NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE
1 –
ORGANIZATION AND NATURE OF OPERATIONS
Organization
Arista
Financial Corp. (the “Company”) was incorporated in Nevada on December 15, 2009. Effective February 21, 2012, the
Company filed with the State of Nevada a Certificate of Amendment to the Articles of Incorporation changing the Company’s
name from Hunt for Travel, Inc. to Praco Corporation (“Praco”) and on January 2, 2018, the Company changed its name
to Arista Financial Corp.
On
April 19, 2017, the Company entered into the Share Exchange Agreement with Arista Capital Ltd. (“Arista Capital”)
and the Arista Capital Shareholders (the “Share Exchange Agreement”) pursuant to which the Company agreed, subject
to the terms and conditions in the Share Exchange Agreement, to exchange newly issued shares of the Company for shares of Arista
Capital held by the Arista Capital Shareholders, with Arista Capital becoming a wholly-owned subsidiary of the Company (the “Transaction”).
The closing of the Transaction (the “Closing”) was to take place sixty days after the execution of this Agreement.
On July 18, 2017, the parties entered into the First Addendum to the Share Exchange Agreement, pursuant to which the closing date
for the Transaction was scheduled for September 15, 2017. In connection with this First Addendum, Arista Capital paid the Company
a $15,000 non-refundable deposit, and had the right to extend the closing date in intervals of thirty days upon payment of an
additional non-refundable deposit of $10,000 for each requested extension interval. In November 2017, Arista Capital paid the
Company an additional $10,000 non-refundable deposit. The Closing occurred on December 14, 2017. At Closing, Arista Capital paid
the Company $72,500 which was used to pay all remaining outstanding liabilities of Praco.
Prior
to Closing, the Company restructured its equity ownership via a reverse stock split at a ratio of 13.2 to 1 which reduced the
number of shares of common stock outstanding to 522,558 shares followed by the issuance of an additional 95,109 shares to certain
Praco Shareholders so that there were 617,667 shares outstanding immediately prior to the Closing. On the date of the Exchange
Agreement, the fair value of the 617,667 shares retained by Praco shareholders was approximately $401,000, or $0.65 per common
share, based on the quoted closing price of the Company common shares. Therefore, the Praco shareholders received aggregate consideration
for the acquisition of $498,500. At Closing, the Company exchanged two shares of its common stock for each outstanding share of
Arista common stock. This resulted in the issuance at Closing of an additional 2,470,666 shares of common stock which consisted
of 2,084,000 common shares issued to Arista Shareholders and 386,666 common shares issued to certain Arista Capital noteholders
upon the conversion of convertible notes payable. Accordingly, Arista Capital Shareholders owned in the aggregate approximately
80% of the outstanding common stock of the Company, with the Praco Shareholders owning the remaining approximately 20% of the
Company and Arista Capital became a wholly-owned subsidiary of the Company. At the time of the closing, under the Exchange Agreement,
the Company, then known as Praco Corporation, was not engaged in any business activity and was considered a shell.
Also,
at Closing, the Praco Shareholders were issued warrants for 283,749 common shares on a pro-rata basis exercisable at $2.00 per
share and subject to the same terms and conditions as the warrants currently held by the Arista warrant holders except without
a cashless exercise option. On the date of the Exchange Agreement, the Company calculated the fair value of the 283,749 warrants
using the Black-Sholes option pricing method. The fair value of the warrants was approximately $108,000. In addition, immediately
following the Closing, the Company exchanged each outstanding Arista warrant for new warrants issued by the Company entitling
the holder to purchase an equal number of shares of the Company’s common stock as the number of Arista shares they were
entitled to purchase upon exercise, subject to the same terms and conditions as the Arista Capital warrants except without a cashless
exercise option. Also, at Closing, the Company exchanged each outstanding Arista Capital convertible note into a convertible note
issued by the Company convertible into an equal amount of shares of the Company’s common stock as the number of Arista Capital
shares into which such notes were convertible, subject to the same terms and conditions as the convertible notes currently held
by Arista Capital convertible noteholders. As a result of such exchange offers, at Closing, the Company issued warrants to purchase
935,000 shares of Common Stock and convertible notes convertible into 199,999 shares of Common Stock.
As
of December 31, 2017, the Company has recapitalized the Company to give effect to the Share Exchange Agreement discussed above.
Under generally accepted accounting principles, the acquisition by the Company of Arista Capital is considered to be capital transactions
in substance, rather than a business combination. That is, the acquisition is equivalent, to the acquisition by Arista Capital
of the Company, then known as Praco Corporation, with the issuance of stock by Arista Capital for the net assets of the Company.
This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting
for the acquisition is identical to that resulting from a reverse acquisition. Under reverse takeover accounting, the comparative
historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Arista Capital. Accordingly,
the Company’s financial statements prior to the closing of the reverse acquisition, reflect only the business of Arista
Capital.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
The
accompanying consolidated financial statements reflect the recapitalization of the stockholders’ deficit as if the transactions
occurred as of the beginning of the first period presented. Thus, the 2,000,000 shares of common stock issued to the former Arista
Capital stockholders are deemed to be outstanding from December 31, 2015.
Arista
Capital was formed on June 10, 2014 as a Nevada corporation. The Company is a finance company that provides financing to other
very small finance companies that do not have significant access to the capital markets. Typically, the Company does this by acquiring
lease portfolios from such lenders at a purchase price that yields the Company an annual return and these lenders continue to
service the portfolios purchased by the Company. The Company is currently focused on leases for trucks and construction equipment.
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The accompanying condensed consolidated financial statements
have been prepared in conformity with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) for interim financial information. Accordingly they do not include all of the information and notes required by U.S. GAAP
for complete financial statements. The accompanying condensed consolidated financial statements include all adjustments, which
consist of normal recurring adjustments and transactions or events discretely impacting the interim periods, considered necessary
by management to fairly state our results of operations, financial position and cash flows. The operating results for interim
periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These
condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto included in our 2017 Form 10-K.
Use
of estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for
the three months ended March 31, 2018 and 2017 include estimates of allowances for uncollectible finance leases receivable, the
useful life of property and equipment, estimates of current and deferred income taxes and deferred tax valuation allowances, the
fair value of equipment held for sale, and the fair value of non-cash equity transactions.
Going
concern
These
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying condensed
consolidated financial statements, for the three months ended March 31, 2018, the Company had a net loss of $231,754 and used
cash in operating activities of $60,326, respectively. Additionally, the Company had an accumulated deficit of $1,166,247 and
had a stockholders’ deficit of $528,181 at March 31, 2018, respectively, and had minimal revenues for the three months ended
March 31, 2018. Management believes that these matters raise substantial doubt about the Company’s ability to continue as
a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that the Company
will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management
believes that its capital resources are not currently adequate to continue operating and maintaining its business strategy for
a period of twelve months from the issuance date of this report. Although the Company has historically raised capital from the
issuance of promissory notes, there is no assurance that it will be able to continue to do so. Management believes that’s
its ability to attract debt and equity financing in the capital markets will be greatly enhanced by becoming a public reporting
company. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects
that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
Fair
value of financial instruments and fair value measurements
The
Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard
Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company
did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance
with Accounting Standards Codification (“ASC”) Topic 820.
The
carrying amounts reported in the consolidated balance sheets for cash, financing lease receivables, due from lease service provider,
accrued interest receivables, prepaid expenses, notes payable, accounts payable, accrued expenses, accrued interest payable and
amounts due to related party approximate their fair market value based on the short-term maturity of these instruments. The Company
does not account for any instruments at fair value using level 3 valuation.
ASC
825-10 “
Financial Instruments
”
,
allows entities to voluntarily choose to measure certain financial assets
and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and
is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and
losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply
the fair value option to any outstanding instruments.
Credit
risk and concentrations
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. At March
31, 2018 and December 31, 2017, cash in bank did not exceed federally insured limits. The Company has not experienced any losses
in such accounts through March 31, 2018.
Financing
leases receivable represent amounts due from lessees in various industries, related to equipment on direct financing leases. Currently,
the Company relies on one source to acquire financing leases and to service such leases. The Company believes that other lenders
are available to acquire lease portfolios if the Company cannot acquire additional financing lease receivable portfolios from
its single source. Additionally, as of March 31, 2018, the Company’s portfolio of financing leases consists of five leases.
A default on or loss of any of these leases would have a material adverse effect on the Company’s results of operations
and financial condition.
Cash
and cash equivalent
For
purposes of the statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months
or less at the purchase date and money market accounts to be cash equivalents. At March 31, 2018 and December 31, 2017, the Company
did not have any cash equivalents.
Financing
leases receivable
Financing
leases receivable are recorded at the aggregate future minimum lease payments, estimated unguaranteed residual value of the leased
equipment less unearned income. Residual values, which are reviewed periodically, represent the estimated amount the Company expects
to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from
these estimates. The unearned income is recognized in revenues in the statements of operations over the lease term, in a manner
that produces a constant rate of return on the lease. Financing leases receivable due after twelve months from the balance sheet
date are reflected as a long-term asset. Financing leases receivables are periodically evaluated based on individual credit worthiness
of customers. Based on this evaluation, the Company records allowance for estimated losses on these receivables.
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three
to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal
terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect
the fact that their recorded value may not be recoverable.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
Revenue
recognition
Income
from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment
in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income
portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. Allowances
for losses on direct financing leases are typically established based on historical charge-off and collection experience and the
collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off
to the allowance as they are deemed uncollectible. Direct financing leases are generally placed in a nonaccrual status (i.e.,
no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically
reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s
judgment, the related direct financing leases may be placed on nonaccrual status. Leases placed on nonaccrual status are only
returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid
lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Income
taxes
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The
Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates
is recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740
“Income Taxes
”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely
than not the position will be sustained upon examination by the tax authorities. As of March 31, 2018 and December 31, 2017, the
Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years
that remain subject to examination are the years ending on and after December 31, 2014. The Company recognizes interest and penalties
related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of March
31, 2018.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award.
Pursuant
to ASC 505-50 –
“Equity-Based Payments to Non-Employees”
, all share-based payments to non-employees,
including grants of stock options, are recognized in the consolidated financial statements as compensation expense over the
service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation
model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally
aligns with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements
accordingly.
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common
stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially
dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method) and common shares
issuable upon the conversion of convertible notes payable (using the as-if converted method). These common stock equivalents may
be dilutive in the future.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
All
potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive
impact on the Company’s net losses and consisted of the following:
|
|
March 31,
2018
|
|
|
March 31,
2017
|
|
Stock warrants
|
|
|
1,268,749
|
|
|
|
635,000
|
|
Stock options
|
|
|
300,000
|
|
|
|
-
|
|
Convertible debt
|
|
|
200,000
|
|
|
|
326,665
|
|
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Recent
accounting pronouncements
Management does not believe that any recently
issued, but not yet effective accounting pronouncements will have a material effect on the accompanying condensed consolidated
financial statements.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE
3 –
FINANCING LEASES RECEIVABLE
In
December 2017, the Company repossessed one truck from one lessee that defaulted on their lease in 2017. At March 31, 2018 and
December 31, 2017, the truck held for sale has an estimated residual value of $15,000 and $15,000, respectively.
The
Seller is responsible for administrating the leases, collecting all payments, and distributing funds to the Company. On a monthly
basis, the Company shall pay the seller an administrative fee equal to 2% of the scheduled payment amount of each lease, 50% of
all penalties or late fee charges collected, and 50% of all default interest collected. The seller shall remit the remaining amount
received from the lessees to the Company. The finance leases require 36 monthly/weekly or bi-weekly payments through February
2020. Each lease is secured by ownership of the related transportation equipment. As of March 31, 2018 and December 31, 2017,
financing leases receivable consists of leases for transportation equipment. At March 31, 2018 and December 31, 2017, financing
leases receivable consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Total minimum financing leases receivable
|
|
$
|
69,085
|
|
|
$
|
89,370
|
|
Unearned income
|
|
|
(7,406
|
)
|
|
|
(11,080
|
)
|
Total financing leases receivable
|
|
|
61,679
|
|
|
|
78,290
|
|
Less: allowance for uncollectible financing leases receivable
|
|
|
(21,229
|
)
|
|
|
(25,405
|
)
|
Financing leases receivable, net
|
|
|
40,450
|
|
|
|
52,885
|
|
Less: current portion of financing leases receivable, net
|
|
|
(28,663
|
)
|
|
|
(33,125
|
)
|
Financing leases receivable, net – long-term
|
|
$
|
11,787
|
|
|
$
|
19,760
|
|
For
the three months ended March 31, 2018 and 2017, activities in the Company’s allowance for uncollectible financing leases receivable
were are follows:
|
|
For the Three Months
Ended March 31,
|
|
|
2018
|
|
2017
|
Allowance for uncollectible financing leases receivable at beginning of period
|
|
$
|
25,405
|
|
|
$
|
79,000
|
Provisions for credit losses
|
|
|
-
|
|
|
|
-
|
Bad debt recovery
|
|
|
(4,176
|
)
|
|
|
|
Allowance for uncollectible financing leases receivable at end of period
|
|
$
|
21,229
|
|
|
$
|
79,000
|
At
March 31, 2018, the aggregate amounts of future minimum gross lease payments receivable are as follows:
|
|
Amount
|
|
2018
|
|
$
|
55,660
|
|
2019
|
|
|
13,425
|
|
|
|
|
|
|
Future minimum gross financing leases receivable
|
|
$
|
69,085
|
|
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE
4 –
CONVERTIBLE DEBT
During
the year ended December 31, 2016, the Company issued 10% convertible promissory notes (the “2016 10% Convertible Notes”)
to seven third party individuals in the aggregate amount of $400,000. The unpaid principal and interest is payable three years
from the date of the respective 2016 10% Convertible Note through December 2019. The Company may prepay any amount outstanding
under the 2016 10% Convertible Note by making a payment to note holder of an amount in cash equal to the principal amount multiplied
by a prepayment penalty percentage of 5.0%. The Noteholders are entitled, at their option, at any time after the issuance of the
2016 10% Convertible Notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest
into the Company’s common stock at a conversion price of $1.50 per share. The noteholders have the option to extend the
due date of the notes for three additional one-year periods. In connection with the 2016 10% Convertible Notes, the Company issued
to noteholders five-year warrants to acquire up to 575,000 shares of common stock at $2.00 per share. On December 14, 2017, in
connection with the Share Exchange Agreement, the Company issued 266,666 shares to certain noteholders upon conversion of principal
amount of $200,000.
During
the period from July 1, 2017 to September 30, 2017, the Company issued 12% convertible promissory notes to three individuals in
the aggregate amount of $200,000. The unpaid principal and interest is payable three years from the date of the respective 12%
Convertible Note through August 1, 2020. The Company may prepay any amount outstanding under the 12% Convertible Note by making
a payment to note holder of an amount in cash equal to the principal amount multiplied by a prepayment penalty percentage of 5.0%.
The Noteholders are entitled, at their option, at any time after the issuance of the 12% Convertible Notes, to convert all or
any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at
a conversion price of $3.00 per share. In connection with the 12% Convertible Notes, the Company issued to noteholders five-year
warrants to acquire up to 300,000 shares of common stock at $4.00 per share.
These
Convertible Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination,
recapitalization or similar transactions.
The
Warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price. The exercise
price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock
combinations, reclassifications or similar events affecting the Company’s common stock.
The
Company evaluated whether or not the convertible notes and warrants above contained embedded conversion options, which meet the
definition of a derivatives under ASC Topic 815. The Company concluded that since the above convertible notes had a fixed
conversion price, the convertible notes were not derivative instruments.
The
convertible notes were analyzed to determine if the convertible notes have an embedded beneficial conversion feature (BCF). Based
on this analysis, the Company concluded that the effective conversion price was greater than the fair value of the Company’s
common stock on the note dates and therefore no BCF was recorded.
For
the three months ended March 31, 2018 and 2017, amortization of debt discount related to these convertible notes amounted to $11,496
and $13,242, respectively, which has been included in interest expense on the accompanying condensed consolidated statements of
operations.
As
of March 31, 2018 and December 31, 2017, accrued interest payable amounted to $13,874 and $11,102, respectively. The weighted
average interest rate for the three months ended March 31, 2018 and 2017 was approximately 11.0% and 10.0%, respectively.
At
March 31, 2018 and December 31, 2017, the convertible debt consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Principal amount
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Less: unamortized debt discount
|
|
|
(81,988
|
)
|
|
|
(93,484
|
)
|
Convertible note payable, net – long-term
|
|
$
|
318,012
|
|
|
$
|
306,517
|
|
At
March 31, 2018, debt maturities
are
$200,000
in 2019 and $200,000
in 2020
.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE
5 –
NOTE PAYABLE
On
December 31, 2017, the Company issued an 8% promissory notes to a third party in the amount of $50,000. In connection with this
promissory note, at December 31, 2017, the Company recorded a subscription receivable of $50,000. The funds were received in January
2018. The unpaid principal and interest is payable on June 8, 2018. In connection with this 8% note, on December 31, 2017, the
Company issued to this noteholder five-year warrants to acquire up to 25,000 shares of common stock at $0.01 per share. The warrants
are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price. The exercise price
of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations,
reclassifications or similar events affecting the Company’s common stock.
As
discussed above, in connection with this note payable, the Company granted a warrant to acquire an aggregate of 25,000 shares
of common stock to noteholder. In December 2017, on the issuance date of the warrant, the fair value of the warrants of $16,345
was recorded as a debt discount and an increase to paid-in capital, respectively. At March 31, 2018 and December 31, 2017, note
payable consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Principal amount
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Less: unamortized debt discount
|
|
|
(7,718
|
)
|
|
|
(15,891
|
)
|
Notes payable, net
|
|
$
|
42,282
|
|
|
$
|
34,109
|
|
For
the three months ended March 31, 2018 and 2017, amortization of debt discount related to this note amounted to $8,173 and $0,
respectively, which has been included in interest expense on the accompanying condensed consolidated statements of operations.
NOTE
6 –
RELATED PARTY TRANSACTIONS
Notes
payable – related parties
In
December 2017, the Company issued 8% promissory notes to certain officers and directors of the Company in the aggregate amount
of $50,000. The unpaid principal and interest is payable on June 8, 2018. In connection with these 8% notes, in December 2017,
the Company issued to these related party noteholders five-year warrants to acquire up to 25,000 shares of common stock at $0.01
per share These warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise
price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject to adjustment in the event
of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting
the Company’s common stock.
As
discussed above, in connection with the notes payable, the Company granted warrants to acquire an aggregate of 25,000 shares of
common stock to note holders. In December 2017, on the issuance date of the respective warrants, the fair value of the warrants
of $16,053 was recorded as a debt discount and an increase to paid-in capital, respectively.
At
March 31, 2018 and December 31, 2017, notes payable – related parties consisted of the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Principal amount
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Less: unamortized debt discount
|
|
|
(6,689
|
)
|
|
|
(14,716
|
)
|
Notes payable – related parties, net
|
|
$
|
43,311
|
|
|
$
|
35,284
|
|
In
connection with related party convertible note and notes payable, the weighted average interest rate for the three months ended
March 31, 2018 and the year ended December 31, 2017 was approximately 8.0% and 9.9%, respectively.
For
the three months ended March 31, 2018 and 2017, amortization of debt discount related to these related party convertible notes
and notes payable amounted to $8,027 and $189, respectively, which has been included in interest expense – related parties
on the accompanying condensed consolidated statements of operations.
As
of March 31, 2018 and December 31, 2017, accrued interest payable - related parties amounted to $2,492 and $186, respectively.
For the three months ended March 31, 2018 and 2017, interest expense - related parties amounted to $9,635 and $929, respectively.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
Due
to related party
In
December 2017, a director of the Company advanced $15,000 to the Company for working capital purposes. The advance in non-interest
bearing and is payable on demand, On January 1, 2018, the advance was converted into a line of credit promissory note.
Line
of credit – related party
On
January 1, 2018, the Company entered into a line of credit promissory note with a company owned by a director of the Company in
the principal amount of $50,000 or such lesser amount as may be borrowed by the Company. This line of credit promissory note shall
bear interest at the rate of 12% per annum and such interest shall be paid each month. The entire outstanding principal amount
of this Note shall be due and payable on December 31, 2018. On the Maturity Date, if this Note has not been paid in full, it shall
bear interest from inception at the rate of 18% per annum until paid in full. On January 1, 2018, the Company reclassified $15,000
of advances received by this related party entity into this promissory note. Additionally, during the three months ended March
31, 2018, the Company borrowed an additional $20,000 pursuant to the line of credit agreement. At March 31, 2018, amounts due
under the line of credit amounted to $35,000.
Office
rent - related party
During
2016 and through June 2017, the Company continued to rent its office space from a Director of the Company on a month-to-month
basis for $500 per month. In July 2017, the Company continues to rent its office space this Director on a month-to-month basis
for $750 per month. For the three months ended March 31, 2018 and 2017, rent expense – related party amounted to $2,250
and $1,500, respectively, and is included in general and administrative expenses on the accompanying condensed consolidated statements
of operations.
NOTE
7 –
STOCKHOLDERS’ DEFICIT
Preferred
Stock
The
Company has 5,000,000 shares of preferred stock authorized. Preferred stock may be issued in one or more series. The Company’s
board of directors is authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance
thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.
Common
stock issued for services
On
March 1, 2018 and effective on March 15. 2018, the Company entered into a six-month consulting agreement for business development
services. In connection with the consulting agreement, the Company issued 60,000 shares of its common stock. The shares were valued
at their fair value of $69,000 or $1.15 per common share which was the fair value on the date of grant based on the closing quoted
share price on the date of grant. In connection with these shares, the Company recorded stock-based consulting fees of $5,750
and prepaid expenses of $63,250 which will be amortized over the remaining agreement term.
Stock
options
Effective
January 1, 2018, in connection with an employment agreement (see Note 8), the Company granted to its CEO options to purchase 300,000
shares of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the options was January
1, 2018 and the options expire on January 1, 2023. The options vest as to (i) 100,000 of such shares on January 1, 2019, and (ii)
as to 100,000 of such shares on January 1, 2020 and 100,000 of such shares on January 1, 2021. The fair value of this option grant
was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
dividend yield of 0%; expected volatility of 100%; risk-free interest rate of 2.20%; and, an estimated holding period of 5 years.
In connection with these options, the Company valued these options at a fair value of $225,193 and will record stock-based compensation
expense over the vesting period. For the three months ended March 31, 2018 and 2017, the Company recorded stock-based compensation
expense of $34,404 and $0, respectively.
At
March 31, 2018, there were 300,000 options outstanding and no options vested and exercisable. As of March 31, 2018, there was
$190,789 of unvested stock-based compensation expense to be recognized through September 2018. The aggregate intrinsic value at
March 31, 2018 was approximately $0 and was calculated based on the difference between the quoted share price on March 31, 2018
and the exercise price of the underlying options.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
Stock
option activities for the three months ended March 31, 2018 is summarized as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance Outstanding December 31, 2017
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding March 31, 2018
|
|
|
300,000
|
|
|
$
|
1.00
|
|
|
|
4.76
|
|
|
$
|
-
|
|
Exercisable, March 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
Warrant
activities for the three months ended March 31, 2018 is summarized as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance Outstanding December 31, 2017
|
|
|
1,268,749
|
|
|
|
2.39
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding March 31, 2018
|
|
|
1,268,749
|
|
|
$
|
2.39
|
|
|
|
4.91
|
|
|
$
|
-
|
|
Exercisable, March 31, 2018
|
|
|
1,268,749
|
|
|
$
|
2.39
|
|
|
|
4.91
|
|
|
$
|
-
|
|
NOTE
8 –
COMMITMENTS AND CONTINCENGIES
Employment
agreement
On
December 14, 2017 and effective on January 1, 2018 (the “Effective Date”), the Company entered into a new employment
agreement with its CEO. For all services rendered by CEO pursuant to this Agreement, during the term of this Agreement the Company
shall pay the CEO a salary at the following annual rates based upon the financial statements of the Company:
|
(i)
|
Upon
the Effective Date, the CEO’s base compensation shall be at the annual rate of $150,000;
|
|
|
|
|
(ii)
|
Thereafter; upon
the first $500,000 of gross proceeds in a financing raised by the Company during the term of the Agreement the CEO’s
base salary compensation shall be raised to $200,000;
|
|
|
|
|
(iii)
|
Thereafter; upon
the next $500,000 of gross proceeds in financings raised by the Company during the term of the Agreement the CEO’s base
salary compensation shall be raised to $250,000;
|
|
|
|
|
(iv)
|
Thereafter; for
each additional $1,000,000 of gross proceeds in financings raised by the Company during the term of the Agreement the CEO’s
base salary compensation shall be increased by $12,000.
|
The
CEO’s base salary shall be increased on each January 1st during the term of this Agreement by not less than five percent
(5%) of the then annual compensation amount.
The
Company will provide the CEO with an allowance equal to $2,000 per month for health insurance with such allowance increased on
each anniversary date of this Agreement at the same rate as the CEO’s base compensation in addition to any amounts provided
to employees generally.
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2018
The
CEO will earn an annual bonus as follows: nine percent (9%) of the Company’s annual EBITDA (Earnings before interest expense,
taxes, depreciation, and amortization and all other non-cash charges) up to the first $5,000,000 of EBITDA, then 5% on amounts
thereafter, based on the audited consolidated results of the Company. This bonus shall be payable in cash within thirty days after
the audit has been completed. In addition, the CEO was entitled to a transaction bonus in the amount of $20,000 payable in cash
at the closing of the Share Exchange in addition to any amounts outstanding to him from Arista at that time.
In
addition, effective January 1, 2018, the CEO was granted options to purchase 300,000 shares of the Corporation’s common
stock at an exercise price of $1.00 per share which shall vest annually on a pro rata basis over the 3 year period commencing
January 1, 2019.
Unless
earlier terminated in accordance with the terms hereof, the term of the Agreement shall be for the period commencing as of the
Effective Date and ending December 31, 2022; provided, however, that on each anniversary date of the Agreement, this Agreement
shall automatically be extended for successive one-year periods unless the Company or the CEO shall have given the other written
notice of its or his intention to terminate this Agreement at least six months prior to the anniversary date in any such year.
In
the event of termination of employment by the Company pursuant to the Agreement, without cause, the Company shall continue for
a period equal to the greater of (A) the balance of the term of the Agreement, or (B) two (2) years, the following: (i) the CEO’s
base salary at its then annual rate, and (ii) provide to the Executive the benefits.
In
the event of termination of the CEO’s employment by the Company in the first year of the Agreement for any reason whatsoever
excluding a termination with cause, the Company shall pay as severance to CEO, no later than thirty days following the date of
termination, the greater of (i) 300% of the maximum allowable bonus payable to the Executive pursuant to Section 4(b); or (ii)
the sum of $300,000.
Future
minimum commitment payments under an employment agreement at March 31, 2018 are as follows:
Years ending December 31,
|
|
Amount
|
|
2018 (remainder of year)
|
|
$
|
157,500
|
|
2019
|
|
|
220,500
|
|
2020
|
|
|
231,525
|
|
2021
|
|
|
243,101
|
|
2022
|
|
|
255,256
|
|
Total minimum commitment employment agreement payments
|
|
$
|
1,107,882
|
|
NOTE
9 -
SUBSEQUENT EVENTS
On
March 1, 2018, the Company entered into a one year consulting agreement with a third party entity for business development services.
In connection with this consulting agreement, the Company paid the consultant $5,000.
In May 2018, the Company issued an 8% promissory
note to an individual in the amount of $50,000. The unpaid principal and interest is payable in November 2018. In connection with
these 8% notes, in May 2018, the Company issued to this individual noteholder five-year warrants to acquire up to 25,000 shares
of common stock at $0.01 per share. The warrants are exercisable for shares of the Company’s common stock upon the payment
in cash of the exercise price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject
to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or
similar events affecting the Company’s common stock.