UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period
ended September 30, 2018
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from ___________ to ___________
Commission file number
333-181742
|
SECTOR 5,
INC.
|
|
(Exact name of registrant as
specified in its charter)
|
|
Nevada
|
|
45-5042353
|
|
(State or other jurisdiction
of
incorporation or
organization)
|
|
(I.R.S. Employer
Identification Number)
|
2000 Duke Street, Suite
110
Alexandria, Virginia
22314
(Address of principal
executive offices)
Satellite Office:
31938 Temecula Parkway, Suite
A323
Temecula CA 92592
(517)
348-1005
(Issuer’s telephone number,
including area code)
(Former name, former address
and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
¨ No x
Indicate by check mark
whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes. x No. ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerate filer, a
non-accelerated filer, a smaller reporting company or, an emerging
growth company. See the definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting company”, and “emerging
growth company”, in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
|
Non-accelerated filer
|
x
|
Smaller reporting company
|
x
|
|
Emerging growth company
|
x |
|
|
If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ¨ No x
State the number of shares outstanding of
each of the issuer’s classes of common equity, as of the latest
practicable date.
|
Class
|
|
Outstanding at November
16, 2018
|
|
Common Stock, par value $.001
per share
|
|
20,475,000 shares
|
SECTOR 5, INC.
TABLE OF CONTENTS
PART I FINANCIAL
INFORMATION
Item 1. Financial
Statements
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(unaudited) |
|
|
|
|
|
ASSETS
|
|
Current Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$ |
666 |
|
|
$ |
111 |
|
|
Accounts receivable
|
|
|
119,961 |
|
|
|
- |
|
|
Inventory
|
|
|
2,807 |
|
|
|
5,396 |
|
|
Prepaid expenses
|
|
|
383,931 |
|
|
|
- |
|
|
Total Current Assets
|
|
|
507,365 |
|
|
|
5,507 |
|
|
Total Assets
|
|
$ |
507,365 |
|
|
$ |
5,507 |
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
72,440 |
|
|
$ |
74,941 |
|
|
Accounts payable, related
party
|
|
|
5,000 |
|
|
|
- |
|
|
Accrued interest
|
|
|
24,709 |
|
|
|
- |
|
|
Accrued interest, related
party
|
|
|
12,520 |
|
|
|
9,335 |
|
|
Loans payable, related
party
|
|
|
175,584 |
|
|
|
355,608 |
|
|
Convertible note, net of
discount of $553,892
|
|
|
296,108 |
|
|
|
- |
|
|
Derivative liability
|
|
|
2,096,316 |
|
|
|
- |
|
|
Total Current Liabilities
|
|
|
2,682,677 |
|
|
|
439,884 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,682,677 |
|
|
|
439,884 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000
shares authorized; 1,000,000 and 1,000,000 shares issued and
outstanding, respectively
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Common stock, $0.001 par value, 245,000,000
shares authorized; 19,400,000 and 18,000,000 shares issued and
outstanding, respectively
|
|
|
19,400 |
|
|
|
18,000 |
|
|
Additional paid-in capital
|
|
|
713,159 |
|
|
|
62,650 |
|
|
Accumulated deficit
|
|
|
(2,908,871 |
) |
|
|
(516,027 |
) |
|
Total stockholders’ deficit
|
|
|
(2,175,312 |
) |
|
|
(434,377 |
) |
|
TOTAL LIABILITIES AND STOCKHOLDERS’
DEFICIT
|
|
$ |
507,365 |
|
|
$ |
5,507 |
|
|
The accompanying notes
are an integral part of these unaudited condensed financial
statements.
|
|
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Revenue
|
|
$ |
5,884,941 |
|
|
$ |
31,396 |
|
|
$ |
6,949,200 |
|
|
$ |
396,474 |
|
|
Cost of goods sold
|
|
|
5,799,265 |
|
|
|
26,211 |
|
|
|
6,861,246 |
|
|
|
387,432 |
|
|
Gross Margin
|
|
|
85,676 |
|
|
|
5,185 |
|
|
|
87,954 |
|
|
|
9,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
|
11,362 |
|
|
|
2,824 |
|
|
|
17,502 |
|
|
|
5,519 |
|
|
Officer compensation (see Note
9 and 6)
|
|
|
7,500 |
|
|
|
- |
|
|
|
320,000 |
|
|
|
- |
|
|
Professional fees
|
|
|
13,770 |
|
|
|
28,720 |
|
|
|
87,982 |
|
|
|
115,590 |
|
|
Consulting, related party
|
|
|
15,000 |
|
|
|
- |
|
|
|
45,000 |
|
|
|
- |
|
|
General and administrative
|
|
|
58,570 |
|
|
|
11,995 |
|
|
|
136,225 |
|
|
|
48,672 |
|
|
Total operating expenses
|
|
|
106,202 |
|
|
|
43,539 |
|
|
|
606,709 |
|
|
|
169,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(20,526 |
) |
|
|
(38,354 |
) |
|
|
(518,755 |
) |
|
|
(160,739 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income/ (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of
derivative
|
|
|
(1,177,658 |
) |
|
|
- |
|
|
|
(1,094,930 |
) |
|
|
- |
|
|
Loss on issuance of convertible
debt
|
|
|
(6,682 |
) |
|
|
- |
|
|
|
(455,043 |
) |
|
|
- |
|
|
Interest expense
|
|
|
(18,604 |
) |
|
|
(854 |
) |
|
|
(28,008 |
) |
|
|
(3,431)
|
|
|
Interest expense, debt
discount
|
|
|
(200,653 |
) |
|
|
- |
|
|
|
(296,108 |
) |
|
|
- |
|
|
Total other expense
|
|
|
(1,403,597 |
) |
|
|
(854 |
) |
|
|
(1,874,089 |
) |
|
|
(3,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income
taxes
|
|
|
(1,424,123 |
) |
|
|
(39,208 |
) |
|
|
(2,392,844 |
) |
|
|
(164,170)
|
|
|
Provision for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net Loss
|
|
$ |
(1,424,123)
|
|
|
$ |
(39,208)
|
|
|
$ |
(2,392,844)
|
|
|
$ |
(164,170)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted
|
|
$ |
(0.07 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.13)
|
|
|
$ |
(0.01)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
and diluted
|
|
|
19,013,044 |
|
|
|
18,000,000 |
|
|
|
18,726,009 |
|
|
|
18,000,000 |
|
|
The accompanying notes are
an integral part of these unaudited condensed financial
statements.
|
|
|
|
For the Nine Months
Ended
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
CASH FLOW FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net Loss
|
|
$ |
(2,392,844 |
) |
|
$ |
(164,170 |
) |
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Common stock issued for officer
compensation
|
|
|
300,000 |
|
|
|
- |
|
|
Change in fair value of
derivative
|
|
|
1,094,930 |
|
|
|
- |
|
|
Loss on issuance of convertible
debt
|
|
|
455,043 |
|
|
|
- |
|
|
Debt discount
|
|
|
296,108 |
|
|
|
- |
|
|
Changes in Operating Assets and
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(119,961 |
) |
|
|
413 |
|
|
Prepaids & other assets
|
|
|
(227,930 |
) |
|
|
30,117 |
|
|
Inventory
|
|
|
2,589 |
|
|
|
45,126 |
|
|
Accounts payable
|
|
|
(2,500 |
) |
|
|
18,569 |
|
|
Accounts payable, related
party
|
|
|
5,000 |
|
|
|
- |
|
|
Accrued interest
|
|
|
24,709 |
|
|
|
- |
|
|
Accrued interest, related
party
|
|
|
3,185 |
|
|
|
3,431 |
|
|
Net Cash Used in Operating Activities
|
|
|
(561,671 |
) |
|
|
(66,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from related party
loans
|
|
|
31,626 |
|
|
|
220,281 |
|
|
Repayment of related party
loans
|
|
|
(211,650 |
) |
|
|
(154,632 |
) |
|
Proceeds from convertible
note
|
|
|
742,250 |
|
|
|
- |
|
|
Net Cash Provided by Financing
Activities
|
|
|
562,226 |
|
|
|
65,649 |
|
|
Net Increase (Decrease) in Cash
|
|
|
555 |
|
|
|
(865 |
) |
|
Cash at Beginning of Period
|
|
|
111 |
|
|
|
865 |
|
|
Cash at End of Period
|
|
$ |
666 |
|
|
$ |
- |
|
|
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
- |
|
|
$ |
- |
|
|
Income taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
Supplemental disclosure of non-cash
activities:
|
|
|
|
|
|
|
|
|
|
Common stock issued for prepaid
financing fees
|
|
$ |
156,000 |
|
|
$ |
- |
|
|
Warrants issued
|
|
$ |
195,909 |
|
|
$ |
|
|
|
The accompanying notes are
an integral part of these unaudited condensed financial
statements.
|
SECTOR 5, INC.
NOTES TO THE CONDENSED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF
BUSINESS
SECTOR 5, INC. (“Sector 5”
or the “Company”) was incorporated in the State of Nevada on April
11, 2012. On March 18, 2016 there was a change in control of the
Company as a result of a private sale of the Company’s common
stock. The change in control includes plans to relaunch the Company
to sell branded electronic products targeting the educational and
consumer electronics markets.
NOTE 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation
The Company’s unaudited
condensed financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. GAAP”). The accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only
normal recurring items, which, in the opinion of management, are
necessary for a fair statement of the results of operations for the
periods shown and are not necessarily indicative of the results to
be expected for the full year ending December 31, 2018. These
unaudited condensed financial statements should be read in
conjunction with the financial statements and related notes
included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017.
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 revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain reclassifications have been made to
the prior period financial information to conform to the
presentation used in the financial statements for the three and
nine months ended September 30, 2018.
Fair Value of
Financial Instruments
The Company follows
paragraph 825-10-50-10 of the FASB Accounting Standards
Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting
Standards Codification (“Paragraph 820-10-35-37”) to measure the
fair value of its financial instruments. Paragraph 820-10-35-37
establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America (U.S.
GAAP), and expands disclosures about fair value measurements. To
increase consistency and comparability in fair value measurements
and related disclosures, Paragraph 820-10-35-37 establishes a fair
value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three levels of
fair value hierarchy defined by Paragraph 820-10-35-37 are
described below:
Level 1: Quoted market
prices available in active markets for identical assets or
liabilities as of the reporting date.
Level 2: Pricing inputs other than quoted
prices in active markets included in Level 1, which are either
directly or indirectly observable as of the reporting date.
Level 3: Pricing inputs that are generally
unobservable inputs and not corroborated by market data.
The carrying amount of the
Company’s financial assets and liabilities, such as cash, prepaid
expenses, accrued expenses and notes payable approximate their fair
value because of the short maturity of those instruments.
The following table classifies the Company’s
liabilities measured at fair value on a recurring basis into the
fair value hierarchy as of:
September 30, 2018:
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains and
(Losses)
|
|
|
Derivative
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,096,316 |
|
|
$ |
(1,094,930 |
) |
Derivative Financial Instruments
Derivative liabilities are
recognized in the balance sheets at fair value based on the
criteria specified in Financial Accounting Standards Board (
“FASB” ) Accounting Standards Codification ( “ASC” )
Topic 815-15 – Derivatives and Hedging – Embedded
Derivatives ( “ASC 815-15” ). Pursuant to ASC Topic
815-15 an evaluation of the embedded conversion feature of
convertible debt is evaluated to determine if the bifurcated debt
conversion feature is required to be classified as a derivative
liability. Since the terms of the embedded conversion features of
the Company’s convertible debt provides for the issuance of shares
of common stock at the election of the holders and the number of
shares is subject to adjustment for a decline in the price of the
Company’s common stock, the Company determined that the embedded
conversion option met the criteria of a derivative liability. The
estimated fair value of the embedded conversion feature of debt
classified as derivative liabilities are determined using the
Black-Scholes option pricing model. The model utilizes Level 3
unobservable inputs to calculate the fair value of the derivative
liabilities at each reporting period.
The Company determined that
using an alternative valuation model such as a Binomial-Lattice
model would result in minimal differences. The fair value of the
embedded conversion feature of debt classified as derivative
liabilities are adjusted for changes in fair value at each
reporting period, and the corresponding non-cash gain or loss is
recorded as other income or expense in the statement of operations.
As of September 30, 2018, the embedded conversion feature of
$2,096,316 of convertible notes payable was classified as a
derivative liability. Each reporting period the embedded conversion
feature is re-valued and adjusted through the caption “change in
fair value of derivative” on the statements of operations.
Revenue and cost
recognition
Revenue is recognized when a
customer obtains control of promised goods or services and is
recognized in an amount that reflects the consideration that an
entity expects to receive in exchange for those goods or services.
In addition, the standard requires disclosure of the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The amount of revenue that is
recorded reflects the consideration that the Company expects to
receive in exchange for those goods. The Company applies the
following five-step model in order to determine this amount: (i)
identification of the promised goods in the contract; (ii)
determination of whether the promised goods are performance
obligations, including whether they are distinct in the context of
the contract; (iii) measurement of the transaction price, including
the constraint on variable consideration; (iv) allocation of the
transaction price to the performance obligations; and (v)
recognition of revenue when (or as) the Company satisfies each
performance obligation.
The Company only applies the
five-step model to contracts when it is probable that the entity
will collect the consideration it is entitled to in exchange for
the goods or services it transfers to the customer. Once a contract
is determined to be within the scope of ASC 606 at contract
inception, the Company reviews the contract to determine which
performance obligations the Company must deliver and which of these
performance obligations are distinct. The Company recognizes as
revenues the amount of the transaction price that is allocated to
the respective performance obligation when the performance
obligation is satisfied or as it is satisfied. Generally, the
Company’s performance obligations are transferred to customers at a
point in time, typically upon delivery.
For the three and nine months ended
September 30, 2018, the Company recognized $5,834,640 and
$6,762,000, respectively, of revenue from one customer to which it
sells its low-end smartphones using the Chrome OS.
Accounts Receivable
Revenues that have been
recognized but not yet received are recorded as accounts
receivable. Losses on receivables will be recognized when it is
more likely than not that a receivable will not be collected. An
allowance for estimated uncollectible amounts will be recognized to
reduce the amount of receivables to its net realizable value. Any
allowance for uncollectible amounts is evaluated quarterly. No
allowance was deemed necessary as of September 30, 2018.
Recently issued
accounting pronouncements
The Company has implemented
all new accounting pronouncements that are in effect. These
pronouncements did not have any material impact on the financial
statements unless otherwise disclosed, and the Company does not
believe that there are any other new accounting pronouncements that
have been issued that might have a material impact on its financial
position or results of operations.
NOTE 3 – GOING CONCERN
As reflected in the
accompanying financial statements, the Company has an accumulated
deficit of $2,908,871 at September 30, 2018 and had a net loss of
$2,392,844 for the nine months ended September 30, 2018. These
factors raise substantial doubt about our ability to continue as a
going concern. The financial statements have been prepared assuming
that the Company will continue as a going concern. 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 be necessary
should the Company be unable to continue as a going concern.
While the Company is
attempting to increase operations and revenues, our cash position
may not be significant enough to support our daily operations.
Management intends to raise additional funds by way of debt and
equity financing. Management believes that the actions presently
being taken to further implement our business plan and generate
increased revenues provide the opportunity for the Company to
continue as a going concern. While the Company believes in the
viability of its strategy to generate increased revenues and in its
ability to raise additional funds, there can be no assurances to
that effect. The Company’s ability to continue as a going concern
is dependent upon the ability to further implement its business
plan and generate increased revenues. The financial statements do
not include any adjustments that might be necessary if the Company
was unable to continue as a going concern.
NOTE 4 - COMMITMENTS
The Sector 5 E3 Chromebook
will arrive next week. The Company had all Google approvals on the
Chromebook from packaging and design. The Company was approved by
Google to make Google’s newest Chromebook and distribute it in the
business to business (B2B) enterprise market segment within the
United States. This marks the third acceptance by Google of Sector
5’s participation in the Chromebook program under Sector 5’s Google
Chrome OS Brand Features and Support Agreement originally entered
into with Google in January 2015.
NOTE 5 – INVENTORY
As of September 30, 2018,
and December 31, 2017, the Company has $2,807 and $5,396,
respectively of finished goods inventory. Inventory consists of
Chromebooks and charging carts. Inventory is carried at the lower
of cost or market using the FIFO method of inventory valuation.
NOTE 6 - RELATED PARTY
TRANSACTIONS
On March 22, 2016, Company
executed a promissory note with Sector Five, Inc., a privately held
Delaware corporation, for the purchase of inventory in the amount
of $120,006. The note is due in one year and bears interest at 5%.
The balance of the note was subsequently reduced by $34,840 for
$17,160 of inventory that was returned to the lender and $7,260
that was determined to be obsolete. As of December 31, 2017, there
was $85,166 and $9,335 of principal and interest, respectively, due
on this note. As of September 30, 2018, there is $85,166 and
$12,520 of principal and interest, respectively, due on this note.
This note is currently past due.
Since the change in control,
the Company’s Chairman has loaned funds to the Company in support
of its operations by providing payments to the Company’s vendors
and advances for operations. These amounts are considered due on
demand and are non-interest bearing. As of September 30, 2018 and
December 31, 2017, the balance due for these advances is $76,070
and $211,175, respectively.
Since the change in control,
Kirkland Holdings, Inc., a company with common management, has
advanced funds to the Company for operations. The advances are
unsecured, non-interest bearing and due on demand. As of September
30, 2018 and December 31, 2017, the balance due for these advances
is $14,348 and $59,267, respectively.
Per the terms of a
consulting agreement, dated January 4, 2018, with Sector Five,
Inc., a privately held Delaware corporation, the company will pay
$5,000 a month for services to be rendered. As of September 30,
2018, the Company has paid $40,000 to Sector Five, Inc and there is
$5,000 outstanding per the agreement.
Pursuant to the terms of the
employment agreement with Erick Kuvshinikov, CEO, effective
February 13, 2018, the Company granted Mr. Kuvshinikov 1,000,000
shares of common stock, all of which were fully vested as of
September 30, 2018. The shares were valued at the closing stock
price on the day they vested of $.30 for total non-cash expense of
$300,000. In addition, Mr. Kuvshinikov will also receive a salary
of $2,500 a month for six months. Mr. Kuvshinikov’s agreement was
extended for another year.
The Company is currently in
dispute with a former officer about unpaid compensation. The former
officer is claiming that the Company owes him approximately $50,000
for commissions earned but never paid. The Company disputes this
claim and believes there is less than a 50% chance of ever having
to pay this claim.
NOTE 7 – CONVERTIBLE NOTE
On April 16, 2018, the
Company executed a convertible promissory note with Auctus Fund,
LLC (“Auctus”) for $350,000. The note bears interest at 10% per
annum and matures on January 16, 2019. The holder has the right at
any time to convert any portion of the note and/or interest into
shares of common stock at a 40% discount to the average of the two
lowest trades during the previous twenty-five days of conversion,
provided that the conversion price is not less than $0.17 prior to
the 180 th day after issue. The Company received
$322,250 net of OID and applicable fees. The company bifurcated the
conversion feature and accounted for it as a derivative liability.
The Company recorded the derivative liability at its fair value of
$689,923 based on the Black Scholes Merton pricing model, a loss on
issuance of $448,361 and a corresponding debt discount of $241,562
to be amortized utilizing the interest method of accretion over the
term of the note. As of September 30, 2018, the Company fair valued
the derivative at $833,718. In addition, $212,545 of the debt
discount has been amortized to interest expense.
On July 31, 2018, the
Company executed a convertible promissory note with Auctus Fund,
LLC for up to $1,500,000. Total consideration for Note is up to
$1,392,500 ($1.5mil less $107,500 OID). The note bears interest at
10% per annum and matures twelve months from the effective date of
each tranche. The holder has the right at any time to convert any
portion of the note and/or interest into shares of common stock at
the lesser of 1) the lowest trade in the twenty-five days prior to
conversion, or 2) 40% discount to the average of the two lowest
trades during the previous twenty-five days of conversion.
The first tranche of
$420,000, net of $80,000 of OID and fees was received on August 7,
2018. The company bifurcated the conversion feature and accounted
for it as a derivative liability. The Company recorded the
derivative liability at its fair value of $311,461 based on the
Black Scholes Merton pricing model, a loss on issuance of $6,682
and a corresponding debt discount of $241,562 to be amortized
utilizing the interest method of accretion over the term of the
note. As of September 30, 2018, the Company fair valued the
derivative at $1,262,597. In addition, $83,532 of the debt discount
has been amortized to interest expense.
NOTE 8 – PREFERRED STOCK
The company has 5,000,000 shares of
preferred stock authorized, 1,000,000 of which have been designated
Series A. Shares of Series A Preferred Stock may be converted at
the holder’s election into shares of common stock, at the
conversion rate of fifty shares of fully paid and nonassessable
common stock for one share of Series A Preferred Stock. Series A is
entitled to votes equal to the number of common shares into which
the preferred could be converted into and has liquidation
preferences of $2.00 per share.
NOTE 9 – COMMON STOCK
Pursuant to the terms of the
employment agreement with Erick Kuvshinikov, CEO, effective
February 13, 2018, the Company granted Mr. Kuvshinikov 1,000,000
shares of common stock. The 1,000,000 shares of common stock were
valued at $0.30, the closing stock price on the date of grant, for
total non-cash expense of $300,000.
On September 27, the Company
entered into an equity purchase agreement (the “Purchase
Agreement”) with Auctus Fund, LLC pursuant to which, upon the terms
and subject to the conditions thereof, Auctus is committed to
purchase shares of the Company’s common stock at an aggregate price
of up to $10,000,000 over the course of its 24-month term. The
actual amount of proceeds received pursuant to each Put Notice
(each, the “Put Amount”) is to be determined by multiplying the Put
Amount Request by the applicable purchase price. The purchase price
for each of the Purchase Shares equals 87.5% of the “Market Price,”
which is defined as the lesser of the (i) lowest closing bid price
of our common stock for any trading day during the five trading
days immediately preceding the date of the respective Put Notice,
or (ii) lowest closing bid price of the common stock for any
trading day during the five trading days immediately following the
clearing date associated with the applicable Put Notice (the
“Valuation Period”). Within three trading days following the end of
the Valuation Period, the Buyer will deliver the Put Amount to us
via wire transfer. The Put Amount Request pursuant to any single
Put Notice must have an aggregate value of at least $25,000, and
cannot exceed the lesser of (i) 150% of the average daily trading
value of the common stock in the five trading days immediately
preceding the Put Notice or (ii) such number of shares of common
stock that has an aggregate value of $300,000.
On September 27, 2018,
pursuant to the terms of the Equity Purchase Agreement with Auctus
Fund, LLC, the Company granted Auctus 400,000 shares of common as a
commitment fee, subject to a 50% “true-up” on the value of the
ccommitment shares. The true-up would occur on the earlier of (i)
ten trading days after the Registration Statement is declared
effective or (ii) ten trading days after six months from the
Closing Date. At that time, if the share price is less than it was
at the Closing Date, then additional shares would be issued such
that the Buyer has received shares with a value of at least what
200,000 shares were worth at the Closing Date. The shares were
valued at $0.39, the closing stock price on the date of grant, for
total non-cash expense of $156,000. The $156,000 has been debited
to prepaid expenses to be amortized when shares are purchased under
the agreement.
NOTE 10 – STOCK WARRANTS
On April 16, 2018, in
connection with and pursuant to the terms of the convertible
promissory note dated April 16, 2018, with Auctus Fund, LLC, the
Company issued warrants to Auctus Fund to purchase up to 350,000
shares of common stock. The warrants have an exercise price of
$0.50 and expire in five years. The aggregate fair value of the
warrants, which was allocated against the debt proceeds totaled
$80,688 based on the Black Scholes Merton pricing model using the
following estimates: exercise price of $0.50, 2.69% risk free rate,
298.24% volatility and expected life of the warrants of 5 years.
The fair value was credited to additional paid in capital and
debited to debt discount to be amortized over the term of the
loan.
On July 31, 2018, in
connection with and pursuant to the terms of the convertible
promissory note dated July 31, 2018, with Auctus Fund, LLC, the
Company issued warrants to Auctus Fund to purchase up to 500,000
shares of common stock. The warrants have an exercise price of
$0.50 and expire in five years. The aggregate fair value of the
warrants, which was allocated against the debt proceeds totaled
$115,221 based on the Black Scholes Merton pricing model using the
following estimates: exercise price of $0.50, 2.85% risk free rate,
282.3% volatility and expected life of the warrants of 5 years. The
fair value was credited to additional paid in capital and debited
to debt discount to be amortized over the term of the loan.
A summary of the status of the Company’s
outstanding stock warrants and changes during the periods is
presented below:
|
|
|
Shares available to
purchase with warrants
|
|
|
Weighted
Average
Price
|
|
|
Weighted
Average
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
850,000 |
|
|
$ |
0.50 |
|
|
$ |
0.30 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Forfeited
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Expired
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Outstanding, September 30, 2018
|
|
|
850,000 |
|
|
$ |
0.50 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
850,000 |
|
|
$ |
0.50 |
|
|
$ |
0.30 |
|
|
Range of Exercise
Prices
|
|
|
Number Outstanding
9/30/2018
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted
Average Exercise
Price
|
|
| $ |
0.50
|
|
|
|
850,000 |
|
|
4.72 years
|
|
$ |
0.50 |
|
NOTE 11 – SUBSEQUENT EVENTS
Management has evaluated
subsequent events pursuant to the requirements of ASC Topic 855,
from the balance sheet date through the date the financial
statements were available to be issued, and has determined that
there are no material subsequent events other than the
following.
On October 1, 2108, the
Company granted 1,000,000 shares of common stock to Unimaxcomm Ltd
as compensation for Unimaxcomm’s financing of the current purchase
orders of Smartphones.
On October 3, 2018, the
Company granted 75,000 shares of common stock for services.
Pursuant to the terms of the
convertible promissory note with Auctus Fund, LLC the second
tranche of $212,250, net of $20,250 of OID and fees, was received
on October 3, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and
analysis should be read in conjunction with our financial
statements, including the notes thereto, appearing in this report
and are hereby referenced. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this report. You
should not place undue certainty on these forward-looking
statements, which apply only as of the date of this report. We
believe it is important to communicate our expectations. However,
our management disclaims any obligation to update any
forward-looking statements whether as a result of new information,
future events or otherwise.
These forward-looking
statements are based on our management’s current expectations and
beliefs and involve numerous risks and uncertainties that could
cause actual results to differ materially from expectations. You
should not rely upon these forward-looking statements as
predictions of future events because we cannot assure you that the
events or circumstances reflected in these statements will be
achieved or will occur. You can identify a forward-looking
statement by the use of the forward-terminology, including words
such as “may”, “will”, “believes”, “anticipates”, “estimates”,
“expects”, “continues”, “should”, “seeks”, “intends”, “plans”,
and/or words of similar import, or the negative of these words and
phrases or other variations of these words and phrases or
comparable terminology. These forward-looking statements relate to,
among other things: our sales, results of operations and
anticipated cash flows; capital expenditures; depreciation and
amortization expenses; sales, general and administrative expenses;
our ability to maintain and develop relationship with our existing
and potential future customers; and, our ability to maintain a
level of investment that is required to remain competitive. Many
factors could cause our actual results to differ materially from
those projected in these forward-looking statements, including, but
not limited to: variability of our revenues and financial
performance; risks associated with technological changes; the
acceptance of our products in the marketplace by existing and
potential customers; disruption of operations or increases in
expenses due to our involvement with litigation or caused by civil
or political unrest or other catastrophic events; general economic
conditions, government mandates; and, the continued employment of
our key personnel and other risks associated with competition.
Plan of Operation
Sector 5, Inc. is committed
to offering the best in value computing solutions for the
education, business, and consumer electronic markets in North
America, and is a devoted member of the Google for Education
partner program utilizing Chrome OS and Android OS. We are an OEM
and ODM with extensive experience working with tier-1 designers,
best-in-class suppliers, and Chinese factories to combine the
strengths of East and West to create products with the latest
technology, that are easy to use, and offer innovative features
such as wireless charging and resilience in extreme environments.
Being a purpose-driven organization is integral to our success,
allowing us to focus on providing reliable market-tailored
solutions that minimize costs of initial deployment and ongoing
operations while maximizing user and administrator productivity,
sets the standards for our commitment to excellent customer support
and key account management, and enables us to have faster time to
market, continue to provide fair pricing, and exceed market
expectations. Sector 5’s promise to the world is defined by our
pursuit of simplicity and innovation, and our commitment to
service.
Sector 5 is now launching
its 3rd Sector 5 E3 Chromebook. Sector 5 entered into a new
manufacturing “Supply Agreement” with authorized Google and Intel
ODM in China. Sector 5 and its manufacturing partners, “best in
class” suppliers, and tier-1 designers are working together to
combine American ingenuity and China’s manufacturing strengths to
create products with the latest technology, innovative features
(rugged designs, spill/drop resistant, portable) and best pricing,
exceeding market expectations. Sector 5 has recently developed a
wireless charging cart solution for laptops, tablets, Chromebooks,
iPads and other mobile devices. Sector 5 has submitted this
technology to the FCC for its approval. Sector 5’s distribution
strategy centers on our competitive advantages in the B2B, retail,
e-commerce, K-12 and Higher Education markets. Building and
maintaining good distribution relationships will be an essential
element of our success. In our product planning efforts, we solicit
input from our sales channels for opportunities as well as
providing them updates on innovations we are developing. The latter
will become increasingly important as we grow our unique portfolio
of products.
Sector 5’s foundation of
success and promise to the world is defined by a pursuit of
simplicity and a commitment to innovation. Quality, reliability and
excellent customer support is an integral component of that
commitment.
Products
The Company has been
focusing on the education market utilizing Chrome and Android
Operating Systems utilizing a Google approval Chromebook. Currently
the Company is obtaining its FCC and CE certifications of a 15-watt
wireless charging solution for its electronics and is in the
process of obtain the proper qualification and testing to
commercialize this new product. With this new technology, the
Company intendeds toto broadly target general consumer retail
channels and possibly other B2B opportunities (e.g. hospitals). The
Company is also in the process of filing patents around the
charging carts solution and other technologies it’s currently
working on. In this phase we will need to carefully and
continuously balance growth in width (number of sales channels and
product sku’s) versus depth (quality of service and support).
Sector 5 has also sold and
delivered almost 153,000 low end smartphones using the Chrome OS.
Sector 5 is focused on delivering Android OS type devices along
with accessories for those devices.
Sector 5 is also bringing in
various curved monitors for business, gamers and education
uses.
We are currently negotiating
contracts with established sales and marketing individuals and
companies who can get Sector 5 branded products placed in the major
retail channels.
During the 4 th
Quarter of this year, we plan to launch a number of products aimed
at the educational market:
|
|
·
|
Chromebooks optimized for
education 11.6” and 13” with 4GLTE Modem (Protypes for all
necessary Government and Google and various Companies
certifications)
|
|
|
·
|
Charging carts wirelessly
with a 15-watt solution for bulk charging and storage of
Chromebooks (various models) The company will be seeking approval
from Google and other PC/iPad/MacBook providers.
|
|
|
·
|
Electronic interactive touch
screen whiteboard utilizing the Chrome OS (1 model)
|
|
|
·
|
Large interactive touch
screens utilizing the Chrome OS (2 models)
|
Our third phase includes
plans to launch the following products, integrating our
intellectual property, through various technologies:
|
|
·
|
Chromebox with camera (our
own patented design) (This devise depends on proper funding)
|
|
|
|
|
|
|
·
|
Obtaining all the necessary
Governmental and Google and related Companies approvals for the
4GLTE Modem for Sector 5 E3 Chromebook or a similar devise.
|
We plan to continuously
explore business opportunities, possibly expanding these product
categories. Using the strength of our current partners
manufacturing capabilities, Sector 5 has identified new product
categories in which our key suppliers will assist in the
development of new products accommodating our ideas and
requirements. Our unique relationships with the leading electronics
suppliers in Shenzhen and throughout China and Taiwan that will
enable us to gain advantages of not only low cost manufacturing but
also achieving the best of the Open Innovation partnership making
it possible for us to realize first-in-market, unique and
affordable products. Shenzhen (called High Tech Zone) is a hub of
Chinese innovation where many of the major Chinese electronics
firms are located. Shenzhen is rapidly becoming the Chinese version
of Silicon Valley. Late in our third phase we plan to create our
first Android 5 portfolio of Smart TV solutions:
|
|
·
|
Sector 5 plans to also take
advantage of US manufacturing capabilities for its wireless
charging solutions
|
|
|
·
|
Creating various sales
channels in modifying existing charging carts of its 15-watt
charging solution
|
|
|
·
|
Smart TV box (possibly
similar hardware as Chromebox).
|
|
|
·
|
Interactive POS Large Screen
Android and Chrome OS devises.
|
|
|
·
|
Android tablets for
education
|
Who We Sell
To
Initially we have been
focused on selling Chromebooks on Amazon and directly to schools,
districts and other education markets.
Sector 5 is establishing
relationships with major distributors in the United States to
assist in selling its Chromebooks. Those relationships also will
assist financing on large orders. While our internal sales staff
ramps up, we intend to broadly target general consumer retail
channels and possibly other B2B opportunities (e.g. hospitals). In
this phase, we will need to carefully and continuously balance
growth in width (# of sales channels and product SKUs) versus depth
(quality of service and support).
Currently, we are entering
into contracts with established sales and marketing companies and
individuals who can get Sector 5 branded products placed in the
major retail channels. We will continuously explore business
opportunities, possibly expanding these product categories. We need
cash for working capital and expansion. Using the strength of our
current partners manufacturing capabilities, Sector 5 has
identified new product categories in which our key suppliers will
assist in the development of new products accommodating our ideas
and requirements. Our unique relationships with the leading
electronics suppliers in China will enable us to gain advantages of
not only low cost manufacturing but also achieving the best of the
Open Innovation partnership making it possible for us to realize
first-in-market, unique and affordable products. Our Chinese office
is located in Shenzhen (called High Tech Zone) and it is the sweet
spot of Chinese innovation. Sector 5 is in the process of obtaining
permission from Google to add a 4GLTE Modem in its Chromebooks.
Quite simply, our initial
goal is to provide Chromebooks and Internet Access for Every
Student
We have brought in grant
writers to help the schools to obtain resources.
Educating America’s Children
utilizing the power of Google and the Chromebook proven technology.
Delivering the latest generation of technology creating a new
market expectation together with unique value added differentiation
and introducing the latest Chromebook defined by Speed, Security
and Simplicity at the best possible price.
Results of Operations
for the Three Months Ended September 30, 2018
Compared to the Three Months Ended September 30, 2017
Revenues
. Sales revenue for the three months ended September 30,
2018 were $5,884,941 as compared to $31,396 for the three months
ended September 30, 2017, an increase of $5,853,545. The increase
in sales for the three months ended September 30, 2018 is the
result of the Company’s change in business model to sell branded
electronic products including the sale of low-end smartphones using
the Chrome OS.
Cost of Goods
Sold. Cost of goods sold for the three months ended
September 30, 2018 were $5,799,265 as compared to $26,211 for the
three months ended September 30, 2017. The increase in cost of
goods sold is in line with the sales mentioned above.
Advertising and
Promotion . Advertising and promotion expenses for
the three months ended September 30, 2018 was $11,362 and $2,824
for the three months ended September 30, 2017, an increase of
$8,538 or 302.3%.
Officer
Compensation. Officer compensation expense for the three
months ended September 30, 2018 was $7,500 as compared to $0 for
the three months September 30, 2017. Officer compensation consists
of $2,500 per month to our CEO.
Professional
Fees . Professional fees for the three months ended
September 30, 2018 were $13,770 as compared to $28,720 for the
three months ended September 30, 2017, a decrease of $14,950 or
52%. Professional fees consist of accounting, audit, legal and
consulting expense. The decrease in the current period is due to a
decrease in consulting expense.
Consulting – Related
Party . During the three months ended September 30,
2018 we incurred $15,000 of consulting expense with a related party
per the terms of an agreement with Sector Five, Inc., a privately
held Delaware corporation, dated January 4, 2018. There was no
related party consulting expense in the prior period.
General and
Administrative Expenses . General and administrative
expenses for the three months ended September 30, 2018 were $58,570
as compared to $11,995 for the three months ended September 30,
2017, an increase of $46,575 or 388.2%. The increase in general and
administrative expenses is due to the process of implementing our
new business model.
Other expense.
Interest expense for the three months ended September 30, 2018 was
$18,604 as compared to $854 for the three months ended September
30, 2017. For the current period we also incurred a loss on the
issuance of a convertible note of $6,682, debt discount
amortization of $200,653 and a loss in change of the fair value of
a derivative of $1,177,658.
Net Loss. Net
loss for the three months ended September 30, 2018 was $1,424,123
compared to $39,208 for the three months ended September 30, 2017.
Net loss increased in the current period due to the $300,000
non-cash expense incurred for the issuance of common stock for
officer compensation and total other expense of $1,403,597.
Results of Operations
for the Nine Months Ended
September 30, 201 8
Compared to the Nine Months
Ended September 30, 201
7
Revenues
. Sales revenue for the nine months ended September 30, 2018
were $6,949,200 as compared to $396,474 for the nine months ended
September 30, 2017. The increase in sales for 2018 is the result of
the Company’s change in business model to sell branded electronic
products including the sale of low-end smartphones using the Chrome
OS.
Cost of Goods
Sold. Cost of goods sold for the nine months ended
September 30, 2018 were $6,861,246 as compared to $387,432 for the
nine months ended September 30, 2017. The increase in cost of goods
sold is the result of the Company’s sales revenue during the nine
months ended September 30, 2018.
Advertising and
Promotion . Advertising and promotion expenses for
the nine months ended September 30, 2018 were $17,502 as compared
to $5,519 for the nine months ended September 30, 2017, an increase
of $11,983 or 217%.
Officer
Compensation. Officer compensation expense for the nine
months ended September 30, 2018 was $320,000 as compared to $0 for
the nine months September 30, 2017. During the nine months ended
September 30, 2018, the company issued 1,000,000 shares of common
stock for total non-cash expense of $300,000. There was no such
expense in the prior period.
Professional
Fees . Professional fees for the nine months ended
September 30, 2018 were $87,982 as compared to $115,590 for the
nine months ended September 30, 2017, a decrease of $27,608 or
23.8%. The decrease in professional fees is due to decreased
consulting expense for the nine months.
Consulting – Related
Party . During the nine months ended September 30,
2018 we incurred $45,000 of consulting expense with a related party
per the terms of an agreement with Sector Five, Inc., a privately
held Delaware corporation, dated January 4, 2018. There was no
related party consulting expense in the prior period.
General and
Administrative Expenses . General and administrative
expenses for the nine months ended September 30, 2018 were $136,225
as compared to $45,709 for the nine months ended September 30,
2017, an increase of $90,516 or 198%. The increase in selling,
general and administrative expenses is due to the implementation of
a new plan of operations to sell branded electronic products.
Other expense.
Interest expense for the nine months ended September 30, 2018 was
$28,008 as compared to $3,431 for the nine months ended September
30, 2017. For the current period we also incurred a loss on the
issuance of a convertible note of $455,043, debt discount
amortization of $296,108 and a gain in change of the fair value of
a derivative of $1,094,930.
Net Loss. Net
loss for the nine months ended September 30, 2018 was $2,392,844
compared to $164,170 for the nine months ended September 30, 2017.
Net loss increased in the current period due to the $300,000
non-cash expense incurred for the issuance of common stock for
officer compensation as well as and total other expense of
$1,874,089.
Liquidity and Capital Resources
The Company has not yet
established an ongoing source of revenue sufficient to cover its
operating costs and allow it to continue as a going concern. The
ability of the Company to continue as a going concern is dependent
on the Company obtaining adequate capital to fund operating losses
until it becomes profitable. If the Company is unable to obtain
adequate capital, it could be forced to cease operations. These
factors raise substantial doubt about the Company’s ability to
continue as a going concern.
In order to continue as a
going concern, the Company will need, among other things,
additional capital resources.
Net Cash Used in
Operating Activities
We used $561,671 of cash in
operating activities for the nine months ended September 30, 2018,
compared to $66,514 for the nine months ended September 30,
2017.
Net Cash Used in
Investing Activities
We haven’t used any funds
for investing activities for the nine months ended September 30,
2018 or 2017.
Net Cash Provided by
Financing Activities
Net cash provided by
financing activities during the nine months ended September 30,
2018 was $562,226. We received $742,250 of proceeds from
convertible noted payable, $31,626 from related parties and repaid
$211,650 of related party debt. Net cash provided by financing
activities was $65,649 during the nine months ended September 30,
2017, of which all was from related party loans.
On April 16, 2018, the
Company executed a convertible promissory note with Auctus Fund,
LLC for $350,000. The note bears interest at 10% per annum and
matures on January 16, 2019. The Company received $322,250 net of
OID and applicable fees.
On July 31, 2018, the
Company executed a convertible promissory note with Auctus Fund,
LLC for up to $1,500,000. Total consideration for Note is up to
$1,392,500 ($1.5mil less $107,500 OID). The note bears interest at
10% per annum and matures twelve months from the effective date of
each tranche. The first tranche of $420,000, net of $80,000 of OID
and fees was received on August 7, 2018. Refer to Note 7 for
additional detail.
The second tranche of
$212,250, net of $20,250 of OID and fees was received on October 3,
2018.
Critical Accounting Policies and
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 the disclosure of contingent assets and
liabilities of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Note 2 to the Financial Statements describes the
significant accounting policies and methods used in the preparation
of the Financial Statements. Estimates are used for, but not
limited to, contingencies and taxes. Actual results could differ
materially from those estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions, and
estimates used in the preparation of the Financial Statements.
We are subject to various
loss contingencies arising in the ordinary course of business. We
consider the likelihood of loss or impairment of an asset or the
incurrence of a liability, as well as our ability to reasonably
estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when management concludes
that it is probable that an asset has been impaired, or a liability
has been incurred and the amount of the loss can be reasonably
estimated. We regularly evaluate current information available to
us to determine whether such accruals should be adjusted.
We recognize deferred tax
assets (future tax benefits) and liabilities for the expected
future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities. The
deferred tax assets and liabilities represent the expected future
tax return consequences of those differences, which are expected to
be either deductible or taxable when the assets and liabilities are
recovered or settled. Future tax benefits have been fully offset by
a 100% valuation allowance as management is unable to determine
that it is more likely than not that this deferred tax asset will
be realized.
Off Balance Sheet
Arrangements
We have not entered into any
off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources
and would be considered material to investors.
Material Commitments
None.
Recent Accounting
Pronouncements
The Company has implemented
all new accounting pronouncements that are in effect. These
pronouncements did not have any material impact on the financial
statements unless otherwise disclosed, and the Company does not
believe that there are any other new accounting pronouncements that
have been issued that might have a material impact on its financial
position or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Disclosure under this section is not
required for a smaller reporting company.
Item 4. Controls and
Procedures
We maintain disclosure
controls and procedures that are designed to ensure that the
information required to be disclosed in the reports that we file
under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules
and forms, and that such information is accumulated and
communicated to our management, including our President and
Treasurer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control
objectives, and in reaching a reasonable level of assurance,
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
As required by SEC Rule
13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our President
and Treasurer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, our chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective at the reasonable
assurance level as of September 30, 2018. It should be noted that
the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how
remote.
Management’s Remediation
Initiatives
In an effort to remediate
the identified material weaknesses and other deficiencies and
enhance our internal controls, we plan to initiate the following
series of measures once we have the financial resources to do
so:
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We will create a position to
segregate duties consistent with control objectives and will
increase our personnel resources and technical accounting expertise
within the accounting function when funds are available to us. And,
we plan to appoint one or more outside directors to an audit
committee resulting in a fully functioning audit committee, which
will undertake the oversight in the establishment and monitoring of
required internal controls and procedures, such as reviewing and
approving estimates and assumptions made by management when funds
are available to us.
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Management believes that the
appointment of outside directors to a fully functioning audit
committee, would remedy the lack of a functioning audit
committee.
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Changes in Internal Control Over
Financial Reporting
There were no changes in our
internal controls over financial reporting that occurred during the
period covered by this report, which were identified in connection
with management’s evaluation required by paragraph (d) of Rules
13a-15 and 15d-15 under the Exchange Act, that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER
INFORMATION
Item 1. Legal
Proceedings
There are not presently any
material pending legal proceedings to which the Company is a party
or as to which any of our property is subject, and no such
proceedings are known to the Company to be threatened or
contemplated against it.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4. Mine Safety
Disclosures
Not applicable.
Item 5. Other
Information
None.
ITEM 6. EXHIBITS
Part I Exhibits
Part II Exhibits
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No.
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Description
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Calculation Linkbase
Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
Document
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101.LAB
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XBRL Taxonomy Label Linkbase Document
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101.PRE
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XBRL Taxonomy Presentation Linkbase
Document
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SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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SECTOR 5, INC.
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| DATE: November 19, 2018 |
By: |
/s/ Erick
Kuvshinikov |
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Erick Kuvshinikov |
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Chief Executive Officer and President |
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(Principal Accounting Officer |
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and Authorized Officer)
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