Notes to Consolidated Financial Statements
December 31, 2017 and December 31, 2016
Note A - Organization and Description of Business
Vegalab Inc. (formerly HPC Acquisitions,
Inc.) (the “Company”) was initially formed under the laws of the State of Minnesota as Herky Packing Co. on July 17,
1968. The Company initially produced and marketed meat snack foods, principally beef jerky, smoked dried beef and snack sausages,
through food brokers, distributors and wagon jobbers. Despite a 1970 restructuring, including the relocation to an approximate
12,500 square foot production facility, the Company’s efforts were unsuccessful and all operations were terminated by the
end of 1970. On April 10, 1972, the Company changed its corporate name to H. P. C. Incorporated. In connection with this name change,
the Company acquired Ed Stein’s Tire Center, Inc., a Minneapolis, Minnesota-based distributor of Gates tires. This acquisition
was unsuccessful and reversed in 1973.
On August 7, 2006, the Company changed
its state of incorporation from Minnesota to Nevada by means of a merger with and into HPC Acquisitions, Inc., a Nevada corporation
formed on June 12, 2006 solely for the purpose of effecting the reincorporation. The Articles of Incorporation and Bylaws of the
Nevada corporation are the Articles of Incorporation and Bylaws of the surviving corporation. Such Articles of Incorporation modified
the Company’s capital structure to allow for the issuance of up to 50,000,000 shares of $0.001 par value common stock and
up to 10,000,000 shares of $0.001 par value preferred stock.
On March 8, 2016, the Company sold 12,011,000
shares of its common stock to David Selakovic for a total cash purchase price of $303,100. This transaction effected a change in
management and control of the Company. Mr. Selakovic assigned to the Company certain assets consisting of the exclusive right to
distribute in the Western Hemisphere natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, certain state permits
for the sale of ECOWIN agrochemicals, and the trademark “Vegalab” (the “DS Assets”).Our new plan of operation
is to commence the business of selling ECOWIN products under the brand name “Vegalab” and the business of selling citrus
products under the brand name “M&G”.
The Company is currently in the business
of selling the ECOWIN products under the “Vegalab” name in the United States of America. The Company’s current
sole source of supply of ECOWIN products is through Vegalab S. A., a Swiss company solely owned by David Selakovic, the Company’s
controlling shareholder and sole officer and director.
On October 18, 2017, the Company purchased
substantially all the assets of a produce packaging business conducted under the name M&G Packing, Inc. located in Tulare County,
California. The acquisition consisted of purchasing the real property and building used in the business from M & G Farms, Inc.,
a California corporation, and all of the equipment, inventory, customers, suppliers, contract rights, and intangible property from
M&G Packing, Inc., a California corporation.
On November 6, 2017, the Company amended
its Articles of Incorporation to change its name to Vegalab, Inc.
Note B - Preparation of Financial Statements
The Company follows the accrual basis of
accounting in accordance with generally accepted accounting principles and has a fiscal year-end of December 31.
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America 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
could differ from those estimates.
Note C - Going Concern Uncertainty
The Company’s business plan is to
distribute, in the Western Hemisphere, certain natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, under the
brand name “Vegalab”. However, there is no assurance that the Company will be able to successfully penetrate its targeted
market or implement its business plan.
The Company's continued existence is dependent
upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient
resources to retire existing liabilities and obligations on a timely basis. The Company faces considerable risk in its business
plan. If insufficient operating capital is available during the next twelve months, the Company will be forced to rely on existing
cash in the bank and additional funds loaned by management and/or significant stockholders.
The Company’s former majority stockholder
previously provided the necessary working capital to maintain the corporate status of the Company. It is the current intent of
management and significant stockholders to provide sufficient working capital, if necessary, to support and preserve the integrity
of the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such
advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future
funding.
The Company anticipates offering future
sales of equity securities. However, there is no assurance that the Company will be able to obtain additional funding through the
sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable
by the Company.
The Company’s certificate of incorporation
authorizes the issuance of up to 10,000,000 shares of preferred stock and 50,000,000 shares of common stock. The Company’s
ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede potential
takeover of the Company, which takeover may be in the best interest of stockholders. The Company’s ability to issue these
authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt
or equity securities.
In such a restricted cash flow scenario,
the Company would be unable to complete its business plan steps, and would, instead, delay all cash intensive activities. Without
necessary cash flow, the Company may become dormant during the next twelve months, or until such time as necessary funds could
be raised in the equity securities market.
While the Company is of the opinion that
good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made,
there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan
steps. These factors raise substantial doubt about the Company’s ability to continue to operate as a going concern for the
twelve months following the issuance date of these consolidated financial statements. The accompanying financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
Note D - Summary of Significant Accounting Policies
|
1.
|
Cash and Cash Equivalents
|
The Company considers all cash on hand
and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased,
to be cash and cash equivalents.
|
2.
|
Concentrations of Credit Risk
|
Sales to two customers comprised 71% and
15% of the Company's total revenues for the year ended December 31, 2017. The customer accounted for 78% and 8% of accounts receivable
as of December 31, 2017. Sales to two customers comprised 66% and 25% of the Company’s total revenues for the year ended
December 31, 2016. Two customers accounted for 75% and 19% of accounts receivable for the year ended December 31, 2016. The Company
believes that, in the event that its primary customers are unable or unwilling to continue to purchase the Company’s goods,
there are a number of alternative customers at comparable prices.
In the normal course of business, the Company
extends unsecured credit to virtually all of its customers which are located throughout the United States. Because of the credit
risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually
become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade
accounts receivable shown on the balance sheet at the date of non-performance. As of December 31, 2017 and 2016, the Company recorded
allowances of $2,915 and $0, respectively, for doubtful accounts from certain sales that occurred but not assessed to be collectible.
Inventory consists of finished goods related to the sale of
certain natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, under the brand name “Vegalab”. Inventory
is valued at the lower of cost or market using the average cost method. A change in income is taken when factors that would result
in a need for a reduction in the valuation, such as excess or obsolete inventory, are noted. At December 31, 2017 and December
31, 2016, there was no reserve for excess or obsolete inventory.
|
5.
|
Property, plant and equipment
|
Property, plant and equipment are recorded
at cost, net of accumulated depreciation. Depreciation is calculated by using the straight-line method over the estimated useful
lives of the assets, which is five years for all categories.
Automobile, computer equipment, and leasehold
improvements consisted of the following:
|
|
December 31, 2017
|
|
|
|
|
|
Automobile
|
|
$
|
14,261
|
|
Land
|
|
|
142,475
|
|
Building
|
|
|
374,338
|
|
Machinery and equipment
|
|
|
490,791
|
|
Total
|
|
|
1,021,136
|
|
Impairment recognized upon acquisition
|
|
|
(179,452
|
)
|
Impairment recognized subsequent to acquisition
|
|
|
(729
|
)
|
Accumulated depreciation
|
|
|
(20,362
|
)
|
Balance
|
|
$
|
821,322
|
|
Depreciation expense for the year ended
December 31, 2017 was $20,362.
Revenue is recognized when the earnings
process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery
or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. All sales are
recorded when the goods are shipped.
The Company ships all product on an FOB-Plant,
“as-is” basis. Accordingly, revenue is recognized by the Company at the point at which an order is shipped at a fixed
price, collection is reasonably assured and the Company has no remaining performance obligations related to the sale. The Company
sells all products with “no right of return” by the purchaser for any factor other than defects in the products’
development.
|
7.
|
Income (Loss) per Share
|
Basic earnings (loss) per share is computed
by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding
during the respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share
is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock
equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the
dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either
the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents
are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
For the years ended December 31, 2017, the Company’s potentially
dilutive shares, which include outstanding common stock options that have not been included in the computation of diluted net loss
per share as the result would have been anti-dilutive.
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Options
|
|
|
448,000
|
|
|
|
-
|
|
Total
|
|
|
448,000
|
|
|
|
-
|
|
|
8.
|
Recent Accounting Pronouncements
|
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is
an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02
does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align,
where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing the provisions
of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB issued ASU 2016–10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update
do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two
aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related
principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services
in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with
either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the
entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed
implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The Company
is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows
or financial condition.
In April 2016, the FASB issued ASU No.
2016-15,
“Classification of Certain Cash Receipts and Cash Payments”
ASU 2016 - provides guidance regarding
the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning
after December 15, 2017, with early adoption permitted. The Company does not believe this ASU will have an impact on our
results of operation, cash flows, other than presentation, or financial condition.
On November 17, 2016, the FASB issued ASU
No. 2016-18, “
Statement of Cash Flows (Topic 230): Restricted Cash”
, a consensus of the FASB’s Emerging
Issues Task Force (the “Task Force”). The new standard requires that the statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of
the restrictions. ASU No. 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017.
The Company does not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or
financial condition.
The Company does not expect the adoption
of other recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial
position or cash flows.
Note E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable,
accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the
current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the
Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent
upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk,
if any.
Financial risk is the risk that the Company’s
earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of
these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Note F – Purchase of M&G Packaging
On October 18, 2017, the Company purchased
substantially all the assets of a produce packaging business conducted under the name M&G Packing, Inc. located in Tulare County,
California. The acquisition consisted of purchasing the real property and building used in the business from M & G Farms, Inc.,
a California corporation, and all of the equipment, inventory, customer lists, vendor lists, contract rights, and intangible property
of M&G Packing, Inc., a California corporation.
The total purchase price for the business
plus closing costs was $854,452, which was paid $429,452 in cash and $425,000 in the form of a promissory note secured by the real
property that bears interest at the rate of 6.0% per annum with interest only payable monthly and all principal and interest due
18 months from the close of escrow on October 24, 2017.
The acquisition was accounted for as a
business combination as defined by FASB Topic 805 – Business Combinations. The allocation of the purchase price to the assets
acquired and liabilities assumed was based on our internal assessment of the valuation of assets. As of the date of this filing,
a purchase price allocation based upon a valuation has been finalized.
Cash paid
|
|
$
|
429,452
|
|
Note payable to seller
|
|
|
425,000
|
|
Total Consideration
|
|
$
|
854,452
|
|
|
|
|
|
|
Purchased:
|
|
|
|
|
Land and building
|
|
$
|
275,000
|
|
Machinery and equipment
|
|
|
400,000
|
|
Goodwill and intangible assets - impaired
|
|
|
179,452
|
(1)
|
Total acquired in acquisition
|
|
$
|
854,452
|
|
|
(1)
|
The Company elected to forgo the valuation of intangible assets acquired and, therefore, impaired the goodwill and intangible assets acquired, which consisted primarily of customer lists, vendor relationships and name brand.
|
Note G – Segments
We had two operating segments one that sells the ECOWIN products
under the “Vegalab” brand name and a produce packaging business conducted under the name M&G Packing, Inc. located
in Tulare County, California that was acquired in the 4
th
quarter of 2017. Prior to the acquisition, the Company’s
only business segment was Vegalab.
For the Year Ended December 31,
2017:
|
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
|
Sales
|
|
|
Depreciation
|
|
|
Profit
|
|
|
Assets
|
|
M&G Packaging
|
|
$
|
2,130,308
|
|
|
$
|
16,667
|
|
|
$
|
356,029
|
|
|
$
|
895,832
|
|
Vegalab
|
|
$
|
361,083
|
|
|
$
|
-
|
|
|
$
|
77,743
|
|
|
$
|
3,891,644
|
|
|
|
$
|
2,491,391
|
|
|
$
|
16,667
|
|
|
$
|
433,772
|
|
|
$
|
4,787,476
|
|
Note H - Related Party Transactions
The Company’s current sole source
of supply of ECOWIN products is through Vegalab S. A., a Swiss company solely owned by David Selakovic, the Company’s controlling
shareholder. All products are sold to the Company at VSA's cost for the products from the manufacturer. During the year ended December
31, 2017, the Company incurred $454,744 for product purchases for resale from Vegalab S. A.
As of December 31, 2017 and December 31,
2016, the Company had outstanding accounts payable – related party of $712,947 and $1,727,857, respectively, for purchases
of inventory.
During the year ended December 31, 2017,
the Company received a credit from Vegalab S.A. of $198,510 as reimbursement for marketing costs, promotion samples, and advertising
expenses incurred by the Company. This amount was recorded as a reduction of general and administrative expenses.
Note I - Note Payable to Investor
On August 24, 2016, the Company’s
new controlling stockholder, David Selakovic, agreed to loan the Company up to $300,000 at a rate of 4% per annum. As of December
31, 2016, Mr. Selakovic loaned the Company a total of $175,000, due on 60 days demand. During the year ended December 31, 2017,
the Company repaid $177,474 including accrued interest of $2,474. The Company recorded accrued interest of $1,894 and $2,474 as
of December 31, 2017 and December 31, 2016, respectively, related to this note payable.
NOTE J - INCOME TAXES
The components of income tax (benefit)
expense for each of the years ended December 31, 2017 and 2016, respectively, are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(17,036
|
)
|
|
$
|
17,036
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(17,036
|
)
|
|
$
|
17,036
|
|
As of December 31, 2017, the Company has
an aggregate net operating loss carryforward of approximately $909,000 to offset future taxable income which are subject to limitations
for federal tax purposes. The amount and availability of any net operating loss carryforwards will be subject to the limitations
set forth in the Internal Revenue Code. Such factors as the number of shares ultimately issued within a three year look-back period;
whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of
historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization
of any net operating loss carryforward(s).
The Company's income tax expense (benefit)
for each of the years ended December 31, 2017 and 2016, respectively, differed from the statutory federal rate of 21% and 34%,
respectively, as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Statutory rate applied to income before income taxes
|
|
$
|
|
|
|
$
|
27,419
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
State income taxes
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Utilization of net operating loss carryforward
|
|
|
-
|
|
|
|
(181
|
)
|
Other
|
|
|
-
|
|
|
|
(10,202
|
)
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Temporary differences, consisting primarily
of the prospective usage of net operating loss carryforwards give rise to deferred tax assets and liabilities as of December 31,
2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
909,275
|
|
|
$
|
675,495
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
909,275
|
|
|
|
675,495
|
|
Less valuation allowance
|
|
|
(909,275
|
)
|
|
|
(675,495
|
)
|
Total deferred tax asset, net of valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Inventories
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
(17,036
|
)
|
Net Deferred Tax Asset (Liability)
|
|
$
|
-
|
|
|
$
|
(17,036
|
)
|
On December 22, 2017, new federal tax reform legislation
was enacted in the United States (the “2017 Tax Act”), resulting in significant changes from previous tax law.
The 2017 Tax Act reduces the federal corporate income tax rate to a flat rate of 21%, from a graduated rate structure with a
top rate of 35%, effective January 1, 2018. The rate change, along with certain immaterial changes in tax basis resulting
from the 2017 Tax Act, resulted in a reduction of the Company’s net deferred tax assets of approximately $88,000, and a
corresponding reduction in the valuation allowance.
Note K - Common Stock Transactions
On March 8, 2016, the Company completed
its issuance of 12,011,000 shares of its common stock to David Selakovic for total cash proceeds of $303,100 of which the Company
received $100,000 cash in the fourth quarter of 2015 and the remaining balance during the year ended December 31, 2016.
In May 2016, the Company completed a private
offering of 1,000,000 shares of common stock for total cash proceeds of $500,000.
On November 15, 2016, the Company issued
140,000 shares of common stock valued at $184,170 valued ($1.32 per share based on the grant date fair value) for consulting services.
On December 1, 2017, the Company issued
200,000 shares of common stock valued at $326,000 ($1.63 per share based on the grant date fair value) for consulting services
commencing on December 1, 2017. As of December 31, 2017 the Company recorded a prepaid expense of $298,833 and stock compensation
expense of $27,167.
During the year ended December 31, 2017,
the Company sold a total of 2,822,899 shares of common stock to third parties for total cash proceeds of $2,540,601.
Note H – Stock Options
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
448,000
|
|
|
|
1.45
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2017
|
|
|
448,000
|
|
|
$
|
1.45
|
|
Options Exercisable at December 31, 2017
|
|
|
379,750
|
|
|
$
|
1.45
|
|
On November 6, 2017, the Company filed
an amendment to its Articles of Incorporation with the Secretary of Nevada to change its name to "Vegalab, Inc." and
approved the Company's 2017 Equity Incentive Plan and the reservation of 2,000,000 shares of common stock for the issuance thereunder.
The name change and the 2017 Equity Incentive Plan were previously approved by its majority shareholders via a special meeting
held on November 6, 2017.
The Company's stock price was higher than the weighted average
exercise price at December 31, 2017; therefore the intrinsic value of the options and warrants was approximately $358,000.
On February 28, 2017, the Company granted options to purchase
30,000 shares of its common stock to consultants at an exercise price of $1.23 per share. The options vest over 10 months. The
options expire on February 25, 2022. The options were valued using the Black Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, annual volatility of 508%, risk free interest rate of 2.09%, an expected life of 5 years.
On November 20, 2017, the Company granted options to purchase
78,000 shares of its common stock to consultants at an exercise price of $1.425 per share. The options vest over 12 months. The
options expire on November 20, 2022. The options were valued using the Black Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, annual volatility of 490%, risk free interest rate of 2.09%, an expected life of 5 years.
On November 20, 2017, the Company granted options to purchase
100,000 shares of its common stock to an employee at an exercise price of $1.425 per share. The options vested immediately. The
options expire on November 20, 2022. The options were valued using the Black Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, annual volatility of 490%, risk free interest rate of 2.09%, an expected life of 5 years.
On November 20, 2017, the Company granted options to purchase
100,000 shares of its common stock to its President who is also a Director at an exercise price of $1.425 per share. The options
vested immediately. The options expire on November 20, 2022. The options were valued using the Black Scholes Option Pricing Model
with the following assumptions: dividend yield of 0%, annual volatility of 490%, risk free interest rate of 2.09%, an expected
life of 5 years.
On December 11, 2017, the Company granted options to purchase
140,000 shares of its common stock to consultants at an exercise price of $1.40 per share. The options vested immediately. The
options expire on December 12, 2022. The options were valued using the Black Scholes Option Pricing Model with the following assumptions:
dividend yield of 0%, annual volatility of 495%, risk free interest rate of 2.16%, an expected life of 5 years.
During the year ended December 31, 2017 total stock option expense
amounted to $550,411.
Note L – Commitment and Contingencies
On June 1, 2017, the Company entered into
a vehicle loan secured by the automobile for $8,761. The loan is repayable over 3 years, maturing June 1, 2020 and repayable at
$266 per month including interest and principal. During the year ended December 31, 2017, the principal repayments were $1,899.
The balance of the amounts owed on the vehicle loan at December 31, 2017 was $6,862, of which $2,904 was classified as current
and $3,958 as long-term.
At December 31, 2017, the Company’s
future principal payments are as follows:
|
|
Amount
|
|
2018
|
|
$
|
2,904
|
|
2019
|
|
|
2,960
|
|
2020
|
|
|
998
|
|
2021
|
|
|
-
|
|
2022 & Thereafter
|
|
|
-
|
|
Total
|
|
$
|
6,862
|
|
Current
|
|
|
2,904
|
|
Long-Term
|
|
|
3,958
|
|
On October 20, 2017, the Company entered
into a lease agreement for a forklift with a lease term of 57 months at a current cost of $380 per month. Per the agreement, no
payment was due in the first 4 months of the lease term. The Company recorded the lease as a capital lease and used its incremental
borrowing rate of 1.90% for purposes of discounting lease payments.
The future minimum lease payments required
under the capital lease and the present value of the net minimum lease payments as of December 31, 2017 are as follows:
2018
|
|
$
|
3,796
|
|
2019
|
|
|
4,555
|
|
2020
|
|
|
4,555
|
|
2021
|
|
|
4,555
|
|
2022 & Thereafter
|
|
|
5,315
|
|
Total future minimum lease payments
|
|
$
|
22,776
|
|
Less: amount representing interest
|
|
|
(1,132
|
)
|
Present value of net minimum lease and obligations
|
|
|
21,644
|
|
On July 20, 2016, the Company entered into
a lease agreement for warehouses located at 2542 Business Parkway Suite 1 and 2, Minden, Nevada. The facility is 24,276 square
feet with a lease term of 36 months at a current cost of $13,959 per month. The Company was also required to make a security deposit
of $14,500. During the year December 31, 2017, the Company incurred rent expense of $190,054.
At December 31, 2017, future minimum obligations
on the lease are:
2018
|
|
$
|
167,504
|
|
2019
|
|
|
125,628
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022 & Thereafter
|
|
|
-
|
|
Total
|
|
$
|
293,132
|
|
Note M – Subsequent Events
On December 29, 2017, Vegalab
exercised an option to purchase The Agronomy Group LLC, a California limited liability company (“TAG”). On
January 22, 2018, Vegalab and TAG entered into a Member Units Purchase Agreement under which Vegalab agreed to purchase all
of the member units in TAG from its two members for a total of 600,000 shares of the restricted common stock of Vegalab, and
warrants to purchase 1,600,000 shares of the restricted common stock of Vegalab at an exercise price of $1.20 per share
exercisable over a term of five years. The acquisition was closed February 20, 2018, effective February 1, 2018. The Company
recognized the assets acquired and liabilities assumed from TAG at their fair value on the acquisition date, and if there was
any excess in purchase price over these values it was allocated to goodwill. The estimated fair values of assets acquired and
liabilities assumed, were determined based on management’s best estimates. Preliminary estimated fair values are
subject to measurement period adjustments which represent updates made to the preliminary purchase price allocation based on
revisions to valuation estimates in the interim period subsequent to the acquisition and initial accounting date up until the
purchase price allocation is finalized which cannot be any later than one year from the acquisition date. The Company engaged
a third-party valuation specialist to assist in the valuation and is in the process of completing its assessment of the fair
value of assets acquired and liabilities assumed. Thus the preliminary measurement of the assets acquired and liabilities
assumed are subject to change, which could be significant. The Company will finalize the amounts recognized no later than one
year from the acquisition date.
The following table shows the preliminary purchase price, estimated
acquisition-date fair values of the assets acquired and liabilities assumed and calculation of goodwill for TAG utilizing the information
at acquisition date. All numbers are in 000’s except shares and warrants.
Assets acquired:
|
|
|
|
Current assets
|
|
$
|
143
|
|
Property and equipment
|
|
|
41
|
|
Intangible assets
|
|
|
3,824
|
|
Goodwill
|
|
|
306
|
|
Total assets acquired
|
|
|
4,314
|
|
Total liabilities assumed
|
|
|
(58
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
4,256
|
|
Consideration paid:
|
|
|
|
|
Issuance of 600,000 shares of common stock
|
|
$
|
2,580
|
|
Issuance of 1,600,000 warrants
|
|
|
1,676
|
|
|
|
|
|
|
Total
|
|
$
|
4.256
|
|
On January 26, 2018, the Company
issued 25,000 shares of common stock to M&G Farms, Inc., which was credited as a payment of $75,000 of principal and
interest on the $425,000 promissory note from the Company to M&G Farms from the Company to M&G Farms.