Quarterly Report (10-q)

Table of Contents

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended March 31, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

VITALIBIS, INC.

(Exact name of registrant issuer as specified in its charter)

Nevada		30-0828224
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3960 Howard Hughes Parkway Suite 500

Las Vegas, NV 89169

(Address of principal executive offices)

702-944-9620

Registrant’s phone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

None

Name of each exchange on which registered:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files). YES ☐ NO ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐	Smaller reporting company	☒
		Emerging growth company	☒

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at May 12, 2020
Common Stock, $.001 par value		57,742,555

INDEX

		Page No.

PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS:	3
	Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited)		4
	Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited)		5
	Statements of Changes in Shareholders' Equity (Deficit) for the three months ended March 31, 2020 and 2019 (unaudited)		6
	Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)		7
	Notes to Financial Statements (unaudited)		8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		24

ITEM 4.	CONTROLS AND PROCEDURES		24

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		26

ITEM 1A.	RISK FACTORS		26

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		26

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		26

ITEM 4.	MINE SAFETY DISCLOSURE		26

ITEM 5.	OTHER INFORMATION		26

ITEM 6.	EXHIBITS		26

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

VITALIBIS, INC.

INDEX TO FINANCIAL STATEMENTS

Balance Sheets at March 31, 2020 and December 31, 2019 (unaudited)	4

Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)	5

Statements of Changes in Shareholders' Equity (Deficit) for the three months ended March 31, 2020 and 2019 (unaudited)	6

Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)	7

Notes to Financial Statements (unaudited)	8

3

VITALIBIS, INC.

BALANCE SHEETS

(UNAUDITED)

	March 31,			December 31,
	2020			2019

ASSETS
Current assets:
Cash	$	11,635		$	65,615
Accounts receivable, net		–			1,687
Prepaid expenses		18,591			86,390
Inventory		357,391			270,732
Total current assets		387,617			424,424

Long term assets
Website development, net		75,697			90,378

Total assets	$	463,314		$	514,802

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities	$	132,691		$	77,933
Unsecured notes payable		2,800			13,617
Derivative liability		769,184			470,331
Current portion of convertible notes payable, net		1,182,605			922,690
Total current liabilities		2,087,280			1,484,571

Convertible notes payable, net		158,939			225,624

Total liabilities		2,246,219			1,710,195

COMMITMENTS AND CONTINGENCIES

Stockholders' deficit:
Preferred stock; $.001 par value, 5,000,000 shares authorized, none issued and outstanding
Series A Preferred Stock, $0.001 par value, 1,000,000 shares authorized, 1,000,000 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		1,000			1,000
Common stock; $.001 par value, 195,000,000 shares authorized, 35,298,085 shares issued and 32,383,196 shares issued outstanding as of March 31, 2020 and December 31, 2019, respectively		35,298			32,383
Additional paid-in capital		8,505,793			8,170,692
Accumulated deficit		(10,324,996	)		(9,399,468	)
Total stockholders’ deficit		(1,782,905	)		(1,195,393	)

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	463,314		$	514,802

The accompanying notes are an integral part of these unaudited financial statements.

4

VITALIBIS, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

	For the Three Months Ended
	March 31,
	2020			2019

Revenue	$	50,162		$	139,585
Cost of Goods Sold		(21,618	)		(88,497	)

Gross Profit		28,544			51,088

Operating expenses:
Selling, general and administrative expenses		186,576			2,448,406
Professional fees		43,196			47,841

Loss from operations		(201,228	)		(2,445,159	)

Interest expense		(396,576	)		(3,340	)
Derivative gain (loss)		(327,724	)		–

Loss before provision for income taxes		(925,528	)		(2,448,499	)
Provision for income taxes		–			–

Net loss	$	(925,528	)	$	(2,448,499	)

Net loss per common share – basic and diluted	$	(0.03	)	$	(0.08	)

Weighted average common shares outstanding – basic and diluted		32,765,279			30,165,622

The accompanying notes are an integral part of these unaudited financial statements.

5

VITALIBIS, INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

	Series A Preferred Stock				Common stock				Additional
	Number of				Number of				paid-in		Accumulated
	Shares		Amount		Shares		Amount		capital		deficit			Total

Balance at December 31, 2019		1,000,000	$	1,000		32,383,196	$	32,383	$	8,170,692	$	(9,399,468	)	$	(1,195,393	)

Shares issued for services		–		–		50,000		50		62,095		–			62,145
Shares issued for conversion of notes payable		–		–		2,864,889		2,865		94,135		–			97,000
Extinguishment of derivative liability due to conversion		–		–		–		–		178,871		–			178,871
Net loss		–		–		–		–		–		(925,528	)		(925,528	)
Balance at March 31, 2020		1,000,000	$	1,000		35,298,085	$	35,298	$	8,505,793	$	(10,324,996	)	$	(1,782,905	)

	Share Capital				Common stock				Additional
	Number of				Number of				paid-in		Accumulated
	Shares		Amount		Shares		Amount		capital		deficit			Total

Balance at December 31, 2018		–	$	–		29,638,900	$	29,639	$	2,913,903	$	(2,553,524	)	$	390,018

Shares and warrants issued for services		–		–		857,500		857		2,230,534		–			2,231,391
Net loss		–		–		–		–		–		(2,448,499	)		(2,448,499	)
Balance at March 31, 2019		–	$	–		30,496,400	$	30,496	$	5,144,437	$	(5,002,023	)	$	172,910

The accompanying notes are an integral part of these unaudited financial statements.

6

VITALIBIS, INC.

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

	For the Three Months Ended
	March 31,
	2020			2019
Cash flow from operating activities:
Net loss	$	(925,528	)	$	(2,448,499	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization expense		14,681			14,681
Amortization of debt discount and deferred financing costs		365,230			5,688
Derivative gain (loss)		327,724			–
Stock-based compensation		62,145			2,231,391
Changes in operating assets and liabilities:
Accounts receivables		1,687			(90	)
Inventory		(86,659	)		34,600
Prepaid expenses		67,799			1,234
Deferred revenue		–			(105,159	)
Accounts payable and accrued liabilities		54,758			(19,694	)
Net cash used in operating activities		(118,163	)		(285,848	)

Cash flow from financing activities:
Proceeds from convertible notes payable		78,000			188,000
Payment of deferred financing costs		(3,000	)		(6,000	)
Repayments on unsecured notes payable		(10,817	)		(7,452	)
Net cash provided by financing activities		64,183			174,548

NET CHANGE IN CASH		(53,980	)		(111,300	)
CASH AT BEGINNING OF PERIOD		65,615			171,979
CASH AT END OF PERIOD	$	11,635		$	60,679

Supplemental disclosure of cash flow information:
Cash paid for interest	$	225		$	184
Cash paid for income taxes	$	–		$	–

Non-cash transactions
Discount on convertible notes payable	$	150,000		$	21,000
Common stock issued for conversion of notes payable	$	97,000		$	–
Extinguishment of derivative liability from conversion of notes payable	$	178,871		$	–
Increase in convertible notes payable due to default	$	316,000		$	–

The accompanying notes are an integral part of these unaudited financial statements.

7

VITALIBIS, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – ORGANIZATION AND GOING CONCERN

Vitalibis (the “Company”) was formed on April 11, 2014 as a Nevada corporation, under the name of Crowd 4 Seeds, Inc. We plan to focus on the development, sale and distribution of hemp oil-based products that contain naturally occurring cannabinoids, including cannabidiol ("CBD") and other products containing CBD-rich hemp oil (“Legal Hemp”). We leverage our proprietary technology platform to maximize our innovative micro-influencer sales model, which fosters engaged customer connections.

On January 18, 2018, our Board of Directors approved an agreement and plan of merger to merge with and into our wholly-owned subsidiary, Vitalibis, Inc., a Nevada corporation, and our name changed from Sheng Ying Entertainment Corp. to Vitalibis, Inc. Vitalibis, Inc. was formed solely to effect the change of name and conducted no operations.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and generated negative cash flows from operations since inception. Due to these conditions, it raised substantial doubt about its ability to continue as a going concern. Management intends to finance operating costs over the next twelve months with existing cash on hand, loans, loans from directors and, or, the sale of common stock. The financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed in the preparation of the financial statements are as follows:

Basis of Presentation

The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring adjustments) to present the financial position of the Company as of March 31, 2020 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the full fiscal year. These financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent year ended December 31, 2019 have been omitted.

Inventories

Inventory is manufactured at third party facilities. Inventories are stated at the lower of cost or net realizable value, using the first-in, first-out method. The Company reviews its inventory for obsolescence and any inventory identified as obsolete is reserved or written off. The Company’s determination of obsolescence is based on assumptions about the demand for its products, product expiration dates, estimated future sales, and management’s future plans.

8

As of March 31, 2020 and December 31, 2019, inventory consists of the following components:

	March 31, 2020		December 31, 2019
Raw materials and supplies	$	44,515	$	44,515
Finished products		312,876		226,217
Total inventory	$	357,391	$	270,732

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:

·

Identification of the contract with a customer

·

Identification of the performance obligations in the contract

·

Determination of the transaction price

·

Allocation of the transaction price to the performance obligations in the contract

·

Recognition of revenue when, or as, the Company satisfies a performance obligation

All of the Company’s revenue is currently generated from the sales of similar products. As such no further disaggregation of revenue information is provided.

Performance Obligations

Product sales are recognized all of the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectibility is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. Payment is received before shipment of the product. Net revenues comprise gross revenues less customer discounts and allowances, actual and expected returns. Shipping charges billed to customers are included in net sales. Various taxes on the sale of products and enrollment packages to customers are collected by the Company as an agent and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority. The Company allows for customers to return unopened products within 45 days. During the three months ended March 31, 2020, there were a trivial amount of refunds processed for returned product.

9

Contract Costs

Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services.

Contract Liabilities

The Company may at times receive payment by credit card at the time customer places an order. Amounts received for undelivered product are considered a contract liability and are recorded as deferred revenue. As of March 31, 2020 and December 31, 2019, the Company had no deferred revenue related to unsatisfied performance obligations.

Cost of Sales

Cost of sales includes all of the costs to purchase and assemble the Company’s products. Products are manufactured for the Company by third-party contractors, such costs represent the amounts invoiced by the contractors. Additionally, shipping costs are included in Cost of Sales in the Statements of Operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include advertising and promotional costs and research and development costs. Also included in Selling, general and administrative expenses are stock-based compensation, certain warehousing fees, non-manufacturing overhead, personnel and related expenses, rent on operating leases, and professional fees.

Advertising and promotional costs are expensed as incurred and totaled $276 and $3,848 in the three months ended March 31, 2020 and 2019, respectively. Research and development costs are expensed as incurred. There were no research and development costs during the three months ended March 31, 2020 and 2019.

Website Development Cost

The Company capitalizes certain development costs associated with internal use software incurred during the application development stage. The Company expenses costs associated with preliminary project phase activities, training, maintenance and any post-implementation period costs as incurred. Capitalization of qualifying application development cost begins when management authorized and commits to funding the project and it is probable that the project will be completed for the function intended. Capitalized internal use software costs are normally amortized over estimated useful lives ranging from 2 to 5 years once the related project has been completed and deployed for customer use. At time the software is considered to have be an indefinite lived asset in which case it is evaluated for impairment at least annually. Capitalized costs are related to the development of our website and customer portal. The Company amortizes capitalized costs over an estimated useful life of three years. Amortization expense for the three months ended March 31, 2020 and 2019 was $14,681.

Recently Issued Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

10

NOTE 3 – UNSECURED NOTE PAYABLE

During the year ended December 31, 2019, the Company entered into two insurance financing arrangements. The first agreement was for a value of $32,875, bearing interest at 8.25%. The Company made a down payment of $8,406 and makes monthly payments of $2,813 through April 2020. The outstanding balance as of March 31, 2020 was $2,800. The second agreement was for a value of $10,312 bearing an interest rate of 12.6%. The Company made a down payment of $2,897 and makes monthly payments of $868 through March 2020. The outstanding balance of this agreement was $0 as of March 31, 2020.

NOTE 4 – CONVERTIBLE NOTES PAYABLE

On March 29, 2019, the Company entered into an unsecured convertible promissory note which allowed for up to $750,000 of principal, with a total original issue discount of up to $150,000, with a principal amount of $250,000. In April 2019, the Company received net cash proceeds of $200,000 after an original issue discount of $50,000. In July 2019, the Company received additional proceeds of $200,000 after an original issue discount of $50,000, and received an additional $200,000 of net proceeds after $50,000 original issue discount in August 2019. The convertible note bears interest at 8% and all principal amounts matured on September 30, 2019, with interest accruing at a rate of 22% if the Company is in default. Beginning at the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is the lesser of $2 or 70% of the lowest trading price during the 30 trading days prior to the conversion date. During the year ended December 31, 2019, the lender converted $50,000 of principal into 714,296 shares of common stock in accordance with the terms of the agreement. During the three months ended March 31, 2020, the lender converted $68,000 of principal into 1,922,581 shares of common stock. The conversions were in accordance with the terms of the note and no gain or loss was recognized.

On March 13, 2020, the lender provided the Company with notice of default of the convertible promissory note. In accordance with the terms of the agreement, an additional $316,000 of principal became due and payable, and the Company began accruing interest expense at the default rate of 22%. The additional principal was recorded as debt discount and amortized to interest expense immediately. As of March 31, 2020, there is $948,000 of principal outstanding on this convertible promissory note in default.

On September 6, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $153,000. The Company received net cash proceeds of $150,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on September 6, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. The Company determined that the conversion features should be accounted for as a derivative liability at the time of issuance of the notes. Unamortized discount and deferred financing costs were $115,800 as of March 31, 2020 related to this convertible note. During the three months ended March 31, 2020, the holder converted $29,000 of principal into 942,308 shares of common stock. These conversions were in accordance with the terms of the note and no gain or loss was recognized. There is $124,000 of principal remaining on this convertible note after these conversions.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on November 25, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $2,479 as of March 31, 2020 related to this convertible note.

11

On April 29, 2020, the Company received a notice of default from the holder of the September 6, 2019 convertible note payable, the November 25 ,2019 convertible note payable with $78,000 of principal and the February 7, 2020 convertible note payable, as a result of insufficient shares authorized to settle conversion of these notes payable. As a result of the default notice, each of these notes became due and payable immediately, interest is accrued at the default rate of 22%, and the principal balance outstanding at the time of default is doubled. The total debt outstanding on these notes after giving effect to the default is $463,000.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $150,000. The Company received net cash proceeds of $131,000 after an original issue discount of $15,000 and fees of $4,000. The convertible note bears interest at 5% and matures on November 25, 2020, with interest accruing at a rate of 15% if the Company is in default. The note is convertible upon issuance through the maturity date into shares of common stock at a fixed price of $1.00 per share to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Beginning six months after the issuance of the note, the holder may convert the note at any time, at a price based on the lower of the fixed price of $1.00 per share or 75% of the lowest trading price during the 15 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $10,539 as of March 31, 2020 related to this convertible note.

On December 10, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $110,000. The Company received net cash proceeds of $97,000 after an original issue discount of $10,000 and fees of $3,000. The lender also received 35,000 shares of common stock as a deferred finance cost, with a fair value of $8,407. The convertible note bears interest at 10% and matures on December 10, 2020, with interest accruing at a rate of 24% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on the lessor of 1) $0.24, or 2) the lesser of 62% of the lowest trade price or the closing bid price during the 20 trading days prior to the conversion date. Unamortized discount and deferred financing costs were $14,856 as of March 31, 2020 related to this convertible note.

On February 7, 2020, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on February 7, 2022, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date.

The following table summarizes outstanding convertible notes as of March 31, 2020 and December 31, 2019:

	March 31, 2020			December 31, 2019
Convertible note dated March 29, 2019, maturing September 30, 2019	$	948,000		$	700,000
Convertible note dated September 6, 2019, maturing September 6, 2021		124,000			153,000
Convertible note dated November 25, 2019, maturing November 25, 2021		78,000			78,000
Convertible note dated November 25, 2019, maturing November 25, 2020		150,000			150,000
Convertible note dated December 10, 2019, maturing December 10, 2020		110,000			110,000
Convertible note dated February 7, 2020, maturing February 7, 2022		78,000			–
Total		1,488,000			1,191,000
Debt discount and deferred finance costs on long-term convertible notes		(121,061	)		(5,376	)
Debt discount and deferred finance costs on short-term convertible notes		(25,395	)		(37,310	)
Current convertible notes payable, net of discount		(1,182,605	)		(922,690	)

Total long-term convertible notes payable, net	$	158,939		$	225,624

12

The following table presents information about the Company’s liabilities measured at fair value on a recurring basis and the Company’s estimated level within the fair value hierarchy of those assets and liabilities as of March 31, 2020 and December 31, 2019:

Fair value measured at March 31, 2020
	Total carrying value at March 31, 2020		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant Unobservable inputs (Level 3)
Liabilities:
Derivative liabilities	$	769,184	$	–	$	–	$	769,184

Fair value measured at December 31, 2019
	Total carrying value at December 31, 2019		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant Unobservable inputs (Level 3)
Liabilities:
Derivative liabilities	$	470,331	$	–	$	–	$	470,331

The fair values of derivatives at the date of issuance during the three months ended March 31, 2020 were estimated using a Black Scholes model and the following assumptions: volatility of between 53% and 65% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of three months to one and a half years, an exercise price of between $0.028 and $0.06825, and a risk-free rate of between 0.28% and 0.63%.

The fair value of derivatives as of March 31, 2020 was estimated using a Black Scholes model and the following assumptions: volatility of 59% and 81% based on a peer group of comparable companies, a dividend yield of 0%, an expected term of between three months and one and a half years, an exercise price of $0.0.0195-$0.021, and a risk-free rate of 0.11-0.20%. There were no transfers between Level 1, 2 or 3 during the three months ended March 31, 2020. As of March 31, 2020, outstanding convertible debt principal is convertible into 51,501,832 shares of common stock.

The table below presents the change in the fair value of the derivative liability during the three months ended March 31, 2020:

Fair value as of December 31, 2019	$	470,331
Fair value on the date of issuance recorded as a debt discount		150,000
Fair value on the date of issuance recorded as a loss on derivative		42,827
Extinguishment of liability due to conversion to equity		(178,871	)
Loss on change in fair value of derivatives		284,897
Fair value as of March 31, 2020	$	769,184

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NOTE 5 – COMMITMENTS AND CONTINGENCIES

Our principal office is part of a group of executive suites. We pay $130 per month for our offices, on a month-to-month basis. In July 2018, the Company also began renting a shared office space for $175 per month on a month to month basis.

In April 2018, the Company entered into an agreement with a third party for a subscription to its e-commerce platform. The Company paid $3,000 for implementation and pays $2,000 per month, with an initial term of one year. After the initial term, the monthly fee may increase depending on the Company’s level of sales through the platform.

During the year ended December 31, 2019, the Company entered an agreement whereby the Company pays a contractor $2,000 per month for a six month term, and the contractor may also receive shares of common stock depending on certain performance targets as discussed in Note 6.

NOTE 6 – STOCKHOLDERS’ DEFICIT

Preferred Stock

The Company has 5,000,000 shares of Preferred Stock authorized. On November 18, 2019, the Company’s Board of Directors designated 1,000,000 of those preferred shares as “Series A Preferred Stock.” Each share of Series A Preferred Stock has voting rights equal to 250 shares of common stock, with a total of 250,000,000 votes available to holders of the Series A Preferred Stock. The Series A Preferred Stock has no conversion rights, no dividend rights and no liquidation preference. The Board of Directors concurrently authorized the issuance of 500,000 shares of Series A Preferred Stock each to Steven Raack, the Company’s Chief Executive Officer, and Thomas Raack, the Company’s Chief Financial Officer.

Common Stock

On November 22, 2019, a majority of the Company’s shareholders approved an increase in the authorized common shares from 112,500,000 to 195,000,000.

During the years ended December 31, 2019 and 2018, the Company entered into various agreements with third parties to provide legal, consulting and marketing services. These agreements generally contain performance conditions such as the completion of certain milestones and sales targets through January 2021. Certain agreements contained service conditions grants of common stock upon signing the agreement, or at recurring periods of 90 days. The Company begins recognizing compensation cost for performance awards when the satisfaction of the performance milestone considered probable. Any awards with service only conditions are recognized over the requisite service period. Certain of these agreements also awarded common stock warrants, which are disclosed below under “Common Stock Warrants”

The following table summarizes the common share activity related to these agreements for the three months ended March 31, 2020:

	Three Months Ended March 31, 2020
Common shares to be issued, beginning balance		1,747,500
Shares awarded for potential future issuance		50,000
Forfeited		(375,000	)
Shares issued		(50,000	)
Remaining shares to be issued, ending balance		1,372,500

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In February 2020, the Company issued 50,000 shares of common stock to advisors under 2019 agreements. During the three months ended March 31, 2020 and 2019, the Company recognized expense of $62,145 and $2,231,391, respectively related to these awards. As of March 31, 2020, the Company expects to recognize a total of $1,995,947 of expense related to the above shares that have not yet vested, assume all vest.

Bruce Lee Beverage Agreement

On December 31, 2018, the Company entered into a business alliance agreement with Bruce Lee Beverage, LLC. (“BLB”). Under the terms of the agreement, the parties will develop a new product utilizing the intellectual property of BLB, with an initial term of five years and automatic five-year renewals thereafter unless terminated by either party with 120 days’ prior written notice. The Company issued 150,000 shares of common stock to BLB on December 31, 2018, and an additional 350,000 shares in January 2019, which are included in the table above.

The Company also issued 1,500,000 warrants in January 2019, with an exercise price of $1.01 per share, with 500,000 vesting upon issuance. BLB can receive up to an additional 1,000,000 shares of common stock, and vest in the remaining 1,000,000 warrants as follows:

·

500,000 shares of common stock and 500,000 warrants will vest upon approval of co-branded product formula, packaging and marketing strategy; execution of licensing agreement between the two parties; and commencement of a mutually agreed upon marketing campaign.

·

250,000 shares of common stock and 250,000 warrants will vest upon sale of 10,000 units of the new product.

·

250,000 shares of common stock and 250,000 warrants will vest upon sale of 30,000 units of the new product.

In June 2019, the Company and BLB executed the license agreement referred to in the first milestone above and the launch of the co-branded product, which began sales in July 2019. The license agreement has a term of 3 years, and specifies that the Company will pay royalties to BLB related to sales of the underlying product as follows:

·

20% of any net sales up to $499 through BLB’s customers;

·

25% of any net sales of between $500 and $999 through BLB’s customers;

·

30% of any net sales exceeding $1,000 through BLB’s customers;

·

5% of net sales on sales up to $2,499 by the Company’s Level 1 Ambassadors;

·

7% of net sales on sales between $2,500 and $4,999 by the Company’s Level 1 Ambassadors;

·

10% of net sales on sales exceeding $5,000 by the Company’s Level 1 Ambassadors;

·

5% of net sales on any sales by the Company’s Level 2 Ambassadors.

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Pursuant to the terms of milestone, the Company issued 500,000 shares of common stock and 500,000 warrants to BLB in June 2019.

During the three months ended March 31, 2020 and 2019, the Company paid a total of $269 and $0, respectively, for royalties earned under the agreement.

Common Stock Warrants

Certain of the agreements noted above also awarded common stock purchase warrants to certain third parties. These warrants are earned upon the recipient earning certain performance metrics. Certain of the agreements issued warrants to the recipient upon execution of the agreement.

The following table summarizes warrant activity for the three months ended March 31, 2020:

Common Stock Warrants

Shares

Weighted
Average
Exercise
Price

Weighted
average
Remaining
Life in years

Outstanding at December 31, 2019

4,440,000

$

1.33

2.6

Granted

–

Cancelled

–

Expired

–

Exercised

–

Outstanding at March 31, 2020

4,440,000

$

1.33

2.30

Exercisable at March 31, 2020

1,334,000

$

1.13

1.35

As of March 31, 2020, the outstanding and exercisable warrants had no intrinsic value. The Company recognized compensation expense of $0 and $175,082 during the three months ended March 31, 2020 and 2019, respectively related to the warrants. The Company expects to recognize a total of $1,547,148 of expense related to all warrants that have not yet vested, assume all vest.

NOTE 7 – LOSS PER COMMON SHARE

The basic net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the weighted average number of common shares during the year. The diluted net loss per common share is calculated by dividing the Company's net loss available to common shareholders by the diluted weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is the basic weighted number of common shares adjusted for any potentially dilutive debt or equity. As of March 31, 2020, diluted net earnings (loss) per common share excludes any impact from the 4,400,000 warrants outstanding (including 1,334,000 that are exercisable as of March 31, 2020), and 51,501,832 shares of common stock issuable under notes payable that are convertible as of March 31, 2020 as their impact would be antidilutive. As of March 31, 2019, diluted net earnings (loss) per common share excludes any impact from the 3,500,000 warrants outstanding (including 834,000 that are exercisable as of March 31, 2019) as their impact would be antidilutive.

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	Three Months Ended March 31,
	2020			2019
Numerator:
Net loss	$	(925,528	)	$	(2,448,499	)
Denominator

Denominator for basic and diluted net loss per common share - weighted average of common shares		32,765,279			30,165,622
Basic and diluted net loss per common share attributed to stockholders	$	(0.03	)	$	(0.08	)

NOTE 8 – TRANSACTION WITH RELATED PARTIES

In March 2018, the Company entered into an Agreement with VOTOCAST, INC. dba newkleus, a California corporation formed and owned by Steven Raack, the President, CEO and a Director of the Company. The Company received an exclusive license in the cannabis industry for the state-of-the-art newkleus™ technology to (1) facilitate Vitalibis’ micro-influencer sales model, and (2) enhance and compliment Vitalibis’ social media strategy.

The Agreement grants Vitalibis an exclusive license for the newkleus patent-pending, user-generated content (UGC) technology for all applications in the cannabis industry. The integration of the newkleus technology allows Vitalibis to create an interactive digital community, while concurrently acquiring valuable user data and content, all of which Vitalibis anticipates will (1) increase customer acquisition and retention and (2) build direct, meaningful and loyal customer relationships.

The Company paid 200,000 shares upon execution of the agreement and a monthly fee ranging from $0 to $2,000 depending on volume of usage. In addition, newkleus provides operational and business development consulting services.

The Company has not paid any fees under this agreement to date.

NOTE 9 – SUBSEQUENT EVENTS

On April 29, 2020, the Company received a notice of default from the holder of the September 6, 2019 convertible note payable, the November 25,2019 convertible note payable with $78,000 of principal and the February 7, 2020 convertible note payable, as a result of insufficient shares authorized to settle conversion of these notes payable. As a result of the default notice, each of these notes became due and payable immediately, interest is accrued at the default rate of 22%, and the principal balance outstanding at the time of default is doubled.

In April and May 2020, the holder of the September 6, 2019 convertible promissory note converted $124,000 of principal and $7,650 of accrued interest into 19,158,756 shares of common stock, retiring the note in full. Also in April 2020, the holder of the March 29, 2019 convertible promissory note that is currently in default converted $23,000 of principal into 3,285,714 shares of common stock.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this report.

Company Overview

The Company

Vitalibis® is a socially conscious brand focused on people, products and the planet. We are a technology-based formulator of premium, full spectrum phytocannabinoid rich hemp products with naturally occurring cannabidiol (CBD), along with safe personal care and nutritional products. Our Ambassador program combines critical elements of social selling, ecommerce and affiliate marketing into one highly focused business system which empowers our people and social mission-driven ecosystem.

Operations

We market and sell consumer products containing full spectrum phytocannabinoid rich hemp oil with naturally occurring CBD under our Vitalibis® brand in a range of market sectors including wellness, and personal care. We currently distribute 8 Vitalibis® branded products and we expect to continue to add new products to our Vitalibis® portfolio to enhance our line of full spectrum phytocannabinoid rich hemp products with naturally occurring cannabidiol (CBD) and hemp-related consumer products. We also expect to develop and launch new brands under the Vitalibis® product development umbrella to more effectively market and sell certain products. We also sell water soluble full spectrum phytocannabinoid rich hemp powder with naturally occurring cannabidiol (CBD) acquired through our supply relationships in the United States to various customers that produce products for resale into the market. We also began offering non-exclusive leases of our proprietary Vitalibis® technology back-end, which is being offered as a Software as a Service (SaaS) platform.

We seek to take advantage of an emerging worldwide trend to re-energize the production of industrial hemp and to foster its many uses for consumers. Historically cultivated for industrial and practical purposes, hemp is used today for textiles, paper, auto parts, biofuel, cosmetics, animal feed, nutritional supplements, and much more. The market for hemp-derived products is expected to increase substantially over the next five years, and we believe Vitalibis® is well positioned to have a demonstrable impact on the rapidly emerging hemp industry.

Hemp-derived CBD is one of at least 80 cannabinoids found in hemp and is non-psychoactive. Our U.S. based supplier oversees our raw material supply chain and raw material processing. Our internal team manages product development and manufacturing, and sales and marketing. We will continue to scale-up our processing capability to accommodate new products in our pipeline.

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We expect to realize revenue to fund our working capital needs through the sale of finished products and raw materials to third parties. However, in order to fund our product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to raise sufficient additional capital to fund our product development efforts, we may need to curtail or delay such activity.

We are an emerging growth company as defined in Section 2(a)(19) of the Securities Act. We will continue to be an emerging growth company until: (i) the last day of our fiscal year during which we had total annual gross revenues of $1,000,000,000 or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed to be a large accelerated filer, as defined in Section 12b-2 of the Exchange Act.

As an emerging growth company, we are exempt from:

Section 14A (a) and (b) of the Exchange Act, which requires companies to hold stockholder advisory votes on executive compensation and golden parachute compensation;

The requirement to provide in any registration statement periodic report or other report to be filed with the Securities and Exchange Commission, certain modified executive compensation disclosure under Item 402 of Regulation S-K or selected financial data under Item 301 of Regulation S-K for any period before the earliest audited period presented in our initial registration statement;

Compliance with new or revised accounting standards until those standards are applicable to private companies;

The requirement under Section 404(b) of the Sarbanes-Oxley Act of 2002 to provide auditor attestation of our internal controls and procedures; and

Any Public Company Accounting Oversight Board ("PCAOB") rules regarding mandatory audit firm rotation, or an expanded auditor report and any other PCAOB rules subsequently adopted, unless the Securities and Exchange Commission determines the new rules are necessary for protecting the public.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the Jumpstart Our Business Startups Act.

Vitalibis, Inc. (the “Company”) was formed on April 11, 2014, as a Nevada corporation, under the name Crowd 4 Seeds, Inc. On January 9, 2017, the Company filed a certificate of amendment to its Certificate of Incorporation with the Secretary of State of the State of Nevada in order to change its name to "Sheng Ying Entertainment Corp." On December 16, 2017, new management took over control of the Company and, on February 5, 2018, the Company filed a certificate of amendment to its Certificate of Incorporation with the Secretary of State of the State of Nevada in order to change its name to “Vitalibis, Inc”.

As of March 31, 2020, and through current date, most of our resources and work have been devoted to adopting and integrating our new business plan, research and development, seeking capital to finance our operations and complying with our obligations under applicable securities laws, rules and regulations.

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We are a public company and, as such, we have incurred and will continue to incur significant expenses for legal, accounting and related services. As a public entity, subject to the reporting requirements of the Exchange Act of 1934, we incur ongoing expenses associated with professional fees for accounting, legal and a host of other expenses including annual reports and proxy statements, if required. We estimate that these costs will range up to $80,000 per year over the next few years and may be significantly higher if our business volume and transactional activity increases, based on our overall business volume (and financial transactions), and we will not yet be subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we exceed $75 million in market capitalization (if ever). These obligations will certainly reduce our ability and resources to expand our business plan and activities. We hope to be able to use our status as a public company to increase our ability to use non-cash means of settling outstanding obligations (i.e. issuance of restricted shares of our common stock) and compensate independent contractors who provide professional services to us, although there can be no assurances that we will be successful in any of these efforts. We will also reduce compensation levels paid to management (if we attract or retain outside personnel to perform this function) if there is insufficient cash generated from operations to satisfy these costs.

On March 29, 2019, the Company entered into an unsecured convertible promissory note which allowed for up to $750,000 of principal, with a total original issue discount of up to $150,000, with a principal amount of $250,000. In April 2019, the Company received net cash proceeds of $200,000 after an original issue discount of $50,000. In July 2019, the Company received additional proceeds of $200,000 after an original issue discount of $50,000, and received an additional $200,000 of net proceeds after $50,000 original issue discount in August 2019. The convertible note bears interest at 8% and all principal amounts matured on September 30, 2019, with interest accruing at a rate of 22% if the Company is in default. Beginning at the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is the lesser of $2 or 70% of the lowest trading price during the 30 trading days prior to the conversion date. On April 3, 2019, the Company issued 35,000 shares to this lender. During the year ended December 31, 2019, the lender converted $50,000 of principal into a total of 714,296 shares of common stock. During the three months ended March 31, 2020, the lender converted $68,000 of principal into 1,922,581 shares of common stock. On March 13, 2020, the lender provided the Company with notice of default of the convertible promissory note. In accordance with the terms of the agreement, an additional $316,000 of principal became due and payable, and the Company began accruing interest expense at the default rate of 22%. The additional principal was recorded as debt discount and amortized to interest expense immediately. As of March 31, 2020, there is $948,000 of principal outstanding on this convertible promissory note in default. Subsequent to March 31, 2020, the lender converted an additional $23,000 of principal into 3,285,714 shares of common stock.

On September 6, 2019, the Company entered into a convertible promissory note, with a principal amount of $153,000. The Company received net cash proceeds of $150,000 after payment fees of $3,000. The convertible note bears interest at 10% and matures on September 6, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date. During the three months ended March 31, 2020, the holder converted $29,000 of principal into 942,308 shares of common stock. Subsequent to March 31, 2020, the lender converted an additional $124,000 of principal and $7,650 of accrued interest into 19,158,756 shares of common stock.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $78,000. The Company received net cash proceeds of $75,000 after payment of fees of $3,000. The convertible note bears interest at 10% and matures on November 25, 2021, with interest accruing at a rate of 22% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on 65% of the lowest trading price during the 15 trading days prior to the conversion date.

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On April 29, 2020, the Company received a notice of default from the holder of the September 6, 2019 convertible note payable, the November 25,2019 convertible note payable with $78,000 of principal and the February 7, 2020 convertible note payable, as a result of insufficient shares authorized to settle conversion of these notes payable. As a result of the default notice, each of these notes became due and payable immediately, interest is accrued at the default rate of 22%, and the principal balance outstanding at the time of default is doubled. The total debt outstanding on these notes after giving effect to the default is $463,000.

On November 25, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $150,000. The Company received net cash proceeds of $131,000 after an original issue discount of $15,000 and fees of $4,000. The convertible note bears interest at 5% and matures on November 25, 2020, with interest accruing at a rate of 22% if the Company is in default. The note is convertible upon issuance through the maturity date into shares of common stock at a fixed price of $1.00 per share to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. Beginning six months after the issuance of the note, the holder may convert the note at any time, at a price based on the lower of the fixed price of $1.00 per share or 75% of the lowest trading price during the 15 trading days prior to the conversion date.

On December 10, 2019, the Company entered into an unsecured convertible promissory note, with a principal amount of $110,000. The Company received net cash proceeds of $97,000 after an original issue discount of $10,000 and fees of $3,000. The lender also received 35,000 shares of common stock as a deferred finance cost. The convertible note bears interest at 10% and matures on December 10, 2020, with interest accruing at a rate of 24% if the Company is in default. Beginning six months after the issuance of the note, the holder may convert the note at any time through the maturity date into shares of common stock, to the extent and provided that no holder of these notes was or will be permitted to convert such notes to the extent that the holder or any of its affiliates would beneficially own in excess of 4.99% of the Company’s common stock after such conversion. The conversion price is determined based on the lessor of 1) $0.24, or 2) the lesser of 62% of the lowest trade price or the closing bid price during the 20 trading days prior to the conversion date.

Results of Operations

Three months ended March 31, 2020 compared to three months ended March 31, 2019

Revenue and Gross Profit

During the three months ended March 31, 2020, the Company generated $50,162 in revenue and $28,544 in gross profit. During the three months ended March 31, 2019, the Company generated $139,585 in revenue and $51,088 in gross profit. The decrease in revenue and gross profit is primarily related to a bulk product sale to a single customer in the prior period that did not occur in the current year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses amounted to $186,576 and $2,448,406, respectively for the three months ended March 31, 2020 and 2019, a decrease of $2,261,830. The decrease was primarily due to lower stock-based compensation and lower executive officer compensation in the current period

Professional fees

Professional fees amounted to $43,196 and $47,481, respectively for the three months ended March 31, 2020 and 2019. The decrease of $4,645 was primarily due to decreased audit fees.

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Interest expense

Interest expense was $396,576 for the three months ended March 31, 2020 compared to $3,340 for the three months ended March 31, 2019. The interest expense primarily relates to the Company’s recently issued convertible notes, including amortization of discount and deferred financing fees of $365,230.

Liquidity and Capital Resources

The following is a summary of the Company’s cash flows used in operating activities for the three months ended March 31, 2020 and 2019:

	Three Months ended March 31, 2020			Three Months ended March 31, 2019
Net cash used in operating activities	$	(118,163	)	$	(285,848	)
Net cash provided by operating activities		64,183			174,548
Net effect on cash	$	(53,980	)	$	(111,300	)

Operating Activities

The cash used in operating activities of $118,163 for the three months ended March 31, 2020 was primarily due to selling, general and administrative costs as the Company increased its operations during the current period and uses of working capital.

Financing Activities

The cash provided by financing activities of $64,183 during the three months ended March 31, 2020 was primarily from one convertible debt issuance, which provided proceeds of $78,000, offset by payments of debt issuance costs of $3,000 and payments on unsecured notes payable of $10,817. During the three months ended March 31, 2019, the cash provided by financing activities of $174,548 was primarily from two convertible debt issuances, which provided proceeds of $188,000, offset by payments of debt issuance costs of $6,000 and payments on unsecured notes payable of $7,452.

We are a public company and as such we have incurred and will continue to incur significant expenses for legal, accounting and related services. As a public entity, subject to the reporting requirements of the Exchange Act of 1934, we incur ongoing expenses associated with professional fees for accounting, legal and a host of other expenses including annual reports and proxy statements, if required. We estimate that these costs will increase over the next few years and may be significantly higher if our business volume and transactional activity increases but we will not yet be subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we exceed $75 million in market capitalization (if ever). These obligations will certainly reduce our ability and resources to expand our business plan and activities. We hope to be able to use our status as a public company to increase our ability to use noncash means of settling outstanding obligations (i.e. issuance of restricted shares of our common stock) and compensate independent contractors who provide professional services to us, although there can be no assurances that we will be successful in any of these efforts. We will also reduce compensation levels paid to management (if we attract or retain outside personnel to perform this function) if there is insufficient cash generated from operations to satisfy these costs.

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We hope to be able to use our status as a public company to enable us to use non-cash means of settling obligations and compensate persons and/or firms providing services to us, although there can be no assurances that we will be successful in any of those efforts. However, these actions, if successful, will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management. The Company may offer shares of its common stock to settle a portion of the professional fees incurred in connection with its registration statement. No negotiations have taken place with any professional and no assurances can be made as to the likelihood that any professional will accept shares in settlement of obligations due to them.

As of March 31, 2020, total liabilities increased to $2,246,219 from $1,710,195 as of December 31, 2019, mainly due to the convertible debt issuances by the Company during the current period.

Going Concern

Our auditor has issued a “going concern” qualification as part of its opinion in the Audit Report for the year ending December 31, 2019, and our unaudited financial statements for the quarter ended March 31, 2020, include a “going concern” note disclosing that our ability to continue as a going concern is contingent on us being able to raise working capital to grow our operations and generate revenue.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company adopted this standard on January 1, 2019 using the modified retrospective method, and adopted the package of practical expedients that allows it to (i) not reassess whether an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases and (iii) not reassess its previously recorded initial direct costs.. The Company made an accounting policy election to treat leases with a minimum term of 12 months or less as short-term leases. The adoption of ASC 842 had no impact to the Company’s consolidated financial statements, due to the Company’s current rental agreements for office space having minimum terms of less than 12 months. The Company currently has no right of use assets or liabilities recognized on its balance sheet related to lease agreements.

The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

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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.

Contractual Obligations

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC`s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2019, that our disclosure controls and procedures are not effective at a reasonable assurance level and are designed to provide reasonable assurance that the controls and procedures will meet their objectives due to the material weaknesses described below. However, 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 Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The internal controls for the Company are provided by executive management’s review and approval of all transactions. Our internal control over financial reporting also includes those policies and procedures that:

	(1)	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

	(2)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and

	(3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls.

Based on this assessment, management has concluded that as of March 31, 2020, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles due to the existence of the following material weaknesses:

	·	Lack of segregation of duties
	·	Lack of audit committee and independent directors
	·	Lack of well established procedures to authorize and approve related party transactions

Although we are unable to meet the standards under COSO because of the limited resources available to a company of our size, we are committed to improving our financial organization. As funds become available, we will undertake to: (1) create a position to segregate duties consistent with control objectives, (2) increase our personnel resources and technical accounting expertise within the accounting function (3) appoint one or more independent directors to our board of directors who shall be appointed to a Company audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; and (4) prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not a party to any legal proceeding or litigation.

Item 1A. Risk Factors.

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14.

31.2		Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14.

32.1		Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Company’s Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS **		XBRL Instance Document

101.SCH **		XBRL Taxonomy Extension Schema Document

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **		XBRL Taxonomy Extension Label Linkbase Document

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

______________

**

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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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.