NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
(UNAUDITED)
NOTE
1 - ORGANIZATION
BUSINESS
Cabinet
Grow, Inc. (the “Company” or “CG-NV”) began operations in California in 2008, doing business as Universal
Hydro (“Hydro”). Prior to April 2014, the Company was a sole proprietorship owned by its’ former chief operating
officer and stockholder. On April 28, 2014, the Company registered with the Secretary of State of California as Cabinet Grow,
Inc. (CG-CA), and all of the business, assets and liabilities of Hydro were assigned to CG-CA. On May 14, 2014, the Company filed
Articles of Incorporation with the Nevada Secretary of State. On May 15, 2014, CG-CA merged with CG-NV, with CG-NV being the surviving
entity. All references herein to CG or the Company refer to CG-NV, CG-CA and Hydro.
On
June 13, 2017, the Company formed a wholly owned subsidiary, Data420 and filed Articles of Incorporation with the Nevada
Secretary of State. Also on June 13, 2017, the Company formed a wholly owned subsidiary, 420 Data Sciences L.L.C. (“420
Data”) and filed Articles of Organization Limited-Liability Company, with the Nevada Secretary of State. On June 16,
2017, 420 Data filed an Amendment to the Articles of Organization changing the name of 420 Data to Data420 Sciences, LLC
(“Data420 Sciences”).
On
November 24, 2016, the Company announced as a result of a working capital deficiency the Company has significantly reduced its’
cabinet making operations, including the layoff of all non-executive employees and has stopped taking new orders from customers.
On
December 31, 2015, the Company agreed to purchase a 100% membership interest (the “
Membership
Interest
”) in Quasar, LLC, a Utah limited liability company (“
Quasar
”), from Tonaquint, Inc., a
Utah corporation (“
Seller
”). Quasar and the Seller are related parties to Chicago Venture Partners,
L.P. (“CVP”), the Company’s main lender until April 29, 2016 (See Note 3). The Company has agreed to
purchase (the “
Purchase
”) the Membership Interest from the Seller for a purchase price of $180,000
pursuant to the terms of a Membership Interest Purchase Agreement (the “
Purchase Agreement
”).
The
Company paid for the Purchase by delivering to Seller at the closing a Secured Promissory Note (the “
Note
”).
The Note is secured by the Company’s pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement
(the “
Pledge Agreement
”) and by a first position Deed of Trust, Security Agreement and Financing Statement
in favor of Seller encumbering certain real property owned by Quasar (the “
Trust Deed
,” and together with the
Purchase Agreement, the Note, the Pledge Agreement, and all other documents entered into in conjunction therewith, the “
Purchase
Documents
”). Quasar’s sole asset is a certain parcel of real property located in Midland Texas (the “Quasar
Property”).
Also
on December 31, 2015, the Company entered into a one year lease agreement with a related party tenant for the Quasar Property.
Pursuant to the agreement, the tenant will pay $1,000 per month and the tenant is responsible for all operating costs of the Quasar
Property including real estate taxes. After the initial term, the lease is renewable on a month to month basis until terminated,
with either party required to notify the other party thirty days in advance of terminating the lease.
In
conjunction with the Purchase, other than the sale of 3 cabinets in January 2016, the Company ceased its prior business as a manufacturer
and distributor of cabinet-based horticultural systems (presented as discontinued operations for the three and nine months ended
September 30, 2016) and began operations in the land leasing business.
On
March 18, 2016, the Board of Directors (the “Board”) of the Company, acting pursuant to a Majority Consent of Stockholders,
approved an amendment to the Articles of Incorporation (the “Amended and Restated Articles”) to among other matters,
clarify that of the 310,000,000 shares of authorized capital stock of the Company, 300,000,000 shares are designated as common
stock and 10,000,000 shares are designated as preferred stock, and to clarify that of the 10,000,000 shares of preferred stock,
100 have been designated as Class A Preferred Stock. Additionally, the Board has the authority to create and designate the rights
and preferences of, additional series of preferred stock, without further stockholder approval. The Board also approved a resolution
giving the Board the authority to effect between a 1:10 and a 1:250 consolidation of the outstanding common stock at any time
before December 31, 2016, and to leave the authorized shares of common stock unchanged at 300,000,000. On May 2, 2016, the Company
filed the Amended and Restated Articles with the Nevada Secretary of State. On December 30, 2016, the Board authorized a consolidation,
whereby every 250 shares of the Company’s common stock would be consolidated into 1 share. The consolidation became effective
on March 9, 2017. All share amounts for all periods presented have been retroactively adjusted to reflect the Reverse Split.
On
April 29, 2016, CVP and Tonaquint sold and transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint
SPA and related Purchase documents to The Dove Foundation (“Dove”). On May 17, 2016, the Company received notification
that Dove has waived the 9.99% ownership limitation contained in the CVP Note.
On
July 27, 2016, the Company received a Notice of Breach of Secured Convertible Promissory Note from Dove regarding the December
2015 and January 2016 installment payments. Pursuant to the terms and conditions of the default, the lender elected to multiply
the outstanding balance by 125%, or $270,056 for the December 2015 default and $344,654 for the January 2016 default. The Lender
also increased the interest rate to 22% per annum pursuant to the default.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit. In the opinion
of management, all adjustments necessary to present the financial position, results of operations and cash flows for the stated
periods have been made. Except as described below, these adjustments consist only of normal and recurring adjustments. Certain
information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements
and notes thereto included in the Company’s annual report for the year ended December 31, 2016 on Form 10-K. Interim results
of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of future results for the
full year. Certain amounts from the 2016 period have been reclassified to conform to the presentation used in the current period.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those
estimates.
DISCONTINUED
OPERATIONS
On
December 31, 2015, the Company’s Board of Directors approved the purchase of certain real property as described in Note
1. As a result of the purchase, the Company’s prior business operations have been (re)classified as discontinued operations
on a retrospective basis for all periods presented herein.
CASH
AND CASH EQUIVALENTS
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
LAND,
PROPERTY AND EQUIPMENT
Property
and equipment are stated at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives
of the assets. The estimated useful lives of property and equipment are as follows:
Manufacturing
equipment
|
10
years
|
Office
equipment and furniture
|
7
years
|
Computer
hardware and software
|
3
years
|
The
Company's property and equipment consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September
30,
2017
|
|
December
31,
2016
|
Equipment
|
|
$
|
826
|
|
|
$
|
826
|
|
Manufacturing equipment
|
|
|
—
|
|
|
|
3,318
|
|
Computers and software
|
|
|
2,912
|
|
|
|
2,912
|
|
Land
|
|
|
180,000
|
|
|
|
180,000
|
|
Accumulated
depreciation
|
|
|
(3,483
|
)
|
|
|
(5,407
|
)
|
Balance
|
|
$
|
180,255
|
|
|
$
|
181,649
|
|
Depreciation
expense for the three and nine months ended September 30, 2017, was $20 and $152, respectively, and was $259 and $776, for the
three and nine months ended September 30, 2016, respectively. During the nine months ended September 30, 2017, the Company disposed
of $3,318 of manufacturing equipment, and recorded a loss on disposal of fixed assets of $1,242.
REVENUE
RECOGNITION
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 605, “Revenue Recognition.” ASC 605 requires that the following four basic criteria
are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is
fixed or determinable and (4) collectability is reasonably assured. The Company recognizes revenue from leased property during
the month the tenant is responsible for payment. Revenues from the sale of cabinets are included in discontinued operations for
all periods presented herein.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation
techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained
from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions
about market participant assumptions developed based on the best information available in the circumstances (“unobservable
inputs”).
Fair
value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily
uses prices and other relevant information generated by market transactions involving identical or comparable assets (“market
approach”). The Company also considers the impact of a significant decrease in volume and level of activity for an asset
or liability when compared with normal activity to identify transactions that are not orderly.
The
highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). Financial instruments are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
The three
hierarchy levels are defined as follows:
Level 1 – Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 – Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit
risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value.
The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s
own credit risk as observed in the credit default swap market.
The
Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses, note payable
and convertible debt. The carrying amounts of such financial instruments approximate their respective estimated fair value
due to the short-term maturities and approximate market interest rates of these instruments. The Company’s derivative
liability (conversion option and warrant derivative) is valued using the level 3 inputs. The estimated fair value is not
necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
September 30, 2017 and December 31, 2016 for each fair value hierarchy level:
September
30, 2017
|
|
Derivative
Liability
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
—
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
Level
III
|
|
$
|
2,299,608
|
|
|
$
|
2,299,608
|
|
INCOME
TAXES
Prior
to May 2014, the Company was organized as a sole proprietorship and was not subject to income taxes. Rather, the Company’s
sole stockholder was subject to income taxes on the Company’s taxable activity. In May 2014, the Company became subject
to income taxes and will be subject to Federal and State income taxes as a corporation.
The
Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes.” Deferred tax assets and liabilities
are recognized to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of
realization. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion
of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes
in tax laws and rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. Interest and penalties are classified as a component of interest and other expenses. To date, the Company
has not been assessed, nor paid, any interest or penalties.
Uncertain
tax positions are measured and recorded by establishing a threshold for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
EARNINGS
(LOSS) PER SHARE
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings per share
is computed by dividing net income by the weighted-average number of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted-average number of shares of common stock, common stock equivalents
and other potentially dilutive securities outstanding during the period. For the periods ending September 30, 2017 and 2016, 3,942,664
and 693,489 shares of common stock, respectively, underlying convertible debt and warrants have been excluded from the computation
diluted earnings per share because they are antidilutive.
RECENT
ACCOUNTING PRONOUNCEMENTS
Recent
accounting pronouncements issued by the FASB and the SEC did not have, or are not believed by management to have, a material impact
on the Company's present or future consolidated financial statements.
NOTE
3 – CONVERTIBLE NOTES PAYABLE
THE
DOVE FOUNDATION, RELATED PARTY
On
June 3, 2014, the Board authorized the Company to enter into a Securities Purchase Agreement (“SPA”) with Chicago
Venture Partners, L.P. (“CVP”). Pursuant to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory
Note in the principal amount of $1,657,500 (the “Note”).
On
June 6, 2014, the Company executed the SPA with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500
(which included CVP’s legal expenses in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000
paid in cash on June 11, 2014 (the “Closing Date”), two $250,000 secured promissory notes and two $250,000 promissory
notes (the “Investor Notes”), aggregating $1,000,000, bearing interest at the rate of 10% per annum. The Investor
Notes are due 30 months from the Closing Date and may be prepaid, without penalty. As security for the Note, the Company’s
former CEO and former COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8).
The
Note may be converted at the option of the holder, on the date that is six months from the Trading Date (defined in the Purchase
Agreement as the date on which the Common Stock is first trading on an Eligible Market) or at any time thereafter at a conversion
price of $0.1976. The conversion price is equal to $6,500,000 divided by 132,000 (the amount of fully diluted shares of Common
Stock of the Company on the date the Company filed its’ Registration Statement). In the event the Company elects to prepay
all or any portion of the Company Note, the Company is required to pay to CVP an amount in cash equal to 125% multiplied by the
sum of all principal, interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued and unpaid interest
under the Company Note into 1,015 shares of common stock.
Pursuant
to the terms of the Note, the Company was required to deliver the Installment Amount (as defined in the Note) on or before each
Installment Date (as defined in the Note) until the Note was repaid. The Company failed to deliver the Installment Amount in June
2015, July 2015 and August 2015 (each, a “Breach” and collectively, the “Breaches”). Each such Breach
would constitute a separate event of default pursuant to the terms of the Note if so declared by the Lender.
The
Company began trading as a public Company on July 13, 2015, and on that date the Company determined that the conversion feature
of the Note represented an embedded derivative since the Note contains provisions that automatically reduce the conversion price.
Accordingly, on July 13, 2015, the Note was not considered to be conventional debt under ASC 815 and the embedded conversion feature
was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair value of the derivative instruments
for the fundings of the Note that occurred prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated
balance sheet with the corresponding amount recorded as a discount to the Note. The discount was amortized from the date of issuance
to the maturity date of the Note. The change in the fair value of the liability for derivative contracts are recorded in other
income or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative
liability on the balance sheet.
On
September 10, 2015, the Company entered into a forbearance and standstill agreement (the “Forbearance and Standstill Agreement”)
with CVP and Matt Lee and Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing
remedies under the Note.
On
April 29, 2016, CVP and Tonaquint sold and transferred all of their ownership and rights under the CVP SPA and Note and the Tonaquint
SPA and related Purchase documents to The Dove Foundation (“Dove”).
On
May 17, 2016, the Company received notification that Dove waived the 9.99% ownership limitation contained in the CVP Note,.
On
July 8, 2016, Dove acquired all of the Class A Preferred Stock.
On
July 27, 2016, the Company received a Notice of Breach of Secured Convertible Promissory Note from Dove regarding the December
2015 and January 2016 installment payments. Pursuant to the terms and conditions of the default, the lender elected to multiply
the outstanding balance by 125%, or $270,056 for the December 2015 default and $344,654 for the January 2016 default. The Lender
also increased the interest rate to 22% per annum pursuant to the default. Also on July 27, 2016, Dove sent the Company a conversion
notice to issue 1,051,779 shares of common stock in exchange for the cancellation of $920,306 of interest and principal due. Immediately
after the conversion Dove owned approximately 87.6% of the common stock of the Company.
A
summary of the convertible note payable balance as of September 30, 2017 and December 31, 2016 is as follows:
|
|
2017
|
|
2016
|
Beginning
balance
|
|
$
|
1,229,360
|
|
|
$
|
1,306,007
|
|
Convertible
notes-newly issued
|
|
|
80,047
|
|
|
|
205,434
|
|
Debt default
penalty
|
|
|
—
|
|
|
|
344,654
|
|
Payments of
convertible notes
|
|
|
—
|
|
|
|
(36,750
|
)
|
Conversions
of convertible notes
|
|
|
—
|
|
|
|
(589,985
|
)
|
Ending
balance
|
|
$
|
1,309,407
|
|
|
$
|
1,229,360
|
|
The
newly issued funded amounts for the nine months ended September 30, 2017 were made directly to various vendors by or on behalf
of Dove and includes $7,277 of OID. The OID is amortized immediately to interest expense, due to the Note being in default. The
embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability. Accordingly, the fair
value of the derivative instruments for the fundings of the Note that occurred during the nine months ended September 30, 2017,
were recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the Note.
The discount was amortized immediately to interest expense, due to the Note being in default. The change in the fair value of
the liability for derivative contracts are recorded in other income or expenses in the consolidated statements of operations at
the end of each quarter, with the offset to the derivative liability on the balance sheet.
WARRANT
The
Company also issued a five year warrant to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average
of the three lowest closing bid prices in the 20 trading days immediately after becoming public (the “Market Price”).
As of September 30, 2017, and December 31, 2016, based on the Market Price, the Company estimated the number of shares that can
be purchased to be 6,545.
Accounting
Standard Codification “ASC” 815 –
Derivatives and Hedging
, which provides guidance on determining
what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its
own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives.
These requirements can affect the accounting for warrants issued by the Company. As the detachable warrants issued with the Note
do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower
prices in the future, we have concluded that the warrants are not indexed to the Company’s stock and are to be treated as
derivative liabilities.
The
warrants were valued using the Black-Scholes option pricing model. In order to calculate the fair value of the warrants, certain
assumptions were made regarding components of the model, including the closing price of the underlying common stock, risk-free
interest rate, volatility, expected dividend yield, and expected life. Changes to the assumptions could cause significant adjustments
to valuation. Since the Company was not public, an estimated a volatility factor utilizing an average of comparable published
volatilities of peer companies was utilized. The risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of the grant for treasury securities of similar maturity.
On
September 30, 2017, the Company revalued the warrant at $8,127 using the Black- Scholes option pricing model and recorded an expense
for the three months ended September 30, 2017 of $3,910 and a credit to of $4,217 to derivative liability expense for the nine
months ended September 30, 2017, respectively, and decreased the derivative liability by $4,217 on the balance sheet as of September
30, 2017.
NOTE
4 –DERIVATIVE LIABILITIES
The
change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the consolidated
statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet.
A
summary of the derivative liability balance as of September 30, 2017 and December 31, 2016 is as follows:
|
|
2017
|
|
2016
|
Beginning
balance
|
|
$
|
1,225,803
|
|
|
$
|
1,648,255
|
|
Initial derivative
liability
|
|
|
87,340
|
|
|
|
509,969
|
|
Fair value change
|
|
|
986,465
|
|
|
|
846,370
|
|
Reduction
for debt payments/conversions
|
|
|
|
|
|
|
(1,778,791
|
)
|
Ending
balance
|
|
$
|
2,299,608
|
|
|
$
|
1,225,803
|
|
The
fair value on the commitment dates for the Note fundings from January 1, 2017 through June 30, 2017, were valued using the Black-Scholes
option pricing model. The fair value for fundings from July 1, 2017 through September 30, 2017, and the re-measurement date for
all of the Company’s derivative liabilities were based upon the Monte Carlo simulation valuation model with the following
management assumptions:
|
|
|
Commitment
Date
|
|
|
|
Re-Measurement
Date
|
|
Expected
dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
305%-388%
|
|
|
|
360
|
%
|
Expected term
|
|
|
.25
years
|
|
|
|
.25
years
|
|
Risk free interest
|
|
|
.50%
- 1.06%
|
|
|
|
1.06
|
%
|
NOTE
5 – RELATED PARTY TRANSACTIONS
As
of September 30, 2017, and December 31, 2016, the Company owed $37,190 to former officers of the Company (included in liabilities
of discontinued operations) and $16,350 to the current CEO (included in accounts payable and accrued expenses, stockholders).
NOTE
PAYABLE, STOCKHOLDER
The
Company’s former COO loaned the Company various amounts for Company expenses. The Company recorded interest expense of $247
and $738 for the three and nine months ended September 30, 2017, and 2016, respectively. As of September 30, 2017, and December
31, 2016, the former COO was owed accrued interest of $5,344 and $4,610, respectively, which is included in liabilities of discontinued
operations on the balance sheets presented herein. As of September 30, 2017, and December 31, 2016, the loan balance was $12,482,
which is also included in liabilities of discontinued operations
NOTE
PAYABLE
On
December 31, 2015, the Company agreed to purchase a 100% membership interest (the “
Membership Interest
”) in
Quasar, LLC, a Utah limited liability company (“
Quasar
”), from Tonaquint, Inc., (“Tonaquint”) a
Utah corporation (“
Seller
”). The Company has agreed to purchase (the “
Purchase
”) the Membership Interest from the
Seller for a purchase price of $180,000 pursuant to the terms of a Membership Interest Purchase Agreement (the “
Purchase
Agreement
”). Quasar’s sole asset is a certain parcel of real property located in Midland Texas (the “Quasar
Property”).
The
Company paid for the Purchase by delivering to Seller at the closing a Secured Promissory Note (the “
Note
”).
The Note is secured by the Company’s pledge of the Membership Interest pursuant to a Membership Interest Pledge Agreement
(the “
Pledge Agreement
”) and by a first position Deed of Trust, Security Agreement and Financing Statement
in favor of Seller encumbering certain real property owned by Quasar (the “
Trust Deed
,” and together with the
Purchase Agreement, the Note, the Pledge Agreement, and all other documents entered into in conjunction therewith, the “
Purchase
Documents
”). The Note, as amended, matures June 30, 2018, and carries simple interest at the rate of six percent per
annum. For the three and nine months ended September 30, 2017, the Company has recorded $2,700 and $8,100 of interest expense.
As of September 30, 2017, accrued and unpaid interest is $8,900.
Also
on December 31, 2015, Quasar entered into a one-year lease (the initial term) of the property to Miller Fabrication, LLC (“Miller”).
After the initial
term, the lease is renewable on a month to month basis until terminated, with either party required to notify the other party
thirty days in advance of terminating the lease.
NOTE
6 – COMMITMENTS AND CONTINGENCIES
LEASE
AGREEMENTS
Effective
August 1, 2014, the Company moved into a 4,427 square foot facility under a new lease agreement, in an industrial complex in Irvine
California. The Company entered into a 26 month lease, pursuant to which, there is no base rent for the first two months, beginning
October 1, 2014, the monthly lease is $4,870 plus CAM charges of $354 and rent increases to $5,091 on October 1, 2015 for the
final twelve months. The Company was straight lining the 24 months costs over the 26 month term of the lease through December
31, 2015, and in January 2016, the Company realized as an expense the remainder of the lease and recorded a liability (included
in liabilities of discontinued operations). Effective February 19, 2016, the Company entered into a sublease with an unaffiliated
third party. For the three and nine months ended September 30, 2016, Dove received $8,250 and $36,750 under the terms of the sublease.
The Company reduced the Dove convertible note for the proceeds and reduced rent expense. Net rent expense was a credit of $6,588
(for the amounts the sub-tenant paid directly to Dove) and expense of $15,914 for the three and nine months ended September 30,
2016, respectively, and is included in loss from discontinued operations. For public reporting purposes and corporate correspondences
regarding such, the Company utilizes the office address of a company controlled by our CEO in West Palm Beach, Florida at no charge.
NOTE
7 – STOCKHOLDERS’ EQUITY
COMMON
STOCK
On
March 18, 2016, the Board of Directors of the Company, acting pursuant to a Majority Consent of Stockholders, approved an amendment
to the Articles of Incorporation (the “Amended and Restated Articles”) to among other matters, clarify that of the
310,000,000 shares of authorized capital stock of the Company, 300,000,000 shares are designated as common stock and 10,000,000
shares are designated as preferred stock, and to clarify that of the 10,000,000 shares of preferred stock, 100 have been designated
as Class A Preferred Stock. Additionally, the Board has the authority to create and designate the rights and preferences of, additional
series of preferred stock, without further stockholder approval. On May 2, 2016, the Company filed the Amended and Restated Articles
with the Nevada Secretary of State. The Board also approved a resolution giving the Board the authority to effect between a 1:10
and a 1:250 consolidation of the outstanding common stock at any time before December 31, 2016, and to leave the authorized shares
of common stock unchanged at 300,000,000. On December 30, 2016, the Board authorized a consolidation, whereby every 250 shares
of the Company’s common stock would be consolidated into 1 share. The consolidation became effective on March 9, 2017. All
share references in these financial statements have been retroactively restated for this stock split.
CLASS
A PREFERRED STOCK
On
June 3, 2014, the Company’s Board of Directors adopted and approved the Class A Preferred Stock Certificate of Designation,
establishing the terms, conditions and relative rights of the Class A Preferred Stock, including that the holders of the Class
A Preferred Stock (the “Class A Holders”) shall have limited voting rights and powers compared to the voting rights
and powers of holders of Common Stock and other series of Preferred Stock. The Class A Holders shall be entitled to notice of
any shareholders meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, but only with respect
to the following matters (collectively, the “Class A Voting Matters”): (i) the appointment and/or removal of any member
of the Company’s board of directors, (ii) any matter related to or transaction (or series of transactions) pursuant to which
the Company would sell or license all or substantially all of its assets or the stockholders of the Company would sell all or
substantially all of their shares of the Company’s stock or where the Company would merge with or into any other entity,
(iii) causing the Company to register its Common Stock for trading pursuant to the Securities Exchange Act of 1934, as amended,
including by filing a Registration Statement on Form S-1 with the Securities Exchange Commission and filing and obtaining FINRA
approval of a Form 15c2-11, and (iv) with respect to any matter involving a transaction whereby the Company will become part of
or merge into an existing public company. For so long as Class A Preferred Stock is issued and outstanding, the holders of Class
A Preferred Stock shall vote together as a single class with the holders of the Corporation’s Common Stock and the holders
of any other class or series of shares entitled to vote with the Common Stock, with the holders of Class A Preferred Stock being
entitled to fifty-one percent (51%) of the total votes on only Class A Preferred Voting Matters regardless of the actual number
of shares of Class A Preferred Stock then outstanding, and the holders of Common Stock and any other shares entitled to vote being
entitled to their proportional share of the remaining 49% of the total votes based on their respective voting power for any Class
A Preferred Voting Matter. The Board also approved the issuance of 50 shares each of the Class A Preferred Stock to the Company’s
Chief Executive Officer and Chief Operating Officer. The issued shares of the Class A Preferred Stock were valued at $428,000
based primarily on management’s estimate of the fair value of the control features embedded in the Class A preferred stock.
On July 8, 2016, in two private transactions, Dove purchased in the aggregate, 100 shares of Class A Preferred Stock from two
shareholders (50 shares each), representing 100% of the issued and outstanding Class A Preferred Stock.
NOTE
8 – DISCONTINUED OPERATIONS
In
December 2015, the Company’s board of directors approved the purchase of certain real property and completed the purchase
on December 31, 2015. In January 2016, the Company ceased its’ prior business activity of marketing, manufacturing and selling
horticulture cabinets.
ASC
205-20 “Discontinued Operations” establishes that the disposal or abandonment of a component of an entity or a group
of components of an entity should be reported in discontinued operations if the disposal represents a strategic shift that has
(or will have) a major effect on an entity’s operations and financial results. As a result, the Company’s results
of operations have been reclassified as discontinued operations on a retrospective basis for all periods presented. Accordingly,
the assets and liabilities of this component are separately reported as “assets and liabilities of discontinued operations”
as of September 30, 2017, and December 31, 2016. The results of operations of this component, for all periods, are separately
reported as “discontinued operations”.
The
Company did not have any activity in discontinued operations for the three and six months ended September 30, 2017. A reconciliation
of the major classes of line items constituting the loss from discontinued operations, net of income taxes as is presented in
the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 are summarized below:
|
|
Three
and nine months ended
September
30, 2016
|
|
|
Three
months
|
|
Nine
months
|
Sales
|
|
$
|
—
|
|
|
$
|
7,350
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Rent
|
|
|
(6,588
|
)
|
|
|
15,913
|
|
General
and administrative
|
|
|
151
|
|
|
|
3,800
|
|
Other
|
|
|
—
|
|
|
|
(4,078
|
)
|
Total
operating expenses
|
|
|
(6,437
|
)
|
|
|
15,635
|
|
Income
(loss) from discontinued operations
|
|
|
|
|
|
|
|
|
net
of income taxes
|
|
$
|
6,437
|
|
|
$
|
(8,285
|
)
|
The
Company did not have any assets of discontinued operations as of September 30, 2017 and December 31, 2016. The following table
presents the reconciliation of carrying amounts of major classes of liabilities of the Company classified as discontinued operations
in the consolidated balance sheets at September 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Carrying
amounts of major classes of liabilities
included
as part of discontinued operations
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
67,681
|
|
|
$
|
67,680
|
|
Accounts payable and
accrued expenses, stockholders
|
|
|
42,539
|
|
|
|
41,800
|
|
Note
payable, stockholder
|
|
|
12,482
|
|
|
|
12,482
|
|
Total
current liabilities included in the liabilities of discontinued operations
|
|
$
|
122,702
|
|
|
$
|
121,962
|
|
NOTE
9 – GOING CONCERN
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of September 30,
2017, and December 31, 2016, the Company had an accumulated deficit of $9,283,196 and $7,873,328 and as of September 30, 2017,
a working capital deficit of $4,320,792. These conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Management’s
Plans
As
a result of a working capital deficiency the Company ceased its prior business as a manufacturer and distributor of cabinet-based
horticultural systems operations. On December 31, 2015, the Company purchased a 100% membership interest (the “
Membership
Interest
”) in Quasar, LLC, a Utah limited liability company (“
Quasar
”), from Tonaquint, Inc., a Utah
corporation (“
Seller
”). The Company purchased the Membership Interest from the Seller for a purchase price of $180,000 pursuant to the terms
of a Membership Interest Purchase Agreement. The Company now operates in the land leasing business. The Company’s cash position
is not sufficient to support its daily operations. The Company relies solely on Dove for paying all of the Company’s expenses.
Recently, the Company formed Data420 Sciences, a wholly owned subsidiary, that plans to aggregate data related to the marijuana
industry and then sell subscription services to such data. Dove has indicated that they would fund the operations of Data420 Sciences,
through debt financing.
NOTE
10 – SUBSEQUENT EVENTS
On
November 8, 2017, the Company filed Articles of Merger (the “Merger”) by and between the Company and its wholly owned
subsidiary, Data420, with the Nevada Secretary of State. Pursuant to the Merger, Cabinet Grow, Inc. was the surviving entity and
effectuated a name change in the State of Nevada to Data420. The Company will file a Corporate Action with FINRA for the name
of the Company to be changed to Data420.