NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF OPERATIONS
Sunstock,
Inc. (formerly known as Sandgate Acquisition Corporation) (“Sunstock” or “the Company”) was incorporated
on July 23, 2012 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited
to, selected mergers and acquisitions. Sunstock operations to date have been limited to issuing shares of its common stock. Sunstock
may attempt to locate and negotiate with a business entity for the combination of that target company with Sunstock, (See Note
9). The combination will normally take the form of a merger, stock-for-stock exchange or stock-for-assets exchange. In most instances,
the target company will wish to structure the business combination to be within the definition of a tax-free reorganization under
Section 351 or Section 368 of the Internal Revenue Code of 1986, as amended. No assurances can be given that Sunstock will be
successful in locating or negotiating with any target company.
In
December 2014, the Company purchased 100 ounces of silver. In 2015, the Company purchased additional precious metals for $302,429
and shifting more of its capital to the acquisition of precious metals. The Company holds physical coins and bullion rather than
contracts for delivery of precious metals or certificates. In time of economic crisis, there may be no guarantee of the delivery
of precious metals as contracts and certificates may exceed available stock.
Currently,
the Company anticipates holding its precious metals as a long-term investment. Depending on market conditions, the Company anticipates
holding its silver holdings until the market price exceeds $50. Likewise, the Company does not plan to sell its gold holdings
unless the market price exceeds $2,500.
BASIS
OF PRESENTATION
The
condensed balance sheet as of December 31, 2016, which has been derived from audited financial statements and the interim unaudited
condensed financial statements as of June 30, 2017 and 2016 have been prepared in accordance with Accounting Principles Generally
Accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Securities
and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. These condensed financial statements
do not include all the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these unaudited
condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto
for the year ended December 31, 2016, included in the Company’s Form 10-K.
The
condensed financial statements included herein as of and for the three months ended June 30, 2017 and 2016 are unaudited; however,
they contain all normal recurring accruals and adjustments that, in the opinion of the Company’s management, are necessary
to present fairly the condensed financial position of the Company as of June 30, 2017, the condensed results of its operations
and cash flows for the three and six months ended June 30, 2017 and 2016 and the condensed cash flows for the nine months ended
September 30, 2017 and 2016. The results of operations for three and nine months ended September 30, 2017 are not necessarily
indicative of the results to be expected for the full year or any future interim periods.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made by the Company’s management include but are not limited to valuation of marketable securities,
and derivative liabilities, realizability of inventories and value of stock-based transactions.
INVENTORIES
Inventories
consist of merchandise for sale and are stated at the lower of cost or market determined on a first-in, first-out (FIFO) method.
When a purchase contains multiple copies of the same item, they are stated at average cost.
Inventories
– silver consists primarily of silver and small amounts of gold held for sale and are stated at cost. Currently, the Company
anticipates holding its precious metals as a long-term investment. Depending on market conditions, the Company anticipates holding
its silver holdings until the market price exceeds $50. Likewise, the Company does not plan to sell its gold holdings unless the
market price exceeds $2,500.
At
each balance sheet date, the Company evaluates its ending inventory quantities on hand and on order and records a provision for
excess quantities and obsolescence. Among other factors, the Company considers historical demand and forecasted demand in relation
to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence
and net realizable value. In addition, the Company considers changes in the market value of components in determining the net
realizable value of its inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable
values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.
REVENUE
RECOGNITION
The
Company recognizes revenues in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Certification (ASC”) Topic 605. Accordingly, the Company recognizes revenues when there is persuasive evidence that an arrangement
exists, product delivery and acceptance have occurred, the sales price is fixed or determinable, and collectability of the transaction
is assured.
EARNINGS
(LOSS) PER COMMON SHARE
Basic
earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of
common shares outstanding during the period which excluded unvested restricted stock. Diluted earnings (loss) per share reflects
additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any
adjustment to income (loss) that would result from the assumed issuance. The potentialcommon shares that may be issued by the
Company relate to outstanding stock options and have been excluded from the computation of diluted earnings (loss) per share because
they would reduce the reported loss per share and therefore have an anti-dilutive effect.
As
of June 30, 2017, there were no potentially dilutive shares that were excluded from the diluted earnings (loss) per share as their
effect would have been antidilutive for each of the periods presented.
STOCK
BASED COMPENSATION
ASC
718 “Compensation - Stock Compensation” prescribes accounting and reporting standards for all stock-based payment
awards to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation
rights, may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based
payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the
option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of
an entity’s past practices or stated policies. If a present obligation exists, the transaction is recognized as a liability;
otherwise, the transaction is recognized as equity.
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50 “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
In
July 2017, the FASB issued ASU No. 2017-11, which eliminates the requirement to classify financial instruments as derivative liabilities
simply because they have down round pricing protection. The Company has often issued warrants with down round pricing protection
as part of its financing activities. Currently, the Company has convertible notes payable and warrants with down round pricing
protection that are classified as derivative liabilities. The Company revalues these warrant tranches each reporting period and
records the valuation differences as a component of other income in the statement of operations. The adoption of this ASU will
allow the Company to classify its remaining warrant derivatives as equity and future warrants that might be issued by the Company
with down round price protection will qualify as equity rather than derivative liability for balance sheet presentation purposes.
This ASU is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is determining
the financial impact of this ASU.
Fair
Value Measurements
Fair
value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability.
U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value
hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides
the most reliable evidence of fair value and must be used to measure fair value whenever available.
Level
2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level
3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants
would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash
flows used in a discounted future cash flows method.
The
Company’s financial instruments consist of cash, accounts payable, accrued expenses, notes payable and convertible notes
payable. The carrying value for all such instruments approximates fair value due to the short-term nature of the instruments.
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
convertible notes at every reporting period and recognizes gains or losses in the statements of operations that are attributable
to the change in the fair value of the derivative convertible notes, preferred stock and warrant liabilities.
NOTE
2 - GOING CONCERN
The
Company has not posted operating income since inception. It has an accumulated deficit of approximately $36,000,000 as
of September 30, 2017. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations
to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders
and/or other third parties.
These
condensed financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its
obligations and continue its operations for the next year. The continuation of the Company as a going concern is dependent upon
financial support from its stockholders, the ability of the Company to obtain necessary equity financing to continue operations,
successfully locating and negotiating with an acquisition target.
There
is no assurance that the Company will ever be profitable. The condensed financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result should the Company be unable to continue as a going concern.
NOTE
3 - RECENT ACCOUNTING PRONOUNCEMENTS
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”)
No. 2014-09. “Revenue from Contracts with Customers.” This new standard will replace the existing revenue recognition
guidance in U.S. GAAP. The core principle of the ASU is the recognition of revenue for the transfer of goods and services equal
to the amount an entity expects to receive for those goods and services. This ASU requires additional disclosures about the nature,
amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
estimates and changes in those estimates. For public entities, the amendments in this update are effective for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. While we are still currently
assessing the impact of the new standard, our revenue is generated from the sale of finished product to customers. Those sales
predominantly contain a single delivery element and revenue is recognized at a single point in time when ownership, risks and
rewards transfer. The timing of revenue recognition for these product sales are not materially impacted by the new standard. We
will update certain disclosures, as applicable to meet the requirements of the new guidance.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This new standard establishes a right-of-use
(“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating
the impact of the adoption of ASU 2016-02 on the Company’s financial statements.
In
March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based
Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. The ASU involves several aspects of the accounting
for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity
or liabilities and classification on the statement of cash flows. Certain of these changes are required to be applied retrospectively,
while other changes are required to be applied prospectively. ASU 2016-09 is effective for public business entities for annual
reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption will be
permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.
As a result of the adoption of this ASU as of January 1, 2017, we have made an entity-wide accounting policy election to account
for forfeitures when they occur. There is no cumulative-effect adjustment as a result of the adoption of this ASU as our estimated
forfeiture rate prior to adoption of this ASU was 0%. The adoption of this ASU did not have a material impact on our condensed
financial statements and related disclosures.
In
November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. Current U.S. GAAP requires an
entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of
financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this
update apply to all entities that present a classified statement of financial position. The current requirement that deferred
tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by
the amendments in this update. The amendments in this update will align the presentation of deferred income tax assets and liabilities
with International Financial Reporting Standards (IFRS) and are effective for fiscal years after December 15, 2016, including
interim periods within those annual periods. The adoption of this ASU as of January 1, 2017 did not have a material impact on
our condensed financial statements and related disclosures.
In
July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Topic 330. Inventory,
currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable
value, or net realizable value less an approximately normal profit margin. The amendments apply to all other inventory, which
includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory
at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU more closely
align the measurement of inventory in U.S. GAAP with the measurement of inventory in IFRS. For public business entities, the amendments
are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.
The adoption of this ASU as of January 1, 2017 did not have a material impact on our condensed financial statements and related
disclosures.
In
August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
This ASU 2014-15 describes how an entity should assess its ability to meet obligations and sets rules for how this information
should be disclosed in the condensed consolidated financial statements. The standard provides accounting guidance that will be
used along with existing auditing standards. The ASU 2014-15 is effective for the annual period ending after December 15, 2016.
Early application is permitted. The adoption of this ASU as of January 1, 2017 did not have a material impact on our condensed
financial statements and related disclosures.
NOTE
4 - RELATED PARTY BALANCES
During
the period ended September 30, 2017 and year ended December 31, 2016, the Company was provided a non-interest bearing, non-secured
line of credit by a shareholder for up to $30,000. The line is due on demand. At September 30, 2017 and year ended December
31, 2016, the Company had net borrowings of approximately $0 and $30,000, respectively, and is still available to draw down. At
December 31, 2016, the amount is included in accounts payable in the accompanying condensed balance sheets. See Note 6 for shares
of stock issued to related parties.
During
the quarter ended June 30, 2017, the Company entered a 19-month lease with the parents of Jason Chang for Corporate office space
at $1,200 per month running through December 2018.
NOTE
5 - COMMITMENTS AND CONTINGIENCIES
The
Company entered into a lease agreement in December 2015 for 2,700 square feet of retail shop space to replace their previous location
below. The lease requires combined monthly payments of base rent of $1,950 for six months beginning January 2015 with an option
for an additional one year running through June of 2017. This lease is currently on a month to month basis at September 30, 2017.
During
June of 2017, the Company entered into a three-month consulting agreement with PAG Group, LLC., to help develop business growth
opportunities through September 2017 for $20,000.
During
the quarter ended June 30, 2017, the Company entered a 19-month lease with the parents of Jason Chang for Corporate office space
at $1,200 per month running through December 2018.
In
addition to these commitments please see below Note 9 – Subsequent Events for activities in October 2017.
LITIGATION
In
December 2013, the Company issued 75,000 shares of common stock to a third party (the “Shareholder”) for consideration
of $16,000. Such consideration was received directly by Jason Chang, CEO, and was not deposited into the Company’s bank
account. As the funds had not been received by the Company, such amounts have been recorded as compensation to Mr. Chang as of
December 31, 2014 (see Note 5). In April 2014, the Company received notice from the Shareholder that he had filed a lawsuit against
the Company and its CEO relating to the delay in the complainants’ stock reaching public listing services. The Company had
made efforts to settle this issue, without an agreement being reached. As such, the Company has recorded a loss contingency based
on its best estimate of all costs to be incurred for the ultimate settlement of this matter. In June 2016, the Company settled
for $82,660 which has been reflected in accrued litigation on the accompanying balance sheet as of September 30, 2017 and December
31, 2016. Repayment of which is anticipated in the 4th quarter of 2017.
INDEMNITIES
AND GUARANTEES
The
Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified
party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents,
as permitted under the laws of the State of Delaware. About its facility leases, the Company has agreed to indemnify its lessors
for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies, and is generally
tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential
future payments the Company could be obligated to make. The Company entered into a lease agreement in December 2015 for 2,700
square feet of retail shop space. The lease requires combined monthly payments of base rent of $1,950 for six months beginning
January 2015 with an option for an additional one year running through June of 2017. Currently the Company is on a month to month
agreement.
Historically,
the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded
for these indemnities and guarantees in the accompanying balance sheet.
NOTE
6 – OUTSTSANDING DEBT
Convertible
notes payable are as follows as of September 30, 2017:
|
|
|
Face Amount
|
|
|
Debt Discount
|
|
|
Net
Amount
|
|
|
Interest rate
|
|
|
Accrued Interest
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auctus
|
|
$
|
112,250
|
|
|
$
|
58,678
|
|
|
$
|
53,572
|
|
|
|
12
|
%
|
|
$
|
6,310
|
|
|
|
February 24, 2018
|
|
|
EMA
|
|
|
115,000
|
|
|
|
76,267
|
|
|
|
38,733
|
|
|
|
10
|
%
|
|
|
3,686
|
|
|
|
June 5, 2018
|
|
|
|
|
$
|
227,250
|
|
|
$
|
134,945
|
|
|
$
|
92,305
|
|
|
|
-
|
|
|
$
|
9,996
|
|
|
|
-
|
|
|
Derivative liability
|
|
$
|
306,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
May 24, 2017, the Company entered a Convertible Promissory Note with Auctus Fund, LLC., (“Auctus”) in the principle
amount of $112,250 (the “Auctus Note”) The Auctus Note bears interest at the rate of 12% per annum (24% upon an event
of default) and is due and payable on February 24, 2018. The principle amount of the Auctus Note and all accrued interest is convertible
at the option of the holder at the lower of (a) 55% multiplied by the average of the two lowest trading prices during the 25 trading
days prior to the date of the note and (b) 55%, (a 45% discount) multiplied by the average market price (the trading period
preceding 25 days of the conversion date). The variable conversion term was a derivative liability and the Company recorded approximately
$100,000 of debt discount upon issuance. The prepayment amount ranges from 135% to 140% of the outstanding principle plus accrued
interest of the note, depending on when such prepayment is made. In addition, the Company recognized issuance costs of $12,750
on the funding date and amortized such costs as interest expense over the term of the note.
On
June 5, 2017, the Company entered a Convertible Promissory Note with EMA Financial, LLC., (“EMA”) in the principle
amount of $115,000 (the “EMA Note”). The EMA Note bears interest at the rate of 10% per annum (24% upon an event of
default) and is due and payable on June 5, 2018. The principle amount of the EMA Note and all accrued interest is convertible
at the option of the holder at the lower of (a) the closing sales price 50% and (b) (a 50% discount) multiplied by the
average market price (the trading period preceding 25 days of the conversion date) or the closing bid price. The variable
conversion term was a derivative liability, see Note 7, and the Company recorded approximately $115,000 of debt discount upon
issuance. The prepayment amount ranges from 135% to 150% of the outstanding principle plus accrued interest of the note, depending
on when such prepayment is made. In addition, the Company recognized issuance costs of $15,000 on the funding date and amortized
such costs as interest expense over the term of the note.
NOTE
7 – DERIVATIVE LIABILITIES
The
Company evaluates its debt instruments, or other contracts to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40,
Derivative Instruments
and Hedging: Contracts in Entity’s Own Equity
. The result of this accounting treatment could be that the fair value
of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement
of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked
to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at
the fair value of the instrument on the reclassification date.
Certain
of the Company’s embedded conversion features on debt are treated as derivatives for accounting purposes. The Company estimates
the fair value of these embedded conversion features using the Black-Scholes Merton option pricing model (“Black-Scholes”).
Based on these provisions, the Company has classified all conversion features and warrants as derivative liabilities at September
30, 2017.
|
|
|
For the Three
months ended
September 30, 2017
|
|
|
Annual Dividend yield
|
|
|
0
|
%
|
|
Expected life (years)
|
|
|
0.04
|
|
|
Risk-free interest rate
|
|
|
1.31
|
%
|
|
Expected volatility
|
|
|
122%
- 149
|
%
|
The
Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock. The standard 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 common stock.
From
time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain
price protection or anti-dilution features that result in these instruments being treated as derivatives. Accordingly, the Company
has estimated the fair value of these embedded conversion features using Black-Scholes with the following assumptions:
The
following table presents the changes in fair value of our embedded conversion features measured at fair value on a recurring basis
for nine months ended September 30, 2017:
|
Balance December 31, 2016
|
|
$
|
-
|
|
|
Inssuance of embedded conversion feature
|
|
|
253,605
|
|
|
Change in fair value
|
|
|
52,411
|
|
|
Balance as of September 30, 2017
|
|
$
|
306,016
|
|
NOTE
8 - STOCKHOLDER’S EQUITY
The
Company is authorized to issue 300,000,000 shares of common stock and 20,000,000 shares of preferred stock.
During
2016, the Company issued an aggregate of 330,000 shares of fully vested non-forfeitable shares of common stock to certain consultants
of the Company to be earned over a one-year period. The shares were valued at $403,500 (based on the closing market price on the
measurement date) of which $720 was received in cash and the remaining $402,780 was recorded as prepaid consulting. The Company
has amortized the final portion of this prepaid expense of approximately $30,000 during the first quarter of 2017.
During
the year ended December 31, 2016, the Company issued an aggregate of 6,600,000 shares of restricted stock to certain employees
for future services (See Note 7 of our Annual Report on Form 10-K as of and for the year ended December 31, 2016 for details).
During the nine months ended September 30, 2017, the Company recorded approximately $2,500,000 in stock based compensation expense
related to the vesting terms of such restricted shares.
During
the nine months ended September 30, 2017, the Company received an aggregate of $4,460 from the issuance of 326,000 shares of its
common stock. In addition, the Company booked proceeds of $60 in relation to the sale of 60,000 shares issued in October 2017
in common stock payable.
During
the nine months ended September 30, 2017, the Company issued 8,190,000 shares of fully vested non-forfeitable shares of common
stock to certain consultants for future services. The fair value of the shares issued was determined to be approximately $9,800,000,
of which, $6,000 is included in subscription receivable, and the remaining amount was recorded as prepaid consulting. During the
three months and nine months ended September 30, 2017, the Company amortized approximately $4,000,000 and $7,100,000 (based on
the closing price on the measurement date), respectively, to stock based compensation expense related to these issuances.
During
the nine months ended September 30, 2017, the Company’s CEO, Jason Chang was awarded 18.05 million of the Company’s
common stock for services valued at an aggregate of approximately $19,500,000 (based on the closing price on the grant date),
of which $9,050 was received in cash and the remaining amount will be recorded as stock based compensation expense in the accompanying
statement of operations as the amounts are earned through December 31, 2017. During the three months and nine months ended September
30, 2017, the Company recorded approximately $3,200,000 and $16,300,000, respectively, to stock based compensation expense related
to these issuances. In addition, the Company booked a common stock payable of $800,000, of which $1,250 was received in cash,
for 1,250,000 shares issued to Jason Chang in October 2017 (included in common stock payable at September 31, 2017).
During
the nine months ended September 30, 2017, the Company issued 2,100,000 shares of Common Stock to other employees for future services.
The fair value of the shares issued was determined to be approximately $2,900,000 based on the market price of the restricted
stock on the measurement date and to be amortized to stock-based compensation expense over the term of the requisite service period.
During the three months and nine months ended September 30, 2017, the Company recorded approximately $2,000,000 and $2,900,000,
respectively, to stock based compensation expense related to these issuances.
NOTE
9 - SUBSEQUENT EVENTS
Notes
Payable:
On
October 11, 2017, Sunstock, Inc. (the “Company” or “we”) entered into a securities purchase agreement
(“SPA”) with Auctus Fund, LLC, upon the terms and subject to the conditions of SPA, we issued a convertible promissory
note in the principal amount of $85,000.00 (the “Note”) to Auctus. The Company received proceeds of $74,250.00 in
cash from Auctus. Interest accrues on the outstanding principal amount of the Note at the rate of 12% per year. The Note is due
and payable on July 11, 2018. The Note is convertible into common stock, subject to Rule 144, at any time after the issue date,
at the lower of (i) the lowest trading price during the previous twenty-five trading days prior to the date of the Note, and (ii)
50% multiplied by the lowest trading price during the twenty-five trading days prior to the conversion date. If the shares are
not delivered to Auctus within three business days of the Company’s receipt of the conversion notice, the Company will pay
Auctus a penalty of $2,000 per day for each day that the Company fails to deliver such common stock through willful acts designed
to hinder the delivery of common stock to Auctus. Auctus does not have the right to convert the Note, to the extent that it would
beneficially own in excess of 4.99% of our outstanding common stock. The Company shall have the right, exercisable on not less
than three (3) trading days’ prior written notice to Auctus, to prepay the outstanding balance on this Note for (i) 135%
of all unpaid principal and interest if paid within 90 days of the issue date and (ii) 150% of all unpaid principal and interest
starting on the 91st day following the issue date. In the event of default, the amount of principal and interest not paid when
due bear default interest at the rate of 24% per annum and the Auctus Note becomes immediately due and payable. Regarding the
Note, the Company paid Auctus $10,750.00 for its expenses and legal fees.
The
Note is a short-term debt obligation that is material to the Company. The Note also contains certain representations, warranties,
covenants and events of default including if the Company is delinquent in its periodic report filings with the SEC, and increases
in the amount of the principal and interest rates under the Note in the event of such defaults. In the event of default, at the
option of Auctus and in Auctus’s sole discretion, Auctus may consider the Note immediately due and payable.
On
October 11, 2017, the “Company” entered into a securities purchase agreement (“SPA2”) with EMA Financial,
LLC (“EMA), upon the terms and subject to the conditions of SPA2, we issued a convertible promissory note in the principal
amount of $85,000.00 (the “Note2”) to EMA. The Company received proceeds of $74,295.00 in cash from EMA. Interest
accrues on the outstanding principal amount of the Note2 at the rate of 12% per year. The Note2 is due and payable on October
11, 2018. The Note2 is convertible into common stock, subject to Rule 144, at any time after the issue date, at the lower of (i)
the closing sale price of the common stock on the on the trading day immediately preceding the closing date, and (ii) 50% of the
lowest sale price for the common stock during the twenty (25) consecutive trading days immediately preceding the conversion date.
If the closing sale price at any time fall below $0.17 or less. (as appropriately and equitably adjusted for stock splits, stock
dividends, stock contributions and similar events), then such 50% figure mentioned above shall be reduced to 35%. If the shares
are not delivered to EMA within three business days of the Company’s receipt of the conversion notice, the Company will
pay EMA a penalty of $1,000 per day for each day that the Company fails to deliver such common stock through willful acts designed
to hinder the delivery of common stock to EMA. EMA does not have the right to convert the note, to the extent that it would beneficially
own in excess of 4.9% of our outstanding common stock. The Company shall have the right, exercisable on not less than five (5)
trading days’ prior written notice to EMA, to prepay the outstanding balance on this Note for (i) 135% of all unpaid principal
and interest if paid within 90 days of the issue date and (ii) 150% of all unpaid principal and interest starting on the 91st
day following the issue date. In the event of default, the amount of principal and interest not paid when due bear default interest
at the rate of 24% per annum and the Note2 becomes immediately due and payable. In connection with the Note2, the Company paid
EMA $10,605.00 for its expenses and legal fees.
The
Note2 is a short-term debt obligation that is material to the Company. The Note2 also contains certain representations, warranties,
covenants and events of default including if the Company is delinquent in its periodic report filings with the SEC, and increases
in the amount of the principal and interest rates under the Note2 in the event of such defaults. In the event of default, at the
option of EMA and in EMA’s sole discretion, EMA may consider the Note2 immediately due and payable.
On
October 24, 2017, the “Company” entered into a securities purchase agreement (“SPA3”) with Powerup Lending
Group, LTD (“POWER), upon the terms and subject to the conditions of SPA3, we issued a convertible promissory note in the
principal amount of $108,000.00 (the “Note3”) to POWER. The Company received proceeds of $105,000 in cash from POWER.
Interest accrues on the outstanding principal amount of the Note3 at the rate of 12% per year. The Note3 is due and payable on
July 30, 2018. The Note3 is convertible into common stock, subject to Rule 144, at any time after the issue date, at 61% of the
lowest sale price for the common stock during the twenty (15) consecutive trading days immediately preceding the conversion date.
If the shares are not delivered to POWER within three business days of the Company’s receipt of the conversion notice, the
Company will pay POWER a penalty of $2,000 per day for each day that the Company fails to deliver such common stock through willful
acts designed to hinder the delivery of common stock to POWER. POWER does not have the right to convert the note, to the extent
that it would beneficially own in excess of 4.99% of our outstanding common stock. The Company shall have the right, exercisable
on not less than three (3) trading days’ prior written notice to POWER, to prepay the outstanding balance on this Note for
(i) 115% of all unpaid principal and interest if paid within 30 days of the issue date and (ii) 120% up to 140% of all unpaid
principal and interest starting on the 31st day up to the 180th day following the issue date. In the event of default, the amount
of principal and interest not paid when due bear default interest at the rate of 22% of all unpaid principal and interest per
annum and the Note3 becomes immediately due and payable. In connection with the Note3, the Company paid POWER $3,000.00 for its
expenses and legal fees.
The
Note3 is a short-term debt obligation that is material to the Company. The Note3 also contains certain representations, warranties,
covenants and events of default including if the Company is delinquent in its periodic report filings with the SEC, and increases
in the amount of the principal and interest rates under the Note3 in the event of such defaults. In the event of default, at the
option of POWER and in POWER’s sole discretion, POWER may consider the Note3 immediately due and payable.
Potential
Acquisitions:
On
October 23, 2017 the Company entered into escrow to purchase a 100 room hotel located in Kern County, California for $4,100,000.
This hotel acquisition is scheduled to close by January 12, 2018.