NOTES TO FINANCIAL STATEMENTS
|
NOTE 1
|
ORGANIZATION AND BASIS OF PRESENTATION
|
Organization and Nature of Business
Code Green Apparel Corp. (the
“
Company
”) was incorporated in Nevada on December 11, 2007. On April 26, 2014, and with the appointment of
George Powell as its CEO and Director, the Company changed its business model to offer eco-friendly corporate apparel primarily
constructed from recycled textiles.
The Company is a publicly held
Nevada corporation, whose common stock trades on the OTC Market Group, Inc.’s Pink Sheets under the trading symbol, “
CGAC.
”
Going Concern
The Company has generated only limited
revenues from operations since inception. Since inception, it has incurred significant losses to date, and as of December 31, 2016,
has an accumulated deficit of approximately $14,500,000. The Company’s ability to continue its operations is uncertain and
is dependent upon its ability to implement a business plan sufficient to generate a positive cash flow and/or raise capital to
fund its operations.
These financial statements do not include any adjustments to
the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations
in the normal course of business.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions
that affect the reported amounts and timing of revenues and expenses, the reported amounts and classification of assets and liabilities,
and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on the Company’s historical
results as well as management’s future expectations. The Company’s actual results could vary materially from management’s
estimates and assumptions. Additionally, interim results may not be indicative of the Company’s results for future interim
periods, or the Company’s annual results.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in time
deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At December
31, 2016, the company did not have any cash equivalents.
Accounts Receivable
Accounts receivable are not collateralized
and interest is not accrued on past due accounts. Periodically, management reviews the adequacy of its provision for doubtful accounts
based on historical bad debt expense results and current economic conditions using factors based on the aging of its accounts receivable.
After management has exhausted all collection efforts, management writes off receivables and the related reserve. Additionally,
the Company may identify additional allowance requirements based on indications that a specific customer may be experiencing financial
difficulties. Actual bad debt results could differ materially from these estimates.
Inventories
Inventories are stated at the lower of
cost (first-in, first-out) or market. The Company periodically reviews its inventories for indications of slow movement and obsolescence
and records an allowance when it is deemed necessary.
Revenue Recognition
The Company recognizes gross sales when
persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collection
is probable. It recognizes revenue in accordance with Accounting Standards Codification (“
ASC
”) 605, Revenue
Recognition (“
ASC 605
”).
Significant Customers
During the years ended December 31, 2016
and 2015 the Company had no one customer which accounted for more than 10% of the Company’s revenues.
Stock Based Compensation
The Company from time to time issues shares of common stock
for services. These issuances have been valued at based upon the quoted market price of the underlying shares.
Disclosure About Fair Value of Financial Instruments
The Company estimates that the fair value of all financial instruments
at December 31, 2016 and 2015 do not differ materially from the aggregate carrying values of its financial instruments recorded
in the accompanying condensed balance sheets. The estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop
the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine
if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued
at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial
instruments, the Company uses the Black-Scholes-Merton pricing model to value the derivative instruments. The classification of
derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the
end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet
date.
The Company has determined that certain convertible debt instruments
outstanding as of the date of these financial statements include an exercise price “
reset
” adjustment that qualifies
as derivative financial instruments under the provisions of ASC 815-40, Derivatives and Hedging - Contracts in an Entity’s
Own Stock (“
ASC 815-40
”). Certain of the convertible debentures have a variable exercise price, thus are convertible
into an indeterminate number of shares for which we cannot determine if we have sufficient authorized shares to settle the transaction
with. Accordingly, the embedded conversion option is a derivative liability and is marked to market through earnings at the end
of each reporting period. Any change in fair value during the period recorded in earnings as “
Other income (expense) -
gain (loss) on change in derivative liabilities.
”
|
|
|
Carrying Value
|
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Derivative liability – December 31, 2015
|
|
$
|
824,468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
824,468
|
|
|
Derivative liability – December 31, 2016
|
|
$
|
1,525,135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,525,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
824,468
|
|
|
Initial measurement at issuance date of the notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431,118
|
|
|
Initial measurement due to insufficient shares available for issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
561,447
|
|
|
Gain on conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,384
|
)
|
|
Change in derivative liability during the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236,514
|
)
|
|
Balance December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,525,135
|
|
Net Income (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Any anti-dilutive effects on net income (loss) per share are excluded. The Company
has no potentially dilutive securities outstanding as of December 31, 2016.
Income Taxes
The Company accounts for income taxes
in accordance with FASB ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and
assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using
enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results
from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely
than not that some or all deferred tax assets will not be realized.
The Company has adopted the provisions of FASB ASC 740-10-05
Accounting for Uncertainty in Income Taxes
.
The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Open tax-years subject to IRS examination include 2013 - 2016.
Recent
Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters
into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle
of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating
the impact of adopting ASU No. 2016-02 on our financial statements.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
that clarifies how to apply revenue recognition guidance related to whether an entity
is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09
as amended by ASU 2015-14
,
for
annual reporting periods beginning after December 15, 2017, including interim periods
within
those years.
The Company has not yet determined the impact of
ASU 2016-08 on its
financial statements.
In March 2016, the FASB issued ASU No.
2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this
Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption
must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized,
minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective
transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance
is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds
shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition
of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should
be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the
statement of cash flows using either a prospective transition method or a retrospective transition method.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which provides further
guidance on identifying performance obligations and improves the operability and understandability of licensing implementation
guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14
,
for annual reporting periods beginning after December 15, 2017, including interim periods
within
those years.
The Company has not yet determined the impact of
ASU 2016-10 on its
financial statements.
|
NOTE 2
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
Property and equipment consists of the following:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
|
16,783
|
|
|
|
2,249
|
|
|
|
|
|
16,783
|
|
|
|
2,249
|
|
|
Less accumulated depreciation
|
|
|
(3,821
|
)
|
|
|
(675
|
)
|
|
Total
|
|
$
|
12,962
|
|
|
$
|
1,574
|
|
The aggregate depreciation charge to operations
was $3,146 and $450 for the year ended December 31, 2016 and 2015, respectively. The depreciation policies followed by the Company
are described in Note 1.
|
NOTE 3
|
INTANGIBLES, NET OF ACCUMULATED AMORTIZATION
|
During December 2016, the Company reviewed
the value of the intangible assets related to the asset acquisition, see Note 11, and determined the value to be $-0-. As such
a full impairment loss of $220,000, ($280,000 intangible asset less $60,000 accumulated amortization) was recorded during the
year ended December 31, 2016 and included in the statement of operations.
During June 2016, the Company issued a $200,000 promissory note
in connection with the Asset Purchase Agreement, see Note 11. The note carries interest at 10% per annum and is due June 23, 2018.
Total outstanding debt was $200,000 and $-0- at December 31, 2016 and 2015, respectively. The accrued interest on the note was
$10,466 and $-0- at December 31, 2016 and 2015, respectively.
During July 2016, the Company issued a promissory note in the
amount of $82,500. The note is currently in default. The note contains an original issue discount in
the amount of $7,500. The remaining balance due at December 31, 2016 and 2015 was $82,500 and $-0-, respectively. The accrued
interest on the note was $8,945 and $-0- at December 31, 2016 and 2015, respectively.
During September 2016, the Company issued a promissory note
in the amount of $10,000. The note is due in six months. The note contains an original issue discount in the amount of $650. The
remaining balance due at December 31, 2016 and 2015 was $95 and $-0-, respectively. Interest accrues at 12% and is paid daily.
The accrued interest on the note was $-0- and $-0- at December 31, 2016 and 2015, respectively. The balance of this note was paid
in February 2017.
On May 1, 2014, the Company entered into an agreement with Anubis
Capital Partners, a business advisor. The agreement calls for monthly payments of $2,500 in service fees along with the issuance
of a $500,000 fully earned convertible debt that accrues interest at 8% per annum. The holder has the option to convert any balance
of principal and interest into common stock of the Company. The rate of conversion for the note is calculated as the lowest of
the 20 trading closing prices immediately preceding such conversion, discounted by 50%. During December 2015, the Company issued
25,000,000 shares of common stock in payment of $212,500 of principal on this convertible debt. At December 31, 2016 and 2015,
$20,000 and $50,000 was owed in services fees, accrued interest was $88,795 and $65,581 and the outstanding convertible debt was
$287,500 and $287,500, respectively.
During the year ended December 31, 2014, the Company issued
$173,500 of convertible notes. The convertible notes carry interest at 10% per annum and are due 24 months from the date of issuance,
June 2016 through September 2016. The note holders have the option to convert into shares of the Company’s common stock after
180 days at 50% of the market price. During April and May of 2015, the Company issued 14,660,440 shares of common stock upon conversion
of $173,500 of principal amount outstanding under these convertible notes. Total outstanding convertible debt was $-0- and $-0-
at December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015 the accrued interest on the convertible notes was $12,027
and $12,027, respectively.
During December 2015, the Company issued a convertible note
in the amount of $175,000. The convertible note is due in one year and contains a prepayment penalty of $25,000. The holder has
the option to convert any balance of principal into common stock of the Company. The rate of conversion for the note is calculated
as the lowest of the 10 trading closing prices immediately preceding such conversion, discounted by 32.5%. During December 2016,
the Company issued 12,000,000 shares of common stock upon conversion of $13,770 of principal amount outstanding under this convertible
note. The remaining balance due at December 31, 2016 and 2015 was $161,730 and $175,000, respectively.
During June 2016, the Company sold a convertible note in the
principal amount of $121,325. The convertible note is due in one year and contains an original issue discount in the amount of
$15,825. The holder has the option to convert any balance of principal into common stock of the Company after the initial 180 days.
The rate of conversion for this note is calculated as the average of the three lowest closing prices of the Company’s common
stock during the 20 trading days immediately preceding such conversion, discounted by 50%. The remaining balance due at December
31, 2016 and 2015 was $73,989 and $-0-, respectively. Interest accrues at 12% per annum and is paid daily. The accrued interest
on the note was $-0- and $-0- at December 31, 2016 and 2015, respectively.
During September 2016, the Company sold a convertible note in
the principal amount of $63,825. The convertible note is due in one year and contains an original issue discount in the amount
of $13,825. The holder has the option to convert any balance of principal into common stock of the Company after the initial 180
days. The rate of conversion for this note is calculated as the average of the three lowest closing prices of the Company’s
common stock during the 20 trading days immediately preceding such conversion, discounted by 50%. The remaining balance due at
December 31, 2016 and 2015 was $53,481 and $-0-, respectively. Interest accrues at 12% per annum and is paid daily. The accrued
interest on the note was $-0- and $-0- at December 31, 2016 and 2015, respectively.
Derivative Liability
On May 1, 2014, the Company secured $500,000 in the form of
a convertible promissory note. The note bears interest at the rate of 8% per annum until it matures, or until there is an event
of default. The note matured on May 1, 2015. The holder has the option to convert any balance of principal and interest into common
stock of the Company. The rate of conversion for the note is calculated as the lowest of the 20 trading closing prices immediately
preceding such conversion, discounted by 50%. A total of $287,500 remains outstanding as of December 31, 2016, and a total of
$212,500 was converted into shares of common stock.
On December 3, 2015, the Company secured $175,000 in the form
of a convertible promissory note. The note does not bear interest until or unless there is an event of default. The note matured
on December 3, 2016. The holder has the option to convert any balance of principal into common stock of the Company. The rate of
conversion for the note is calculated as the lowest of the 10 trading closing prices immediately preceding such conversion, discounted
by 32.5%.
On June 15, 2016, the Company secured $121,325 in the form
of a convertible promissory note. The note bears interest at 12% per annum. The note matures on June 15, 2017. The holder has
the option to convert any balance of principal into common stock of the Company after the initial 180 days. The rate of conversion
for this note is calculated as the average of the three lowest closing prices of the Company’s common stock during the 20
trading days immediately preceding such conversion, discounted by 50%.
On September 23, 2016, the Company secured $63,825 in the form
of a convertible promissory note. The note bears interest at 12% per annum. The note matures on September 23, 2017. The holder
has the option to convert any balance of principal into common stock of the Company after the initial 180 days. The rate of conversion
for this note is calculated as the average of the three lowest closing prices of the Company’s common stock during the 20
trading days immediately preceding such conversion, discounted by 50%.
Due to the variable conversion price associated with these
convertible promissory notes, the Company has determined that the conversion feature is considered a derivative liability. The
accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as
of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair values of the embedded debt derivatives of
$500,842, $227,746, $322,660 and $108,458 were charged to current period operations as interest expenses. The fair value of the
described embedded derivative was determined using the Black-Scholes Model with the following assumptions:
|
(1) risk free interest rate of
|
0.10% to 0.45%
|
|
(2) dividend yield of
|
0%;
|
|
(3) volatility factor of
|
248% to 435%;
|
|
(4) an expected life of the conversion feature of
|
365 days; and
|
|
(5) estimated fair value of the Company’s common stock of
|
$0.006 to $0.008 per share.
|
During the year ended December 31, 2016, the Company recorded
a loss in fair value of derivative of $194,602.
The following table represents the Company’s derivative
liability activity for the year ended December 31, 2016:
|
Balance at December 31, 2015
|
|
$
|
824,468
|
|
|
Initial measurement at issuance date of the notes
|
|
|
431,118
|
|
|
Initial measurement due to insufficient shares available for issuance
|
|
|
561,447
|
|
|
Gain on conversion
|
|
|
(55,384
|
)
|
|
Change in derivative liability during the year ended December 31, 2016
|
|
|
(236,514
|
)
|
|
Balance December 31, 2016
|
|
$
|
1,525,135
|
|
|
NOTE 6
|
Derivative financial instruments
|
The following table presents the components of the Company’s
derivative financial instruments associated with convertible promissory notes (See Note 5) which have no observable market data
and are derived using the Black-Scholes option pricing model measured at fair value on a recurring basis, using Level 1 and 3 inputs
to the fair value hierarchy, at December 31, 2016 and 2015:
|
|
|
2016
|
|
|
2015
|
|
|
Embedded conversion features
|
|
$
|
963,688
|
|
|
$
|
—
|
|
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
Insufficient shares
|
|
|
561,447
|
|
|
|
—
|
|
|
Derivative financial instruments
|
|
$
|
1,525,135
|
|
|
$
|
—
|
|
These derivative financial instruments arise as a result of applying
ASC 815 Derivative and Hedging
(“
ASC 815
”),
which requires the Company to make a determination whether an equity-linked financial instrument, or embedded feature, is indexed
to the entity’s own stock. This guidance applies to any freestanding financial instrument or embedded features that have
the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s
own stock.
During the year ended December 31, 2016, the Company had outstanding
notes with embedded conversion features and the Company did not, at this date, have a sufficient number of authorized and available
shares of common stock to settle the outstanding contracts which triggered the requirement to account for these instruments as
derivative financial instruments until such time as the Company has sufficient authorized shares.
Laguna Beach Office
The Company is obligated under a commercial real estate lease
agreement. The lease is for a term of 60 months which began February 1, 2016 and expires January 31,
2021. The lease calls for current monthly rental payments of $3,438.
Dallas Office
The Company is obligated under a commercial real estate sublease
agreement. The sublease is for a term of seven months which began on August 1, 2016 and expires on February
28, 2017. The lease calls for current monthly rental payments of $2,200.
Rental expense for the years ended December 31, 2016 and 2015
was $50,784 and $23,500, respectively. Future minimum rental payments for the remaining terms are as follows:
|
Year Ending December 31,
|
|
|
Amount
|
|
|
2017
|
|
|
$
|
45,656
|
|
|
2018
|
|
|
|
41,256
|
|
|
2019
|
|
|
|
41,256
|
|
|
2020
|
|
|
|
41,256
|
|
|
2021
|
|
|
|
3,438
|
|
|
Total
|
|
|
$
|
172,862
|
|
|
NOTE 8
|
STOCKHOLDERS’ EQUITY
|
On January 10, 2016, the Company issued
10,000,000 shares of its restricted common stock to its President and CEO, George J. Powell, III as a bonus in consideration for
his efforts throughout the 2015 fiscal year. The shares had a fair market value of $280,000.
On January 10, 2016, the Company issued
10,000,000 shares of its restricted common stock to its then newly appointed Director and COO, a signing bonus
for his appointment to the Company’s Board of Directors. The shares had a fair market value of $280,000.
On January 10, 2016, the Company issued
5,000,000 shares of its restricted common stock to Anubis Capital Partners as a bonus and in consideration for strategic advisory
services rendered throughout the 2015 fiscal year. The shares had a fair market value of $140,000.
On June 15, 2016, the Company issued
5,000,000 shares of its restricted common stock to an unrelated party as partial payment of the Asset Purchase Agreement, see Note
11. The shares had a fair market value of $30,000.
During June, 2016, the Company issued
7,000,000 shares of its restricted common stock to unrelated parties pursuant to employment services, see Note 12. The shares had
a fair market value of $42,000.
During November 2016, the Company issued
4,545,555 shares of common stock in fulfillment of a stock subscription agreement in the amount of $50,000.
During December 2016, the Company issued
5,000,000 shares of its common stock in exchange for services received. The underlying shares had a fair value of $25,000 and
the expense is included in the statement of operations for the year ended December 31, 2016.
During December 2016, the Company issued
12,000,000 shares of its common stock in connection with the conversion of debt in the principal amount of $13,770.
Series A Preferred Stock
On May 22, 2015, the Company designated a series of Series A
Preferred Stock. The holders of the Series A Preferred Stock are not be entitled to receive dividends paid on the Company’s
common stock. The holders of the Series A Preferred Stock are not entitled to any liquidation preferences. The shares of the Series
A Preferred Stock have no conversion rights. The Series A Preferred Stock provide the holder thereof the power to vote on all shareholder
matters (including, but not limited to at every meeting of the stockholders of the Company and upon any action taken by stockholders
of the Company with or without a meeting) equal to fifty-one percent (51%) of the total vote. Following the third anniversary of
the original issuance of the Series A Preferred Stock, the Company has the option with (a) the unanimous consent or approval of
all members of the Board of Directors of the Company; (b) the approval of the holders of a majority of the outstanding shares of
Series A Preferred Stock; and (c) the approval of any interest or option holder(s) of such Series A Preferred Stock, to redeem
any and all outstanding shares of the Series A Preferred Stock by paying the holders a redemption price of $100 per share.
Series B Preferred Stock
On December 7, 2015, the Company designated a series of Series
B Preferred Stock. The Series B Preferred Stock have an original issue price and liquidation preference (pro rata with the common
stock) of $10.00 per share. The Series B Preferred Stock provides the holders thereof the right to convert such shares of Series
B Preferred Stock into common stock on a 100-for-one basis, provided that no conversion can result in the conversion of more than
that number of shares of Series B Preferred Stock, if any, such that, upon such conversion, the aggregate beneficial ownership
of the Company’s common stock of any such holder and all persons affiliated with any such holder as described in Rule 13d-3
is more than 4.99% of the Company’s common stock then outstanding (the “
Maximum Percentage
”). For so long
as any shares of the Series B Convertible Preferred Stock remain issued and outstanding, the holders thereof are entitled to vote
that number of votes as equals the number of shares of common stock into which such holder’s aggregate shares of Series B
Convertible Preferred Stock are convertible, subject to the Maximum Percentage.
On December 7, 2015, the Company entered into an Exchange Agreement
(the “
Exchange
”) with its shareholder, Dr. Eric H. Scheffey, whereby Dr. Scheffey exchanged forty million (40,000,000)
shares of the Company’s restricted common stock for 40,000 shares of the Company’s Series B Preferred Stock.
On January 4, 2016, the Company sold
25,000 shares of its restricted Series B Preferred Stock in connection with a Subscription Agreement dated December
7, 2015 (the January 1, 2016 payment) and received $250,000. The intrinsic value, the difference between the subscription price
and the underlying price of the common stock on the date of the subscription agreement, has been valued at $250,000. Accordingly,
this Discount attributable to beneficial conversion privilege of preferred stock has been recorded as an dividend in the current
period and an increase in additional paid-in capital.
Deferred income tax assets and liabilities
are computed annually for differences between the financial statement and income tax bases of assets and liabilities. Such deferred
income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences
are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts
expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.
Deferred income taxes result from temporary
differences in the recognition of revenues and expenses for financial and tax reporting purposes. At December 31, 2016 and 2015,
deferred income tax assets, which are fully reserved, were comprised primarily of the net operating loss carryforwards of approximately
$14,000,000 and $11,000,000, respectively.
The valuation allowance increased by $3,000,000
and $1,500,000 during the years ended December 31, 2016 and 2015, respectively, as a result of the increase in the net operating
carryforwards.
For federal income tax purposes, the Company
has net operating loss carryforwards of approximately $14,000,000 as of December 31, 2016 that expire through 2036 and $11,000,000
as of December 31, 2015 that expire through 2036. Additionally, the ultimate utilization of net operating losses may be limited
by change of control provision under section 382 of the Internal Revenue Code.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation
of liabilities in the normal course of business. The Company has had only limited revenues since inception. Since inception, it
has incurred significant losses to date, and as of December 31, 2016, has an accumulated deficit of approximately $14,500,000.
The Company’s ability to continue its operations is uncertain and is dependent upon its ability to implement a business plan
sufficient to generate a positive cash flow and/or raise capital to fund its operations. These financial statements do not include
any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable
to continue operations in the normal course of business.
|
NOTE 11
|
ASSET PURCHASE AGREEMENT
|
Effective on June 23, 2016, the Company entered into an Asset
Purchase Agreement with 10Star LLC (“
10Star
” and the “
Purchase Agreement
”), pursuant to which,
the Company purchased certain contracts, relating to 10Star’s “
On the Border
” and “
7-Eleven
”
accounts (the “
Purchased Accounts
”).
The purchase price paid for the Assets at closing on June 23,
2016, was (a) $50,000 in cash; (b) 5 million shares of restricted common stock; and (c) a promissory note in the amount of $200,000
(the “
Promissory Note
”). During December 2016, the asset value of $280,000 was considered fully impaired. As
such, the entire value of $280,000 less the accumulated amortization in the amount of $60,000, was written off.
Amounts due under the Promissory
Note accrue interest at the rate of 10% per annum (12% upon the occurrence of an event of default), with all interest payable
on the maturity date of the Promissory Note, June 23, 2018, provided that the amounts owed under the Promissory Note can be pre-paid
in whole or part at any time prior to maturity. Until the earlier of (a) the maturity date of the Promissory Note; and (b) the
date the Promissory Note is paid in full, we are required to pay 10Star fifty percent (50%) of the Gross Profits generated by
us in connection with the Purchased Accounts, no later than the end of the calendar month following the month during which we
generate such Gross Profits and receive payment in connection therewith. “
Gross Profit
” means: (x) the total
gross revenues derived from the Purchased Accounts, less (y) (i) cost of goods sold, (ii) returns, (iii) discounts, (iv) adjustments,
and (v) allowances, and those other items that are customarily subtracted from total gross revenue to determine gross profit in
accordance with generally accepted accounting principles (“
GAAP
”). Each payment is credited first to accrued
interest and second to principal. The Promissory Note contains standard and customary events of default. The Promissory Note is
unsecured and 10Star has no right to any collateral or security interests in connection therewith.
|
NOTE 12
|
EMPLOYMENT AGREEMENTS
|
As part of, and as a required term and condition of the Purchase
Agreement, the Company entered into executive employment agreements with Aaron Luna and William Joseph (J.B.) Hill, to serve as
Executive Vice Presidents of the Company in May 2016, in anticipation of the Acquisition.
The employment agreements with Aaron Luna and William Joseph
(J.B.) Hill, as Executive Vice Presidents of the Company, entered into with such executives at closing, each have substantially
similar terms, including an effective date of April 1, 2016, an initial term of one year (automatically renewable thereafter for
additional one year terms in the event neither party provides the other notice of non-renewal at least 30 days prior to the end
of the then term). Both agreements include a base salary as determined by the Board of Directors in its sole and absolute discretion
in addition to an equity consideration of 3.75 million restricted shares of common stock to Mr. Luna and 3.25 million restricted
shares of common stock to Mr. Hill (the “
Restricted Shares
”), which Restricted Shares are subject to forfeiture
and cancellation until March 31, 2017, pursuant to Restricted Stock Award Agreements, which provide that if the executive’s
employment is terminated due to death, the end of the term of the employment agreement, for cause, or by the executive for any
reason other than good reason (as defined in the agreements), the vesting of the Restricted Shares ceases on the date of termination
and any unvested Restricted Shares are forfeited, provided that if the executive’s employment is terminated by us without
cause or by the executive for good reason, any Restricted Shares that are scheduled to vest during the period through the end of
the initial term or the then current extension term, if any, vest immediately. In addition to the base salary described above,
the executives receive a commission on our net sales (gross sales less (i) returns, (ii) discounts, (iii) adjustments, (iv) allowances,
and (v) any and all payments made to 10Star in accordance with the terms of the Purchase Agreement)(“
Net Sales
”),
to accounts other than the Purchased Accounts, determined on a case-by-case basis in the reasonable discretion of the Company;
and a commission equal to 1.50% of all Net Sales shipped by us (and paid by customers), for the Purchased Accounts, due monthly
in arrears.
The Company may terminate either executive’s employment
(a) for “
cause
”; (b) in the event such executive suffers a physical or mental disability which renders him
unable to perform his duties and obligations for either 90 consecutive days or 180 days in any 12-month period; (c) for any reason
without “
cause
”; or (d) upon expiration of the initial term of the applicable agreement (or any renewal) upon
notice as provided above. The agreements also automatically terminate upon the death of the applicable executive.
Either executive may also terminate his employment (a) for
“
good reason
”; provided, however, prior to any such termination by an executive for “
good reason
”,
such executive must first advise us in writing (within 15 days of the occurrence of such event) and provide us 15 days to cure
(5 days in connection with the reduction of such executive’s salary or the failure to pay amounts owed to him)); (b) for
any reason without “
good reason
”; and (c) upon expiration of the initial term of the agreement (or any renewal)
upon notice as provided above.
If either executive’s employment is terminated pursuant
to his death, disability, the end of the initial term (or any renewal term), without “
good reason
” by such
executive, or by us for “
cause
”, the applicable executive is entitled to all salary and commissions accrued
through the termination date and no other benefits other than as required under the terms of employee benefit plans in which the
executive was participating as of the termination date. Additionally, any unvested stock options or Restricted Shares held by
the executive immediately terminate and are forfeited.
If an executive’s employment is terminated by an executive
for “
good reason
”, or by us without “
cause
”, (a) the executive is entitled to continue to
receive the salary due pursuant to the terms of the agreement at the rate in effect upon the termination date for six (6) months
following the termination date, payable in accordance with our normal payroll practices and policies; (b) the executive is due
any commissions accrued through the termination date; and (c) provided executive elects to receive continued health insurance coverage
through COBRA, we are required to pay executive’s monthly COBRA contributions for health insurance coverage, as may be amended
from time to time (less an amount equal to the premium contribution paid by active Company employees, if any) for six months following
the termination date; provided, however, that if at any time executive is covered by a substantially similar level of health insurance
through subsequent employment or otherwise such obligation ceases. Additionally, unvested benefits (whether equity or cash benefits
and bonuses) will vest immediately upon such termination and any outstanding stock options previously granted to executive will
vest immediately upon such termination and will be exercisable until the earlier of (A) one year from the date of termination and
(B) the latest date upon which such stock options would have expired by their original terms under any circumstances and any unvested
Restricted Shares will vest immediately.
Both Mr. Luna and Mr. Hill subsequently terminated their services with the Company in October 2016, and all Restricted Shares have been forfeited,
provided that such shares have not yet been cancelled to date.
|
NOTE 13
|
SUBSEQUENT EVENTS
|
On April 12, 2017, our Board of
Directors and majority shareholder (i.e., George J. Powell, III, the Company’s Chief Executive Officer and Director,
who holds (i) 1,000 shares of Series A Preferred Stock, which provides the holder thereof the right to vote 51% of the vote
on all shareholder matters and (ii) 89,115,016 shares of the Company’s outstanding common stock), via a written consent
to action without meeting, approved the filing of a Certificate of Amendment to our Articles of Incorporation to increase the
authorized common stock of the Company, from one billion (1,000,000,000) shares of common stock, $0.001 par value per share,
to one billion, nine hundred and ninety million (1,990,000,000) shares of common stock, $0.001 par value share (the
“
Amendment
”). The increase in authorized shares is reflected in the balance sheets.
The Amendment did not change (a) the number of authorized shares
of our preferred stock, which remained ten million (10,000,000) shares of preferred stock, $0.001 par value per share; (b) the
rights of our Board of Directors to designate the rights and preferences of such preferred stock (as further described in our Articles
of Amendment, as amended); or (c) the previously designated series of our preferred stock.
On April 13, 2017, the Company filed the Amendment with the
Nevada Secretary of State, which became effective on the same date.
On April 12, 2017, pursuant to a Note Purchase Agreement,
we sold
a 10% Convertible Debenture in the principal amount of $32,500 (which included a $5,000 original issue discount) to Sojourn Investments,
LP (“
Sojourn
” and the “
Sojourn Debenture
”). The principal amount of the debenture accrues
at 10% per annum until paid or converted into common stock (18% upon the occurrence of an event of default). The Sojourn Debenture
has a maturity date of January 12, 2018, provided the debenture can be repaid at any time, provided that if repaid more than 30
days after the issuance date, we are required to pay 130% of the principal amount of the debenture, together with accrued interest.
The Sojourn Debenture is convertible into shares of our common
stock at any time, at a conversion price equal to 58% of the average of the lowest three (3) closing prices during the prior 20
trading days.
In the event we fail to deliver the shares of common stock issuable
upon conversion of the
debenture
within three business days of our receipt
of a conversion notice, we are required to pay
Sojourn
$1,000 per day for
each day that we fail to deliver such shares for up to the first 30 days that the failure continues.
At no time may the
Sojourn
Debenture
be converted into shares of our common stock if such conversion would result in
Sojourn
and
its affiliates owning an aggregate of in excess of 4.99% of the then outstanding shares of our common stock.
The
Sojourn Debenture
provides
for standard and customary events of default such as failing to timely make payments under the
Sojourn
Debenture
when due and the failure of the Company to timely comply with the Exchange Act reporting requirements. Additionally,
upon the occurrence of certain defaults, as described in the
Sojourn Debenture
,
we are required to pay
Sojourn
liquidated damages in addition to the amount
owed under the
Sojourn Debenture
.
We hope to repay the
Sojourn
Debenture
prior to any conversion. In the event that the
Sojourn Debenture
is
not repaid in cash in its entirety, Company shareholders may suffer dilution if and to the extent that the balance of the
Sojourn
Debenture
is converted into common stock.
On April 17, 2017, we sold Carebourn a Convertible Promissory
Note in the principal amount of $135,575 (the “
April 2017 Carebourn Convertible Note
”), pursuant to a Securities
Purchase Agreement, dated April 17, 2017. The April 2017 Carebourn Convertible Note bears interest at the rate of 12% per annum
(22% upon an event of default) and is due and payable on April 17, 2018. The April 2017 Carebourn Convertible Note had an original
issue discount of $27,075. In addition, we paid $8,500 of Carebourn’s expenses and attorney fees in connection with the sale
of the note, which were included in the principal amount of the note.
Periodic payments are due by us on the April 2017 Carebourn
Convertible Note at the rate of $565 per day ($135,575 / 240 days)(the “
Repayment Amount
”), via direct withdrawal
from our bank account. The Repayment Amount automatically adjusts to a prorated higher amount in the amount any penalties or events
of default occur under the April 2017 Carebourn Convertible Note.
The April 2017 Carebourn Convertible Note provides for standard
and customary events of default such as failing to timely make payments under the April 2017 Carebourn Convertible Note when due,
the failure of the Company to timely comply with the Exchange Act reporting requirements and the failure to maintain a listing
on the OTCQB. Additionally, upon the occurrence of certain defaults, as described in the April 2017 Carebourn Convertible
Note, we are required to pay Carebourn liquidated damages in addition to the amount owed under the April 2017 Carebourn Convertible
Note.
The principal amount of the April 2017 Carebourn Convertible
Note and all accrued interest is convertible at the option of the holder thereof into our common stock at any time following the
180th day after the April 2017 Carebourn Convertible Note was issued. The conversion price of the April 2017 Carebourn Convertible
Note is equal to 50% of the average of the lowest three (3) trading prices of the Company’s common stock during the twenty
trading days prior to the conversion date.
In the event we fail to deliver the shares of common stock issuable
upon conversion of the note within three business days of our receipt of a conversion notice, we are required to pay Carebourn
$1,500 per day for each day that we fail to deliver such shares.
At no time may the April 2017 Carebourn Convertible Note be
converted into shares of our common stock if such conversion would result in Carebourn and its affiliates owning an aggregate of
in excess of 4.99% of the then outstanding shares of our common stock.
We may prepay in full the unpaid principal and interest on the
April 2017 Carebourn Convertible Note, with at least 20 trading days’ notice, (a) any time prior to the 180th day after the
issuance date, by paying 130% of the principal amount of the note together with accrued interest thereon; and (b) any time after
the 180th day after the issuance date and prior to the 364
th
day after issuance, by paying 150% of the principal
amount of the note together with accrued interest thereon.
The April 2017 Carebourn Convertible Note also contains customary
positive and negative covenants.
We hope to repay the April 2017 Carebourn Convertible Note prior
to any conversion. In the event that the April 2017 Carebourn Convertible Note is not repaid in cash in its entirety, Company shareholders
may suffer dilution if and to the extent that the balance of the April 2017 Carebourn Convertible Note is converted into common
stock.
On January 10, 2017, the Company
issued 10,000,000 shares of its restricted common stock to its Director and COO, Thomas Witthuhn, in consideration for operations
achievements relative to building the Company.
On
January 12, 2017, we issued 12 million shares of common stock to Beaufort Capital Partners LLC in connection with the conversion
of debt.
On
March 22, 2017, we issued 20 million shares of common stock to Anubis Capital Partners in connection with the conversion of debt.
On
April 7, 2017, we issued 21,481,481 shares of common stock to Anubis Capital Partners in connection with the conversion of debt.
On
April 10, 2017, we issued 20 million shares of common stock to Anubis Capital Partners in connection with the conversion of debt.
On
February 9, 2017, the Company entered into an Advertising Services Agreement (the “
Advertising Agreement
”)
with Cicero Consulting Group, LLC (“
Cicero
”), pursuant to which Cicero agreed to provide marketing and advertising
services to the Company for a term of six months. In consideration for agreeing to provide those services we agreed to issue Cicero
32 million shares of common stock.