NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
(unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The “Company” was incorporated on December 15, 2014 (date of inception) under the laws of the State of Nevada, as CubeScape, Inc. Effective January 5, 2017, the Company amended its articles of incorporation and changed its name to American Rebel Holdings, Inc. The Company completed a business combination with its majority stockholder, American Rebel, Inc. on June 19, 2017. As a result, American Rebel, Inc. became a wholly owned subsidiary of the Company.
The acquisition of American Rebel, Inc. was accounted for as a reverse merger. The Company issued 17,421,000 shares of its common stock and issued warrants to purchase 500,000 shares of common stock to shareholders of American Rebel, Inc. and cancelled 9,000,000 shares of common stock owned by American Rebel, Inc.
The Company filed a registration statement on Form S-1 which was declared effective by the U.S. Securities and Exchange Commission on October 14, 2015. Twenty six (26) investors invested at a price of $0.01 per share for a total of $60,000. The direct public offering closed on December 11, 2015.
Nature of operations
The Company is developing branded products in the self-defense and patriotic product areas that are promoted and sold using personal appearance, music, Internet and television avenues. The Company’s products will be under the American Rebel Brand and imprinted.
Interim Financial Statements and Basis of Presentation
The accompanying unaudited interim financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by the U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the results for the full fiscal year. These financial statements should be read along with the Annual Report filed on Form 10-K of the Company for the period ended December 31, 2018 and notes thereto contained.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiary. All significant intercompany accounts and transactions have been eliminated.
Year end
The Company’s year-end is December 31.
Cash and cash equivalents
For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
Inventory and Inventory Deposits
Inventory consists of backpacks, jackets and accessories manufactured to our design and held for resale and are carried at the lower of cost (First-in, First-out Method) or market value. The Company determines the estimate for the reserve for slow moving or obsolete inventories by regularly evaluating individual inventory levels, projected sales and current economic conditions. The Company also makes deposit payments on inventory to be manufactured that are carried separately until the goods are received into inventory.
8
Fixed assets and depreciation
Property and equipment is stated at cost net of accumulated depreciation. Additions and improvements are capitalized while ordinary maintenance and repair expenditures are charged to expense as incurred. Depreciation is recorded by the straight-line method over the estimated useful life of the asset, which ranges from five to seven years.
Revenue recognition
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the consumer; (3) the amount of fees to be paid by the consumer is fixed or determinable; and (4) the collection of our fees or product revenue is probable.
The Company will record revenue when it is realizable and earned and product has been shipped to the consumers or that our service has been rendered to the consumer. License income will be reported as income when the Company has completed any responsibility to earn the income and when any earned royalties are received.
Advertising costs
Advertising costs are expensed as incurred; Marketing costs incurred were $175,311 and $172,021 for the three-month periods ended June 30, 2019 and 2018, respectively, and $354,471 and $395,175, respectively, for the six month periods then ended.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2019 and December 31, 2018, respectively. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.
Level 3: If inputs from levels 1 and 2 are not available, the Financial Accounting Standards Board (the “FASB”) acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
Stock-based compensation
The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expense related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
9
In January 2018, the Company agreed to issue and subsequently issued a total of 500,000 shares of common stock as compensation for professional services to be performed during 2018. The common stock was valued at a price of $0.50 per share consistent with earlier sales of common stock by American Rebel, Inc. as well as the present conversion price of the Company’s convertible debentures. In January, 2018, the Company issued 300,000 shares of common stock as compensation in settlement of professional services billed at $180,000.
During January 2018, the Company recorded $157,483 in compensation expense, increased prepaid expense $31,251, and reduced Accrued expense $74,600 with the issuance of 466,667 shares of common stock. The common stock was valued at prices of $0.50 and $0.60 per share consistent with earlier sales of common stock by American Rebel, Inc. as well as the present conversion price of the Company’s convertible debentures and negotiation with a vendor.
During January 2019, the Company recorded $178,505 in compensation expense, increased prepaid expense $160,000, and increased Discount on debt $57,467 with the issuance of 400,000 shares of common stock and 175,000 warrants to purchase common stock. The common stock was valued at prices of $0.65 to $0.76 per share consistent with market prices at the date of the transaction.
Earnings per share
The Company follows ASC Topic 260 to account for earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Income taxes
The Company follows ASC Topic 740 for recording provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expense or benefit is based on the changes in the asset or liability for each period. If available evidence suggests that it is more likely than not that some portion or the entire deferred tax asset will not be realized, a valuation allowance is required to reduce the deferred tax asset to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income tax in the period of change.
Deferred income tax may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by taxing authorities. As of June 30, 2019 and December 31, 2018, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.
The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months.
The Company classifies tax-related penalties and net interest as income tax expense. For the three and six month periods ended June 30, 2019 and 2018, respectively, no income tax expense has been recorded.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
10
Recent pronouncements
The Company evaluated recent accounting pronouncements through June 30, 2019 and believes that none have a material effect on the Company’s financial statements except for the following.
In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date. In 2014 FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provided a framework for addressing revenue recognition issues and replaces almost all existing revenue recognition guidance in current U.S. GAAP. The core principle of ASU 2014-09 is for companies to recognize revenue for 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. ASU 2014-09 also resulted in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. The amendments in ASU 2015-14 defer the effective date of the new revenue recognition guidance to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management is evaluating the future impact of this guidance on the Company’s financial statements and notes thereto.
In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined; calculated as if the accounting had been completed at the acquisition date. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU should be applied prospectively with earlier application permitted for financial statements that have not been issued. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The objective of ASU 2016-02 is to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 is permitted. The Company is evaluating the effects adoption of this guidance will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Clarification on Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows, to create consistency in the classification of eight specific cash flow items. This standard is effective for calendar-year SEC registrants beginning in 2018. The Company is evaluating the effects adoption of this guidance will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230), which amends the existing guidance relating to the disclosure of restricted cash and restricted cash equivalents on the statement of cash flows. ASU 2016-18 is effective for the fiscal year beginning after December 15, 2017, and interim periods within that fiscal year, and early adoption is permitted. The Company is evaluating the impact of adoption of ASU 2016-18 on its Consolidated Statements of Cash Flows.
In May 2017, the FASB issued ASU 2017-09, Stock Compensation (Topic 718)-Scope of Modification Accounting, to provide guidance on determining which changes to terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is evaluating the effects adoption of this guidance will have on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260)-Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in Part I of the ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments in Part II recharacterize the indefinite deferral of certain provisions of Topic 480 with a scope exception and do not have an accounting effect. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is evaluating the effects adoption of this guidance will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815)-Targeted Improvements to Accounting for Hedging Activities. The new guidance is intended to more closely align hedge accounting with entities’ hedging strategies, simplify the application of hedge accounting, and increase the transparency of hedging programs. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is evaluating the effects adoption of this guidance will have on its consolidated financial statements.
11
Amendments clarifying guidance in Topic 205, Risks and Uncertainties, are applicable to entities that have not commenced planned principal operations, which we have commenced recently.
NOTE 2 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. As noted above, the Company is in the development stage and, accordingly, has not yet generated significant revenues from operations. Since inception, the Company has been engaged in financing activities and executing its business plan of operations and incurring costs and expenses related to developing products and market identity, obtaining inventory and preparing for public product launch. As a result, the Company incurred net income (losses) for the six months ended June 30, 2019 and 2018 of ($1,724,762) and ($1,110,334), respectively. The Company’s accumulated deficit was ($9,012,321) as of June 30, 2019 and ($7,287,559) as of December 31, 2018. The Company’s working capital deficit was ($2,157,261) as of June 30, 2019 and a deficit of ($888,280) as of December 31, 2018. In addition, the Company’s development activities since inception have been sustained through equity and debt financing and the deferral of payments on accounts payable and other expenses.
The ability of the Company to continue as a going concern is dependent upon its ability to raise capital from the sale of its equity and, ultimately, the achievement of operating revenues. Management believes holders of its warrants will execute their outstanding warrants generating investment capital for the Company. Management is also in discussion with several investment banks and broker dealers regarding the initiation of a capital campaign.
Management believes sufficient funding can be secured through the obtaining of loans, as well as future offerings of its preferred and common stock to institutional and other financial sources. However, no assurance can be given that the Company will obtain this additional working capital, or if obtained, that such funding will not cause substantial dilution its stockholders. If the Company is unable to secure such additional funds from these sources, it may be forced to change or delay its business plan rollout.
These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Note 3 – INVENTORY AND DEPOSITS
Inventory and deposits includes the following:
|
|
June 30,
2019
(unaudited)
|
|
December 31,
2018
(audited)
|
|
|
|
|
|
|
|
Inventory - Finished goods
|
|
$
|
652,576
|
|
$
|
520,154
|
Inventory deposits
|
|
|
100,514
|
|
|
248,729
|
|
|
|
753,090
|
|
|
768,883
|
Less: Reserve for excess and obsolete
|
|
|
-
|
|
|
-
|
Net inventory and deposits
|
|
$
|
753,090
|
|
$
|
768,883
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment includes the following:
|
|
|
|
|
|
|
|
|
June 30,
2019
(unaudited)
|
|
December 31,
2018
(audited)
|
|
|
|
|
|
|
|
Marketing equipment
|
|
$
|
32,261
|
|
$
|
32,261
|
Vehicles
|
|
|
277,886
|
|
|
277,886
|
|
|
|
310,147
|
|
|
310,147
|
Less: Accumulated depreciation
|
|
|
(212,143)
|
|
|
(181,129)
|
Net property and equipment
|
|
$
|
98,004
|
|
$
|
129,018
|
12
For the three months ended June 30, 2019 and 2018 we recognized $15,507 and $15,507 in depreciation expense, respectively and $31,014 and $31,014 for the six month periods then ended. We depreciate these assets over a period of sixty (60) months which has been deemed their useful life. In January, 2016 we acquired three vehicles from related parties and assumed the debt secured by the vehicles as described at Note 7 – Notes Payable. Accordingly, the recorded cost of each vehicle is the amount of debt assumed under each related loan, or a total of $277,886.
NOTE 5 – RELATED PARTY NOTE PAYABLE AND RELATED PARTY TRANSACTIONS
For the year ended December 31, 2016, the Company received loans from its sole officer and director totaling $221,155. The balance at December 31, 2018 was $16,588. During the six months ended June 30, 2019, the company repaid $12,092 of these loans resulting in a balance at June 30, 2019 of $4,496. These loans are due on demand and carry no interest.
During the year ended December 31, 2018, the Company entered into several convertible debt instruments with stockholders in the amount of $270,000, for a total of $345,000. The Company accrued interest expense on this convertible debt for a total of $51,020 at June 30, 2019. Since public trading of the Company’s common stock began in 2018, the Company determined a Beneficial Conversion Discount of $270,000 applied to the 2018 sales the Convertible Debentures. The discount reduced the liability balance of the debentures to $0 when the debentures were issued and recorded the proceeds of the sale as Additional paid in Capital. The discount will be amortized over the three year term of the debentures. The discounted balance of the convertible debentures at June 30, 2019 was $162,890.
During the year ended December 31, 2018, holders of convertible debentures exercised their rights to convert the debt of $2,060,000 and accrued interest of $280,529 to 4,681,058 shares of common stock. Of the total amount borrowed under the convertible debt and exercise of warrants, $2,664,787 was loaned to American Rebel, Inc., the Company’s former majority stockholder and now the Company’s wholly owned subsidiary, as a working capital loan to pay its operating expenses including legal, accounting, product development, brand expansion, and marketing costs. This loan is eliminated in consolidation.
Charles A. Ross, Jr. serves as the Company’s sole officer and director. Compensation for Mr. Ross was $100,000 and $100,000, respectively for the six months ended June 30, 2019 and 2018.
NOTE 6 – NOTES PAYABLE – NONRELATED PARTIES
Effective January 1, 2016, the Company acquired three vehicles from various related parties in exchange for the assumption of the liabilities related to those vehicles. The liabilities assumed are as follows at June 30, 2019 and December 31, 2018.
|
|
June 30,
2019
(unaudited)
|
|
December 31,
2018
(audited)
|
Loan secured by a tour bus, payable in monthly payments of $2,710 including
interest at 12% per annum through June 2020.
|
$
|
39,751
|
$
|
52,929
|
|
|
|
|
|
Loan secured by a promotional vehicle. Loan is past due, payments are made at
irregular intervals and interest expense accrues at 3% per month until paid in full.
|
|
68,044
|
|
68,044
|
|
|
|
|
|
Total recorded as current liability
|
$
|
107,795
|
$
|
120,993
|
Current and long-term portion. Total loan balance is reported as current because loans are past due, become due within one year or are expected to be repaid within one year.
NOTE 7 – NOTES PAYABLE – WORKING CAPITAL
On July 6, 2017, the Company’s wholly-owned operating subsidiary completed the sale of a secured promissory note in the principal amount of $250,000 with an interest rate of 12% per annum to a private investor, and current stockholder. In April, 2018 the Company’s wholly-owned operating subsidiary completed the sale of additional notes under similar terms in the additional principal amount totaling $250,000. In July, 2018 the Company’s wholly-owned operating subsidiary completed the sale of additional notes under similar terms in the additional principal amount totaling $300,000. In October and December, 2018 the Company’s wholly-owned operating subsidiary completed the sale of additional notes under similar terms in the additional principal amount totaling $425,000. The notes are secured by a pledge of certain of the Company’s current inventory and the chief executive officer’s personal guaranty. These working capital notes require payments equal to 75-100% of current sales of that specific secured inventory and mature in 180 days. In connection with the original note, the Company issued 250,000 shares of its common stock to the note holder valued at $0.50 per share for a total of $125,000. The fair value of the common stock issued was recorded as a discount to the note payable and the discount was amortized over the term of that agreement to interest expense using the straight-line method that approximates the effective interest method.
13
During the six months ending June 30, 2019, the Company and the Company’s wholly-owned operating subsidiary completed the sale of additional short term notes under similar terms in the additional principal amount totaling $1,137,000. The notes are secured by a pledge of certain of the Company’s current inventory and the chief executive officer’s personal guaranty. These short term working capital notes mature in 30-120 days. In connection with these notes, the Company issued 100,000 shares of its common stock, warrants to purchase 75,000 shares of its common stock and a conversion feature for 300,000 shares at $0.50 per share. The fair value of these share incentives was calculated to be $171,446. The fair value of the share incentives was recorded as a discount to the note payable and the discount was amortized over the term of those agreements to interest expense using the straight-line method that approximates the effective interest method. Interest expense recorded as a result of amortization of discount for the six months ended June 30, 2019 is $152,160. As of June 30, 2019 and December 31, 2018, the outstanding balance due on the working capital notes was $2,191,203 and $1,165,787, respectively.
NOTE 8 – CONVERTIBLE DEBENTURE – RELATED PARTY
Since September 16, 2016, the Company sold convertible debentures in the amount of $2,405,000 in the form of 12% three-year convertible term notes. Interest is accrued at an annual rate of 12% and is payable in common stock at maturity. Both principal and interest may be converted into common stock at a price of $0.50 per share after the passage of 181 days. The Company may redeem the debenture at its option or force conversion after common stock trades at a price in excess of $1.00 per share for five days. The Holder may force redemption after the Company raises $3 million dollars in equity. The holders of the convertible debentures were issued three year warrants to purchase 2,405,000 shares of the Company’s common stock at $1.00 per share. As of December 31, 2018, the Company received $2,405,000 under this convertible debenture. In April and November, 2018, debentures with face value of $2,060,000 plus accrued interest of $280,529 were converted into 4,681,058 shares of common stock. As of December 31, 2018, the Company had a face value of $345,000 due under this convertible debenture.
The convertible debenture holder, based on its agreement, with maturities beginning September 16, 2019 has the option to convert their principal and interest into 690,000 (plus 102,040 for accrued interest) shares of common stock. The fair value of the embedded beneficial conversion feature resulted in no discount to the convertible debenture – related party at December 31, 2018 and a discount of $182,110 at June 30, 2019.
During the year ended December 31, 2018, the Company sold convertible debt instruments in the amount of $270,000. Since public trading of the Company’s common stock began in 2018, the Company determined a beneficial conversion discount of $270,000 applied to the 2018 sales the convertible debt instruments. The discount reduced the liability balance of the debentures to $0 when the debentures were issued and recorded the proceeds of the sale as Additional paid in Capital. The discount will be amortized over the three year term of the debentures. The discounted balance of the convertible debentures at June 30, 2019 was $162,890.
The Company analyzed the conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and fair value measurement under ASC 820 and determined that the beneficial conversion feature under the convertible debenture should be recorded as a discount to debt if market was more than the conversion feature.
The convertible debenture - related party is measured at fair value at the end of each reporting period or termination of the debenture agreement with the change in fair value recorded to earnings. The fair value of the embedded beneficial conversion feature did not result in a discount to the convertible debenture - related party. The discount if and when we have one will be amortized over the term of agreement or modification to the agreement to interest expense using the straight-line method that approximates the effective interest method.
The Company used the eight steps to determine fair value under ASC 820. (1) Identify the item to be valued and the unit of account. (2) Determine the principal or most advantageous market and the relevant market participants. (3) Select the valuation premise to be used for asset measurements. (4) Consider the risk assumptions applicable to liability measurements. (5) Identify available inputs. (6) Select the appropriate valuation technique(s). (7) Make the measurement. (8) Determine amounts to be recognized and information to be disclosed.
Fair value was determined by the market price of the Company’s publicly traded stock with no discount allowed. This was determined as of the effective date of the agreement entered convertible debenture - related party. The conversion price was then compared to fair value, determined by market price and the difference between the two multiplied by the number of shares that would be issued upon conversion. Since public trading of the common stock began in 2018, market price of the Company’s traded stock has ranged from $0.15 to $2.50 per share.
As of June 30, 2019, the outstanding balance due the convertible debentures holders was $345,000, including $0 in original issue discount or interest.
14
NOTE 9 – EMBEDDED DERIVATIVES – FINANCIAL INSTRUMENTS
Since September 2016 the Company entered into a financial instrument, which consists of a convertible debenture, containing a conversion feature. Generally financial instruments are convertible into shares of the Company’s common stock; at prices that are either marked to the volume weighted average price of the Company’s publicly traded stock or a static price determinative from each financial instrument agreement. These prices may be at a significant discount to market as determined overall by the volume weighted average price of the Company’s publicly traded common stock. The Company for all intent and purposes considers these discounts to be fair market value as would be determined in an arm’s length transaction with a willing buyer and the restrictive nature of the common stock issued, unless issued pursuant to a registration or some other registered shares with the SEC.
The Company accounts for the fair value of the conversion feature in accordance with ASC 815-15, Derivatives and Hedging; Embedded Derivatives, which requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt and original issue discount notes payable. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations. The Company valued the embedded derivatives using eight steps to determine fair value under ASC 820. (1) Identify the item to be valued and the unit of account. (2) Determine the principal or most advantageous market and the relevant market participants. (3) Select the valuation premise to be used for asset measurements. (4) Consider the risk assumptions applicable to liability measurements. (5) Identify available inputs. (6) Select the appropriate valuation technique(s). (7) Make the measurement. (8) Determine amounts to be recognized and information to be disclosed.
The fair value of the conversion feature of the financial instrument as of June 30, 2019 was $0. The Company did not record any expense associated with the embedded derivatives at June 30, 2019. No embedded derivative expense was realized as there was no change in the conversion price.
NOTE 10 – INCOME TAXES
At June 30, 2019 and December 31, 2018, the Company had a net operating loss carryforward of $9,012,321and $7,287,559, respectively, which begins to expire in 2034.
Components of net deferred tax asset, including a valuation allowance, are as follows:
|
|
June 30,
2019
(unaudited)
|
|
December 31, 2018
(audited)
|
Deferred tax asset:
|
|
|
|
Net operating loss carryforward
|
$
|
1,892,587
|
$
|
1,530,387
|
Total deferred tax asset
|
|
1,892,587
|
|
1,530,387
|
Less: Valuation allowance
|
|
(1,892,587)
|
|
(1,530,387)
|
Net deferred tax asset
|
$
|
-
|
$
|
-
|
|
|
|
|
|
Valuation allowance for deferred tax assets as of June 30, 2019 and December 31, 2018 was $1,892,587 and $1,530,387, respectively. In assessing the recovery of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not deferred tax assets will not be realized as of June 30, 2019 and December 31, 2018 and recognized 100% valuation allowance for each period.
Reconciliation between the statutory rate and the effective tax rate for both periods and as of December 31, 2018:
Federal statutory rate
|
|
|
(21.0)
|
%
|
State taxes, net of federal benefit
|
|
|
(0.0)
|
%
|
Change in valuation allowance
|
|
|
21.0
|
%
|
Effective tax rate
|
|
|
0.0
|
%
|
15
NOTE 11 – SHARE CAPITAL
The Company is authorized to issue 100,000,000 shares of its $0.001 par value common stock and 1,000,000 shares of its $0.001 par value preferred stock.
Common stock
In January 2018, the Company issued 467,667 shares of its common stock to pay professional and consulting fees and recorded an expense based on fair market value of $0.50 and $0.60 per share for a total expense of $263,334.
In January 2019, the Company issued a 30 day warrant to purchase 250,000 shares of its common stock at a price of $0.01 per share to pay consulting fees. Total fair value of $160,000 was recorded as an expense of $160,000 at June 30, 2019. The warrants were exercised and 250,000 shares of common stock were issued.
In January 2019, the Company’s wholly-owned operating subsidiary completed the sale of a secured promissory note in the principal amount of $300,000 with an interest rate of 16.66% per annum to a private investor. The note is secured by a pledge of all of the Company’s current inventory and the chief executive officer’s personal guaranty. This working capital note matures in 120 days. In connection with this note, the Company issued 100,000 shares of its common stock to the note holder.
In May 2019, the Company identified 50,000 shares of common stock in its subsidiary that had been awarded at date of incorporation but not recorded by the Company. The share count was corrected to include these shares valued at Par value of $0.001.
At June 30, 2019 and December 31, 2018, there were 30,312,058 and 29,912,058 shares of common stock issued and outstanding, respectively.
NOTE 12 – WARRANTS AND OPTIONS
In January 2019, the Company issued three-year and five-year warrants to purchase 75,000 shares of the Company’s common stock at $1.00 per share in conjunction with working capital loans totaling $75,000.
As of June 30, 2019, there were 2,710,000 warrants issued and outstanding. As of December 31, 2018, there were 2,635,000 warrants outstanding to acquire additional shares of common stock.
The Company evaluates outstanding warrants as derivative liabilities and will recognize any changes in the fair value through earnings. The Company determined that the Warrants have an immaterial fair value at June 30, 2019. The warrants do not trade in a highly active securities market, and as such, the Company estimated the fair value of these common stock equivalents using Black-Scholes and the following assumptions:
Expected volatility was based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods. The Company’s common stock has not traded so the volatility computation was based on other similarly situated companies. The Company believes this method produced an estimate that was representative of the Company’s expectations of future volatility over the expected term which due to their maturity period as expiry, it was three years. The Company had no reason to believe future volatility over the expected remaining life of these common stock equivalents was likely to differ materially from historical volatility. Expected life was based on three years due to the expiry of maturity. The risk-free rate was based on the U.S. Treasury rate that corresponded to the expected term of the common stock equivalents.
|
|
June 30,
2019 (unaudited)
|
|
December 31, 2018
(audited)
|
|
|
|
|
|
Stock Price
|
$
|
|
.95
|
$
|
.70
|
Exercise Price
|
$
|
|
1.00
|
$
|
1.00
|
Term (expected in years)
|
|
|
3.00
|
|
3.00
|
Volatility
|
|
|
258.2%
|
|
163.0%
|
Annual Rate of Dividends
|
|
|
0.0%
|
|
0.0%
|
Risk Free Rate
|
|
|
2.41%
|
|
2.69%
|
16
Stock Purchase Warrant
The following table summarizes all warrant activity for the year ended December 31, 2018 and the six months ended June 30, 2019.
|
Shares
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Remaining
term
|
|
Intrinsic
value
|
Outstanding, December 31, 2017
|
2,635,000
|
|
$0.91
|
|
1.44 years
|
|
-
|
Granted
|
270,000
|
|
$1.00
|
|
1.10 years
|
|
-
|
Exercised
|
660,000
|
|
$0.50
|
|
-
|
|
-
|
Expired
|
-
|
|
-
|
|
-
|
|
-
|
Outstanding and Exercisable at December 31, 2018
|
2,245,000
|
|
$0.58
|
|
0.80 years
|
|
-
|
|
|
|
|
|
|
|
|
Granted
|
375,000
|
|
$0.34
|
|
0.99 years
|
|
-
|
Exercised
|
250,000
|
|
$0.01
|
|
-
|
|
-
|
Expired
|
-
|
|
-
|
|
-
|
|
-
|
Outstanding and Exercisable at June 30, 2019
|
2,370,000
|
|
$0.60
|
|
0.91 years
|
|
-
|
NOTE 13 – SUBSEQUENT EVENTS
The Company evaluated all events that occurred after the balance sheet date of June 30, 2019 through the date the financial statements were issued and determined that there were the following subsequent events:
Subsequent to June 30, 2019, the Company entered into working capital loans substantially secured by inventory in the amount of $1,260,000 and extended an additional $351,875 of existing working capital loans. These loans are due in approximately 180 days from issue. In conjunction with these loans, the company issued 1,400,000 shares of common stock and issued a three year warrant to purchase 50,000 shares of common stock at a price of $1.00 per share. The Company also issued 9,700,000 shares of common stock as compensation to key personnel including officers, directors and service providers.
17
FORWARD LOOKING STATEMENTS
This document contains “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however, consult further disclosures we make in this Quarterly Report on Form 10-Q, Current Reports on Form 8-K and other reports made under the Exchange Act.
Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:
our ability to efficiently manage and repay our debt obligations;
our inability to raise additional financing for working capital;
our ability to generate sufficient revenue in our targeted markets to support operations;
significant dilution resulting from our financing activities;
actions and initiatives taken by both current and potential competitors;
supply chain disruptions for components used in our products;
manufacturers inability to deliver components or products on time;
our ability to diversify our operations;
the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain;
adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
deterioration in general or global economic, market and political conditions;
inability to efficiently manage our operations;
inability to achieve future operating results;
the unavailability of funds for capital expenditures;
our ability to recruit, hire and retain key employees;
the inability of management to effectively implement our strategies and business plans; and
the other risks and uncertainties detailed in this report.
In this form 10-Q references to “American Rebel”, “ARI”, “the Company”, “we,” “us,” “our” and similar terms refer to American Rebel Holdings, Inc. and its wholly owned operating subsidiary, American Rebel, Inc.