As of September 30, 2017,
there were 55,693,216 shares of common stock outstanding, 14,135,284 shares of common stock issuable upon the exercise of all
of our outstanding warrants and 5,000,000 shares of common stock issuable upon the exercise of all vested options.
PART
I
Item
1.
Our
Business
COMPANY
OVERVIEW
We
are a vertically integrated cannabis-focused agriculture company that is committed to cultivating and distributing the highest
quality medical and recreational cannabis.
Since
May 2016 our primary focus is on the cultivation and distribution of medicinal and recreational cannabis.
In
May 2016 we decided to discontinue our food truck operations.
In
September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer
in exchange 3 million shares of the company’s stock he owned upon satisfaction of the terms of the Settlement Agreements.
These shares are to be held in escrow until their release.
In
September 2016 we acquired 100% of the ownership interests in Urban Pharms, LLC, DJ&S, LLC and DJ&S Property #1, LLC (collectively,
“Urban Pharms”) for 12,000,000 newly issued shares of the Company’s common stock of which 7,000,000 shares were
issued to our new subsidiary Urban Pharms, LLC as condition to satisfy trust deed holders.
In
September 2016 we changed our corporate name to American Patriot Brands, Inc.
Urban
Pharms, LLC is a medical and recreational cannabis business which collectively owns: indoor and outdoor cannabis facilities, greenhouses,
cloning facilities, and manufacturing facilities all primarily conducted on Urban Pharms’ approximate 280 acre property
in southern Oregon.
In January 2017 we acquired TSL Distribution,
LLC, a licensed cannabis distributor located in Oregon, that does business as The SWEET Life Distribution. In exchange we
paid $50,00 in cash, issued 200,000 shares of common stock, 200,000 3 year warrants with a $1.00 strike price and
a 24 month note for $150,000.
We
are committed to conducting business and make accretive cannabis business acquisitions relating to growing and distributing cannabis,
in jurisdictions where it is legal to do so.
The
company generated revenue from food and beverage sales through the company-operated food trucks in Southern California and Phoenix,
Arizona until September 2016.
During
the fiscal years 2015 through our formerly wholly owned subsidiary, Grilled Cheese, Inc., owned a food truck operation which sold
various types of gourmet grilled cheese sandwiches and other comfort foods principally in the areas of Los Angeles, California
and Phoenix Arizona.
The
report of our independent registered public accounting firm on our consolidated financial statements for the year ended December
31, 2015 contains an explanatory paragraph regarding our ability to continue as a going concern. Our business will require significant
amounts of capital to sustain operations and make the investments we need to execute our longer-term business plan.
Our
net loss for the year ended December 31, 2015 was $6,146,501 and the deficit accumulated by us amounts of $21,775,487 as of December
31, 2015. This raises substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
In
order to continue as a going concern and achieve a profitable level of operations, we will need, among other things, additional
capital resources. Management’s plan to continue as a going concern includes raising capital through increased sales and
growing operations to profitability and through additional debt and/or equity financing. However, management cannot provide any
assurances that we will be successful in accomplishing any of our plans of raising additional funds or increasing sales. Our
ability to continue as a going concern is dependent upon our management’s ability to successfully implement the plans described
above. Management cannot provide any assurance that unforeseen circumstances that may occur at any time within the next twelve
months or thereafter will not increase the need for us to raise additional capital on an immediate basis. There can be no assurance
that we will be able to continue to raise funds in subsequent debt or equity financings, in which case the Company may be unable
to meet its obligations.
Our
Corporate History and Background
In
May 2016 we decided to discontinue our food truck operations and in September 2016 we sold our Trademarks and Intellectual Property
relating to our food truck business to a former company officer in exchange for 3 million shares of the company’s stock
he owned upon satisfaction of the terms of the Settlement Agreements. These shares are to be held in escrow until their release.
In
May 2016 we the acquired several medicinal cannabis operations and our primary focus became the cultivation, manufacture, and
distribution of medicinal and recreational cannabis.
Going
forward, our primary focus is on the cultivation and distribution of medicinal and recreational cannabis.
We
changed our name to “American Patriot Brands, Inc.” in September 2016, and we filed a Certificate of Amendment to
our Articles of Incorporation and concurrently changed our corporate headquarters to 4570 Campus Drive, Suite 1, Newport Beach,
CA 92660.
Our
company was incorporated in the state of Nevada on December 31, 2009 as GSP-1, Inc. We were formed as a vehicle to pursue a business
combination. The Company selected December 31 as its fiscal year end.
In
July 2011, we filed a Certificate of Amendment to our Articles of Incorporation to change our name from “GSP-1, Inc.”
to “TRIG Acquisition 1, Inc.” In February 2013, we filed a Certificate of Amendment to our Articles of Incorporation
to change our name from “TRIG Acquisition 1, Inc.” to “The Grilled Cheese Truck, Inc.” to reflect our
acquisition of Grilled Cheese, Inc.
Our
Industry
Cannabis
/ Marijuana Industry Overview
Marijuana
cultivation refers to the planting, tending, improving and harvesting of the flowering plant Cannabis, primarily for the production
and consumption of cannabis flowers, often referred to as “buds”. The cultivation techniques for marijuana cultivation
differ than for other purposes such as hemp production and generally references to marijuana cultivation and production do not
include hemp.
As
of March 2017, there are a total of 28 states, plus the District of Columbia, with legislation passed as it relates to medicinal
cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811)
(“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule
I drug, which is viewed as having a high potential for abuse, has no currently-accepted use for medical treatment in the U.S.,
and lacks acceptable safety for use under medical supervision.
These
28 states, and the District of Columbia, have adopted laws that exempt patients who use medicinal cannabis under a physician’s
supervision from state criminal penalties. These are collectively referred to as the states that have decriminalized medicinal
cannabis, although there is a subtle difference between decriminalization and legalization, and each state’s laws are different.
The
states that have legalized medicinal cannabis are as follows (in alphabetical order):
1.
Alaska
|
11.
Maine
|
21.
New York
|
2.
Arizona
|
12.
Maryland
|
22.
North Dakota
|
3.
Arkansas
|
13.
Massachusetts
|
23.
Ohio
|
4.
California
|
14.
Michigan
|
24.
Oregon
|
5.
Colorado
|
15.
Minnesota
|
25.
Pennsylvania
|
6.
Connecticut
|
16.
Montana
|
26.
Rhode Island
|
7.
Delaware
|
17.
Nevada
|
27.
Vermont
|
8.
Florida
|
18.
New Hampshire
|
28.
Washington
|
9.
Hawaii
|
19.
New Jersey
|
|
10.
Illinois
|
20.
New Mexico
|
|
Medical
cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use
of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts. Legalization is
generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal,
and regulated source.
The
dichotomy between federal and state laws has also limited the access to banking and other financial services by marijuana businesses.
Recently the U.S. Department of Justice and the U.S. Department of Treasury issued guidance for banks considering conducting business
with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must now file a Marijuana Limited
Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue
that is generated exclusively from legal sales. However, since the same guidance noted that banks could still face prosecution
if they provide financial services to marijuana businesses, it has led to the widespread refusal of the banking industry to offer
banking services to marijuana businesses operating within state and local laws.
In
November 2016, California and Nevada voters both approved marijuana use for adults over the age of 21 without a doctor’s
prescription or recommendation, so called recreational marijuana, and permitted the cultivation and sale of marijuana, in each
case subject to certain limitations. We intend to seek to obtain the necessary permits and licenses to expand our existing business
to cultivate and distribute marijuana in compliance with these laws, although there is no guarantee that we will be successful
in doing so. Despite the changes in state laws, marijuana remains illegal under federal law.
In
November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”),
in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess
up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six
marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things,
cultivate, process and distribute marijuana products under certain conditions. Many of the provisions of the AUMA do not become
effective until January 1, 2018 and the California Bureau of Marijuana Control is expected to enact regulations to implement the
AUMA by that date.
Nevada
voters approved Question 2 in a ballot initiative in November 2016. Among other things, Question 2 makes it legal for adults over
the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one- eighth of an ounce of marijuana concentrates.
Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses
to cultivate, process and distribute marijuana products under certain conditions. The Nevada Department of Taxation has indicated
that it will enact regulations to implement Question 2 by the summer of 2017.
In
an effort to provide guidance to federal law enforcement, the Department of Justice (the “DOJ”) has issued Guidance
Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October
19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General
James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the Controlled Substances
Act (the “CSA”), but, the DOJ is also committed to using its limited investigative and prosecutorial resources to
address the most significant threats in the most effective, consistent, and rational way.
The
August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state
laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement
priorities that are important to the federal government:
●
|
Distribution
of marijuana to children;
|
●
|
Revenue
from the sale of marijuana going to criminals;
|
●
|
Diversion
of medical marijuana from states where it is legal to states where it is not;
|
●
|
Using
state authorized marijuana activity as a pretext of other illegal drug activity;
|
●
|
Preventing
violence in the cultivation and distribution of marijuana;
|
●
|
Preventing
drugged driving;
|
●
|
Growing
marijuana on federal property; and
|
●
|
Preventing
possession or use of marijuana on federal property.
|
The
DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts
of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the
event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical
marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue
and profits.
We
currently operate medical marijuana businesses in Oregon. Although the possession, cultivation and distribution of marijuana for
medical use is permitted in Oregon, provided compliance with applicable state and local laws, rules, and regulations, marijuana
is illegal under federal law. We believe we operate our business in compliance with applicable Oregon law and regulations. Any
changes in federal, state or local law enforcement regarding marijuana may affect our ability to operate our business. Strict
enforcement of federal law regarding marijuana would likely result in the inability to proceed with our business plans, could
expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance
or other business services may also affect our ability to operate our business.
INTERNATIONAL
OPPORTUNITY
In
recent years, the actions of governments around the world have signaled a significant change in attitudes towards cannabis. Governments
in Australia, Brazil, Canada, Germany, Chile, Jamaica, Israel, Mexico, South Africa, and others have taken steps to foster research
into cannabis-based medical treatments and/or towards increasing legal access to medical cannabis.
On
January 19, 2017, the German parliament passed legislation that legalized medical cannabis and included provisions for medical
cannabis treatment expenses to be covered by health insurance. In early April 2017, the German government issued a Request for
Proposal seeking submissions from parties interested in obtaining one of up to 10 licenses to produce medical marijuana in Germany.
Canada
has developed a regulatory model, companies acting within that framework have an opportunity to grow market share in the global
community. Australia began the rollout of a regulatory framework in 2016.
The
opening of legal cannabis markets around the world presents an opportunity for us. Medical cannabis opportunities are becoming
increasingly available as new jurisdictions move towards establishing new or improved medical cannabis systems.
We
remain committed to only conducting business, related to growing cannabis, in jurisdictions where it is legal to do so. We believe
that operating and investing in markets without federal legal frameworks, puts the company at risk of prosecution, puts at risk
its ability to operate freely, and potentially could jeopardize its listing on major exchanges and in turn its access to capital
from reputable investment funds.
Strategy
- Cannabis
We
are committed to conducting business and make accretive acquisitions relating to growing and distributing cannabis, in jurisdictions
where it is legal to do so both domestically and abroad
Food
Truck Business
[Discontinued in May 2016]
We
discontinued our Food Truck Business in May 2016. We thought that the retail market for gourmet food trucks was a fast growing
and fragmented industry with the potential for growth; however we found operating profitably in this space to be difficult and
chose to exit this business.
In
September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer
in exchange for 3 million shares of the company’s stock he owned and we reimbursed him $100,000 in cash for back pay and
expenses.
License
Agreements
[Transferred as part of sale in September 2016]
As
part of our business, and in conjunction with expanding our overall business plan, we entered into license agreements with individuals
or entities regarding our intellectual property. Specifically, we granted certain exclusive licensing rights regarding our intellectual
property, including but not limited to trademarks, copyrights, know-how, trade secrets, software, patents, certain goods and services
pertaining to our business, to entities in designated areas, whereby such individuals or entities will be entitled to the use
of our intellectual property in connection with their use and sale of our products and our brand name. In exchange for such licenses,
we receive a specifically negotiated cash payments, royalty payments and/or equity interests in the licensees.
Intellectual
Property
[Transferred as part of sale in September 2016]
Our
intellectual property consists of our copyrighted website content and social media pages on Facebook and Twitter. We have and
will continue to file applications with the United States Patent and Trademark Office (the “USPTO”) to protect our
intellectual property. As of the date of this report, we have obtained federal registration for certain trademarks and logos,
including but not limited to “GCT”, “CHEESY MAC AND RIB MELT”, “PEPPERBELLY MELT”, “PLAIN
AND SIMPLE MELT”, “S’MORE MELT”, “THE CHEESE MAC MELT”, “THE FULLY LOADED”, “YOU
CANT SAY GRILLED CHEESE WITHOUT SMILING” and the “Reclining Girl Eating Sandwich Design” logo. We have additional
trademark and logo applications pending with the USPTO and will continue to file additional applications to protect our intellectual
property in the future.
Charitable
Foundation and Not-For-Profit Initiatives
In
September 2013, our Board of Directors approved the creation of a new charitable foundation. This foundation is intended to provide
financial assistance to the surviving spouses and children of United States military personnel who have died in combat and to
United States military personnel suffering from physical and mental disabilities. We initially intend to donate up to 1,000,000
shares of our common stock to the foundation, with such shares to be donated from time to time as the Board of Directors determines
is prudent.
In
November 2014, the Company issued 1,000,000 restricted shares of its Common Stock to certain nonprofits that support people in
need with a focus on veterans.
The
issuance of the restricted shares to the charitable foundations is subject to the following resale restrictions: each of the charitable
foundations receiving restricted shares from the Company may only sell up to 1/12
th
of such shares in any given month
following the eligibility for resale of such shares either pursuant to 1) a registration statement filed by the Company to register
such shares or 2) Rule 144 of the Securities Act.
Brick
and Mortar - Ruby’s Pennsylvania proposed transactions
We
entered into a series of agreements in January 2015, with franchisees of Ruby’s Franchise Systems, Inc. to acquire all,
or substantially all, of the assets of each of DJ Brinton Lake, LLC, DJR King of Prussia, Inc. and DJR Suburban Square, Inc. (which
we collectively refer to as the Ruby’s Franchisees). Accordingly each of the Ruby’s Franchisees agreed not to negotiate
with, or agree to sell or otherwise dispose of, directly or indirectly, any of their respective assets to any other third party,
until March 31, 2015 and the extended expiration date of October 31, 2015.
We
did not and will not complete these transactions as part of discontinuing our food business.
Environmental
Matters
We
are subject to various federal, state and local environmental regulations. However, compliance with applicable environmental regulations
is not believed to have a material effect on capital expenditures, financial condition, results of operations, or our competitive
position.
Employees
At
December, 31 2015, the Company had 54 employees, including 4 executives, 39 in food services and 11 administrative employees.
In
August 2017 we had 46 employees, including 2 corporate executives and 44 in farming and distribution activities.
Legal
Proceedings
In
the normal course of our business, we may periodically become subject to various lawsuits. However, there are currently no legal
actions pending against us, or, to our knowledge, are any such proceedings contemplated.
Corporate
Information
Our
principal office is located at 4570 Campus Drive, Suite 1, Newport Beach, CA 92660.
Item
1A.
Risk
Factors
You
should carefully consider the following risk factors and all other information contained in this Annual Report. If any of the
following risks occur, our business, financial conditions or results of operations may be materially and adversely affected. This
Annual Report also contains forward-looking statements that involve risks and uncertainties. There can be no assurance that actual
results will not materially differ from expectations. Important factors could cause actual results to differ materially from those
indicated by such forward-looking statements.
Risks
Related to Our Business
We
changed our primary business to cannabis cultivation and distribution from the food truck business
Since
May 2016 our primary focus is on the cultivation, and distribution of medicinal and recreational cannabis. In May 2016 the company
decided to discontinue its food business. It is possible that we may not be successful in the cannabis business.
We
have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to
decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our
cash flow.
We
have incurred significant losses in prior periods. For the year ended December 31, 2015, we incurred a net loss of $6,146,501
and, as of that date, we had an accumulated deficit of $21,775,487. Any losses in the future could cause the quoted price of our
Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become
due, and on our cash flow.
Our
independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability
to obtain future financing.
The
report of our independent auditors on our consolidated financial statements for the year ended December 31, 2015 included an explanatory
paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts
are based on our incurring significant net loss and our working capital deficit position. Our ability to continue as a going concern
will be determined by our ability to obtain additional funding in the short term to enable us to realize the commercialization
of our planned business operations.
Risks
Relating to Our Business and Industry
CANNABIS
Federal
regulation and enforcement may adversely affect the implementation of medical cannabis laws and regulations may negatively impact
our revenues and profits.
Currently,
there are 28 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate
medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering
similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that
cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited.
Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such potential amendments
there can be no assurance, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be
producing, cultivating, or dispensing marijuana in violation of federal law. Active enforcement of the current federal regulatory
position on cannabis may thus indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the
CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. In February 2017, the
Trump administration announced that there may be “greater enforcement” of federal laws regarding marijuana. Any such
enforcement actions could have a negative effect on our business and results of operations.
In
an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United
States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney
General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum
provides that the DOJ is committed to the enforcement of the CSA, but, the DOJ is also committed to using its limited investigative
and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.
The
August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state
laws legalizing medical and recreational marijuana possession in small amounts.
The
memorandum sets forth certain enforcement priorities that are important to the federal government:
|
●
|
Distribution
of marijuana to children;
|
|
●
|
Revenue
from the sale of marijuana going to criminals;
|
|
●
|
Diversion
of medical marijuana from states where it is legal to states where it is not;
|
|
●
|
Using
state authorized marijuana activity as a pretext of other illegal drug activity;
|
|
●
|
Preventing
violence in the cultivation and distribution of marijuana;
|
|
●
|
Preventing
drugged driving;
|
|
●
|
Growing
marijuana on federal property; and
|
|
●
|
Preventing
possession or use of marijuana on federal property.
|
The
DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts
of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the
event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical
marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue
and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to
the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including
Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical
marijuana. This prohibition is currently in place until April 28, 2017.
We
could be found to be violating laws related to medical cannabis.
Currently,
there are 28 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate
medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering
similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that
cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited.
Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such amendments there
can be no assurance, there is a risk that federal authorities may enforce current federal law. The risk of strict enforcement
of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. Because we cultivate,
produce, sell and distribute medical marijuana, we have risk that we will be deemed to facilitate the selling or distribution
of medical marijuana in violation of federal law.
Finally,
we could be found in violation of the CSA in connection with the sale of our products. This would cause a direct and adverse effect
on our subsidiaries’ businesses, or intended businesses, and on our revenue and prospective profits.
Variations
in state and local regulation, and enforcement in states that have legalized medical cannabis, may restrict marijuana-related
activities, including activities related to medical cannabis, which may negatively impact our revenues and prospective profits.
Individual
state laws do not always conform to the federal standard or to other states laws. A number of states have decriminalized marijuana
to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization
and medical laws. As of March 2017, eight states and the District of Columbia have legalized the recreational use of cannabis.
Variations exist among states that have legalized, decriminalized, or created medical marijuana exemptions. For example, certain
states have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal
use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical
marijuana needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of
marijuana may indirectly and adversely affect our business and our revenue and profits.
In
November 2016, California voters approved Proposition 64, also known as the Adult Use of Marijuana Act (“AUMA”), in
a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess
up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six
marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things,
cultivate, process and distribute marijuana products under certain conditions. Many of the provisions of the AUMA do not become
effective until January 1, 2018 and the California Bureau of Marijuana Control is expected to enact regulations to implement the
AUMA by that date.
Also
in November 2016, Nevada voters approved Question 2 in a ballot initiative. Among other things, Question 2 makes it legal for
adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one- eighth of an ounce of
marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question
2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. The Nevada Department
of Taxation has indicated that it will enact regulations to implement Question 2 by the summer of 2017.
If
we are unable to obtain the permits and licenses required to operate our business in compliance with the new regulations in California
or Nevada, we may experience negative effects on our business and results of operations.
Prospective
customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of
federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.
Our
website will be visible in jurisdictions where medicinal and/or recreational use of marijuana is not permitted and, as a result,
we may be found to be violating the laws of those jurisdictions.
Marijuana
remains illegal under federal law.
Marijuana
is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has
been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state
laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed
with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets,
including real property, cash, equipment and other goods, could be subject to asset forfeiture because marijuana is still federally
illegal.
In
February 2017, the Trump administration announced that there may be “greater enforcement” of federal laws regarding
marijuana. Any such enforcement actions could have a negative effect on our business and results of operations.
We
are not able to deduct some of our business expenses.
Section
280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses,
forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana
business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business
may be less profitable than it could otherwise be.
We
may not be able to attract or retain a majority of independent directors.
We
currently have only three directors on our board of directors and our board is not currently comprised of a majority of independent
directors. We may in the future desire to list our common stock on The New York Stock Exchange (“NYSE”) or The NASDAQ
Stock Market (“NASDAQ”), both of which require that a majority of our board be comprised of independent directors.
We may have difficulty attracting and retaining independent directors because, among other things, we operate in the marijuana
industry, and as a result we may be delayed or prevented from listing our common stock on the NYSE or NASDAQ.
We
may not be able to successfully execute on our merger and acquisition strategy
Our
business plan depends in part on merging with or acquiring other businesses in the marijuana industry. The success of any acquisition
will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into
our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any
acquisition may result in diversion of management’s attention from other business concerns, and such acquisition may be
dilutive to our financial results and/or result in impairment charges and write-offs. We might also spend time and money investigating
and negotiating with potential acquisition or investment targets, but not complete the transaction.
Although
we expect to realize strategic, operational and financial benefits as a result of our acquisitions, we cannot predict whether
and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into
our business.
Any
future acquisition could involve other risks, including the assumption of unidentified liabilities for which we, as a successor
owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges,
including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory
or political environment in which these investments are located, that our due diligence review may not adequately uncover and
that may arise after entering into such arrangements.
Laws
and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our cultivation,
production and dispensary operations
Local,
state, and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations
of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material
adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations may be enacted in the
future that will be directly applicable to certain aspects of our cultivation, production and dispensary businesses, and our business
of selling cannabis products. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor
can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated,
could have on our business.
We
may not obtain the necessary permits and authorizations to operate the medical marijuana business.
We
may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations for our cultivation,
production and dispensary businesses, or may only be able to do so at great cost. In addition, we may not be able to comply fully
with the wide variety of laws and regulations applicable to the medical marijuana industry. Failure to comply with or to obtain
the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the
medical marijuana business, which could have a material adverse effect on our business.
If
we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.
Our
participation in the medical marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and
inquiries by various federal, state, or local governmental authorities against us. Litigation, complaints, and enforcement actions
could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales,
revenue, profitability, and growth prospects. We have not been, and are not currently, subject to any material litigation, complaint,
or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority. We are
presently engaged in the distribution of marijuana; however, we have not been, and are not currently, subject to any material
litigation, complaint or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental
authority with respect to our business.
We
may have difficulty accessing the service of banks, which may make it difficult for us to operate.
Since
the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with
the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing
to accept their business. The inability to open or maintain bank accounts may make it difficult for us to operate our medical
marijuana businesses. If any of our bank accounts are closed, we may have difficulty processing transactions in the ordinary course
of business, including paying suppliers, employees and landlords, which could have a significant negative effect on our operations.
A
drop in the retail price of commercially grown produce may negatively impact our business.
The
demand for our produce depends in part on the price of commercially grown produce. Fluctuations in economic and market conditions
that impact the prices of commercially grown produce, such as increases in the supply of such produce and the decrease in the
price of commercially grown produce, could cause the demand for produce to decline, which would have a negative impact on our
business.
Litigation
may adversely affect our business, financial condition, and results of operations.
From
time to time in the normal course of our business operations, we may become subject to litigation that may result in liability
material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations
are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may
be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of
whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient
amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance
coverage for any claims could adversely affect our business and the results of our operations.
Risks
Related to Our Common Stock
There
is a limited market for our common stock, which may make it difficult for you to sell your stock.
Our
common stock trades on the OTC Pink under the symbol “GRLD” There is a limited trading market for our common stock.
Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of
holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
The
market price of our common stock may be highly volatile, and you could lose all or part of your investment.
The
trading price of our common stock is likely to be volatile. This volatility may prevent you from being able to sell your shares
at or above the price you paid for your shares. Our stock price could be subject to wide fluctuations in response to a variety
of factors, which include:
|
●
|
actual
or anticipated fluctuations in our quarterly or annual financial results;
|
|
●
|
additional
needs for financing;
|
|
●
|
failure
of industry or securities analysts to maintain coverage of us, changes in financial estimates by any industry or securities
analysts that follow us or our failure to meet such estimates;
|
|
●
|
market
factors, including rumors, whether or not correct, involving us, our products, or our competitors;
|
|
●
|
fluctuations
in stock market prices and trading volumes of securities of similar companies;
|
|
●
|
sales
or anticipated sales of large blocks of our stock;
|
|
●
|
short
selling of our common stock by investors;
|
|
●
|
additions
or departures of key personnel;
|
|
●
|
regulatory
or political developments;
|
|
●
|
changes
in accounting principles or methodologies;
|
|
●
|
litigation
or governmental investigations;
|
|
●
|
negative
publicity about us in the media and online; and
|
|
●
|
general
financial market conditions or events.
|
Our
common stock is considered a “penny stock,” and thereby be subject to additional sale and trading regulations that
may make it more difficult to sell.
Our
common stock is considered to be a low-priced security, or a “penny stock,” under rules promulgated under the Exchange
Act. A stock is considered to be a “penny stock” if it meets one or more of the definitions in Rules 15g-2 through
15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades
at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted
on The NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three year period, or with average revenues of less than
$6.0 million for the past three years. The principal result or effect of being designated a “penny stock” is that
securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
The
principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in
sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9
promulgated under the Securities Exchange Act of 1934. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s
account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in
the market or otherwise.
As
an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward-looking statements
does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under
the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, as our common stock is
considered “penny stock”, we do not have the benefit of this safe harbor protection in the event of any legal action
based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material
respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could
hurt our financial condition.
Future
issuance of our common stock could dilute the interests of existing stockholders.
We
may issue additional shares of our common stock in the future in connection with a financing or an acquisition. The issuance of
a substantial number of shares of common stock could have the effect of substantially diluting the interests of our existing stockholders
and any subsequent sales or resales by our stockholders could have an adverse effect on the market price of our common stock.
FINRA
sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our
shares.
FINRA
rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending
that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers,
broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and
investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability
such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell
our shares, have an adverse effect on the market for our shares, and thereby depress our share price.
We
have no plans to pay dividends.
To
date, we have paid no cash dividends on our common shares. For the foreseeable future, earnings generated from our operations
will be retained for use in our business and not to pay dividends.
If
we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on
the market price for shares of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system
of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, or persons performing similar functions, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
As
a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We will
be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting
and a report by our independent registered public accounting firm addressing these assessments. The process of designing and implementing
effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the
economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate
to satisfy our reporting obligations as a public company.
We
cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial
reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful
or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue
our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us
to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have
a negative effect on the market price for shares of our common stock.
Lack
of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley
Act.
It
may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required
by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants
in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the
Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications
that Sarbanes-Oxley Act requires publicly-traded companies to obtain.
We
have incurred the costs as a public company which may affect our profitability.
As
a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. We are
subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial
expenditure of financial resources. Compliance with these rules and regulations significantly increase our legal and financial
compliance costs and some activities are more time-consuming and costly. Management may need to increase compensation for senior
executive officers, engage additional senior financial officers who are able to adopt financial reporting and control procedures,
allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet
the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting
and compliance costs may negatively impact our financial results.
Because
we became a public company by means of a reverse merger, and became a cannabis company we may not be able to attract the attention
of major brokerage firms.
Additional
risks may exist since we became public through a “reverse merger” and became a cannabis company securities analysts
of major brokerage firms may not provide our Company coverage since there is little incentive to brokerage firms to recommend
the purchase of its common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings
on our behalf in the future.
“Emerging
growth companies” are subject to lessened disclosure requirements.
“Emerging
growth companies” as defined in the JOBS Act, permits certain qualifying companies to take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to:
●
|
not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
|
●
|
taking
advantage of an extension of time to comply with new or revised financial accounting standards;
|
●
|
reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
|
●
|
exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden
parachute payments not previously approved.
|
We
have elected not to take advantage of the extended transition period for complying with new or revised accounting standards pursuant
to Section 107(b) of the JOBS Act and such election not use such transition period is irrevocable.
Public
company compliance may make it more difficult to attract and retain officers and directors
.
The
Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial
compliance costs, and have made, and will continue to make, some activities more difficult, time consuming or costly and may place
significant strain on the Company’s personnel, systems and resources.
The
Sarbanes-Oxley Act and rules subsequently implemented by the SEC have required changes in corporate governance practices of public
companies. As a public company, we expect these rules and regulations to increase our compliance costs and to make certain activities
more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult
and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be
more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers.
Because
our directors and executive officers are among our largest shareholders, they can exert significant control over our business
and affairs and have actual or potential interests that may depart from investors
.
As
of September 30, 2017 our directors, executive officers and affiliates collectively and beneficially own or control 31% of outstanding
common stock.
Additionally, the holdings of our directors and
executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the options or
warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock. The interests
of such persons may differ from the interests of our other shareholders. As a result, in addition to their board seats and offices,
such persons will have significant influence over and control all corporate actions requiring shareholder approval, irrespective
of how our other shareholders may vote, including the following actions:
●
|
to
elect or defeat the election of our directors;
|
●
|
to
amend or prevent amendment of our Certificate of Incorporation or By-laws;
|
●
|
to
effect or prevent a merger, sale of assets or other corporate transaction; and
|
●
|
to
control the outcome of any other matter submitted to our shareholders for vote.
|
Such
persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain
control of our Company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our
stock price.
We
have a substantial number of convertible securities outstanding. The exercise of our outstanding warrants and conversion of our
outstanding convertible notes can have a dilutive effect on our common stock.
If
the price per share of our common stock at the time of exercise of any warrants or other convertible securities is in excess of
the various exercise or conversion prices of such convertible securities and the holders of our convertible securities decide
to convert such securities into shares of common stock, it will have a dilutive effect on our common stock. As of December 31,
2015, we had (i) outstanding warrants to purchase 10,322,284 shares of our common stock at a weighted average exercise price of
$2.14 per share and (ii) outstanding convertible notes that, upon conversion, would provide note holders with an aggregate of
1,470,667 shares of our common stock. Further, any additional financing that we secure may require the granting of rights, preferences
or privileges senior to those of our common stock and result in additional dilution of the existing ownership interests of our
common stockholders.
Item
1B.
Unresolved
Staff Comments.
Not
applicable.
ITEM
2.
PROPERTIES
Our corporate office is located at 4570 Campus Drive, Suite
1, Newport Beach, CA 92660
A
summary
of the offices and properties we lease or own are presented in the table below. Our facilities are considered to be in good condition,
adequate for its purpose and suitably utilized according to the requirements of the relevant operations.
Purpose
|
|
|
|
|
Location
|
|
Lease
/
Own
|
|
Monthly
payment
|
|
|
Begin
Date
|
|
End
Date
|
|
Term
|
Corporate
Office
|
|
|
1
|
|
|
Newport
Beach, CA
|
|
Lease
|
|
$
|
1,300
|
|
|
|
|
|
|
Month
to month
|
Office
|
|
|
2
|
|
|
Portland,
OR
|
|
Lease
|
|
$
|
2,198
|
|
|
6/1/2016
|
|
6/30/2019
|
|
37
months
|
Cultivation
Facility
|
|
|
3
|
|
|
Medford,
OR
|
|
Own
|
|
$
|
none
|
|
|
|
|
|
|
|
1
|
We
rent 600 sq.ft. of office space which is sufficient for our needs
|
2
|
We
rent a 1,600 sq.ft office space in Portland, OR
|
3
|
We
own a 280 acre farm in Medford, OR
|
In
2016 we vacated and settled all obligations relating to the kitchen facilities in Gardenia, CA and Phoenix, AZ
Item
3.
Legal
Proceedings
In
the normal course of our business, we may periodically become subject to various lawsuits. However, there are currently no legal
actions pending against us or, to our knowledge, are any such proceedings contemplated.
Item
4.
Mine
Safety Disclosures
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
TRIG
Acquisition 1, Inc. (the “Company”) was incorporated in the State of Nevada on December 31, 2009 as GSP-1, Inc. The
Company was formed as a vehicle to pursue a business combination. On July 6, 2011, the Company filed a Certificate of Amendment
to its Articles of Incorporation to change its name from “GSP-1, Inc.” to “TRIG Acquisition 1, Inc.”
On
October 18, 2012, the Company entered into a share exchange agreement (the “Exchange Agreement”) by and among (i)
the Company, (ii) Grilled Cheese, Inc., a California corporation, (“Grilled Cheese”), (iii) GCT, Inc., a Nevada corporation
and wholly-owned subsidiary of the Company (“GCT Sub”); (iv) David Danhi, the majority shareholder of Grilled Cheese
(“Majority Shareholder”) and (v) Michelle Grant, the minority shareholder of Grilled Cheese (“Minority Shareholder”,
together with the Majority Shareholder, the “Grilled Cheese Shareholders”). Pursuant to the terms of the Exchange
Agreement: (1) the Majority Shareholder transferred to GCT Sub all of the shares of Grilled Cheese held by such shareholder in
exchange for the issuance of 4,275,000 shares of the Company’s common stock, par value $0.001 per share (the “Common
Stock”); and (2) the Minority Shareholder transferred all of the shares of Grilled Cheese held by the Minority Shareholder
in exchange for $500,000 and 845,000 shares of Common Stock (the “Share Exchange Transaction”).
The
Share Exchange Transaction has been accounted for as a reverse acquisition of the Company, by Grilled Cheese but in substance
as a capital transaction, rather than a business combination since the Company had nominal operations and assets prior to and
as of the closing of the Share Exchange Transaction. The former stockholders of Grilled Cheese represent a significant constituency
of the Company’s voting power immediately following the Share Exchange Transaction and Grilled Cheese’s management
assumed operational, financial and governance control. The transaction is deemed a reverse recapitalization and the accounting
is similar to that resulting from a reverse acquisition. For accounting purposes, Grilled Cheese is treated as the surviving entity
and accounting acquirer in accordance with ASC 805, Business Combinations although the Company was the legal acquirer. Accordingly,
the Company’s historical financial statements are those of Grilled Cheese. The accumulated losses of Grilled Cheese were
carried forward after the completion of the Share Exchange Transaction.
All
reference to Common Stock and per share amounts have been restated to effect the Share Exchange Transaction which occurred on
October 18, 2012.
In
September 2016 the Company changed its corporate name from “The Grilled Cheese Truck, Inc.” to “American Patriot
Brands, Inc.”. On February 19, 2013, following the Share Exchange Transaction, the Company changed its corporate name from
“TRIG Acquisition 1, Inc.” to “The Grilled Cheese Truck, Inc.”
The
Company is a food truck operation that sells various types of gourmet grilled cheese and other comfort foods in the Southern California
and Phoenix, Arizona areas. The Company’s food trucks currently make multiple stops per week at prearranged locations. The
food preparation occurs at a kitchen which supports streamlined operations within the truck by limiting assembly and grilling,
allowing the truck to achieve maximum revenues per hour by delivering our food items including melts, tots, soups and sides efficiently
to customers. The Company’s business model includes the use of social media and location booking to attract customers to
the truck’s various locations.
In
May 2016, the Company elected to discontinue its food truck operations and enter the U.S. cannabis industry.
2.
|
Going
Concern and Basis of Presentation
|
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and settlement of liabilities in the normal course of business. The business will require significant amounts of capital
to sustain operations and make the investments it needs to execute its longer term business plan. The Company has cash and working
capital deficiency of $0 and $6,903,836 respectively, at December 31, 2015. The Company has historically relied on proceeds from
the issuance of debt and shares of its Common Stock to finance its operations. The Company’s net loss for the year ended
December 31, 2015 was $6,146,501 and the deficit accumulated by the Company amounts to $21,775,488 as of December 31, 2015. These
matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going
concern.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
In
order to continue as a going concern and achieve a profitable level of operations, the Company will need, among other things,
additional capital resources. Management’s plan to continue as a going concern includes raising capital through increased
sales and conducting additional financings through debt and equity transactions. However, management cannot provide any assurances
that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern
is dependent upon the management’s ability to successfully implement the plans described above, including securing additional
sources of financing and attain profitable operations. Management also cannot provide any assurance that unforeseen circumstances
that could occur at any time within the next twelve months or thereafter will not increase the need for the Company to raise additional
capital on an immediate basis. The Company is actively targeting sources of additional financing through debt and equity transactions
and other transactions. There can be no assurance that we will be able to continue to raise funds in which case the Company may
be unable to meet its obligations.
3.
|
Summary
of Significant Accounting Policies
|
|
a.
|
Basis
of Consolidation
|
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company
transactions are eliminated.
These
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for annual financial statements and with Form 10-K and article 8 of the Regulation
S-X of the United States Securities and Exchange Commission (“SEC”). Under this basis of accounting, revenues are
recorded as earned and expenses are recorded at the time liabilities are incurred.
|
c.
|
Cash
and Cash Equivalents
|
Cash
primarily consists of cash on hand and bank deposits. The Company currently has no cash equivalents which would consist of money
market accounts and other highly liquid investments with an original maturity of three months or less when purchased.
|
d.
|
Use
of Estimates in Preparation of Financial Statements
|
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ from those
estimates. Included in these estimates are assumptions about collection of accounts and notes receivable, useful life of fixed
assets, deferred income tax asset valuation allowances, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods,
such as expected volatility, risk-free interest rate, and expected dividend rate.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
|
e.
|
Property
and Equipment
|
Property
and equipment are stated at cost. Depreciation is computed on the straight-line method. The depreciation and amortization methods
are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:
Computers
|
4
Years
|
Vehicles
|
4
Years
|
Office
Equipment
|
7
Years
|
Food
Service Equipment
|
7
Years
|
Furniture
and Fixtures
|
7
Years
|
Leasehold
Improvements
|
7
Years
|
Amortization
of leasehold improvements is computed using the straight-line method over the shorter of the life of the lease or the estimated
useful life of the assets. Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized.
At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from
the accounts and any gains or losses are reflected in income.
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing
this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects
of obsolescence, demand, competition, and other economic factors. Based on this assessment, there was an impairment at December
31, 2015 of $134,856.
Accounts
receivable are generally unsecured. The majority of the Company’s sales are in cash from truck stop sales. Receivables relate
to catering and special event sales. The Company establishes an allowance for doubtful accounts receivable based on the age of
outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection
efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied
against the allowance for doubtful accounts. As of December 31, 2015 and 2014, the allowance for doubtful accounts amounted to
$56,134 and $51,723, respectively.
The
Company’s revenue is derived from three sources. The primary source is from truck stop sales and lesser portions are from
catering and event services and licensed truck sales. Truck stop sales are primarily received in cash and revenue for these sales,
net of sales tax, is reported at that time.
For
catering and special event services, customers must sign and deliver the Company’s standard catering agreement with a minimum
payment of 50% of the agreed upon price of the event. The remaining balance is due by credit card payment within 2 days of the
event or cash on the day of the event. The initial 50% deposit is fully refundable until 14 days prior to the event, between 4
and 13 days prior to the event, the deposit is non-refundable and if the customer cancels within 3 days of the event, 100% of
the agreed-upon price of the event is due. Revenue is recognized, net of sales tax, at the time good and services are provided.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
For
recurring licensing revenue, which is based on 6% of gross revenue from truck stop sales collected by the licensee, revenue is
recognized at the end of each month when the licensee is invoiced and the revenue is booked as a receivable.
For
area licensing revenue, which is generally a fixed amount, the revenue is recognized when the Company has no remaining obligations
or intent, either by agreement, trade practice, or law, to the extent it is collectible.
Any
amount receivable or received pursuant to licensing revenues, but unrecognized for revenue recognition purpose is recorded as
deferred revenues.
Advertising
costs, which are included in selling costs in the accompanying Statements of Operations, are expensed when incurred. These costs
consist primarily of printing for signs, menus, and promotional items. Also included are costs of web based advertising. Total
advertising expenses for the years ended December 31, 2015 and 2014 amounted to $15,766 and $42,989, respectively.
|
i.
|
Beneficial
Conversion Feature
|
The
Company accounts for the beneficial conversion feature of convertible notes payable when the conversion rate is below market value.
Pursuant to FASB ASC 470-20 – Debt With Conversion and Other Options, the estimated fair value of the beneficial conversion
feature is recorded in the financial statements as a discount from the face amount of the notes. Such discounts are amortized
over the term of the notes or conversion of the notes, if sooner. The Company recognized amortization expense related to the beneficial
conversion features on convertible notes payable totaling $80,096 and $109,378 during the years ended December 31, 2015 and 2014,
respectively.
The
Company accounts for its long-lived assets in accordance with FASB ASC 360 – Impairment or Disposal of Long-Lived Assets
that requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical
cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an
asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future
net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the
asset’s carrying value and fair value or disposable value. During the years ended December 31, 2015, the Company recorded
an impairment of certain licensing rights amounting to $200,000.
|
k.
|
Earnings
(loss) per common share
|
The
Company utilizes the guidance per FASB Codification “ASC 260 “Earnings per Share”. Basic earnings per share
are calculated by dividing income available to stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average number of common shares and dilutive common share
equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the conversion of
convertible notes and the exercise of stock options and warrants (calculated using the modified-treasury stock method). Such securities,
shown below, presented on a common share equivalent basis and outstanding as of December 31, 2015 and 2014 have been excluded
from the per share computations:
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
|
|
As
of
|
|
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
Convertible
notes
|
|
|
1,470,667
|
|
|
|
711,667
|
|
Options
issued to employee
|
|
|
2,000,000
|
|
|
|
1,000,000
|
|
Warrants
|
|
|
10,310,284
|
|
|
|
9,710,951
|
|
|
|
|
13,794,966
|
|
|
|
11,422,618
|
|
The
Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 740-10-25, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. Penalties and interest on underpayment of income
taxes are reflected in the Company’s effective tax rate.
The
Company’s revenues in the statements of operations are net of sales taxes.
|
n.
|
Fair
Value of Financial Instruments
|
Effective
January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and Disclosures, or ASC 820, for assets and liabilities
measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring
fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s
financial position or operating results, but did expand certain disclosures.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level
1:
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
|
|
Level
2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
The
Company did not have any Level 2 or Level 3 assets or liabilities as of December 31, 2015 and 2014, with the exception of its
convertible notes payable. The carrying amounts of these liabilities at December 31, 2015 and 2014 approximate their respective
fair value based on the Company’s incremental borrowing rate.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Additional
Disclosures Regarding Fair Value Measurements
The
carrying value of cash and cash equivalents, accounts receivable, notes receivable, other receivable, accounts payable and accrued
expenses, notes payable, promissory notes and due from licensee- including related party liabilities- approximate their fair value
due to the short term maturity of these items.
In
addition, FASB ASC 825-10-25 Fair Value Option, or ASC 825-10-25, was effective for January 1, 2008. ASC 825-10-25 expands opportunities
to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and
certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
|
o.
|
Convertible
Instruments
|
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with professional
standards for “Accounting for Derivative Instruments and Hedging Activities.”
Professional
standards generally provide three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the
host instrument is deemed to be conventional as defined under professional standards as “The Meaning of “Conventional
Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated
from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with
Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options
embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment
date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements
are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary
deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between
the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price
embedded in the note.
ASC
815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net
cash settlement, then the contract shall be classified as an asset or a liability.
|
p.
|
Deferred
Financing Costs
|
Costs
incurred with obtaining and executing debt arrangements are capitalized and amortized over the term of the related debt using
the straight line method. The Company recognized amortization expense related to the deferred finance costs totaling $70,865 and
$235,968 during the years ended December 31, 2015 and 2014, respectively. In accordance with ASU No. 2015-03, deferred finance
costs, net of accumulated amortization, in the amount of $259,237 and $103 have been included as a contra to the corresponding
convertible notes payable in the consolidated balance sheets as of December 31, 2015 and 2014, respectively.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
On
July 31, 2015 the Company entered into a licensing agreement with Kiosk Concepts, Inc. for the use of the “the Original
Soupman” brand and recipes. In connection with the licensing agreement the Company made advance payments in the amount of
$200,000 during the year ending December 31, 2015. In May 2016 the Company elected to discontinue it food truck operations and
determined that the licensing agreement was no longer necessary. The Company fully impaired the intangible asset at December 31,
2015 (see Note 3 j. -
Impairment of Long-Lived Assets).
|
r.
|
Stock-Based
Compensation
|
The
Company adopted the provisions of ASC 718. We estimate the fair value of stock options under the fair value method using a Black
Scholes valuation model, consistent with the provisions of ASC 718 and SEC Staff Accounting Bulletin No. 107,
Share-Based Payment
.
Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock.
We determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could
reasonably be expected to be a better indicator of our expected volatility than historical volatility. The expected term assumption
used in calculating the estimated fair value of our stock-based compensation awards is based on detailed historical data about
employees’ exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture
rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting
fair value method provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase
plan, we decided to continue to use the Black-Scholes model to calculate the estimated fair value.
Certain
reclassifications have been made to conform the prior period data to the current presentations. These reclassifications had no
effect on the reported results.
|
t.
|
Recently
Issued Accounting Standards
|
Intra-Entity
Transfers of Assets Other Than Inventory
In
October 2016, the FASB issued guidance that requires the income tax consequences of an intra-entity transfer of an asset other
than inventory to be recognized when the transfer occurs instead of when the asset is sold to an outside party. The new guidance
is effective beginning with the first quarter of our 2019 fiscal year (with early adoption permitted as of the beginning of an
annual period). The guidance is required to be adopted retrospectively by recording a cumulative- effect adjustment to retained
earnings as of the beginning of the adoption period. We are assessing the potential impact this guidance will have on its financial
statements.
Stock
Compensation - Employee Share-Based Payments
In
March 2016, the FASB issued guidance to amend certain aspects of accounting for employee share-based awards, including accounting
for income taxes related to those transactions. This guidance will require recognizing excess tax benefits and deficiencies (that
result from an increase or decrease in the fair value of an award from grant date to the vesting date or exercise date) on share-based
compensation arrangements in the tax provision, instead of in equity as under the current guidance. In addition, these amounts
will be classified as an operating activity in the statement of cash flows, instead of as a financing activity, hi addition, cash
paid for shares withheld to satisfy employee taxes will be classified as a financing activity, instead of as an operating activity.
The guidance is effective beginning in the first quarter of our 2018 fiscal year (with early adoption permitted) and is required
to be adopted as follows:
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
|
●
|
Prospectively
for the recognition of excess tax benefits and deficiencies in the tax provision.
|
|
|
|
|
●
|
Retrospectively
or prospectively for the classification of excess tax benefits and deficiencies in the statement of cash flows.
|
|
|
|
|
●
|
Retrospectively
for the classification of cash paid for shares withheld to satisfy employee taxes in the statement of cash flows.
|
Leases
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for
the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new standard
also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative information. The new standard will be effective for us on January 1, 2019. Early adoption
is permitted. We are in the process of evaluating the impact the adoption of this standard will have on its consolidated financial
statements and related disclosures.
Balance
Sheet Classification of Deferred Taxes
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”). ASU 2015-17 requires entities to present deferred tax assets and deferred tax liabilities as noncurrent
in a classified balance sheet. The new standard is effective for public entities for annual periods beginning after December 15,
2016, with early adoption allowed on either a prospective or retrospective basis. We adopted ASU 2015-17, on a prospective basis,
for our annual period ended December 31, 2015. Accordingly, the accompanying consolidated balance sheets at December 31, 2016
and 2015 reflect the presentation of deferred tax assets and deferred tax liabilities in accordance with ASU 2015-17.
Inventory
Measurement
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU
2015-11”), which requires entities to measure inventory at the
lower of cost and net realizable value (“NRV”
).
ASU 2015-11 defines NRV as the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. The ASU will not apply to inventories that are measured by using either the last-in,
first-out method or the retail inventory method. The guidance in ASU 2015-11 is effective prospectively for fiscal years beginning
after December 15, 2016, and interim periods therein. Early adoption is permitted. Upon transition, entities must disclose the
nature of and reason for the accounting change. We do not expect that the adoption of this standard will have a material effect
on its consolidated financial statements.
Going
Concern Disclosures
In
August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as
a Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments
of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and
provides guidance on determining when and how to disclose going concern uncertainties hi the financial statements. Certain disclosures
will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern.
ASU 2014-15 is effective for annual and interim reporting periods ending after December 15, 2015, with early adoption permitted.
We do not expect that the adoption of this standard will have a material effect on its consolidated financial statements.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Presentation
of Debt Issuance Costs
In
April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance
costs related to a recognized debt liability be reported on the balance sheet as a direct deduction from the carrying amount of
that debt liability. The guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and is
required to be applied retrospectively. Early adoption is permitted and we adopted ASU 2015-03 in the second quarter of 2015.
Subsequently, in August 2015, the FASB issued No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated
with Line-of-Credit Arrangements. ASU 2015-15 codifies the SEC’s position that it would be allowable for an entity to defer
and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of
the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The
Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flows.
The
Company had promissory notes from licensees aggregating $31,990 and $54,780 outstanding at December 31, 2015 and 2014, respectively.
The notes receivable bear interest ranging between 0% and 3.25%. The principal amount on the notes receivable are generally due
within 12 months from issuance or payable upon demand. The Company recognized $0 and $10,790 of interest income in connection
with such notes during the years ended December 31, 2015 and 2014, respectively. Due to the uncertainty of collectability, the
Company has recorded an allowance of $269,608 and $226,828 against these notes and related interest receivable as of December
31, 2015 and 2014, respectively.
On
September 27, 2013, a licensee issued a promissory note to the Company relating to a one-time license fee in the amount of $250,000.
The note matures on September 28, 2016 and bears interest at 3% per annum. Due to the uncertainty of collectability the Company
has recorded an allowance for the full amount of the note as of December 31, 2015.
6.
|
Property,
Equipment and Vehicles Held for Sale
|
Property
and equipment consists of the following:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
POS
systems
|
|
$
|
21,358
|
|
|
$
|
21,358
|
|
Food
service equipment
|
|
|
39,681
|
|
|
|
39,681
|
|
Truck
equipment
|
|
|
257,316
|
|
|
|
5,346
|
|
Vehicles
|
|
|
25,956
|
|
|
|
248,926
|
|
Leasehold
improvements
|
|
|
10,703
|
|
|
|
10,703
|
|
Computers
|
|
|
2,334
|
|
|
|
5,334
|
|
Furniture
and fixtures
|
|
|
11,924
|
|
|
|
8,924
|
|
Total
|
|
|
369,272
|
|
|
|
340,272
|
|
Accumulated
impairment
|
|
|
(134,856
|
)
|
|
|
-
|
|
Accumulated
depreciation
|
|
|
(185,226
|
)
|
|
|
(99,620
|
)
|
Total
property and equipment, net
|
|
$
|
49,190
|
|
|
$
|
240,652
|
|
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Depreciation
expense for the years ended December 31, 2015 and 2014 amounted to $85,007 and $75,357, respectively. During the year ended December
31, 2015 the Company recorded impairment charges totaling $134,856 related to truck equipment.
During
the year ended December 31, 2014, the Company sold four vehicles with an aggregate carrying value of $173,190, two of which were
classified for sale with an aggregate carrying value of $77,390 at December 31, 2013. In consideration for the disposition, one
of the buyers assumed the obligations under a note payable which had a carrying value of $53,390, another buyer owes the Company
$24,000 at December 31, 2014, which is recorded as notes receivable, the third buyer paid $20,000 and issued a note receivable
of $27,000, of which $19,990 is outstanding at December 31, 2014, and the fourth buyer paid $5,000, and resulted in loss on disposition
of asset of $43,800 during the year ended December 31, 2014.
The
Company’s convertible promissory notes at December 31, 2015 and 2014 are as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Convertible
notes payable, bearing interest at 10%, maturing between October 2015 and December 2016, principal and accrued interest convertible
at the holder’s option following the effectiveness of the Company’s registration statement or mandatory conversion
at their maturity date, at a price of $1.00 per share
|
|
$
|
645,000
|
|
|
$
|
370,000
|
|
Convertible
note payable, bearing interest at 10%, maturing May 2015, principal and accrued interest convertible at the holder’s
option at a price of $0.75 per share
|
|
|
125,000
|
|
|
|
125,000
|
|
Convertible
note payable, bearing interest at 12%, maturing December 2015, principal and accrued interest convertible at the holder’s
option at a price of $1.00 per share
|
|
|
134,000
|
|
|
|
-
|
|
Convertible
note payable, bearing interest at 10%, maturing between June 2016 and December 2016, principal and accrued interest convertible
at the holder’s option at a price of $2.00 per share
|
|
|
1,050,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized
deferred finance costs
|
|
|
(259,237
|
)
|
|
|
(103
|
)
|
Unamortized
debt discount
|
|
|
(244,593
|
)
|
|
|
(75,816
|
)
|
Total
|
|
|
1,450,170
|
|
|
|
769,081
|
|
Less:
Current portion
|
|
|
(1,450,170
|
)
|
|
|
(245,957
|
)
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
523,124
|
|
The
Company generated proceeds of $1,159,000 and $475,000 from the issuance of convertible promissory notes during the years ended
December 31, 2015 and 2014, respectively.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
In
January 2015 the Company executed a term sheet with R2S, LLC to raise up to $1,500,000 of secured convertible notes payable. The
notes are senior to all future debt financing of the Company and secured by all current and future assets. The term sheet also
prohibits the Company from issuing other debt securities pari-passu with the secured notes. As of December 31, 2015, $1,275,000
of notes payable were secured.
The
Company issued 62,640 and 3,620,700 shares of its common stock to satisfy its obligations pursuant to convertible notes during
the year ended December 31, 2015 and 2014, respectively. The aggregate amount of principal and accrued interest satisfied by the
issuance of shares of common stock amounted to $59,333 and $3,620,697 during the years ended December 31, 2015 and 2014, respectively.
In
connection with the issuance of the convertible notes payable issued during the year ended December 31, 2015, the Company issued
764,333 non-detachable warrants to the noteholder, issuable upon conversion of such note. The warrants are exercisable at a price
of $1.50-$4.00 per share and will mature within 3 years from their issuance date.
In
connection with the issuance of the convertible notes payable issued during the year ended December 31, 2014, the Company granted
341,667 non-detachable warrants to the noteholder, issuable upon conversion of such note. The warrants are exercisable at a price
of $1.50-$4.00 per share and will mature within 3 years from their issuance date.
The
beneficial conversion feature of the convertible notes and related warrants issued to the noteholders amounted to $165,883 and
$109,378 during the years ended December 31, 2015 and 2014, respectively, and was recorded as debt discount of the corresponding
debt.
The
Company recognized interest expense of $656,845 and $694,841, including amortization of debt discount of $285,335 and $64,694,
amortization of beneficial conversion feature of $80,096 and $109,378 and amortization of deferred finance costs of $70,865 and
$235,968 during the years ended December 31, 2015 and 2014, respectively.
As
of December 31, 2015 six convertible promissory notes totaling $359,000 had matured and were not repaid as of their maturity dates.
|
8.
|
Promissory
Notes Payable
|
The
Company’s promissory notes at December 31, 2015 and 2014 are as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Five
secured notes payable, bearing interest at 12%, maturing between October 2015 and March 2016
|
|
$
|
157,400
|
|
|
$
|
-
|
|
Two
unsecured notes payable, bearing interest at 12%, maturing December 2015
|
|
|
175,000
|
|
|
|
-
|
|
Unsecured
revenue advances
|
|
|
56,627
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discount
|
|
|
(11,370
|
)
|
|
|
-
|
|
Total
|
|
|
377,657
|
|
|
|
-
|
|
Less:
Current portion
|
|
|
(377,657
|
)
|
|
|
-
|
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company generated proceeds of $410,800 and $85,000 from the issuance of promissory notes during the years ended December 31, 2015
and 2014, respectively.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
In
connection with the issuance of the promissory notes payable during the year ended December 31, 2015, the Company issued 295,000
non-detachable warrants to the noteholder, issuable upon conversion of such note. The warrants are exercisable at a price of $1.00-$2.00
per share and will mature within 3 years from their issuance date.
On
September 21, 2012, September 24, 2012 and October 1, 2012, the Company entered into three secured promissory notes totaling $37,500
due on December 6, 2012 and bearing interest at 12% per annum. In March 2013, the note holders agreed to extend the maturity date
of the notes to September 30, 2013. These notes were in default at December 31, 2013. At January 23, 2014, the Company satisfied
its obligations under such promissory notes by issuing 75,000 shares of its Common Stock as well as 9,375 warrants. The fair value
attributed to the consideration given by the Company to satisfy such obligations was based on the pricing of its subscription
agreement (which are priced at $1.25 per share including the warrant) which is contemporaneous to this transaction. The excess
of the fair value of the consideration given by the Company, which amounted to $93,750, over the carrying value of the promissory
notes and related interest payable, which amounted to $42,852, was recognized as interest expense of $50,898 in the accompanying
consolidated statements of operations during the year ended December 31, 2014.
On
December 27, 2013, the Company entered into an unsecured promissory note totaling $44,000 bearing interest at 10% per annum. The
Company satisfied its obligations under the note by repaying it in January 2014.
On
May 23, 2014, the Company issued a promissory note payable of $5,000. The Company satisfied its obligations under such the note
payable by repaying it in June 2014.
During
the year ended December 31, 2015, the Company issued five secured notes payable totaling $170,000. The notes are secured by all
the Company’s current and future assets.
During
the year ended December 31, 2015, the Company issued two unsecured promissory notes totaling $175,000.
During
the year ended December 31, 2015, the Company entered into three future receivables purchase and sale agreements. The Company
receives advances totaling $65,800 pursuant to these agreements and agreed to repay the advances, along with a service fee, out
of future collection of accounts receivable. The Company expects to replay the advances in full during 2016 and has included these
amounts in the Promissory notes on the consolidated balance sheets.
As
of December 31, 2015 five promissory notes totaling $345,000 had matured and were not repaid as of their maturity dates.
9.
Promissory Notes Payable – Related Party
The
Company’s promissory notes with related parties at December 31, 2015 and 2014 are as follows:
|
|
December
31, 2015
|
|
|
December
31, 2014
|
|
|
|
|
|
|
|
|
Three
secured notes payable, bearing interest at 12%, maturing March 2016
|
|
$
|
45,000
|
|
|
$
|
-
|
|
Unsecured
note payable, bearing interest at 12%, maturing December 2015
|
|
|
45,000
|
|
|
|
-
|
|
Unsecured
note payable, bearing interest at 10%, maturing on the next financial closing date
|
|
|
-
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discount
|
|
|
(6,393
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83,607
|
|
|
|
25,000
|
|
Less:
Current portion
|
|
|
(83,607
|
)
|
|
|
-
|
|
Long-term
portion
|
|
$
|
-
|
|
|
$
|
25,000
|
|
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
The
Company generated proceeds of $90,000 and $25,000 from the issuance of promissory notes with related parties during the years
ended December 31, 2015 and 2014, respectively.
In
connection with the issuance of the notes payable with related parties during the year ended December 31, 2015, the Company granted
90,000 non-detachable warrants to the noteholder, issuable upon conversion of such note. The warrants are exercisable at a price
of $2.00-$4.00 per share and will mature within 3 years from their issuance date.
On
September 12, 2012, the Company entered into a secured promissory note (the “Chord Note”) with Chord Advisors, LLC.
The Chord Note totaled $12,500, was due on December 6, 2012 and bears interest at 12% per annum. In March 2013, Chord Advisors,
LLC agreed to extend the maturity date of the note to December 31, 2013. The Company’s former Chief Financial Officer, David
Horin, is the President of Chord Advisors, LLC. This note was in default at December 31, 2013. At January 23, 2014, the Company
satisfied its obligations under such promissory notes by issuing 25,000 shares of its Common Stock as well as 3,125 warrants.
The fair value attributed to the consideration given by the Company to satisfy such obligations was based on the pricing of its
subscription agreement (which are priced at $1.25 per share including the warrants) which is contemporaneous to this transaction.
The excess of the fair value of the consideration given by the Company, which amounted to $31,250, over the carrying value of
the promissory notes and related interest payable, which amounted to $14,002, was recognized as interest expense of $17,248 in
the accompanying consolidated statements of operations during the year ended December 31, 2014.
As
of December 31, 2015 five promissory notes-related parties totaling $90,000 had matured and were not repaid as of their maturity
dates.
Warrants
to purchase 10,322,284 shares were outstanding and exercisable as of December 31, 2015. The weighted average exercise price was
$2.14, with exercise prices ranging from $1.00 to $4.00 per share. The outstanding weighted average remaining contractual life
as of December 31, 2015 as 1.60 years, with expiration dates ranging from January 10, 2016 to November 3, 2019. As of December
31, 2015 the intrinsic value of all warrants was $0.
The
following table summarizes the warrant activity for the years ending December 31, 2015 and 2014:
|
|
|
|
|
Weighted
|
|
|
|
Number
of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Price
Per Share
|
|
Outstanding
at December 31, 2013
|
|
|
4,866,000
|
|
|
$
|
1.89
|
|
Issued
|
|
|
4,844,951
|
|
|
|
2.28
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2014
|
|
|
9,710,951
|
|
|
|
2.08
|
|
Issued
|
|
|
1,536,333
|
|
|
|
2.43
|
|
Exercised
|
|
|
49,500
|
|
|
|
2.12
|
|
Expired
|
|
|
875,500
|
|
|
|
2.00
|
|
Outstanding
at December 31, 2015
|
|
|
10,322,284
|
|
|
$
|
2.14
|
|
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Transactions
involving the Company’s warrant issuance are summarized as follows:
Warrants
issued concurrent with convertible notes
In
connection with the issuance of its convertible notes, the Company issued 764,333 and 341,667 warrants to the noteholders during
the years ended December 31, 2015 and 2014, respectively. The Company accounts for the warrant valuation in accordance with FASB
ASC 470-20, Debt with Conversion and Other Options. The Company records the fair value of warrants issued in connection with those
instruments. The discount recorded in connection with the warrant valuation is recognized as non-cash interest expense and is
amortized over the term of the convertible note. The fair value of the warrants, which amounted to $349,349 and $109,378 during
the years ended December 31, 2015 and 2014, respectively, has been recognized as debt discount.
Warrants
issued concurrent with promissory notes
In
connection with the issuance of its promissory notes, the Company issued 295,000 warrants to the noteholders during the year ended
December 31, 2015. The fair value of the warrants, which amounted to $169,436 during the year ended December 31, 2015, has been
recognized as debt discount.
Warrants
issued concurrent with related party promissory notes
In
connection with the issuance of its related party promissory notes, the Company issued 90,000 warrants to the noteholders during
the years ended December 31, 2015. The fair value of the warrants, which amounted to $52,554 during the year ended December 31,
2015, has been recognized as debt discount.
Warrants
issued for services
During
the year ended December 31, 2015, the Company issued 387,000 warrants valued at $196,862 for services rendered. The warrants expire
between January and December 2018 and are exercisable at a price of $2.00 per share.
During
the year ended December 31, 2014, the Company issued 1,882,000 warrants valued at $993,212 for services rendered. The warrants
expire between April and December 2019 and are exercisable at a price ranging between $1.00 and $3.00 per share.
During
the year ended December 31, 2014, the Company issued 500,000 warrants valued at $219,500 in connection with subscription agreement.
The warrants expire in December 2017 and are exercisable at $2.50 per share
Warrants
issued pursuant to private placement
The
Company issued 1,824,500 warrants in connection with a private placement consisting of shares of common stock during the year
ended December 31, 2014. The warrants expire in three years from their issuance date and are exercisable at price of $2.50 per
share.
Warrants
issued pursuant to settlement of promissory notes
The
Company issued 9,375 and 3,125 warrants pursuant to the settlement of certain promissory notes and promissory notes-related party
in January 2014. The warrants expire in January 2017 and are exercisable at a price of $2.00 per share (see Note 8 and 9).
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Warrants
issued pursuant to settlement of payables to vendors, officers, and directors
The
Company issued 330,000 warrants pursuant to the settlement of certain Accounts payable and Accounts payable-related
party during the year ended December 31, 2014. The warrants expire in May 2017 and are exercisable at a price of $1.25 per share.
The
Company issued 120,951 warrants pursuant to the settlement of certain Accounts payable and Accounts payable-related
party during the year ended December 31, 2014. The warrants expire in June 2017 and are exercisable at a price of $1.25 per share.
Exercise
of warrants
During
the year ended December 31, 2015, 49,500 warrants were exercised at an average price of $2.12 per share. The Company issued 49,500
shares of common stock to the holders of these warrants upon exercise.
The
fair value of these warrants issued and the significant assumptions used to determine those fair values, using a Black-Scholes
option-pricing model are as follows:
Significant
assumptions:
|
|
2015
|
|
|
2014
|
|
Risk-free
interest rate at grant date
|
|
|
0.75%-1.31
|
%
|
|
|
0.76%-1.10
|
%
|
Expected
stock price volatility
|
|
|
80%-130
|
%
|
|
|
80
|
%
|
Expected
dividend payout
|
|
|
—
|
|
|
|
—
|
|
Expected
life-years
|
|
|
(a
|
)
|
|
|
(a
|
)
|
(a)
All warrants issued expire in 3-5 years. The average remaining life of the warrants is 1.60 years.
11.
|
Commitments
and Contingencies
|
Operating
Leases
On
September 1, 2013 the Company leased a facility (“commissary kitchen”) in Los Angeles, California under a five-year
term totaling $345,132. Under the terms of the lease the Company paid a deposit of $10,620 which has been recorded in Other Assets.
Rental expense for the commissary kitchen for the year ended December 31, 2015 and 2014 totaled $69,246 and $64,992, respectively
and over the remaining term was as follows: $70,302 for 2016; $73,116 for 2017; and $37,272 for 2018.
On
July 1, 2010 the Company leased a facility (“commissary kitchen”) in Los Angeles, California under an informal lease
letter agreement directly with the Landlord. The rental terms of the lease are on a month to month basis.
On
October 21, 2009 the Company executed a Vehicle and Maintenance Agreement with a Los Angeles based mobile food truck vendor. The
agreement provides for rental of one or more mobile food trucks on a month to month basis after an initial six minimum month term
per truck where rent is payable daily upon return of the truck to the vendor’s service and parking facility.
Combined
rental expense for kitchen facilities and food truck rental for the year ended December 31, 2015 and 2014 were $327,804 and $441,764,
respectively.
Litigation:
The
Company is subject to certain legal proceedings and claims, which arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a
material adverse effect on its financial position, results of operations or liquidity.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Contingency
related to outstanding payroll tax liabilities:
The
Company has payroll tax liabilities of approximately $1,316,065 due to federal and various state taxing authorities as of December
31, 2015. The amounts have been included in payroll tax liabilities and accrued compensation on the consolidated balance sheets.
If the Company does not satisfy these liabilities, the taxing authorities may place liens on its bank accounts which would have
a negative impact on its ability to operate. Further, the actual liability may be higher due to interest or penalties assessed
by same taxing authorities.
Letters
of Intent:
On
January 27, 2015, the Company entered into three letters of intent to acquire the assets of DJ, Brinton Lake, LLC, DJR King of
Prussia, Inc. and DJR Suburban Square, Inc. from the same party. The Company elected not to proceed with the letters of intent
and the letters of intent expired on October 31, 2015. The Company has no further obligation related to these letters of intent
as of December 31, 2015.
Contingency
related to outstanding payroll tax liabilities:
On
July 31, 2015, the Company entered into a side letter agreement (the “Franchise Side Letter”) between the Company
and Soupman, Inc., confirming the Master Franchise Agreement between the Company and Kiosk Concepts, Inc. Payments of $100,000
to acquire the Master Franchise Agreement were paid to Kiosk Concepts, Inc. in August and December 2015. In May 2016 the Company
elected to discontinue its food truck operations and ceased making payments under the Master Franchise Agreement. The Master Franchise
Agreement was terminated due to non-payment. The Company has no further obligations under the Master Franchise Agreement as of
December 31, 2015.
12.
|
Stockholders’
Deficit
|
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of preferred stock consisting of 1,000,000 shares of Series A Convertible Preferred
Stock $0.001 par value per share (“Series A Preferred Stock”), and 9,000,000 shares of blank check preferred stock,
$0.001 par value per share.
Outstanding
shares of Series A Preferred Stock, if any, shall automatically be converted into shares of Common Stock upon the earlier of (i)
one year from the date of initial issuance of any shares of the Series A Preferred Stock at a conversion rate equal to $0.50 per
share of Common Stock or (ii) the effectiveness of a registration statement filed with the SEC covering the resale of Common Stock
issued by the Company in its next PIPE transaction (the “PIPE”).
As
of December 31, 2015 and 2014, no preferred stock was issued and outstanding.
Common
Stock
The
Company is authorized to issue 100,000,000 shares of Common Stock.
Shares
issued pursuant to Conversion of Convertible Note Payable
The
Company issued 62,640 shares of its common stock valued at $62,640 upon conversion of convertible notes payable of $50,000 and
accrued interest of $9,333 during the year ended December 31, 2015.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
The
Company issued 3,620,700 shares of its common stock valued at $3,620,697 upon conversion of convertible notes payable of $3,150,000
and accrued interest of $470,697 during the year ended December 31, 2014.
Shares
issued pursuant to Services
The
Company issued to certain consultants 30,000 shares of its Common Stock in consideration for services rendered during the year
ended December 31, 2015. The fair value of the shares amounted to $37,500 during the year ended December 31, 2015.
The
Company issued to certain consultants 741,130 shares of its Common Stock in consideration for services rendered during the year
ended December 31, 2014. The fair value of the shares amounted to $930,163 during the year ended December 31, 2014. The fair value
of the price per share for the aforementioned transactions was based on the price per share of its private placement during the
corresponding periods, which occurred contemporaneously with such transactions.
The
Company issued to a former board member 31,750 shares of its Common Stock in consideration for services rendered during the year
ended December 31, 2014. The fair value of the shares amounted to $39,688 during the year ended December 31, 2014. The fair value
of the price per share for the aforementioned transactions was based on the price per share of its private placement during the
corresponding periods, which occurred contemporaneously with such transactions.
Shares
issued pursuant to exercise of warrants
The
Company issued 49,500 shares of its Common Stock in conjunction with the exercise of 49,500 warrants during the year ended December
31, 2015. The average exercise price was $2.12 per share for an amount totaling $100,000 for the year ended December 31, 2015.
Shares
issued pursuant to Satisfaction of Accounts Payable and Accrued Compensation
The
Company satisfied its obligations with a consultant and issued 140,250 shares of its Common Stock during the year ended December
31, 2015. The fair value of the shares amounted to $175,313 during the year ended December 31, 2015.
The
Company satisfied its obligations with certain parties during the year ended December 31, 2014, as follows:
Party
(ies)
|
|
Shares
of
common stock issued
|
|
|
Carrying
value of
liability
satisfied
|
|
Certain
Vendors
|
|
|
98,951
|
|
|
$
|
123,689
|
|
Company’s
Chief Executive Officer
|
|
|
112,000
|
|
|
|
140,000
|
|
Company’s
Chief Financial Officer
|
|
|
36,000
|
|
|
|
45,000
|
|
Company’s
Chief Creative Officer
|
|
|
70,000
|
|
|
|
87,500
|
|
One
of the Company’s Directors
|
|
|
112,000
|
|
|
|
140,000
|
|
A
relative of one of the Company’s Directors
|
|
|
40,000
|
|
|
|
50,000
|
|
The
fair value of the price per share for the aforementioned transactions was based on the price per share of its private placement,
which occurred contemporaneously with such transactions.
The
relative of one of the Company’s directors performed advisory services in connection with veteran affairs, separate from
the Clark Group agreement.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
Shares
issued pursuant to Private Placement
The
Company generated gross proceeds of $2,280,625 by issuing 1,824,500 shares of its Common Stock pursuant to a private placement
during the year ended December 31, 2014.
On
October 8, 2013, the Company commenced an offering of up to $5,000,000 representing 4,000,000 Units for $1.25 per unit. Each Unit
consists of: (i) one share (the “Shares”) of Company common stock, par value $ 0.001 per share (“Common Stock”)
and (ii) a warrant (the “Warrants”) to purchase one share of Common Stock (the “Warrant Shares”). The
Warrants may be exercised until October 31, 2016 at an exercise price of $2.50 per Warrant Share. Through December 31, 2015, the
Company issued 104,000 shares of common stock in connection with such closings.
Shares
issued pursuant to Settlement of Promissory Notes
The
Company satisfied its obligations under $37,500 and $12,500 promissory notes and promissory notes-related party and accrued interest
by issuing 100,000 shares of its Common Stock valued at $125,000 during the year ended December 31, 2014.
Shares
issued pursuant to Charitable Contributions
On
November 17, 2014, the Company issued 1,000,000 restricted shares of its Common Stock to charitable foundations that assist veterans.
The issuance of the restricted shares of Common Stock to the charitable foundations is subject to the following resale restriction:
no more than 1/12
th
of the shares initially donated may be sold in any given month following the eligibility for resale
either pursuant to 1) a registration statement filed by the Company to register such shares or 2) pursuant to Rule 144. The fair
value of the shares amounted to $1,250,000 and was based on the price per share of its private placement during the corresponding
periods, which occurred contemporaneously with such transactions.
Stock
Compensation Plan
During
September 2013, the Company adopted the 2013 Equity Plan (“2013 Plan”). An aggregate of 4,000,000 shares of our Common
Stock are reserved for issuance under the 2013 Plan. The 2013 Plan may be administered, interpreted and constructed by the Board
or a committee designated by the Board (the “Designee”). The 2013 Plan allows the Designee to grant stock options
to employees, directors, senior management and consultants (under certain circumstances described in the 2013 Plan).
The
Company recorded share-based payment expenses amounting to $398,919 and $216,356 during the years ended December 31, 2015 and
2014 in connection with all options outstanding respectively. The amortization of share-based payment was recorded in general
and administrative expenses.
On
January 26, 2015, the Company granted options under the 2013 Plan to Al Hodges, pursuant to his employment agreement, to purchase
1,000,000 common shares as follows: (i) 333,333 common shares at $3.00 per share that vest on January 26, 2016; (ii) 333,333 common
shares at $3.00 per share that vest on January 26, 2017; (iii) 333,334 common shares that vest on January 26, 2018. Each of the
options are exercisable for a term of five years.
The
Company granted 1,000,000 options in September 2013, as follows: (i) 250,000 options with an exercise price of $2.00 per share
(ii) 250,000 options with an exercise price of $3.00 per share (iii) 250,000 options with an exercise price of $4.00 per share,
and (iv) 250,000 options with an exercise price of $5.00 per share. Each of the options are exercisable for a term of 10 years.
These were the only options granted and outstanding at December 31, 2014.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
The
fair value of the options granted during the year ended December 31, 2015 are based on the Black Scholes Model using the following
assumptions:
Exercise
price:
|
|
$
|
3.00
|
|
Market
price at date of grant:
|
|
$
|
1.25
|
|
Volatility:
|
|
|
80
|
%
|
Expected
dividend rate:
|
|
|
0
|
|
Expected
terms (years):
|
|
|
5
|
|
Risk-free
interest rate:
|
|
|
1.36
|
%
|
A
summary of the activity during 2015 and 2014 of the Company’s stock option plan is presented below:
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2014
|
|
|
1,000,000
|
|
|
$
|
3.50
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
or cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2014
|
|
|
1,000,000
|
|
|
$
|
3.50
|
|
|
$
|
—
|
|
Granted
|
|
|
1,000,000
|
|
|
|
3.00
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Expired
or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
|
|
2,000,000
|
|
|
$
|
3.25
|
|
|
$
|
—
|
|
All
options issued expire in approximately 4-8 years. The average remaining life of the options is 5.88 years. As of December 31,
2015 the intrinsic value of all options was $0.
The
total compensation cost related to options not yet recognized amounted to $540,245 and $350,319 at December 31, 2015 and 2014
respectively, and the Company expects that it will be recognized over the remaining period of 25 months.
13.
|
Related
Party Transactions
|
The
related party transactions for the years ended December 31, 2015 and 2014, are summarized below:
|
a.
|
TRIG
Capital Advisory Agreement
|
On
July 16, 2012, the Company entered into an advisory agreement with TRIG Capital Group, LLC whose members are Alfonso J. Cervantes,
a shareholder and the Company’s former President, Secretary and a director of the Company, Robert Lee, the Executive Chairman,
Principal Financial Officer and a director of the Company and Peter Goldstein, a shareholder and financial advisor to the Company,
at that time. The term of the agreement shall begin on the effective date and continue until such agreement is terminated by the
parties. Pursuant to the advisory agreement, TRIG Capital will provide the Company with foreign and domestic marketing services,
management advice and support regarding operations, administrative services, and assist with business development as required
by the Company. In addition, TRIG Capital will assist management in establishing its franchising operations and assisting in the
sale of these franchises. Under the advisory agreement, TRIG Capital may engage third parties reasonably acceptable to the Company
to assist in its efforts to satisfy the terms of the Agreement, but TRIG Capital shall be liable for any such payments made to
third parties engaged by TRIG Capital.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
As
compensation for such services, the Company granted TRIG Capital the TRIG Warrant to purchase 1,800,000 shares of Common Stock.
The TRIG Warrant is exercisable until July 16, 2017. The TRIG Warrant is exercisable at $2.00 or on a cashless basis if the market
price of the Company’s Common Stock is less than the exercise price or $2.00. The 1,800,000 warrants were subsequently transferred
to Mr. Cervantes, Mr. Goldstein and Mr. Lee, equally. In addition to the warrant, the Company will pay TRIG Capital a cash bonus
of ten (10%) percent of the purchase price of any franchises that TRIG Capital may sell on behalf of the Company after completion
of the Share Exchange Transaction for a period of five (5) years. Additionally, TRIG Capital will receive a monthly fee of $7,000
on the last day of each month for a period of no less than 18 months. During the years ended December 31, 2014, the Company incurred
no fees under this agreement. The Company has an accounts payable of $0 as of December 31, 2015. This agreement lapsed in January
2014.
|
b.
|
Villard
Advisory Agreement
|
On
July 16, 2012, the Company entered into an advisory agreement (the “Villard Advisory Agreement”) with Dimitri Villard
(the “Advisor”). The parties agreed that from July 1, 2012 until June 30, 2013, the Advisor would perform advisory
services for the Company, as well as serving as member of the Company’s Board. The Advisor will devote, on a non-exclusive
basis, the necessary time, energy and efforts to the business of the Company and to use his best efforts and abilities to faithfully
and diligently promote the Company’s business interests. The Company will pay the Advisor $45,000, consisting of: (i) $22,500
of shares of the Company’s Common Stock to be issued equally on a monthly basis pursuant to the terms of the Villard Advisory
Agreement, and (ii) $22,500 of cash to be paid in monthly payments of $1,875 pursuant to the terms of the Villard Advisory Agreement.
The Villard Advisory Agreement contains a share provision, whereby the Company will issue $22,500 of shares or 45,000 shares over
the requisite service period based upon a 50% discount of the $1.00 per share price of Common Stock sold in the 2012 private placement
offering. On September 6, 2013, the Company amended the Villard Advisory Agreement by extending the term of the agreement through
February 28, 2014. During the year ended December 31, 2014 the Company incurred fees of $11,250. The Company has an accounts payable
of $0 and $16,375 at December 31, 2015 and 2014, respectively. During the year ended December 31, 2014, the Company issued 13,100
shares of its Common Stock to satisfy certain obligations to Mr. Villard amounting to $16,375. Additionally, the Company issued
31,750 and 45,000 shares of its Common Stock to Mr. Villard for services rendered during the years ended December 31, 2014. The
fair value of the common stock amounted to $39,688.
|
c.
|
Grandview
Capital Advisory Agreement
|
On
July 16, 2012, the Company entered into the Grandview Advisory Agreement with Grandview Capital Partners, Inc. (‘Grandview”)
whose majority shareholder is Peter Goldstein, a shareholder and financial advisor to the Company at that time. Pursuant to the
Grandview Advisory Agreement, Grandview will provide the Company primarily with assistance and advice in seeking out a potential
merger or acquisition partner or target.
The
Company will pay Grandview $10,000 per month for a period of 18 months. In the event that the Company enters into any transaction
involving a sale of the Company or the sale of any substantial or material assets within 36 months of the date of the Grandview
Advisory Agreement, Grandview will receive a fee between two (2%) and ten (10%) percent of the total transaction, depending on
the transaction value, as defined in the Grandview Advisory Agreement. Additionally, the Company paid Grandview a cash success
fee of $40,000 upon the consummation of the initial closing of the 2012 private placement offering and an additional cash success
fee of $40,000 upon the final closing of the 2012 private placement offering. During the year ended December 31, 2013, the Company
incurred fees of $90,000 and has an accounts payable balance of $53,912 and $106,789 as of December 31, 2014 and 2013, respectively.
Additionally, the Company issued 330,000 warrants to Grandview as one of the private placement agents during the year ended December
31, 2013. The fair value of the warrants amounted to $152,978.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
On
September 6, 2013, the Company entered into the Termination Agreement, whereby the company terminated the Grandview Advisory Agreement
with Grandview. The Grandview Advisory Agreement was mutually terminated by the parties because Mr. Goldstein’s relationship
with the Company changed. As provided in the Grandview Advisory Agreement and the Termination Agreement, the Company agreed that
the provisions relating to the payment of fees (including but not limited to the tail fees specified in the Grandview Advisory
Agreement relating to any entities or individuals Grandview introduced to the Company prior to the execution of the Termination
Agreement), reimbursement of expenses, indemnification and contribution, independent contractor, conflicts, confidentiality and
waiver of the right to trial by jury survive such termination. Peter Goldstein, the recently appointed President, interim Chief
Financial Officer, Secretary and Director of the Company, is the founder, chairman, chief executive officer and registered principal
of Grandview. Mr. Goldstein was also the Company’s founder and served as President and Director of the Company from December
31, 2009 to April 12, 2012. Mr. Goldstein did not hold any officer or director positions with the Company when the Grandview Advisory
Agreement was consummated and through the Company’s 2013 private placement offering related to its debentures.
|
d.
|
Peter
Goldstein Agreement
|
On
November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with Peter Goldstein (the “Amended
Goldstein Agreement”), which amends Mr. Goldstein’s employment agreement dated September 6, 2013. The Amended Goldstein
Agreement provides that Mr. Goldstein will serve as Treasurer of the Company in addition to his roles as President, Interim Chief
Financial Officer and Secretary of the Company. The Amended Goldstein Agreement provides that in the event that the Company completes
a private placement offering commencing in May 2013, Mr. Goldstein shall receive a cash payment of $100,000 if the Company raises
a minimum of $5,000,000 in that offering. Also, pursuant to the Amended Goldstein Agreement, the Company shall pay Mr. Goldstein
a success fee, if the Company closes on an acquisition, merger or joint venture or similar transaction, payable in the same form
of consideration paid by the Company, in the amount of (i) 2.5% of the first $5,000,000 of total consideration paid, or any part;
(ii) plus, 2% of the second $5,000,000 of total consideration paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total
consideration, or any part; (iv) plus, 1% of the next $5,000,000 of total consideration, or any part; (v) plus, 0.5% of the balance
of total consideration paid. No other material amendments were made to Mr. Goldstein’s employment agreement.
The
Amended Goldstein Agreement ended on December 31, 2015. The Company owed Mr. Goldstein $313,022 and $28,125 in accrued compensation
and expenses pursuant to the Amended Goldstein Agreement for the years ended December 31, 2015 and 2014, respectively. The amount
was included in payroll tax liabilities and accrued compensation on the consolidated balance sheets.
On
August 15, 2012, the Company entered into the Clark Group Agreement with Wesley K. Clark & Associates, LLC (the “Clark
Group”). General Wesley K. Clark currently serves as Chairman and CEO of the Clark Group and as one of the Company’s
directors. The agreement commenced upon the completion of the Share Exchange Transaction and will continue for a period of two
years. This agreement was amended on September 6, 2013.
On
November 18, 2014, the Company entered into Amendment No. 2 to the term sheet (the “Second Amended Clark Agreement”)
with the Clark Group, which amends the term sheet with the Clark Group originally dated August 15, 2012 (the “Clark Agreement”),
as amended by Amendment No. 1 dated September 6, 2013 (the “Amended Clark Agreement”). The Second Amended Clark Agreement
provides that as of the date thereof, the Company shall issue to the Clark Group 500,000 warrants to purchase Common Stock, such
warrants exercisable through December 31, 2016 at a price of $1.00 per share and without the condition that a certain number of
veteran franchise agreements be executed (as set forth in the Clark Agreement). The Second Amended Clark Agreement has a term
that continues through December 31, 2015. No other material amendments were made to Clark Group’s agreement with the Company.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
During
the years ended December 31, 2015 and 2014, the Company incurred fees of $243,589 and $240,000, respectively and had an accounts
payable balance of $334,323 and $90,734 as of December 31, 2015 and 2014, respectively, which has been included in Accounts payable-
related parties on the consolidated balance sheets. The Company issued 112,000 shares of its Common Stock to General Clark in
satisfaction of liabilities amounting to $140,000 during the year ended December 31, 2014.
|
f.
|
Robert
Y. Lee Agreement
|
On
November 18, 2014, the Company entered into Amendment No. 2 to its employment agreement with Robert Y. Lee (the “Second
Amended Lee Agreement”), which amends Mr. Lee’s employment agreement originally dated July 16, 2013, as amended by
Amendment No. 1 dated September 6, 2013. The Second Amended Lee Agreement provides that in the event that the Company completes
a private placement offering commencing in May 2013, Mr. Lee shall receive a cash payment of $100,000 if the Company raises a
minimum of $5,000,000 in that offering. Also, the Company shall pay Mr. Lee a success fee, if it closes on an acquisition, merger
or joint venture or similar transaction, payable in the same form of consideration paid by the Company in the amount of (i) 2.5%
of the first $5,000,000 of total consideration paid, or any part; (ii) plus, 2% of the second $5,000,000 of total consideration
paid, or any part; (iii) plus, 1.5% of the third $5,000,000 of total consideration paid, or any part; (iv) plus, 1% of the next
$5,000,000 of total consideration paid, or any part; (v) plus, 0.5% of the balance of total consideration paid. No other material
amendments were made to Mr. Lee’s employment agreement.
The
Second Amended Lee Agreement ended on December 31, 2015. The Company owed Mr. Lee $480,421 and $55,000 in accrued compensation
and expenses pursuant to the Second Amended Lee Agreement as of December 31, 2015 and 2014, respectively. The amount was included
in Payroll tax liabilities and accrued compensation on the consolidated balance sheet.
On
November 18, 2014, the Company entered into Amendment No. 1 to its employment agreement with David Danhi (the “Amended Danhi
Agreement”), which amends Mr. Danhi’s employment agreement dated October 18, 2012. The Amended Danhi Agreement provides
that if Mr. Danhi and the Company enter into a services agreement with a third party, pursuant to which Mr. Danhi provides services
to a third party for which the Company receives a fee, the Company shall pay a bonus to Mr. Danhi equal to 100% of such fee, in
cash or shares of Common Stock, provided that such bonus shall not be greater than $25,000. In addition, Mr. Danhi shall receive
a cash payment of $160,000 if the Company raises a minimum of $5,000,000 in a private placement financing. No other material amendments
were made to Mr. Danhi’s employment agreement.
The
Amended Danhi Agreement ended in September 2016. The Company owed Mr. Danhi $31,030 and $39,869 in accrued compensation and expenses
pursuant to the Amended Danhi Agreement as of December 31, 2015 and 2014, respectively. The amount was included in payroll tax
liabilities and accrued compensation on the consolidated balance sheet.
|
h.
|
PBNJ
Advisory Agreement
|
On
November 18, 2014, the Company entered into Amendment No. 1 to its advisory agreement (the “Amended PBNJ Agreement”)
with PBNJ Advisors, Inc. (“PBNJ”), which amends PBNJ’s advisory agreement dated April 14, 2014. The Amended
PBNJ Agreement has a term that continues through December 31, 2015 and provides for compensation to PBNJ in the amount of 75,000
shares of Common Stock and 75,000 warrants to purchase Common Stock, such warrants exercisable for a period of 3 years at price
of $2.00 per share. The Amended PBNJ Agreement also provides that both parties may terminate the agreement upon 30-day written
notice. No other material amendments were made to PBNJ’s advisory agreement. On December 31, 2014, the Company entered into
Amendment No. 2 to its advisory agreement (the “Amended #2 PBNJ Agreement”) with PBNJ, which amends PBNJ’s advisory
agreement dated April 14, 2014. The Amended #2 PBNJ Agreement provides for compensation to PBNJ in the amount of 20,000 shares
of Common Stock.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
The
Amended #2 PBNJ Agreement ended on December 31, 2015. The Company owed PBNJ $89,912 and $12,000 in accrued consulting fees pursuant
to the Amended #2 PBNJ Agreement as of December 31, 2015 and 2014, respectively. The amounts have been included in Accounts Payable-
Related Parties on the consolidated balance sheets
|
i.
|
Advances
from related party
|
From
time to time, Company officers advance funding to the Company to cover operating expenses. Cash advances from officers do not
accrue interest and have no formal repayment terms. During the year ended December 31, 2015, there were advances from one officer
totaling $10,000. As of December 31, 2015, there was $10,000 of outstanding advances.
|
j.
|
Issuance
of shares to the Company’s officers
|
During
the year ended December 31, 2014, the Company satisfied the following liabilities with certain officers of the Company by issuing
shares of its Common Stock as follows:
|
|
Shares
of
|
|
|
|
|
|
|
Common
stock
|
|
|
Carrying
value of
|
|
Party
(ies)
|
|
and
warrants issued
|
|
|
liability
satisfied
|
|
Company’s
Chief Executive Officer
|
|
|
112,000
|
|
|
$
|
140,000
|
|
Company’s
Chief Financial Officer
|
|
|
36,000
|
|
|
|
45,000
|
|
Company’s
Chief Creative Officer
|
|
|
70,000
|
|
|
|
87,500
|
|
A
relative of one the Company’s directors
|
|
|
40,000
|
|
|
|
50,000
|
|
Additionally,
the Company issued to one of its former Board members 31,750 shares of its Common Stock during the year ended December 31, 2014.
The fair value of the shares amounted to $39,688.
The
relative of one of the Company’s directors performed advisory services in connection with veteran affairs separate from
the Clark Group agreement.
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of goods
sold for the years ended December 31, 2015 and 2014, respectively.
Suppliers
|
|
|
Year
ended
December 31, 2015
|
|
|
Year
ended
December 31,2014
|
|
A
|
|
|
|
0
|
%
|
|
|
32
|
%
|
For
the year ended December 31, 2014, the Company had one supplier who accounted for approximately $618,000 of their purchases used
for production or approximately 18% of total cost of sales for the year then ended. The amount payable to supplier A at December
31, 2014 amounted to $39,237.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
15.
|
Asset
Purchase Agreements
|
On
August 8, 2013, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), by and among
Hook & Ladder Draught House, LLC, a Texas limited liability company (“HL”), KOW Leasing Co., LLC, a Texas limited
liability company (“KOW”), Mr. Devaraj, as sole member of HL and KOW, respectively (“Mr. Devaraj” together
with HL and KOW, the “Sellers”), the Company and GCT Texas Master, LLC, a Nevada limited liability company and a licensee
of the Company (“GCT-TX”, together with the Company, the “Buyer”). HL is a mobile food service business
that provides food and alcohol out of renovated fire engines. Pursuant to the Asset Purchase Agreement, the Company agreed to
purchase substantially all of the Seller’s rights, title and interests in and to certain assets, properties and rights of
every kind, nature and description, tangible and intangible, real, personal or mixed, accrued and contingent, which are owned
or leased by Sellers and used in the Seller’s business, including but not limited to all equipment, customer contracts,
property leases, intellectual property, vehicles, books and records, licenses and corporate and trade names.
As
consideration for the Seller to enter into the Asset Purchase Agreement, the Company agreed to: (i) issue to Sellers 500,000 shares
of the Company’s Common Stock, and (ii) issue a warrant to Sellers to purchase up to 250,000 shares of Common Stock (the
“HL Warrant”). The 500,000 shares of Common Stock issued to the Sellers under the Asset Purchase Agreement are subject
to customary piggy-back registration rights and were valued at $1.00 per share. The HL Warrant is exercisable at a price of $1.00
per share, contains customary piggyback registration rights and shall be exercisable for a period of three (3) years. In total
the value of the common shares issued were $500,000 and the value of the warrants issued were $128,993 for total consideration
of $628,993.
The
assets purchased were fixed assets of equipment and vehicles totaling $543,439, which initially were recorded at the carrying
value, which at the time the Company estimated to approximate their fair market value and intellectual property valued at $138,944.
The fair value allocation of intellectual property is based on management estimates. At December 31, 2013, the Company determined
a full impairment of the identifiable intellectual property, including but not limited to all customer contracts, property leases,
intellectual property, vehicles, books and records, licenses and corporate and trade names, was necessary. In addition, the Company
assumed a liability totaling $53,390 for a finance arrangement relating to the purchase of a vehicle which it sold in January
2014 (see Note 6).
The
Company also agreed to appoint Mr. Devaraj to the Company’s Board, and, for so long as Mr. Devaraj holds any shares of Common
Stock, the Board shall take all reasonable actions such that Mr. Devaraj shall be nominated to serve as a member of the Board.
Additionally, the Company entered into an employment agreement with Mr. Devaraj, whereby Mr. Devaraj will be employed by the Company
as the Director of Business Development for a period of three years.
On
August 8, 2013, HL and KOW (assignors) and the Company (assignee) entered into assignment agreement to ensure that all the intellectual
property subject of the Asset Purchase Agreement is properly transferred to assignee.
On
August 8, 2013, H&L (assignor) and the Company (assignee) entered into assignment and assumption of sublease agreement to
assign and transfer to assignee all of right, title and interest in tenant under sublease. Assignor is the holder of tenant’s
interest in that certain sublease dated as of March 1, 2013 between KOW as landlord and assignor as a tenant.
On
August 8, 2013, KOW (assignor) and the Company (assignee) entered into assignment and assumption of lease agreement to assign
and transfer to assignee all of right, title and interest as tenant in lease and desires to succeed to the interest of assignor
under the lease and to assume the obligation of assignor. Assignor is the holder of tenant’s interest in that certain lease
dated as of May 17, 2012 between Southern Methodist University as landlord and assignor as a tenant.
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
On
November 13, 2013, the Company and AFT closed (the “AFT Closing”) the transactions contemplated by the Asset Sale
Agreement. At the AFT Closing, the Company transferred to AFT certain intellectual property that was developed and owned by KOW,
which was part of the assets purchased by the Company from KOW pursuant to that certain Asset Purchase Agreement, dated August
8, 2013, between the Company, KOW, HL and Mr. Devaraj. The Company sold to AFT one domain name, hookandladder.biz, which had nominal
value and did not include any of the other intellectual property acquired on August 8, 2013 by the Company. The domain name was
carried on the Company’s balance sheet at $-0-. In consideration, AFT paid the Company an aggregate cash payment of $450,000
and issued to the Company membership interests equal to a twenty percent (20%) interest of the issued and outstanding membership
interests in AFT. In addition, at the AFT Closing, the Company and AFT agreed to enter into a truck rental lease agreement pursuant
to which AFT shall lease to the Company, franchise or licensed operators of the Seller, One Hundred (100) new Food trucks, at
prevailing market rates and on such other terms and conditions as substantially set forth in the Truck Rental Lease Agreement
(the “
Truck Rental Agreement
“), in accordance with the lease commencement schedule as follows: (i)
Twenty (20) trucks on or before March 31, 2014; and (ii) a minimum of Ten (10) trucks per month after March 31, 2014. The Company
recorded the full $450,000 as a deferred sale since AFT has not yet delivered any of the twenty trucks agreed to be leased by
the Company from AFT before June 30, 2014. On December 15, 2014, the Company and AFT entered into an amendment to the original
agreement, cancelling the issuance of Company membership interests equal to a twenty percent (20%) interest of the issued and
outstanding membership interests in AFT and agreed to enter into the Truck Rental Lease Agreement. Since this amendment released
the Company from any ongoing liabilities related to the asset sale, the Company recognized the related $450,000 deferred sale
as other income during the year ending December 31, 2014.
The
Company accounts for income taxes under ASC 740, “Expenses – Income Taxes”. ASC 740 requires the recognition
of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax
basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards.
ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred
tax assets.
Through
October 18, 2012, Grilled Cheese Truck Inc. was an S Corporation that operated out of the State of California. Tax returns were
filed as an S Corporation, which is a ‘pass through entity’ for tax purposes. Taxable income flowed through to members,
and income taxes were not imposed at the company level, except in special circumstances. Subsequent to the Reverse Acquisition
Agreement on October 18, 2012, operations are consolidated with those of TRIG Acquisition 1, Inc., a Nevada corporation, which
is subject to both Federal and State income taxes.
The
table below summarizes the reconciliation of the Company’s income tax provision (benefit) computed at the statutory U.S.
Federal rate and the actual tax provision:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
Income
tax (benefit) provision at the Federal statutory rate
|
|
$
|
(2,089,810
|
)
|
|
$
|
(2,622,151
|
)
|
State
income taxes, net of Federal benefit
|
|
|
(312,365
|
)
|
|
|
(391,934
|
)
|
Benefit
of loss (tax liability) not realized due to the Company status as a “pass through entity” for tax proposes
|
|
|
—
|
|
|
|
—
|
|
Amortization
of debt discount and deferred financing costs
|
|
|
170,513
|
|
|
|
160,251
|
|
Common
stock issued for services
|
|
|
83,172
|
|
|
|
867,562
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
Valuation
tax asset allowance
|
|
|
2,148,491
|
|
|
|
1,986,272
|
|
Tax
provision
|
|
$
|
—
|
|
|
$
|
—
|
|
American
Patriot Brands, Inc. and Subsidiaries
(formerly
The Grilled Cheese Truck, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2015 and 2014
The
net operating loss carryforwards available amount to approximately $14.4 million at December 31, 2015, of which approximately
$1.1 million is subject to limitation for change in ownership, for purposes of utilization of the Company’s NOL’s
under Section 382, may have occurred with the reverse merger that was entered into on October 18, 2012. Subsequent to the reverse
merger on October 18, 2012, the Company has assumed the net operating loss (“NOL”) carry forward of TRIG Acquisition
1, Inc. This NOL will be expiring through the year 2033.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Included in the deferred tax asset is the aforementioned NOL.
The Company is not able to predict if such future taxable income will be more likely than not sufficient to utilize the benefit.
As such, the Company does not believe the benefit is more likely than not to be realized and they have recognized a full valuation
allowance for these deferred tax assets.
The
Company’s deferred tax asset as of December 31, 2015 and 2014 is as follows:
|
|
December
31,
|
|
|
|
2015
|
|
|
2014
|
|
Net
operating losses
|
|
$
|
5,620,966
|
|
|
$
|
3,701,723
|
|
Fair
value of compensatory options and warrants
|
|
|
232,843
|
|
|
|
581,781
|
|
Deferred
revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
|
5,853,809
|
|
|
|
4,283,504
|
|
Valuation
allowance
|
|
|
(5,853,809
|
)
|
|
|
(4,283,504
|
)
|
Deferred
tax asset, net of allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
As
of September 30, 2017 all applicable Federal and State tax returns for the years ended December 31, 2010 through 2015 had been
filed.
Joint
Venture
In
January 2016 the Company commenced operations of a newly formed joint venture. The joint venture was formed between The Grilled
Cheese Truck, Inc. and Seawolf Group, LLC whereby the two companies would combine their respective food truck operations in Southern
California and operate the “The Lobos Truck” and “The Grilled Cheese Truck” under a single operating company.
In
May 2016, the Company elected to discontinue their food truck operations. In September 2016, pursuant to the joint venture agreement,
Seawolf Group, LLC elected to terminate the joint venture and “unwind” the transaction. The 650,000 shares of Preferred
Series B stock that were pledged as consideration for the transaction were rescinded.
Acquisitions
In
September 2016, the Company acquired 100% of the ownership interests in Urban Pharms, LLC, DJ&S, LLC and DJ&S Property
#1, LLC (collectively, “Urban Pharms”) for 12,000,000 newly issued shares of the Company’s common stock of which
7,000,000 shares were issued to our new subsidiary Urban Pharms, LLC as condition to satisfy trust deed holders.
In June 2017, the Company acquired TSL Distribution, LLC, a licensed cannabis distributor located in Oregon,
that does business as The SWEET Life Distribution. In exchange we paid $50,00 in cash, issued 200,000 shares of common stock, 200,000
3 year warrants with a $1.00 strike price and a 24 month note for $150,000.
Divestitures
In
September 2016 we sold our Trademarks and Intellectual Property relating to our food truck business to a former company officer
in exchange 3,100,000 shares of common stock he owned upon satisfaction of the terms of the Settlement Agreements. These shares
are to be held in escrow until their release.
Issuance
of common shares for compensation
In
March 2016, the Company issued 942,003 shares of restricted common stock to Robbie Y. Lee, Chairman in full settlement of $480,421
of accrued compensation and expenses as of December 31, 2015.
In
January 2017, the Company issued 275,654 shares of restricted common stock to Algie Hodges, former Chief Executive in full satisfaction
of $248,675 of accrued compensation and expenses as of December 31, 2015.
Issuance
of shares and notes payable
In
2016, the Company issued 1,849,604 shares of restricted common stock for total proceeds of $347,500.
In
2016, the Company issued a secured promissory note totaling $250,000 in conjunction with the Urban Pharms, acquisition. The note
is secured by the real estate, bears interest at 10% per annum and matures in 24 months.
In,
2016, the Company issued promissory notes totaling $265,000. The notes bear interest at various rates per annum and with various
short term maturity dates in. The notes also provide a renewable roll-over provision
Conversion
of note payable
On
August 1, 2016, the Company issued 157,143 shares of common stock for convertible notes and accrued interest totaling $27,500,
which were outstanding as of December 31, 2015.
On
September 29, 2016, the Company issued 426,668 shares of common stock for convertible notes and accrued interest totaling $106,667,
which were outstanding as of December 31, 2015.