Note C - Summary of Significant Accounting
Policies
|
1.
|
Principles
of consolidation
|
The accompanying unaudited condensed
consolidated financial statements include the accounts of Vegalab, Inc. and its wholly owned subsidiaries, M&G Packaging
Inc. and The Agronomy Group LLC. All intercompany accounts have been eliminated in the consolidation.
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 condensed consolidated
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.
During interim periods, the Company follows
the accounting policies set forth in its annual audited consolidated financial statements filed with the U. S. Securities and Exchange
Commission on its Annual Report on Form 10-K for the year ended December 31, 2017.
In the opinion of management, the accompanying
interim condensed consolidated financial statements, prepared in accordance with the U.S. Securities and Exchange Commission’s
instructions for Form 10-Q, should be read in conjunction with the audited consolidated financial statements and notes thereto
contained in the Company’s annual report filed with the SEC on Form10-K for the year ended December 31, 2017, and are unaudited
and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial
condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending
December 31, 2018.
|
2.
|
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.
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. At June 30, 2018 and December 31, 2017, the Company recorded allowances of $0 and $2,915, 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 net realizable value using the average cost method. A change to income is recorded when factors that
would result in a reduction in the valuation, such as excess or obsolete inventory, are noted. At June 30, 2018 and December 31,
2017, there was no allowance for excess or obsolete inventory. M&G Farms from time to time holds customer’s inventory
on a consignment basis until it is sold. As of June 30, 2018 and December 31, 2017 there was no consignment inventory held by the
Company.
|
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, excluding lands, which is five years for all categories and ten years for buildings.
The Company ships all product and fruit 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 and fruit with “no right of return” by the purchaser for any factor other than defects
in the products.
|
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 three and six months ended June
30, 2018 and 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.
Options
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Balance – Beginning of period
|
|
|
448,000
|
|
|
|
448,000
|
|
Total – End of period
|
|
|
448,000
|
|
|
|
448,000
|
|
Warrants
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Balance - Beginning of period
|
|
|
-
|
|
|
|
-
|
|
Additions
|
|
|
1,600,000
|
|
|
|
|
|
Balance – End of period
|
|
|
1,600,000
|
|
|
|
-
|
|
|
8
.
|
Amortization
and Impairment of Long-Lived Assets
|
Amortization and impairment of long-lived
assets are non-cash expenses relating primarily to non-compete agreements and trademarks acquisitions and websites. The Company
accounts for long-lived assets in accordance with the provisions of ASC 360-10,
"Accounting for the Impairment or Disposal
of Long-Lived Assets"
. This statement requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Non-compete provisions are amortized over five years and trademark and other intangibles are amortized over 10 years. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
|
9
.
|
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 financial position, results of operations or cash flows.
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).”
The new guidance provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts
that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance
requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected
to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant
judgments and changes in those judgments that management made to determine the revenue that is recorded. This accounting standard
update, as amended, will be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods
within annual reporting periods beginning after December 15, 2019. The new revenue standard may be applied retrospectively to each
prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Early adoption is permitted,
but no earlier than fiscal 2017. Since the company is an Emerging Growth Company, adoption is not required until 2019. The Company
is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its
consolidated financial statements.
The Company has never registered
and sold its securities under the Securities Act of 1933. Consequently, it will remain an Emerging Growth Company “EGC”
until five fiscal years after it effectuates a sale of registered securities, unless one of the following occurs:
|
·
|
its total annual gross revenues are $1.07 billion or more
|
|
·
|
it has issued more than $1 billion in non-convertible debt in a period of three years or
|
|
·
|
it becomes a “large accelerated filer,” as defined in Exchange Act Rule 12b-2.
|
Based on the foregoing, there is no determinable date on which the Company will cease to be an EGC.
The Company does not expect the adoption
of other recently issued accounting pronouncements to have a significant impact on the Company’s financial position, results
of operations or cash flows.
Note E – Fixed Assets
Fixed Assets 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, excluding
land, which is five years for all categories and ten years for buildings.
Automobile, land, building, and machinery
and equipment consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
14,261
|
|
|
$
|
14,261
|
|
Land
|
|
|
141,000
|
|
|
|
142,475
|
|
Building
|
|
|
199,338
|
|
|
|
374,338
|
|
Machinery and equipment
|
|
|
884,608
|
|
|
|
490,791
|
|
Total
|
|
|
1,239,207
|
|
|
|
1,021,865
|
|
Impairment recognized upon acquisition
|
|
|
-
|
|
|
|
(179,452
|
)
|
Impairment recognized subsequent to acquisition
|
|
|
-
|
|
|
|
(729
|
)
|
Accumulated depreciation
|
|
|
(128,964
|
)
|
|
|
(20,362
|
)
|
Balance at the end of period
|
|
$
|
1,110,243
|
|
|
$
|
821,322
|
|
Depreciation expense for the three months
ended June 30, 2018 and 2017 was $44,204 and $866, respectively. Depreciation expense for the six months ended June 30, 2018 and
2017 was $86,469 and $866, respectively.
Note F – Acquisition of Business
On December 29, 2017, Vegalab exercised
an option to purchase 100% of 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 total consideration of 600,000 shares of the common stock of Vegalab, and warrants to purchase
1,600,000 shares of the 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 the excess of the purchase price over these values was allocated
to intangible assets and 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.
Assets acquired:
|
|
|
|
Current assets
|
|
$
|
150,910
|
|
Property and equipment
|
|
|
35,265
|
|
Trademarks and customer relationships
|
|
|
3,140,000
|
|
Goodwill
|
|
|
1,151,407
|
|
Total assets acquired
|
|
|
4,477,582
|
|
Total liabilities assumed
|
|
|
(221,582
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
4,256,000
|
|
Consideration paid:
|
|
|
|
|
Issuance of 600,000 shares of common stock
|
|
$
|
2,580,000
|
|
Issuance of 1,600,000 common stock warrants
|
|
|
1,676,000
|
|
|
|
|
|
|
Total
|
|
$
|
4,256,000
|
|
The Company is amortizing the intangible assets
over their useful lives of 5-10 years. During the three and six months ended June 30, 2018, the Company recorded amortization
expense of $82,066 and $176,248, respectively.
Note G – Segments
The Company has two operating segments,
one that sells the products under the “Vegalab” brand name and a produce processing 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.
As of June 30, 2018 and the six months
then ended:
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Segment
Assets
|
|
|
Revenue
|
|
|
Gross Profit
(Loss)
|
|
|
Depreciation
|
|
M&G Packaging
|
|
$
|
1,544,617
|
|
|
$
|
6,093,331
|
|
|
$
|
(99,099
|
)
|
|
$
|
70,861
|
|
Vegalab’s
|
|
$
|
8,829,657
|
|
|
$
|
5,361,619
|
|
|
$
|
1,401,134
|
|
|
$
|
15,608
|
|
|
|
$
|
10,374,274
|
|
|
$
|
11,454,950
|
|
|
$
|
1,302,035
|
|
|
$
|
86,469
|
|
For the three months ended June 30, 2018:
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Segment
Assets
|
|
|
Revenue
|
|
|
Gross Profit
(Loss)
|
|
|
Depreciation
|
|
M&G Packaging
|
|
$
|
1,544,617
|
|
|
$
|
1,533,843
|
|
|
$
|
(307,651
|
)
|
|
$
|
37,763
|
|
Vegalab’s
|
|
$
|
8,850,657
|
|
|
$
|
2,632,478
|
|
|
$
|
17,158
|
|
|
$
|
6,441
|
|
|
|
$
|
10,394,274
|
|
|
$
|
4,166,321
|
|
|
$
|
(290,493
|
)
|
|
$
|
44,204
|
|
Note H - Related Party
Transactions
The Company’s current sole source
of supply of ECOWIN products is through Vegalab S. A., (“VSA”) 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.
AS of June 30, 2018 and December 31, 2017, the Company had outstanding payable of 2,327,649 and 705,432 to VSA for purchase of
products.
As of June 30, 2018 and December 31, 2017, the Company had payables to David Selakovic, the Company’s
controlling shareholder, of $166,614 and $0 for purchase of inventory and payment of Company’s operating expense. These payables
bear no interest, are unsecured and due on demand. During the six months ended June 30, 2018 and 2017, the Company incurred $3,545,281
and $244,000 for product purchases for resale from Vegalab S. A.
Note I - Note Payable to Investor
On August 24, 2016, the Company’s
controlling stockholder, David Selakovic, agreed to loan the Company up to $300,000 at a rate of 4% per annum. Outstanding loans
on this agreement were $0 and $0 at June 30, 2018 and December 30, 2017, The Company recorded accrued interest of $1,894 and $1,894
as of June 30, 2018 and December 31, 2017, respectively, related to this note.
Note J - Note Payable
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 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. 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 accrued interest on the promissory note.
Note K - Common Stock
Transactions
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 common stock of Vegalab, valued at $4.30 per share at the acquisition
date, and warrants to purchase 1,600,000 shares of the common stock of Vegalab at an exercise price of $1.20 per share exercisable
over a term of five years, valued at $1.05 per warrant. The acquisition was closed February 20, 2018, effective February 1, 2018.
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 accrued interest
on the promissory note dated October 9, 2017 from the Company to M&G Farms.
Note L – Stock Options and Warrants
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
Options
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
448,000
|
|
|
$
|
1.45
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at June 30, 2018
|
|
|
448,000
|
|
|
$
|
1.45
|
|
Options Exercisable at June 30, 2018
|
|
|
425,650
|
|
|
$
|
1.45
|
|
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Warrants
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
1,600,000
|
|
|
|
1.20
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance at June 30, 2018
|
|
|
1,600,000
|
|
|
$
|
1.20
|
|
Warrants Exercisable at June 30, 2018
|
|
|
1,600,000
|
|
|
$
|
1.20
|
|
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 June 30, 2018; therefore
the intrinsic value of the options was approximately $514,750 on June 30, 2018.
In connection with the acquisition of TAG
on February 1, 2018, the Company issued 1,600,000 shares of the common stock warrants of Vegalab at an exercise price of $1.20
per share exercisable over a term of five years. The warrants vested immediately. The warrants expire on March 1, 2023. The warrants
were valued using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 0%, annual volatility
of 245%, risk free interest rate of 2.53%, and an expected life of 5 years. The total value of the warrants was approximately $1,676,000
on the date of issuance. As of June 30, 2018, the intrinsic value of the warrants were approximately $2,240,000.
During the three and six months ended June 30, 2018, we incurred
stock option expense of $82,264 and $54,971.
Note
M - Concentrations of Credit Risk
Sales to three customers comprised 35%,
34% and 24%, respectively, of the Company's product sales revenues for the three months ended June 30, 2018. Sales to three
customers comprised 39%, 27% and 27%, respectively, of the Company's product sales revenues for the three months ended June 30,
2017. Two customers accounted for 57% and 35% of the Company’s accounts receivable as of June 30, 2018, respectively. Two
customers accounted for 78% and 8% of accounts receivable, respectively, as of December 31, 2017.
Sales to three customers comprised 25%,
22% and 10%, respectively, of the Company's processing revenues for the three months ended June 30, 2018. Sales to three customers
comprised 24%, 20% and 10%, respectively, of the Company's processing revenues for the six months ended June 30, 2018. Sales to
three customers 25%, 22% and 10%, respectively, of the Company's processing revenues for the three months ended June 30, 2017.
Three customers accounted for 32%, 30%, and 10%, respectively, of accounts receivable as of June 30, 2018.
Note N – Commitments
Future minimum lease payments required under the Company capital lease for a forklift and the present value
of the net minimum lease payments as of June 30, 2018 are as follows:
2018
|
|
$
|
2,278
|
|
2019
|
|
|
4,555
|
|
2020
|
|
|
4,555
|
|
2021
|
|
|
4,555
|
|
2022 & Thereafter
|
|
|
5,315
|
|
Total future minimum lease payments
|
|
$
|
21,258
|
|
Less: amount representing interest
|
|
|
(1,089
|
)
|
Present value of net minimum lease and obligations
|
|
|
20,169
|
|
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 three and six months ended June 30, 2018, the Company incurred rent expense of $101,002 and $50,501, respectively.
On February 13, 2018, the Company entered
into a lease agreement for office space located at 764 P Street, Fresno California. The office is 2,850 square feet with a lease
term of 12 months commencing on March 1, 2018 at a current cost of $3,000 per month. The Company was also required to make a security
deposit of $3,000. During the three and six months ended June 30, 2018, the Company incurred rent expense of $12,250 and $9,000,
respectively.
At June 30, 2018, future minimum obligations
on the operating leases are:
2018
|
|
$
|
101,752
|
|
2019
|
|
|
131,628
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022 & Thereafter
|
|
|
-
|
|
Total
|
|
$
|
233,380
|
|