“DEA”) enforces the CSA, and persons violating it are subject to federal criminal prosecution. The criminal penalty structure in the CSA is determined based on the specific predicate violations, including but not limited to: simple possession, drug trafficking, attempt and conspiracy, distribution to minors, trafficking in drug paraphernalia, money laundering, racketeering, environmental damage from illegal manufacturing, continuing criminal enterprise, and smuggling. A first conviction under the CSA can generally result in possible fines from $250,000 to $50 million dollars, and incarceration for periods generally from five and up to forty years. For a second conviction, fines increase generally from $500,000 to $75 million dollars, and incarceration for periods generally from ten years to twenty years to life.

 

The federal government recently issued guidance to federal prosecutors concerning marijuana enforcement under the CSA. On January 4, 2018, Attorney General Jeff Sessions issued a memorandum for all United States Attorneys concerning federal cannabis enforcement generally. The Department of Justice (the “DOJ”) rescinded all previous prosecutorial guidance issued by it regarding cannabis, including the August 29, 2013 memorandum by James Cole, then Deputy Attorney General (the “Cole Memorandum”).

 

The Cole Memorandum previously set out the DOJ’s prosecutorial priorities in light of various states legalizing cannabis for medicinal and/or recreational use. The Cole Memorandum provided that when states have implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities. A strong and effective regulatory system, according to the Cole Memorandum, would affirmatively address federal priorities by, for example, implementing effective measures to prevent diversion of cannabis outside of the regulated system and to other states, prohibiting access to cannabis by minors, and replacing an illicit cannabis trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for. In such circumstances, consistent with the traditional allocation of federal-state efforts in this area, the Cole Memorandum provided that enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing cannabis-related activity. If state enforcement efforts did not protect against the harms set forth above, the federal government could seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on those harms.

 

The rescission of the Cole Memorandum created material uncertainty as it relates to how the DOJ will evaluate cannabis cases for prosecution and introduced risk into the Company’s business as it relates to the research, growth, cultivation, development, manufacturing, marketing and sale of its cannabis products.

 

Current guidance requires U.S. Attorneys to decide whether or not to pursue prosecution of cannabis activity based upon factors including: the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. The guidance reiterates that the cultivation, distribution and possession of cannabis continues to be a crime under the CSA.

 

On March 23, 2018, President Donald J. Trump signed into law a $1.3 trillion-dollar spending bill that included an amendment known as “Rohrabacher-Blumenauer,” which prohibits the DOJ from using federal funds to prevent certain states “from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.”

 

The United States Food & Drug Administration (the “FDA”) is generally responsible for protecting the public health by ensuring the safety, efficacy, and security of (1) prescription and over the counter drugs; (2) biologics including vaccines, blood & blood products, and cellular and gene therapies; (3) foodstuffs including dietary supplements, bottled water, and baby formula; and, (4) medical devices including heart pacemakers, surgical implants, prosthetics, and dental devices.

 

 
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Regarding its regulation of drugs, the FDA process requires a review that begins with the filing of an “Investigational New Drug” (IND) application, with follow on clinical studies and clinical trials that the FDA uses to determine whether a drug is safe and effective, and therefore subject to approval for human use by the FDA.

 

Aside from the FDA’s mandate to regulate drugs, the FDA also regulates dietary supplement products and dietary ingredients under the Dietary Supplement Health and Education Act of 1994. This law prohibits manufacturers and distributors of dietary supplements and dietary ingredients from marketing products that are adulterated or misbranded. This means that these firms are responsible for evaluating the safety and labeling of their products before marketing to ensure that they meet all the requirements of the law and FDA regulations, including, but not limited to the following labeling requirements: (1) identifying the supplement; (2) nutrition labeling; (3) ingredient labeling; (4) claims; and, (5) daily use information.

 

The FDA has not approved cannabis as a safe and effective drug for any indication. As of the date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our cannabis products.

 

The FDA has concluded that cannabis is excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. The FDA’s position is that because cannabis is a Schedule 1 drug under the CSA, and therefore are illegal drugs that are under the purview of the DEA and DOJ who are charged with enforcing CSA. However, at some indeterminate future time, the FDA may choose to change its position concerning cannabis and may choose to enact regulations that are applicable to cannabis products as either drugs or supplements. In this event, our cannabis products may be subject to regulation. 

 

In addition to strict compliance with all applicable California cannabis related laws and regulations, the Company’s activities intend to comply with the parameters of a recent 9th Cir. Federal Appellate Court decision, United States v. McIntosh, 2016 DJDAR 8484 (Aug. 16, 2016), which held: “the U.S. Department of Justice cannot spend money to prosecute federal marijuana cases if the defendants comply with state guidelines that permit the drug's sale for medical purposes”. The Court reasoned that “if the DOJ punishes individuals for engaging in activities permitted under state law (such as the use, cultivation, distribution and possession of medical marijuana), then the DOJ is preventing state law from being implemented as a practical matter.” “By officially permitting certain conduct, state law provides for non-prosecution of individuals who engage in such conduct. If the federal government prosecutes such individuals, it has prevented the state from giving practical effect to its law providing for non-prosecution of individuals who engage in the permitted conduct." This ruling is consistent with Congress’s “Rohrabacher-Blumenauer” amendment, discussed above, which prohibits the DOJ from using federal funds to prevent certain states “from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.”

 

State Regulation

 

The State of California requires company engaged in the cannabis operations to be licensed by the State of California. The Company is regulated by multiple agencies in California

 

 

·

The Bureau of Cannabis Control (Bureau) is the lead agency in regulating commercial cannabis licenses for medical and adult-use cannabis in California. The Bureau is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events.

 

·

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture (CDFA), ensures public safety and environmental protection by licensing and regulating commercial cannabis cultivators in California.

 

·

Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, (CDPH). MCSB is responsible for regulation of all commercial cannabis manufacturing in California. MCSB strives to protect public health and safety by ensuring commercial cannabis manufacturers operate safe, sanitary workplaces and follow good manufacturing practices to produce products that are free of contaminants, meet product guidelines and are properly packaged and labeled.

 

 
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These 3 divisions require the Company (via VBF) to maintain its licensing packages and be compliant with all local, state and environmental regulations. The Company estimates that the cost of licensing each year will be approximately $50,000 - $100,000 per year. The amount will vary year to year depending on what changes have been made to regulations and if any upgrades would be required to be made on the property.

 

The Company (via VBF) currently is licensed by the State of California for the following activities:

  

Adult Use and Medicinal Distributor License Provisional

Valid 5-17-19 to 5-16-20

Lic# C11-0000102-LIC

 

Provisional Cannabis Cultivation License (Nursery)

Valid 8-7-19 to 8-7-20

Lic # PAL18-0003152

 

Provisional Cannabis Cultivation License  ( Adult Use Small Mixed Light Tier2)

Valid 3/15/19- to 3/15/20

Lic# PAL18-0000119

 

Annual Manufacturing License 

Adult and Medicinal Cannabis Products-Provisional

Type 6 Non Volatile Solvent Extraction

Valid 4-11-19 to 4-11-20

Lic# CDPH-10002395 

 

The Company (via VBF) grows its own cannabis plants through its Cannabis Cultivation License. The material grown and harvested from its cultivation operations are either packaged and sold through the Company’s Distribution license (via VBF) or processed through its Manufacturing license (via VBF) which is later sold through its Distribution license (via VBF). This allows the Company (by and through VBF) to sell products it manufactures (at reduced cost since the raw materials are self-grown), as well as products manufactured by third parties.

 

On January 29, 2018, the Company (via VBF) received its Distributor licenses from the State of California for Adult Use and Medicinal Use.

 

On April 11, 2019, VBF received its Annual Manufacturing License from the State of California. VBF also received its Provisional Cannabis Cultivation License.

 

Results of Operations

 

We have not earned any operational revenues from our inception on September 29, 2016 through January 31, 2018.

 

Three Months Ended January 31, 2018 Compared to Three Months Ended January 31, 2017

 

 

 

Three Months Ended

 

 

 

 

 

 

January 31,

 

 

 

 

Statement of Operations Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

$ -

 

Operating expenses

 

 

315,783

 

 

 

980

 

 

 

314,803

 

Other expenses

 

 

14,415

 

 

 

-

 

 

 

14,415

 

Net loss

 

$ 330,198

 

 

$ 980

 

 

$ 329,218

 

 

Our interim consolidated financial statements report a net loss of $330,198 for the three months ended January 31, 2018 compared to a net loss of $980 for the three months ended January 31, 2017. Our losses have increased by $329,218, primarily as a result of an increase in labor, supplies and greenhouse lease related to the cultivation of medical cannabis with the operations commenced in March 2017.

 

 
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Liquidity and Capital Resources

 

Working Capital

 

 

 

 January 31,

 

 

 October 31,

 

 

 

 

Balance Sheet Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$ 2,740

 

 

$ 24,656

 

 

$ (21,916 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$ 2,740

 

 

$ 24,656

 

 

$ (21,916 )

Total current liabilities

 

$ 361,728

 

 

$ 74,731

 

 

$ 286,997

 

Working capital (deficiency)

 

$ (358,988 )

 

$ (50,075 )

 

$ (308,913 )

 

Cash Flows

 

 

 

Three Months Ended

 

 

 

 

 

 

January 31,

 

 

 

 

Cash Flow Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash Flows used in Operating Activities

 

$ (325,957 )

 

$ (980 )

 

$ (324,977 )

Cash Flows provided by Financing Activities

 

 

304,041

 

 

 

10

 

 

 

304,031

 

Net Change in Cash During Period

 

$ (21,916 )

 

$ (970 )

 

$ (20,946 )

 

Our total current assets as of January 31, 2018 were $2,740 as compared to total current assets of $24,656 as of October 31, 2017. The decrease was primarily due to a use of cash for operating activities.

 

Our total current liabilities as of January 31, 2018 were $361,728 as compared to total current liabilities of $74,731 as of October 31, 2017. The increase was primarily due to an increase in convertible note and notes payable – related party.

 

The report of our auditors on our audited condensed consolidated financial statements for the fiscal year ended October 31, 2017, contains a going concern qualification as we have suffered losses since our inception. We have minimal assets and have achieved no operating revenues since our inception. We have been dependent on sales of equity securities to conduct operations. Unless and until we commence material operations and achieve material revenues, we will remain dependent on financings to continue our operations.

 

 
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Operating Activities

 

Net cash used in operating activities during the three months ended January 31, 2018 was $325,957, compared to $980 net cash used in operating activities during the three months period ended January 31, 2017.

 

Investing Activities

 

During the three months ended January 31, 2018 and 2017, our Company did not have any investing activities.

 

Financing Activities

 

Cash provided by financing activities during the three months ended January 31, 2018 was $304,041 as compared to $10 in cash provided by financing activities during the three months ended January 31, 2017. During the three months ended January 31, 2018, our Company received $135,000 from convertible note, $99,200 from notes payable – related party and $69,841 from capital contribution. During the three months ended January 31, 2017, our Company received $10 from bank overdraft.

 

Cash Requirements

 

We will require additional capital as we expand our business operations. Initially, to carry out our business plan, we will need to raise additional capital through operations, or the issuance of our equity and/or debt securities. There can be no assurance that we will be able to raise additional capital or, if we are able to raise additional capital, the terms we be favorable to us. Currently we do not have any inventory and therefore we have no product to sell to generate operating revenues.

 

These conditions indicate a material uncertainty that casts significant doubt about our ability to continue as a going concern. We require additional debt or equity financing to have the necessary funding to continue operations and meet our obligations. We have continued to adopt the going concern basis of accounting in preparing our financial statements.

 

Future Financings

 

We anticipate continuing to rely on sales of our equity and/or debt securities in order to continue to fund our business operations. Issuances of additional shares of our capital stock will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.

 

Off-Balance Sheet Arrangements

 

We have no 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.

 

 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2018. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms as a result of the following material weaknesses:

 

The specific material weakness identified by our management was ineffective controls over certain aspects of the financial reporting process because of a lack of a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements and inadequate segregation of duties. A "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements would not be prevented or detected on a timely basis.

 

We expect to be materially dependent upon a third party to provide us with accounting consulting services for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our disclosure controls and procedures and internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements.

 

Changes in Internal Controls

 

There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rule 13a-15 or Rule 15d-15 that occurred in the quarter ended January 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not currently involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we area party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on us.

 

Item 1A. Risk Factors

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

On March 2, 2018. the Company agreed to terms with REI Extracts regarding an extraction and distribution joint venture conducted under the Company’s licenses. To carry out the purposes of the joint venture, REI delivered equipment to SIGO’s facilities to conduct extraction tests. Additionally, REI Extracts also provided consulting services related to cultivation and provided a master grower. The new master grower originally began working with the Company in January 2018. The Company agreed to pay the grower based on the yield of sellable flower per warehouse bay, 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

 

In December, 2018, SIGO and REI Extracts mutually agreed to terminate their joint venture. All equipment delivered by REI Extracts was removed by REI Extracts and the Company ceased utilizing the master grower provided by REI Extracts.

 

On November 30, 2018, pursuant to a purchase agreement entered into by and between SIGO and Job Growing, Inc. (“Job Growing”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Job Growing, in exchange for the rights to 50% of the net profits of Job Growing. In the event that Job Growing either: (i) files a registration statement, with the Securities and Exchange Commission (the “SEC”), to become a reporting company under the Securities Exchange Act of 1934; or (ii) is acquired by an unrelated third party, then SIGO has the right to buy a fifty percent (50%) equity interest in Job Growing for the additional consideration of one and no/100 dollar ($1.00).

 

On September 17, 2019 Job Growing notified the Company of its intent to terminate the agreement between Job Growing and the Company effective immediately.

 

On August 15, 2019, the Company received a true up notice from Job Growing to issue 576,091 shares of Series C Preferred Stock to Job Growing valued at $633,700, pursuant to the terms of the purchase agreement signed on November 30, 2018. 

 

On January 15, 2019, BMG was fined approximately $35,000 for not having Worker's Compensation insurance for the months of January 2018 - April 2018.  The Company believes this is a fine owed by BMG and is not a liability due to the Company, as we transferred ownership of BMG during December 2017, to T.J. Magallanes, the Company's former CEO (see Note 1). VBF Brands, the Company's operating entity, has worker’s compensation and was not subject to the fine.  The Company ceased operating BMG in December 2017.

 

On February 11, 2019, pursuant to a purchase agreement entered into by and between SIGO and Cicero Travel Group, Inc. (“Cicero Travel”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Cicero Travel, in exchange for the rights to receive 33% of the net profits of Cicero Travel, 19% of the issued and outstanding shares of the common stock of Cicero Travel and the right to purchase an additional 14% of the issued and outstanding shares of the common stock of Cicero Travel.

 

On August 19, 2019, the Company received a true up notice from Cicero Travel to issue 486,672 shares of Series C Preferred Stock to Cicero Travel valued at $593,740, pursuant to the terms of the purchase agreement signed on February 11, 2019.  The Company believes the true up notice is without merit, that Cicero Travel has not met its obligations under the purchase agreement and SIGO intends to cancel the previously issued shares of Series C Preferred Stock and will not be issuing any additional shares of Series C Preferred Stock to Cicero Travel.

 

Item 6. Exhibits

 

Exhibit Number

 

Description

(31)

 

Rule 13a-14 (d)/15d-14d) Certifications

31.1*

 

Section 302 Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer

(32)

 

Section 1350 Certifications

32.1*

 

Section 906 Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer

101*

 

Interactive Data File

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

______ 

* Filed herewith.

 

 
24
 
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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

SUNSET ISLAND GROUP, INC.

 

(Registrant)

 

Dated: September 25, 2019

 

/s/ Valerie Baugher

 

Valerie Baugher

 

President, Chief Executive Officer, Chief Financial Officer and Director

 

(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

 

25 

 

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