NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
Chase Packaging Corporation (“the Company”), a Texas Corporation, previously manufactured woven paper mesh for industrial applications, polypropylene mesh fabric bags for agricultural use, and distributed agricultural packaging manufactured by other companies. Management’s plans for the Company include securing a merger or acquisition, raising additional capital, and other strategies designed to optimize shareholder value. However, no assurance can be given that management will be successful in its efforts. The failure to achieve these plans will have a material adverse effect on the Company’s financial position, results of operations, and ability to continue as a going concern.
The interim condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation and a reasonable understanding of the information presented. The Interim Condensed Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q should be read in conjunction with the financial statements and the related notes, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, previously filed with the SEC.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of financial position as of September 30, 2019, results of operations for the nine months and three months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018, as applicable, have been made. The results of operations for the nine months and three months ended September 30, 2019 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The accounting policies followed by the Company are set forth in Note 3 to the Company’s financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018, which is incorporated herein by reference. Specific reference is made to that report for a description of the Company’s securities and the notes to financial statements.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
Recently Adopted Accounting Pronouncements
Leases — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 amends existing lease accounting guidance and requires recognition of most lease arrangements on the balance sheet. The adoption of this standard will result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
Compensation – Stock Compensation — In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial position, results of operations or cash flows.
Recent Accounting Pronouncements – To Be Adopted
Intangibles, Goodwill and Other — In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”). To simplify the subsequent measurement of goodwill, ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, ASU No. 2017-04 requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. The Company will adopt ASU No. 2017-04 commencing in the first quarter of fiscal 2021. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement — This ASU modifies the disclosure requirements on fair value measurements in Topic 820, including the removal, modification to, and addition of certain disclosure requirements. This ASU will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The majority of the disclosure changes are to be applied on a prospective basis. Although this ASU has a significant impact to the Company’s fair value disclosures, no additional impact is expected to the Company’s condensed financial statements.
The Company does not believe that other standards, which have been issued but are not yet effective, will have a significant impact on its financial statements.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash with a remaining maturity of three months or less at the time of acquisition to be cash equivalents. The Company maintains its cash and cash equivalents balances with high credit quality financial institutions. As of September 30, 2019 and December 31, 2018, the Company had cash in insured accounts in the amount of $208,580 and $46,713, respectively, and cash equivalents (US treasury bills) held in financial institutions that were uninsured by Federal Deposit Insurance Corporation in the amount of approximately $500,000 and $709,158 respectively.
Income Taxes
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured assuming enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such asset will be realized.
The Company adopted FASB Interpretation of “Accounting for Uncertainty in Income Taxes.” There was no impact on the Company’s financial position, results of operations, or cash flows as a result of implementing this guidance. At September 30, 2019 and December 31, 2018, the Company evaluated its tax positions and did not have any unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company currently has no federal or state tax examinations in progress.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. “tax regulations.” Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50. Effective January 1, 2019, the Company adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
The Company followed the accounting guidance in ASC 505-50-30-11, until January 1, 2019 which provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
|
i.
|
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
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|
|
|
|
ii.
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The date at which the counterparty’s performance is complete.
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Upon the adoption of ASU 2018-07, the Company measured the fair value of equity instruments for nonemployee based payment awards on the grant date.
NOTE 4 - BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Basic loss per common share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding. Diluted loss per share is computed by dividing the net loss by the sum of the weighted-average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the exercise of common stock equivalents.
We have excluded 6,909,000 common stock equivalents (preferred stock, warrants and stock options) from the calculation of diluted loss per share for the nine months ended September 30, 2019 and 2018, which, if included, would have an antidilutive effect.
NOTE 5 - WARRANTS AND PREFERRED STOCKS:
Warrants
2019 Extension of Warrant Terms
On July 9, 2019, 6,909,000 common share purchase warrants issued by the Company were modified to extend their maturity date to September 7, 2021. The exercise price and all other terms of the original warrant agreement remain the same. The warrants modification expense of $567,194 was computed as the incremental value of the modified warrants over the unmodified warrants on the modification date using a per share price of $0.15 per share, which was the contemporaneous private placement offering price. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:
Average risk-free interest rate
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|
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1.58
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%
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Average expected life-years
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|
|
2
|
|
Expected volatility
|
|
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172.88
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%
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Expected dividends
|
|
|
0
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%
|
|
|
Number of Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
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6,909,000
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|
|
$
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0.15
|
|
|
|
0.68
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Extended
|
|
|
6,909,000
|
|
|
|
0.15
|
|
|
|
2
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(6,909,000
|
)
|
|
|
0.15
|
|
|
|
-
|
|
Outstanding at September 30, 2019
|
|
|
6,909,000
|
|
|
$
|
0.15
|
|
|
|
1.94
|
|
Exercisable at September 30, 2019
|
|
|
6,909,000
|
|
|
$
|
0.15
|
|
|
|
1.94
|
|
As of September 30, 2019 and December 31, 2018, the average remaining contractual life of the outstanding warrants was 1.94 years and 0.68 year, respectively. The warrants will expire on September 7, 2021.
Series A 10% Convertible Preferred Stock
On December 31, 2018, all 36,562 Series A 10% Convertible Preferred Stocks were converted to 43,045,897 restricted Common stock, including 6,456,882 restricted Common stock paid for preferred shares dividend of $261,504. As of September 30, 2019, there was no preferred stock outstanding.
The principal terms of the Series A 10% Convertible Preferred Stock were as follows:
Voting rights – The Series A 10% Convertible Preferred Stock has voting rights (one vote per share) equal to those of the Company’s common stock.
Dividend rights – The Series A 10% Convertible Preferred Stock carries a fixed cumulative dividend, as and when declared by our Board of Directors, of 10% per annum, accrued daily, compounded annually and payable in cash upon a liquidation event for up to five years, as well as the right to receive any dividends paid to holders of common stock.
Conversion rights – The holders of the Series A 10% Convertible Preferred Stock have the right to convert any or all of their Series A 10% Convertible Preferred Stock, at the option of the holder, at any time, into common stock on a one for one thousand basis.
Redemption rights –The shares of the Series A 10% Convertible Preferred Stock may be redeemed by the Company, in whole or in part, at the option of the Company, upon written notice by the Company to the holders of Series A 10% Convertible Preferred Stock at any time in the event that the Preferred Stock of one or more holders has not been previously converted. The Company shall redeem each share of Preferred Stock of such holders within thirty (30) days of the Company’s delivery of notice to such holders and such holders shall surrender the certificate(s) representing such shares of Preferred Stock.
Liquidation entitlement – In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A 10% Convertible Preferred Stock shall be entitled to receive, in preference to the holders of common stock, an amount equal to $100 per share of Series A 10% Convertible Preferred Stock plus all accrued and unpaid dividends.
At any time on or after August 2, 2011, the Holders of 66 2/3% or more of the Preferred Stock then outstanding could have requested liquidation of their Preferred Stock. In the event that, at the time of such requested liquidation, the Company’s cash funds (in excess of a $50,000 reserve fund) then available to effect such requested liquidation were inadequate for such purpose, then such requested liquidation should have taken place (on a ratable basis) only to the extent such excess cash funds were available for such purpose.
Other provisions – There will be proportional adjustments for stock splits, stock dividends, recapitalizations and the like.
NOTE 6 - DIVIDENDS:
On December 31, 2018, all 36,562 Series A 10% Convertible Preferred Stocks were converted to 43,045,897 restricted Common stock, including 6,456,882 restricted Common stock paid for preferred shares dividend of $261,504.
NOTE 7 - STOCKHOLDERS’ EQUITY:
The Company’s 2008 Stock Awards Plan was approved April 9, 2008 by the Board of Directors and ratified at the Company’s annual meeting of stockholders held on June 3, 2008. The 2008 Plan became effective June 24, 2008 and terminated on June 24, 2018. Subject to certain adjustments, the number of shares of Common Stock that could be issued pursuant to awards under the 2008 Plan was 2,000,000 shares. A maximum of 80,000 shares may be granted in any one year in any form to any one participant, of which a maximum of (i) 50,000 shares may be granted to a participant in the form of stock options and (ii) 30,000 shares may be granted to a participant in the form of Common Stock or restricted stock. The 2008 Plan was administered by a committee of the Board of Directors. Employees, including any employee who is also a director or an officer, consultants, and outside directors of the Company are eligible to participate in the 2008 Plan. The 2008 Stock Awards Plan expired June 24, 2018; the Board of directors has not adopted a new stock awards plan.
On April 11, 2019, the Board of Directors authorized the issuance of 300,000 shares each to 7 directors and to the CFO/Asst. Sect, valued at approximately $9,300 each based on the closing bid price as quoted on the OTC on April 22, 2019 at $0.03 per share, and on June 28, 2019 the Board of Directors authorized the issuance of 300,000 shares to Matthew W. Long, a newly appointed board member, valued at approximately $27,000 based on the closing bid price as quoted on the OTC on June 28, 2019 at $0.09 per share. The 2,400,000 shares, held in escrow, were recorded at par of $240,000 and are for merger/acquisition services to be performed in 2019. The escrow is pending shareholder approval of the change of state of incorporation to Delaware and the subsequent amendment to the Certificate of Incorporation reducing the par value of Common stock from $0.10 to $0.01.
NOTE 8 - FAIR VALUE MEASUREMENTS:
ASC 820, “Fair Value Measurements and Disclosure,” (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels are described below:
Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;
Level 2 Inputs — Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 Inputs — Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
There were no transfers in or out of any level during the nine months ended September 30, 2019 or 2018.
Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in the Company’s balance sheets, the Company has elected not to record any other assets or liabilities at fair value, as permitted by ASC 820. No events occurred during the nine months ended September 30, 2019 or 2018 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.
The Company determines fair values for its investment assets as follows:
Cash equivalents at fair value — the Company’s cash equivalents, at fair value, consist of money market funds — marked to market. The Company’s money market funds are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices from an exchange.
The following tables provide information on those assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, respectively:
|
|
Carrying
Amount In
Balance Sheet
September 30,
|
|
|
Fair Value
September 30,
|
|
|
Fair Value Measurement Using
|
|
|
|
2019
|
|
|
2019
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Bills
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money Market Funds
|
|
|
208,580
|
|
|
|
208,580
|
|
|
|
208,580
|
|
|
|
—
|
|
|
|
—
|
|
Total Assets
|
|
$
|
708,580
|
|
|
$
|
708,580
|
|
|
$
|
708,580
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Carrying
Amount In
Balance Sheet
December 31,
|
|
|
Fair Value
December 31,
|
|
|
Fair Value Measurement Using
|
|
|
|
2018
|
|
|
2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Bills
|
|
$
|
709,158
|
|
|
$
|
709,158
|
|
|
$
|
709,158
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money Market Funds
|
|
|
46,713
|
|
|
|
46,713
|
|
|
|
46,713
|
|
|
|
—
|
|
|
|
—
|
|
Total Assets
|
|
$
|
755,871
|
|
|
$
|
755,871
|
|
|
$
|
755,871
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
The Company’s Board of Directors has agreed to pay the Company’s Chief Financial Officer an annual salary of $17,000. No other officers or directors of the Company receive compensation other than reimbursement of out-of-pocket expenses incurred in connection with Company business and development.
NOTE 10 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events from September 30, 2019 through the issuance date of these financial statements, and there are no events requiring disclosure.