Washington, D.C. 20549
The number of shares outstanding of the
registrant’s $0.001 par value Common Stock as of April 14, 2017, was 1,200,043 shares.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The following table sets forth for the periods
indicated the high and low bid quotations for our common stock. These quotations represent inter-dealer quotations, without adjustment
for retail markup, markdown, or commission and may not represent actual transactions. The prices below have been adjusted for the
1 for 250 reverse split that was effective March 9, 2017.
Period
|
|
|
High
|
|
|
|
Low
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
First Quarter (January 1, 2016 – March 31, 2016)
|
|
$
|
4.975
|
|
|
$
|
2.50
|
|
Second Quarter (April 1, 2016 – June 30, 2016)
|
|
$
|
4.50
|
|
|
$
|
2.25
|
|
Third Quarter (July 1, 2016 – September 30, 2016)
|
|
$
|
4.25
|
|
|
$
|
1.25
|
|
Fourth Quarter (October 1, 2016 – December 31,2016)
|
|
$
|
12.25
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
High
|
|
|
|
Low
|
|
Fiscal Year 2015
|
|
|
|
|
|
|
|
|
First Quarter (January 1, 2015 – March 31, 2015)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Second Quarter (April 1, 2015 – June 30, 2015)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Third Quarter (July 1, 2015 – September 30, 2015)
|
|
$
|
270.00
|
|
|
$
|
100.
|
00
|
Fourth Quarter (October 1, 2015 – December 31,2015)
|
|
$
|
125.00
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
(b) Holders.
The number of record holders of our common
stock as of April 7, 2017 is 59.
(c) Dividends
The Company did not declare any cash dividends
for the years ended December 31, 2016 and 2015. Our Board of Directors does not intend to distribute any cash dividends in the
near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors,
and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital
requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will
be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
(d) Securities authorized for issuance under
equity compensation plans
None.
Recent Sales of Unregistered Equity Securities
During the year ended December 31, 2015, the
Company sold 2,008 shares of common stock and received $200,800.
On April 1, 2015, the Company agreed to issue
300 shares of common stock to a consultant. The Company valued the shares at $100 per share. Accordingly, $30,000 is included in
stock compensation expense for the year ended December 31, 2015.
On April 15, 2015 and May 15 2015, the Company
issued 50 shares of stock to Hayden.
On July 16, 2015, CVP converted $50,000 of
accrued and unpaid interest under the Company Note into 1,015 shares of common stock.
On July 21, 2015, the Company issued 1,400
shares of restricted common stock to a consultant. The Company valued the shares at $100 per share. Accordingly, $140,000 is included
in stock compensation expense for the year ended December 31, 2015.
On July 21, 2015, 70 shares of common stock
were issued equal in value to an aggregate of $7,000 per month to two employees as part of their compensation. Accordingly, $7,000
is included in stock compensation expense for the year ended December 31, 2015.
On July 21, 2015, the Company agreed to issue
300 shares of common stock to a consultant. The Company valued the shares at $100 per share. Accordingly, $30,000 is included in
stock compensation expense for the year ended December 31, 2015.
On July 24, 2015, the board of directors of
the Company approved the granting of 5,294 shares of restricted common stock to employees, including 3,000 shares awarded to the
Company’s CFO at the time. The Company valued the shares at $100 per shares and has included $529,400 in stock compensation
expense for the year ended December 31, 2015. The board of directors also approved the issuance of common stock equal in value
to an aggregate of $7,000 (amended to $6,000) per month to two employees as part of their compensation.
On August 4, 26, and 28, 2015, the Company
issued 1,725, 230 and 920, respectively, of restricted shares of common stock upon the conversion from the holders of the August
2015 Notes. The shares were issued at $50 per share.
On August 4, 2015, the Company issued 400 restricted
shares of common stock to a consultant. The Company valued the shares at $100 per share and has included $40,000 in stock compensation
expense for the year ended December 31, 2015.
On September 30, 2015, the Company agreed to
issue 40 restricted shares of common stock to a consultant. The Company valued the shares at $100 per share and has included $4,000
in stock compensation expense for the year ended December 31, 2015. The shares were certificated in October 2015.
On October 27, 2015, the Company issued 115
shares of restricted common stock upon the conversion of the September 2015 Note.
On October 27, 2015, the Company issued 40
restricted shares of common stock to a consultant. The Company valued the shares at $62.50 per share and has included $2,500 in
stock compensation expense for the year ended December 31, 2015.
On October 27, 2015, 185 shares of common stock
were issued equal in value to an aggregate of $18,500 per month to two employees as part of their compensation. Accordingly, $18,500
is included in stock compensation expense for the year ended December 31, 2015.
On July 27, 2016, Dove converted $920,306 of
principal and accrued and unpaid interest under the Company Note into 1,051,778 shares of common stock.
All such shares were issued in reliance on
the exemption found in Section 4(a)(2) of the Securities Act of 1933, as amended. Each share recipient was provided with access
to information which would be required to be included in a registration statement and such issuances did not involve a public offering.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OR PLAN OF OPERATION.
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with the financial statements and notes thereto for
the years ended December 31, 2016 and 2015.
The independent auditor’s report on our
financial statements for the years ended December 31, 2016 and 2015 includes a “going concern” explanatory paragraph
that describes substantial doubt about our ability to continue as a going concern. Management’s plans in regard to the factors
prompting the explanatory paragraph are discussed below and also in Note 10 to the audited consolidated financial statements.
While our financial statements are presented
on the basis that we are a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business over a reasonable length of time, our auditor has raised substantial doubt about our ability to continue
as a going concern.
Through December 2015,
we assembled and sold cabinet-based horticultural systems. The Company purchased cabinets, as well as lights, filters and fans,
from third party suppliers. Upon receipt of an order from a customer, the Company assembled the parts into a “finished horticulture”
cabinet for sale. The design and production of our hydroponic and soil grow cabinets make the process of growing in a self-contained
cabinet automated and simplified. Our mission is
to make hydroponic and soil growing simpler,
more efficient and a better value than other products found on the market.
On November 24, 2015, the Company announced
as a result of a working capital deficiency the Company has significantly reduced operations, including the layoff of all non-executive
employees and has stopped taking new orders from customers.
On December 31, 2015, the Company agreed to
purchase a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company
(“
Quasar
”), from Tonaquint, Inc., a Utah corporation (“
Seller
”). The Company has agreed to
purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000.00 pursuant
to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”).
The Company paid for the Purchase by delivering
to Seller at the closing a Secured Promissory Note (the “
Note
”). The Note is secured by the Company’s
pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement (the “
Pledge Agreement
”)
and by a first position Deed of Trust, Security Agreement and Financing Statement in favor of Seller encumbering certain real property
owned by Quasar
(the “
Trust Deed
,” and together with the Purchase Agreement, the Note, the Pledge Agreement,
and all other documents entered into in conjunction therewith, the “
Purchase Documents
”).
In conjunction with the Purchase, other than
the sale of 3 cabinets in January 2016, the Company ceased its prior business as a manufacturer and distributor of cabinet-based
horticultural systems and began operations in the land leasing business.
Results of Operations
For the year ended December 31, 2016 compared
to December 31, 2015
Revenues, related party
Revenues, related party for the year ended
December 31, 2016, of $12,000 was pursuant to a lease, whereby effective December 31, 2015, Quasar LLC, the Company’s wholly
owned subsidiary, entered into a one year lease agreement with a related party tenant. Pursuant to the lease the tenant will pay
$1,000 per month to Quasar.
Operating Expenses
Operating expenses for the year ended December
31, 2016 were $41,959 compared to $498,460 for the year ended December 31, 2015. The expenses were comprised of the following:
|
|
Year ended December 31,
|
Description
|
|
2016
|
|
2015
|
Professional fees
|
|
$
|
82,153
|
|
|
$
|
416,785
|
|
Depreciation
|
|
|
1,034
|
|
|
|
—
|
|
Gain on debt payments
|
|
|
(59,646
|
)
|
|
|
—
|
|
Other general and administrative
|
|
|
18,418
|
|
|
|
82,175
|
|
Total
|
|
$
|
41,959
|
|
|
$
|
498,960
|
|
Other Expenses
Other expense for the year ended December 31,
2016 were $2,625,563 compared to $1,774,062 for the year ended December 31, 2015. Amounts included in other expenses for the 2016
period was an expense of $918,956 for the change in the fair value of derivative liabilities, compared to $648,540 for the 2015
period. Interest expense, other for the year ended December 31, 2016 and 2015 were as follows:
|
|
Year ended December 31,
|
Description
|
|
2016
|
|
2015
|
Amortization of discount on convertible notes
|
|
$
|
987,245
|
|
|
$
|
740,890
|
|
Face value of issued interest, convertible notes
|
|
|
359,637
|
|
|
|
108,849
|
|
Debt default penalty
|
|
|
344,654
|
|
|
|
270,057
|
|
Amortization of deferred financing costs
|
|
|
3,288
|
|
|
|
2,783
|
|
Other
|
|
|
11,783
|
|
|
|
2,852
|
|
Total
|
|
$
|
1,706,607
|
|
|
$
|
1,125,521
|
|
Net Loss
Net loss for the year ended December 31, 2016,
was $2,687,541 compared to $3,468,283 for the year ended December 31, 2015, primarily as a result of increases of $918,956 and
$648,540, in the fair value of derivative liabilities for the years ended December 31, 2016 and 2015, respectively. There was also
an increase in interest expense for the year ended December 31, 2016 of $581,086, compared to the year ended December 31, 2015.
Included in the net loss is the loss of discontinued operations of $32,020 and $1,195,262 for the years ended December 31, 2016
and 2015, respectively.
Capital Resources and
Liquidity
Liquidity is the ability of an enterprise to
generate adequate amounts of cash to meet its needs for cash requirements. As of December 31, 2016, we had $1,582 in cash or cash
equivalents on hand. At December 31, 2016 we had current liabilities of $2,917,700 compared to current assets of $5,583 which resulted
in a negative working capital position of $2,912,117. The current liabilities are comprised principally of accounts payable, accrued
expenses, convertible note payable (related party), derivative liabilities and note payable to a stockholder.
Operating Activities
Cash flows from operations provided $250,859
for the year ending December 31, 2016 compared to $153,401 for the year ended December 31, 2015. For the year ended December 31,
2016, non-cash activity of; $987,245 of amortization of discounts and fees on convertible notes, $918,956 of derivative liability
expense, the recording of initial discounts on convertible notes of $509,969, $43,462 of gain on convertible debt payments and
$32,020 of a net loss on discontinued operations were major factors to adjust net loss to net cash used in operating activities.
Non-cash expenses for the nine months ended
September 30, 2015, of $465,639 of amortization of discounts on convertible notes and deferred financing fees, the recording of
initial discounts on convertible notes of $2,021,387, loss on discontinued operations of $1,098,195 and a gain of $60,603 for the
change in fair value of derivative liabilities were major adjusting factors to reconcile the Company’s net loss of $3,521,968
to net cash provided by operating activities.
Investing Activities
There was no cash flow activity from continuing
operations related to investing activities for the nine months ended September 30, 2016 and 2015, respectively.
Financing Activities
There was no cash provided by financing activities
from continuing operations for the nine months ended September 30, 2016, compared to $570,864 for the nine months ended September
30, 2015. During the nine months ended September 30, 2015 the Company received proceeds of $363,750 from the issuance of convertible
promissory notes, $200,800 from the sale of shares of common stock and $6,314 for the amounts received from a stockholder.
Capital Resources and Recent Financings
On June 3, 2014, the Board authorized the Company
to enter into a Securities Purchase Agreement (“SPA”) with Chicago Venture Partners, L.P. (“CVP”). Pursuant
to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory Note in the principal amount of $1,657,500 (the
“Note”).
On April 29, 2016, CVP and Tonaquint sold and
transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint SPA and related Purchase documents to
The Dove Foundation (“Dove”).
On June 6, 2014, the Company executed the SPA
with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500 (which included CVP’s legal expenses
in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000 paid in cash on June 11, 2014 (the “Closing
Date”), two $250,000 secured promissory notes and two $250,000 promissory notes (the “Investor Notes”), aggregating
$1,000,000, bearing interest at the rate of 10% per annum. The Investor Notes are due 30 months from the Closing Date and may be
prepaid, without penalty.
As security for the Note, the Company’s
CEO and former COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). On August 5, 2016, Dove acquired
all of the Class A Preferred Stock.
Pursuant to the terms of the Note, the Company
was required to deliver the Installment Amount (as defined in the Note) on or before each Installment Date (as defined in the Note)
until the Note was repaid. The Company failed to deliver the Installment Amount in June 2015, July 2015 and August 2015 (each,
a “Breach” and collectively, the “Breaches”). Each such Breach would constitute a separate event of default
pursuant to the terms of the Note if so declared by the Lender.
On September 10, 2015, the Company entered
into a forbearance and standstill agreement (the “Forbearance and Standstill Agreement”) with CVP and Matt Lee and
Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing remedies under the Note.
On May 17, 2016, the Company received notification
that Dove has waived the 9.99% ownership limitation contained in the CVP Note, thereby creating a potential change in control of
the Company.
On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from Dove regarding the December 2015 and January 2016 installment payments. Pursuant
to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,056 for the
December default (included in the December 31, 2015, balances) and $344,654 for the January default. The Lender also increased
the interest rate to 22% per annum pursuant to the default. Also on July 27, 2016, Dove sent the Company a conversion notice to
issue 1,051,778 shares of common stock in exchange for the cancellation of $920,306 of interest and principal due. Immediately
after the conversion Dove owned approximately 87.6% of the common stock of the Company.
The Note may be converted at the option of
the holder, on the date that is six months from the Trading Date (defined in the Purchase Agreement as the date on which the Common
Stock is first trading on an Eligible Market, but in any event the Company shall cause its Common Stock to be trading on an Eligible
Market within nine months of the Closing Date of June 11, 2014) or at any time thereafter at a conversion price of $49.40. The
conversion price is equal to $6,500,000 divided by 132,000 (the amount of fully diluted shares of Common Stock of the Company on
the date the Company filed its’ Registration Statement). In the event the Company elects to prepay all or any portion of
the Company Note, the Company is required to pay to CVP an amount in cash equal to 125% multiplied by the sum of all principal,
interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued and unpaid interest under the Company
Note into 1,015 shares of common stock.
Initially, the Company determined that the
conversion feature of the convertible note did not meet the criteria of an embedded derivative and therefore the conversion feature
was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price and
no active market for the Company’s common stock. Since the convertible note included an embedded conversion feature that
did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether it meets the definition
of a beneficial conversion feature (“BCF”) within the scope of ASC 470-20, “Debt with Conversion and Other Options”,
and determined that a BCF existed. During the year ended December 31, 2015, and prior to the Company becoming a public company,
the Company received $163,000 in new funding and recorded a BCF expense in the amount of $163,000. The Company began trading as
a public Company on July 13, 2015, and on that date the Company determined that the conversion feature of the Note represented
an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, on July 13,
2015, the Note was not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from
the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments for the fundings
of the Note that occurred prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated balance sheet
with the corresponding amount recorded as a discount to the Note. Such discount is being amortized from the date of issuance to
the maturity date of the Note. The change in the fair value of the liability for derivative contracts are recorded in other income
or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability
on the balance sheet.
We presently have 300,000,000 shares of common
stock authorized, of which 1,200,043 shares were issued and outstanding as of December 31, 2016 and April 14, 2017.
Off-Balance Sheet Arrangements
There are 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 investors.
Critical Accounting Policies
BASIS OF PRESENTATION
The accompanying financial statements are prepared
in accordance with Generally Accepted Accounting Principles in the United States of America.
EMERGING GROWTH COMPANY
We qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). 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 of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards.
As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
USE OF ESTIMATES
The preparation of financial statements in
conformity 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 amount of revenues
and expenses during the reported period. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS
On December 31, 2015, the Company’s Board
of Directors approved the purchase of certain real property as described in Note 1. As a result of the purchase, the Company’s
prior business operations have been (re)classified as discontinued operations on a retrospective basis for all periods presented
herein.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments
with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Substantially all individuals pay in advance
of their product being shipped. During the year ended December 31, 2015, the Company occasionally shipped product with payment
terms of 30 to 60 days to retailers. For these shipments, the Company records accounts receivable from amounts due from its customers
upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables
are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an
amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the
collectability of the accounts and prior loss experience. For the years ended December 31, 2016 and 2015, management’s evaluation
did not require any allowance for uncollectible receivables.
INVENTORY
Inventory is valued at the lower of cost or
market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving
inventory is made based on management analysis or inventory levels and future sales forecasts. Based on management’s analysis
as of December 31, 2015, the Company recorded a write down of inventory of $31,598.
LAND, PROPERTY AND EQUIPMENT
Property and equipment are stated
at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives of the assets. The estimated
useful lives of property and equipment are as follows:
Manufacturing equipment
|
10 years
|
Office equipment and furniture
|
7 years
|
Computer hardware and software
|
3 years
|
The Company's property and equipment consisted of the following
at December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
Furniture and Equipment
|
|
$
|
3,318
|
|
|
$
|
3,318
|
|
Manufacturing equipment
|
|
|
826
|
|
|
|
826
|
|
Software
|
|
|
2,912
|
|
|
|
2,912
|
|
Land
|
|
|
180,000
|
|
|
|
180,000
|
|
Accumulated depreciation
|
|
|
(5,407
|
)
|
|
|
(4,373
|
)
|
Balance
|
|
$
|
181,649
|
|
|
$
|
182,683
|
|
Depreciation expense for the year ended December
31, 2016, was $1,034 and was $28,958 (included in loss of discontinued operations) for the year ended December 31, 2015.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue
Recognition.” ASC 605 requires that the following four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue from leased property during the month the tenant is responsible for payment. Revenues from
the sale of cabinets are included in net loss from discontinued operations for all periods presented herein.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under
a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value,
distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting
entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received
to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information
generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers
the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity
to identify transactions that are not orderly.
The highest priority is given to unadjusted
quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Financial instruments are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
The three hierarchy levels are defined
as follows:
Level 1 – Quoted prices
in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices
for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations
that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect
the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that
applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in
the credit default swap market.
The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts
of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate
market interest rates of these instruments. The Company’s derivative liability (conversion option and warrant derivative)
is valued using the level 3 inputs. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
The following table represents the Company’s
financial instruments that are measured at fair value on a recurring basis as of December 31, 2016 and December 31, 2015 for each
fair value hierarchy level:
December 31, 2016
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,225,083
|
|
|
$
|
1,225,083
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,648,255
|
|
|
$
|
1,648,255
|
|
INCOME TAXES
Prior to May 2014,
the Company was organized as a sole proprietorship and was not subject to income taxes. Rather, the Company’s sole stockholder
was subject to income taxes on the Company’s taxable activity. In May 2014, the Company became subject to income taxes and
will be subject to Federal and State income taxes as a corporation.
The Company accounts for income taxes in accordance
with ASC 740-10, “Income Taxes.” Deferred tax assets and liabilities are recognized to reflect the estimated future
tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest
and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid,
any interest or penalties.
Uncertain tax positions
are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized.
EARNINGS (LOSS) PER SHARE
The Company reports earnings (loss) per share
in accordance with ASC 260, "Earnings per Share." Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities
outstanding during the period. For the periods ending ended December 31, 2016 and 2015, 445,603 and 1,049,418 shares of common
stock, respectively, underlying convertible debt and warrants have been excluded from the computation diluted earnings per share
because they are antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued
by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or
future consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
See Index to Financial Statements and Financial
Statement Schedules appearing on pages F-1 to F-17 of this annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
A review and evaluation was performed by the
Company’s management, including the Company’s Chief Executive Officer who is also the Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures
as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO/CFO has concluded that
as of December 31, 2016, the Company’s disclosure controls and procedures, were not effective at ensuring that the material
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in
the application of SEC rules and forms.
Management’s Report on Internal Controls
over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s
principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures
that:
•
|
Pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and disposition of
our assets;
|
•
|
Provide
reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance
with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our asset
s
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. It should be noted that any system of internal control,
however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system
will be met. 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.
Our Principal Executive Officer and CFO have
evaluated the effectiveness of our internal control over financial reporting as described in Exchange Act Rules 13a-15(e) and 15d-15(e)
as of the end of the period covered by this report based upon criteria established in “Internal Control-Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As
a result of this evaluation, we concluded that our internal control over financial reporting was not effective as of December 31,
2016
as described below.
We assessed the effectiveness of the Company’s
internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources:
We have an inadequate
number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties
: We
have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee:
We do not have
a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal
controls and procedures.
We have discussed the material weakness noted
above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than
remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would
not be prevented or detected.
This annual report on Form 10-K does not include
an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules
of the SEC that permit us to provide only management’s report in this annual report on Form 10-K.
Changes in Internal Control over Financial
Reporting
There have been no changes in the Company’s
internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s
internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016 AND 2015
NOTE 1 - ORGANIZATION
BUSINESS
Cabinet Grow, Inc. (the “Company”
or “CG-NV”) began operations in California in 2008, doing business as Universal Hydro (“Hydro”). Prior
to April 2014, the Company was a sole proprietorship owned by its’ former chief operating officer and stockholder. On April
28, 2014, the Company registered with the Secretary of State of California as Cabinet Grow, Inc. (CG-CA), and all of the business,
assets and liabilities of Hydro were assigned to CG-CA. On May 14, 2014, the Company filed Articles of Incorporation with the Nevada
Secretary of State. On May 15, 2014, CG-CA merged with CG-NV, with CG-NV being the surviving entity. All references herein to CG
or the Company refer to CG-NV, CG-CA and Hydro.
On November 24, 2015, the Company announced
as a result of a working capital deficiency the Company has significantly reduced its’ cabinet making operations, including
the layoff of all non-executive employees and has stopped taking new orders from customers.
On December 31, 2015, the Company agreed to
purchase a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company
(“
Quasar
”), from Tonaquint, Inc., a Utah corporation (“
Seller
”). Quasar and the Seller are
related parties to Chicago Venture Partners, L.P. (“CVP”), and the Company’s main lender (See Note 3). The Company
has agreed to purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000
pursuant to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”).
The Company paid for the Purchase by delivering
to Seller at the closing a Secured Promissory Note (the “
Note
”). The Note is secured by the Company’s
pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement (the “
Pledge Agreement
”)
and by a first position Deed of Trust, Security Agreement and Financing Statement in favor of Seller encumbering certain real property
owned by Quasar
(the “
Trust Deed
,” and together with the Purchase Agreement, the Note, the Pledge Agreement,
and all other documents entered into in conjunction therewith, the “
Purchase Documents
”). Quasar’s sole
asset is a certain parcel of real property located in Midland Texas (the “Quasar Property”).
Also on December 31, 2015, the Company entered
into a one year lease agreement with a related party tenant for the Quasar Property. Pursuant to the agreement, the tenant will
pay $1,000 per month and the tenant is responsible for all operating costs of the Quasar Property including real estate taxes.
In conjunction with the Purchase, other than
the sale of 3 cabinets in January 2016, the Company ceased its prior business as a manufacturer and distributor of cabinet-based
horticultural systems (presented as discontinued operations for the three and six months ended June 30, 2016 and 2015) and began
operations in the land leasing business.
On March 18, 2016, the Board of Directors (the
“Board”) of the Company, acting pursuant to a Majority Consent of Stockholders, approved an amendment to the Articles
of Incorporation (the “Amended and Restated Articles”) to among other matters, clarify that of the 310,000,000 shares
of authorized capital stock of the Company, 300,000,000 shares are designated as common stock and 10,000,000 shares are designated
as preferred stock, and to clarify that of the 10,000,000 shares of preferred stock, 100 have been designated as Class A Preferred
Stock. Additionally, the Board has the authority to create and designate the rights and preferences of, additional series of preferred
stock, without further stockholder approval. The Board also approved a resolution giving the Board the authority to effect between
a 1:10 and a 1:250 consolidation of the outstanding common stock at any time before December 31, 2016, and to leave the authorized
shares of common stock unchanged at 300,000,000. On May 2, 2016, the Company filed the Amended and Restated Articles with the Nevada
Secretary of State. On December 30, 2016, the Board authorized a consolidation, whereby every 250 shares of the Company’s
common stock would be consolidated into 1 share. The consolidation became effective on March 9, 2017. All share amounts for all
periods presented have been retroactively adjusted to reflect the Forward Split.
On April 29, 2016, CVP and Tonaquint sold and
transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint SPA and related Purchase documents to
The Dove Foundation (“Dove”). On May 17, 2016, the Company received notification that Dove has waived the 9.99% ownership
limitation contained in the CVP Note, thereby creating a potential change in control of the Company.
On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from Dove regarding the December 2015 and January 2016 installment payments.
Pursuant to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,056
for the December default (included in the December 31, 2015, balances) and $344,654 for the January default. The Lender also increased
the interest rate to 22% per annum pursuant to the default.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are prepared
in accordance with Generally Accepted Accounting Principles in the United States of America.
EMERGING GROWTH COMPANY
We qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). 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 of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards.
As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
USE OF ESTIMATES
The preparation of financial statements in
conformity 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 amount of revenues
and expenses during the reported period. Actual results could differ from those estimates.
DISCONTINUED OPERATIONS
On December 31, 2015, the Company’s Board
of Directors approved the purchase of certain real property as described in Note 1. As a result of the purchase, the Company’s
prior business operations have been (re)classified as discontinued operations on a retrospective basis for all periods presented
herein.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments
with an original term of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Substantially all individuals pay in advance
of their product being shipped. During the year ended December 31, 2015, the Company occasionally shipped product with payment
terms of 30 to 60 days to retailers. For these shipments, the Company records accounts receivable from amounts due from its customers
upon the shipment of products. The allowance for losses is established through a provision for losses charged to expenses. Receivables
are charged against the allowance for losses when management believes collectability is unlikely. The allowance (if any) is an
amount that management believes will be adequate to absorb estimated losses on existing receivables, based on evaluation of the
collectability of the accounts and prior loss experience. For the years ended December 31, 2016 and 2015, management’s evaluation
did not require any allowance for uncollectible receivables.
INVENTORY
Inventory is valued at the lower of cost or
market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving
inventory is made based on management analysis or inventory levels and future sales forecasts. Based on management’s analysis
as of December 31, 2015, the Company recorded a write down of inventory of $31,598.
LAND, PROPERTY AND EQUIPMENT
Property and equipment are stated
at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives of the assets. The estimated
useful lives of property and equipment are as follows:
Manufacturing equipment
|
10 years
|
Office equipment and furniture
|
7 years
|
Computer hardware and software
|
3 years
|
The Company's property and equipment consisted of the following
at December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
Furniture and Equipment
|
|
$
|
3,318
|
|
|
$
|
3,318
|
|
Manufacturing equipment
|
|
|
826
|
|
|
|
826
|
|
Software
|
|
|
2,912
|
|
|
|
2,912
|
|
Land
|
|
|
180,000
|
|
|
|
180,000
|
|
Accumulated depreciation
|
|
|
(5,407
|
)
|
|
|
(4,373
|
)
|
Balance
|
|
$
|
181,649
|
|
|
$
|
182,683
|
|
Depreciation expense for the year ended December
31, 2016, was $1,034 and was $28,958 (included in loss of discontinued operations) for the year ended December 31, 2015.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue
Recognition.” ASC 605 requires that the following four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue from leased property during the month the tenant is responsible for payment. Revenues from
the sale of cabinets are included in net loss from discontinued operations for all periods presented herein.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are determined under
a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation techniques used to measure fair value,
distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting
entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances (“unobservable inputs”).
Fair value is the price that would be received
to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date. In determining fair value, the Company primarily uses prices and other relevant information
generated by market transactions involving identical or comparable assets (“market approach”). The Company also considers
the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity
to identify transactions that are not orderly.
The highest priority is given to unadjusted
quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level
3 measurements). Financial instruments are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement.
The three hierarchy levels are defined
as follows:
Level 1 – Quoted prices
in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices
for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices or valuations
that require inputs that are both significant to the fair value measurement and unobservable.
Credit risk adjustments are applied to reflect
the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that
applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in
the credit default swap market.
The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying amounts
of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate
market interest rates of these instruments. The Company’s derivative liability (conversion option and warrant derivative)
is valued using the level 3 inputs. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
The following table represents the Company’s
financial instruments that are measured at fair value on a recurring basis as of December 31, 2016 and December 31, 2015 for each
fair value hierarchy level:
December 31, 2016
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,225,083
|
|
|
$
|
1,225,083
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
1,648,255
|
|
|
$
|
1,648,255
|
|
INCOME TAXES
Prior to May 2014,
the Company was organized as a sole proprietorship and was not subject to income taxes. Rather, the Company’s sole stockholder
was subject to income taxes on the Company’s taxable activity. In May 2014, the Company became subject to income taxes and
will be subject to Federal and State income taxes as a corporation.
The Company accounts for income taxes in accordance
with ASC 740-10, “Income Taxes.” Deferred tax assets and liabilities are recognized to reflect the estimated future
tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest
and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid,
any interest or penalties.
Uncertain tax positions
are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized.
EARNINGS (LOSS) PER SHARE
The Company reports earnings (loss) per share
in accordance with ASC 260, "Earnings per Share." Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities
outstanding during the period. For the periods ending ended December 31, 2016 and 2015, 445,603 and 1,049,418 shares of common
stock, respectively, underlying convertible debt and warrants have been excluded from the computation diluted earnings per share
because they are antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued
by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or
future consolidated financial statements.
NOTE 3 – CONVERTIBLE NOTES PAYABLE
THE DOVE FOUNDATION, RELATED PARTY
On June 3, 2014, the Board authorized the Company
to enter into a Securities Purchase Agreement (“SPA”) with Chicago Venture Partners, L.P. (“CVP”). Pursuant
to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory Note in the principal amount of $1,657,500 (the
“Note”).
On April 29, 2016, CVP and Tonaquint sold and
transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint SPA and related Purchase documents to
The Dove Foundation (“Dove”).
On June 6, 2014, the Company executed the SPA
with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500 (which included CVP’s legal expenses
in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000 paid in cash on June 11, 2014 (the “Closing
Date”), two $250,000 secured promissory notes and two $250,000 promissory notes (the “Investor Notes”), aggregating
$1,000,000, bearing interest at the rate of 10% per annum. The Investor Notes are due 30 months from the Closing Date and may be
prepaid, without penalty.
A summary of the convertible note payable balance as of December
31, 2016 and 2015, is as follows:
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
1,306,007
|
|
|
$
|
733,500
|
|
Convertible notes-newly issued
|
|
|
205,434
|
|
|
|
463,450
|
|
Debt default penalty
|
|
|
344,654
|
|
|
|
270,057
|
|
Payments of convertible notes
|
|
|
(36,750
|
)
|
|
|
—
|
|
Conversions of convertible notes
|
|
|
(589,985
|
)
|
|
|
(161,000
|
)
|
Unamortized discount
|
|
|
—
|
|
|
|
(531,187
|
)
|
Total
|
|
$
|
1,229,360
|
|
|
$
|
774,820
|
|
The newly issued funded amounts for the year
ended December 31, 2016, were made directly to various vendors from CVP and includes $18,676 of OID. The Company has also not recorded
the remaining balance of the Investor Notes issued by CVP to the Company.
As security for the Note, the Company’s
CEO and former COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). On August 5, 2016, Dove acquired
all of the Class A Preferred Stock.
Pursuant to the terms of the Note, the Company
was required to deliver the Installment Amount (as defined in the Note) on or before each Installment Date (as defined in the Note)
until the Note was repaid. The Company failed to deliver the Installment Amount in June 2015, July 2015 and August 2015 (each,
a “Breach” and collectively, the “Breaches”). Each such Breach would constitute a separate event of default
pursuant to the terms of the Note if so declared by the Lender.
On September 10, 2015, the Company entered
into a forbearance and standstill agreement (the “Forbearance and Standstill Agreement”) with CVP and Matt Lee and
Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing remedies under the Note.
On May 17, 2016, the Company received notification
that Dove has waived the 9.99% ownership limitation contained in the CVP Note, thereby creating a potential change in control of
the Company.
On July 27, 2016, the Company received a Notice
of Breach of Secured Convertible Promissory Note from Dove regarding the December 2015 and January 2016 installment payments. Pursuant
to the terms and conditions of the default, the lender elected to multiply the outstanding balance by 125%, or $270,056 for the
December default (included in the December 31, 2015, balances) and $344,654 for the January default. The Lender also increased
the interest rate to 22% per annum pursuant to the default. Also on July 27, 2016, Dove sent the Company a conversion notice to
issue 1,051,778 shares of common stock in exchange for the cancellation of $920,306 of interest and principal due. Immediately
after the conversion Dove owned approximately 87.6% of the common stock of the Company.
The Note may be converted at the option of
the holder, on the date that is six months from the Trading Date (defined in the Purchase Agreement as the date on which the Common
Stock is first trading on an Eligible Market, but in any event the Company shall cause its Common Stock to be trading on an Eligible
Market within nine months of the Closing Date of June 11, 2014) or at any time thereafter at a conversion price of $0.1976. The
conversion price is equal to $6,500,000 divided by 33,000,000 (the amount of fully diluted shares of Common Stock of the Company
on the date the Company filed its’ Registration Statement). In the event the Company elects to prepay all or any portion
of the Company Note, the Company is required to pay to CVP an amount in cash equal to 125% multiplied by the sum of all principal,
interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued and unpaid interest under the Company
Note into 1,015 shares of common stock.
Initially, the Company determined that the
conversion feature of the convertible note did not meet the criteria of an embedded derivative and therefore the conversion feature
was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price and
no active market for the Company’s common stock. Since the convertible note included an embedded conversion feature that
did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether it meets the definition
of a beneficial conversion feature (“BCF”) within the scope of ASC 470-20, “Debt with Conversion and Other Options”,
and determined that a BCF existed. During the year ended December 31, 2015, and prior to the Company becoming a public company,
the Company received $163,000 in new funding and recorded a BCF expense in the amount of $163,000. The Company began trading as
a public Company on July 13, 2015, and on that date the Company determined that the conversion feature of the Note represented
an embedded derivative since the Note is convertible into a variable number of shares upon conversion. Accordingly, on July 13,
2015, the Note was not considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from
the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments for the fundings
of the Note that occurred prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated balance sheet
with the corresponding amount recorded as a discount to the Note. Such discount is being amortized from the date of issuance to
the maturity date of the Note. The change in the fair value of the liability for derivative contracts are recorded in other income
or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability
on the balance sheet.
WARRANT
The Company also issued a five year warrant
to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid prices
in the 20 trading days immediately after becoming public (the “Market Price”). Since the Company was not public and
could not determine the Market Price, based on the current discounted cash flow valuation, the Company initially estimated that
CVP can purchase 24,000 shares of common stock, with an exercise price of $50 per share. As of December 31, 2016 and 2015, based
on the Market Price, the Company estimated the number of shares that CVP can purchase to be 6,545.
Accounting Standard Codification “ASC”
815 –
Derivatives and Hedging
, which provides guidance on determining what types of instruments or embedded
features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating
the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the
accounting for warrants issued by the Company. As the detachable warrants issued with the Note do not have fixed settlement provisions
because their exercise prices may be lowered if the Company issues securities at lower prices in the future, we have concluded
that the warrants are not indexed to the Company’s stock and are to be treated as derivative liabilities.
The warrants were valued using the Black-Scholes
option pricing model. In order to calculate the fair value of the warrants, certain assumptions were made regarding components
of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility, expected dividend
yield, and expected life. Changes to the assumptions could cause significant adjustments to valuation. Since the Company was not
public, an estimated a volatility factor utilizing an average of comparable published volatilities of peer companies was utilized.
The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of
similar maturity. The warrants associated with the Note were initially valued and recorded a derivative liability of $577,100
using the Black-Scholes valuation methodology and the Company also recorded an initial derivative liability expense of $77,100
and a discount to the Note of $500,000.
On December 31, 2016, the Company revalued
the warrant at $12,435 using the Black- Scholes option pricing model and recorded a credit to derivative liability expense for
the year ended December 31, 2016, and decreased the derivative liability by $1,356 on the balance sheet as of December 31, 2016.
NOTE
4 – NOTE DISCOUNTS AND DERIVATIVE LIABLITIES
A summary of the note discount balances as of December 31, 2016
and 2015, is as follows:
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
531,187
|
|
|
$
|
376,022
|
|
Initial note discounts
|
|
|
456,058
|
|
|
|
896,145
|
|
Amortization
|
|
|
(987,245
|
)
|
|
|
(579,980
|
)
|
Reduction for conversions
|
|
|
—
|
|
|
|
(161,000
|
)
|
Total
|
|
$
|
—
|
|
|
$
|
531,187
|
|
The change in the fair value of the liability
for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at the end of each
quarter, with the offset to the derivative liability on the balance sheet.
A summary of the derivative liability balance as of December 31,
2016 and 2015, is as follows:
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
1,648,255
|
|
|
$
|
581,373
|
|
Initial derivative liability
|
|
|
509,969
|
|
|
|
2,021,387
|
|
Fair value change
|
|
|
846,370
|
|
|
|
(694,265
|
)
|
Reduction for debt payments/conversions
|
|
|
(1,778,791
|
)
|
|
|
(206,240
|
)
|
Total
|
|
$
|
1,225,803
|
|
|
$
|
1,648,255
|
|
The fair value on the commitment dates for
the Note fundings from January 1, 2016 through December 31, 2016, and the re-measurement date for the Company’s derivative
liabilities were based upon the following management assumptions:
|
|
|
Commitment Date
|
|
|
|
Re-Measurement Date
|
|
Expected dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
92%-215%
|
|
|
|
196
|
%
|
Expected term
|
|
|
.12-.84 years
|
|
|
|
.12 years
|
|
Risk free interest
|
|
|
.19%-.58%
|
|
|
|
.51
|
%
|
Since the Company did not have a sufficient trading history, an
estimated a volatility factor utilizing an average of comparable published volatilities of peer companies was utilized.
NOTE 5 – RELATED PARTY TRANSACTIONS
For the years ended December 31, 2016 and 2015,
the Company paid its’ officers and former officers the following amounts:
|
|
2016
|
|
2015
|
Chief Executive Officer (“CEO”)
|
|
$
|
—
|
|
|
$
|
59,576
|
|
Chief Operating Officer (“COO”)
|
|
|
—
|
|
|
|
51,234
|
|
Chief Financial Officer (“CFO”)
|
|
|
—
|
|
|
|
55,650
|
|
Total
|
|
$
|
—
|
|
|
$
|
166,460
|
|
As of December 31, 2016 the Company owed $14,424,
$22,766 and $16,350 to the CEO, former COO and former CFO, respectively, for accrued and unpaid fees. Of this amount, $37,190 is
included in liabilities of discontinued operations and $16,350 is included in accounts payable and accrued liabilities, stockholders,
on the December 31, 2016, balance sheet. Currently, Mr. May is the sole officer.
NOTE PAYABLE, STOCKHOLDER
The Company’s former COO loaned the Company
various amounts for Company expenses. The Company recorded interest expense of $984 and $948 for the years ended December 31, 2016
and 2015, respectively. As of December 31, 2016 and 2015, the former COO was owed accrued interest of $4,610
and $3,625, respectively, which is included in accounts payable and accrued liabilities, stockholders, on the balance sheets
presented herein. As of December 31, 2016 and 2015, the loan balance was $12,482, which is included in liabilities of discontinued
operations.
NOTE PAYABLE, RELATED PARTY
On December 31, 2015, the Company agreed to
purchase a 100% membership interest (the “
Membership Interest
”) in Quasar, LLC, a Utah limited liability company
(“
Quasar
”), from Tonaquint, Inc., (“Tonaquint”) a Utah corporation (“
Seller
”).
Tonaquint is a related party to CVP as the same person is the control person of both Tonaquint and CVP. The Company has agreed
to purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000 pursuant
to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”).
The Company paid for the Purchase by delivering
to Seller at the closing a Secured Promissory Note (the “
Note
”). The Note is secured by the Company’s
pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement (the “
Pledge Agreement
”)
and by a first position Deed of Trust, Security Agreement and Financing Statement in favor of Seller encumbering certain real property
owned by Quasar
(the “
Trust Deed
,” and together with the Purchase Agreement, the Note, the Pledge Agreement,
and all other documents entered into in conjunction therewith, the “
Purchase Documents
”).
Also on December 31, 2015, Quasar entered into
a one year lease of the property to Miller Fabrication, LLC (“Miller”). Miller is controlled by the same individual
as Tonaquint and CVP, and therefore is a related party to the Company.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
Effective August 1, 2014, the
Company moved into a 4,427 square foot facility under a new lease agreement, in an industrial complex in Irvine California.
The Company entered into a 26 month lease, pursuant to which, there is no base rent for the first two months, beginning
October 1, 2014, the monthly lease is $4,870 plus CAM charges of $354 and rent increases to $5,091 on October 1, 2015 for the
final twelve months. The Company was straight lining the 24 months costs over the 26 month term of the lease through December
31, 2015, and in January 2016, the Company realized as an expense the remainder of the lease and recorded a liability.
Effective February 19, 2016, the Company entered into a sublease with an unaffiliated third party, whereby, pursuant to the
sublease CVP was to receive $5,500 per month through September 30, 2016 from the sub-tenant. For the year ended December 31,
2016, the Company received $36,750 under the terms of the sublease. The Company reduced the CVP convertible note for the
proceeds and reduced rent expense. Net rent expense was $36,034 and $39,637 for years ended December 31, 2016 and 2015,
respectively, and is included in loss from discontinued operations.
NOTE 7 – STOCKHOLDERS’ EQUITY
COMMON STOCK
On March 18, 2016,
the Board of Directors of the Company, acting pursuant to a Majority Consent of Stockholders, approved an amendment to the Articles
of Incorporation (the “Amended and Restated Articles”) to among other matters, clarify that of the 310,000,000 shares
of authorized capital stock of the Company, 300,000,000 shares are designated as common stock and 10,000,000 shares are designated
as preferred stock, and to clarify that of the 10,000,000 shares of preferred stock, 100 have been designated as Class A Preferred
Stock. Additionally, the Board has the authority to create and designate the rights and preferences of, additional series of preferred
stock, without further stockholder approval. On May 2, 2016, the Company filed the Amended and Restated Articles with the Nevada
Secretary of State. The Board also approved a resolution giving the Board the authority to effect between a 1:10 and a 1:250 consolidation
of the outstanding common stock at any time before December 31, 2016, and to leave the authorized shares of common stock unchanged
at 300,000,000. On December 30, 2016, the Board authorized a consolidation, whereby every 250 shares of the Company’s common
stock would be consolidated into 1 share. The consolidation become effective on March 9, 2017.
On July 27, 2016, the Company issued 1,051,778
shares of common stock in exchange for the cancellation of $920,306 of interest and principal due on a convertible note.
CLASS A PREFERRED STOCK
On June 3, 2014, the Company’s Board
of Directors adopted and approved the Class A Preferred Stock Certificate of Designation, establishing the terms, conditions and
relative rights of the Class A Preferred Stock, including that the holders of the Class A Preferred Stock (the “Class A Holders”)
shall have limited voting rights and powers compared to the voting rights and powers of holders of Common Stock and other series
of Preferred Stock. The Class A Holders shall be entitled to notice of any shareholders meeting in accordance with the Bylaws of
the Corporation, and shall be entitled to vote, but only with respect to the following matters (collectively, the “Class
A Voting Matters”): (i) the appointment and/or removal of any member of the Company’s board of directors, (ii) any
matter related to or transaction (or series of transactions) pursuant to which the Company would sell or license all or substantially
all of its assets or the stockholders of the Company would sell all or substantially all of their shares of the Company’s
stock or where the Company would merge with or into any other entity, (iii) causing the Company to register its Common Stock for
trading pursuant to the Securities Exchange Act of 1934, as amended, including by filing a Registration Statement on Form S-1 with
the Securities Exchange Commission and filing and obtaining FINRA approval of a Form 15c2-11, and (iv) with respect to any matter
involving a transaction whereby the Company will become part of or merge into an existing public company. For so
long as Class A Preferred Stock is issued and outstanding, the holders of Class A Preferred Stock shall vote together as
a single class with the holders of the Corporation’s Common Stock and the holders of any other class or series of shares
entitled to vote with the Common Stock, with the holders of Class A Preferred Stock being entitled to fifty-one percent (51%) of
the total votes on
only Class A Preferred Voting Matters regardless of the actual
number of shares of Class A Preferred Stock then outstanding, and the holders of Common Stock and any other shares entitled to
vote being entitled to their proportional share of the remaining 49% of the total votes based on their respective voting power
for any Class A Preferred Voting Matter. The Board also approved the issuance of 50 shares each of the Class A Preferred Stock
to the Company’s Chief Executive Officer and Chief Operating Officer. The issued shares of the Class A Preferred Stock were
valued at $428,000 based primarily on management’s estimate of the fair value of the control features embedded in the Class
A preferred stock. On August 5, 2016, in two private transactions, Dove purchased in the aggregate, 100 shares of Class A Preferred
Stock from two shareholders (50 shares each), representing 100% of the issued and outstanding Class A Preferred Stock.
WARRANTS
In June 2014, the Company issued a five year
warrant to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid
prices in the 20 trading days immediately after becoming public (the “Market Price”). Since the Company was not public
and could not determine the Market Price, based on the current discounted cash flow valuation, the Company initially estimated
that CVP can purchase 24,000 shares of common stock, with an exercise price of $0.20 per share. As of December 31, 2016 and 2015,
based on the Market Price, the Company estimated the number of shares that CVP can purchase to be 6,545.
NOTE 8 – DISCONTINUED OPERATIONS
In December 2015, the Company’s board
of directors approved the purchase of certain real property and completed the purchase on December 31, 2015. In January 2016, the
Company ceased its’ prior business activity of marketing, manufacturing and selling horticulture cabinets.
ASC 205-20 “Discontinued Operations”
establishes that the disposal or abandonment of a component of an entity or a group of components of an entity should be reported
in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s
operations and financial results. As a result, the Company’s results of operations have been reclassified as discontinued
operations on a retrospective basis for all periods presented. Accordingly, the assets and liabilities of this component are separately
reported as “assets and liabilities of discontinued operations” as of December 31, 2016 and 2015. The results of operations
of this component, for all periods, are separately reported as “discontinued operations”.
A reconciliation of the major classes of line
items constituting the loss from discontinued operations, net of income taxes as is presented in the Consolidated Statements of Operations
for the years ended December 31, 2016, and 2015 are summarized below:
|
|
Years ended December 31,
|
|
|
2016
|
|
2015
|
Sales
|
|
$
|
7,350
|
|
|
$
|
702,602
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
515,461
|
|
Gross margin
|
|
|
7,350
|
|
|
|
187,141
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and management fees
|
|
|
—
|
|
|
|
592,588
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
28,958
|
|
Selling, advertising and marketing
|
|
|
—
|
|
|
|
279,700
|
|
Rent
|
|
|
36,034
|
|
|
|
39,637
|
|
General and administrative
|
|
|
7,417
|
|
|
|
143,344
|
|
Professional fees
|
|
|
—
|
|
|
|
290,773
|
|
Other
|
|
|
(4,081
|
)
|
|
|
7,403
|
|
Total operating expenses
|
|
|
39,370
|
|
|
|
1,382,403
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
net of income taxes
|
|
$
|
(32,020
|
)
|
|
$
|
(1,195,262
|
)
|
The following table presents the reconciliation of carrying amounts
of major classes of assets and liabilities of the Company classified as discontinued operations in the consolidated balance sheets
at December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
Carrying amounts of major classes of assets
included as part of discontinued operations
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
2,587
|
|
Accounts receivable, net
|
|
|
—
|
|
|
|
1,500
|
|
Prepaid expenses and other current assets
|
|
|
—
|
|
|
|
41,128
|
|
Total current assets included in the assets of discontinued operations
|
|
|
—
|
|
|
$
|
44,915
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities
included as part of discontinued operations
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
67,680
|
|
|
$
|
103,088
|
|
Accounts payable and accrued expenses, stockholders
|
|
|
37,190
|
|
|
|
48,190
|
|
Customer deposits
|
|
|
—
|
|
|
|
2,500
|
|
Note payable, stockholder
|
|
|
12,482
|
|
|
|
12,482
|
|
Total current liabilities included in the liabilities of discontinued operations
|
|
$
|
117,352
|
|
|
$
|
166,260
|
|
NOTE 9 – GOING CONCERN
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As of December 31, 2016 and 2015, the Company had an accumulated
deficit of $7,873,328 and $5,185,787 and as of December 31, 2016, a working capital deficit of $2,912,317. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Management’s
Plans
As a result
of a working capital deficiency the Company ceased its prior business as a manufacturer and distributor of cabinet-based horticultural
systems operations. On December 31, 2015, the Company agreed to purchase a 100% membership interest (the “
Membership
Interest
”) in Quasar, LLC, a Utah limited liability company (“
Quasar
”), from Tonaquint, Inc., a Utah
corporation (“
Seller
”). Quasar (prior to the purchase) and Tonaquint are related parties to CVP, the Company’s
main lender. The Company has agreed to purchase the Membership Interest from the Seller for a purchase price of $180,000 pursuant
to the terms of a Membership Interest Purchase Agreement.
The Company now operates in the
land leasing business.
NOTE 10 – SUBSEQUENT EVENTS
On March 9, 2017,
the share consolidation, whereby every 250 shares of the Company’s common stock has been consolidated into 1 share became
effective upon approval from the required regulatory authorities (see Note 1).
In accordance with
ASC 855-10, the Company has analyzed its operations subsequent to December 31, 2016 to the date these financial statements were
issued, and has determined that it does not have any material subsequent events to disclose in these financial statements other
than the events described above.
F-17