UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2017
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from to _______________ to ____________
Commission
file number 000-54830
SUNSTOCK,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization) |
46-1856372
(I.R.S. Employer
Identification No.) |
111
Vista Creek Circle
Sacramento,
California 95835
(Address
of principal executive offices) (zip code)
Registrant’s
telephone number, including area code: 916-860-9622
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, $0.0001 par value per share
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act [ ] Yes
[X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ]
Yes [X] No
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. [X] Yes [ ] No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [ ]
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer [ ] |
Accelerated filer [ ] |
Non-accelerated filer [ ]
|
Smaller
reporting company [X] |
| |
|
(do not check if smaller reporting company) |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X]
No
State
the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day
of the registrant’s most recently completed second fiscal quarter: $19,373,747 as of June 30, 2017
Indicate
the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
| Class |
|
Outstanding
at April 4, 2018 |
| Common
Stock, par value $0.0001 |
|
51,503,638
|
Documents
incorporated by reference: None
Table
of Contents
PART
I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” contains statements relating to our future plans and developments, financial goals and operating
performance that are based on our current beliefs and assumptions. These statements constitute “forward-looking statements”
within the meaning of federal securities laws. Words such as “expects,” “anticipates,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” “could,” “may,”
“should,” and similar expressions or variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally,
statements concerning future matters are forward-looking statements.
Although
forward-looking statements in this report reflect the good faith judgment of our management, such statements are only based on
facts and factors known by us as of the date of this report. Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include,
without limitation, those specifically addressed under the section below entitled “Risk Factors,” as well as those
discussed elsewhere in this report and in our other filings with the Securities and Exchange Commission (“SEC”). Readers
are urged not to place undue reliance on these forward-looking statements.
We
undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this report, whether as a result of new information, future events or otherwise, except as required
by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report,
as well as our other SEC filings, which attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations, and prospects.
Item
1. Business
Background
The
Company has only recently emerged from its status as a development-stage company, and it has limited operating history and is
expected to experience losses in the near term. The Company’s independent registered public accounting firm has issued a
report stating there is substantial doubt about the Company’s ability to continue as a going concern.
Summary
The
Company operates a deep discount variety retail store under the name “Dollar Green Stores” (“dollar stores”)
in Sacramento.
In
September 2013, the Company’s management developed plans to open and operate two retail stores in Sacramento, California,
under the named “Dollar Green Stores.” In February 2014, the Company
opened its first dollar store in Sacramento, which consists of more than 2,200 square feet of retail store space. The Company
opened its second dollar store in May 2014. In August 2014, the Company was forced to close its original store due to its landlord’s
failure to comply with city building codes. The Company relocated the second store in December 2015 and settled the existing lease
at that time. Therefore, the Company currently operates one retail store.
Additionally,
the Company began trading precious metals in December 2014 with the purchase 100 ounces of silver. The Company has since purchased
gold and is evaluating potentially expanding its ownership of additional precious metals. Though management has limited experience
in the precious metals field they have solicited outside experts contribute to the Company’s investment strategies.
The
Company also has plans to acquire and operate hotels and residential properties in the high demand areas of California such as
Southern California and the Bay Area.
On
April 18, 2017 the Company entered into a Letter of Intent to purchase a central California hotel for approximately $7,000,000
and entering escrow October, 2017 however with the escrow expired in December 2017 and the purchase did not close.
The
Business: Discount Retail Stores
The
Company owns and operates a discount retail store and which it expects to close in the second quarter of 2018 if its hotel
operations materialize.
According
to Deloitte’s general publication “Dollar Store Strategies for National Brands,” which was published in 2012
as the stigma of dollar store shopping wanes, the dollar store channel has developed into a booming, $55.6 million industry
in the United States. Through its discount retail stores segment, the Company intends to offer a broad selection of merchandise,
including consumable products such as food, paper and cleaning products, bathroom and kitchen cleaners, personal grooming products
such as soap, hair products, as well as pet supplies, and non-consumable products such as seasonal merchandise, home décor
and domestics, and apparel. The Company intends to stock its retail stores with high quality national brands from leading manufacturers,
as well as comparable quality private brand selections with prices at substantial discounts to national brands.
The
Business: Hotel and Residential Properties
The
Company believes the hotel industry accounts for a significant part of the overall economy. The industry is highly segmented with
many different brands targeting a vast range of customer needs at various price points. Businesses in the hotel industry generally
operate under one or more business models, including hotel management, brand franchising and hotel ownership. Hotels are categorized
into three groups: full-service, select-service and limited-service. Full-service hotels typically offer a full range of amenities
and facilities, including food and beverage facilities and meeting facilities. Select-service hotels furnish some of the amenities
offered at full-service hotels but on a smaller scale and generally do not to have meeting facilities. Limited-service hotels
usually offer only lodging, however some provide modest food and beverage facilities such as breakfast buffets or small meeting
rooms.
Lodging
demand growth is generally related to the strength of the overall economy. Additionally, local demand factors may stimulate business
and leisure travel to specific locations. In particular, macroeconomic trends relating to GDP growth, corporate profits, capital
investments and employment growth are some of the primary drivers of lodging demand. As the economy continues to improve, the
ongoing trend of strong transient demand and growing group business will continue to drive demand for hotels and lodging and allow
the industry to achieve increased growth.
The
Market
The
dollar channel is a $47 billion industry growing at a rate of 9% annually in the United States. The recent recession and
post-recessionary shopping habits have made dollar stores a frequent channel for more consumers—of all incomes. Dollar stores
appeal to primarily low- and fixed-income consumers; however, a growing segment of shoppers are high-income consumers, as the
stigma of dollar stores seems to be waning. Across consumer segments, dollar-store shopping trips appear to be expanding from
merely a fill-in or occasional targeted purchase to a grocery or mass merchandise substitute. To some extent, the growth of dollar
stores—in particular multi-price-point dollar stores, where the price of most products exceeds one dollar—is at the
expense of mass merchandisers and grocery channels.
This
growth in dollar stores is faster than traditional channels, particularly in the sales of personal goods, household goods, food,
and beverages. Dollar stores typically offer more variety in food and beverage (including national brands) and the consumer perception
of store brand quality improves.
The
hotel industry globally and in the United States has improved as the economy has recovered over the past few years. According
to the STR Global Census, October 2013 (adjusted to September 2013), U.S. hotel demand has grown at a compound annual growth (“CAGR”)
rate of 4.9% over the past three years. Hotel supply has lagged at a CAGR of just 0.9%. The Company believes there is ample room
to enter this market and that barriers for entry remain relatively low.
The
Company’s Presence in the Market
The
Company has targeted strategic locations in northern California that are currently underserved by the dollar store channel. It
currently operates one deep discount retail store location in Sacramento, California.
As
of December 31, 2017, the Company has no presence in the hotel market.
Although
the Company intends to begin trading precious metals and has begun acquiring and evaluating potential positions in the market,
it does not currently have a presence in the trade of such metals. Likewise, the Company currently has no presence in the hotel
or residential property marketplace. It intends to acquire such properties in the near future, thereby establishing a footprint
in the market.
The
Business: Precious Metals
Silver
and other precious metals, may be used as an investment. A traditional way of investing in silver is by buying actual bullion
bars. In some countries, like Switzerland and Liechtenstein, bullion bars can be bought or sold over the counter at major banks.
Another means of buying and trading silver is through silver coins. Silver coins include the one ounce 99.99% pure Canadian Silver
Maple Leaf and the one ounce 99.93% pure American Silver Eagle. Likewise, an increasing popular method of trading in silver and
precious metals is through exchange-traded products, such as exchange-traded funds, exchange-traded notes and closed-end funds
that aim to track the price of silver. Silver exchange-traded products are traded on the major stock exchanges including the London
and New York Stock Exchanges.
The
Company believes that stimulative monetary policies adopted by the United States, the European Union, China and Japan may cause
an increase in inflation. Gold and silver have traditionally served as a hedge against economic uncertainty and high inflation.
At
the present time, the Company does not anticipate or foresee a material effect on this line of its business from existing or probable
governmental regulations.
Services
and Products
The
Company plans to operate its discount retail store in the basic consumer goods market until such time when it begins
to operate hotels.
The
Company has begun to establish positions in precious metals and intends to hold as a long term investment. Currently, the Company
has acquired 22,003 ounces of silver and a small amount of gold.
On
April 18, 2017, the Company entered into a Letter of Intent to purchase a central California hotel for approximately $7,000,000
entering escrow in October 2017, however the escrow expired in December 2017.and
the purchase was terminated
Pricing
At
the moment, the Company’s business is phasing out of the dollar store retail sector. Most products are priced at 99 cents
or less. However, about 20% of the products offered at the 2,700 square feet store are priced over $1.00 due to customer requests
for specific products.
Competition
The
Company’s discount retail store is part of a highly competitive industry. The basic consumer packaged goods market encompasses
discount stores and many other retailers, including mass merchandise, grocery, drug, convenience, variety and other specialty
stores. The Company’s direct competitors will include retail companies such as ‘Dollar General’, ‘Family
Dollar’, ‘Dollar Tree’, and ’99 Cent Only Store’ to the extent that these competitors are within
a similar geographic area to the Company’s stores. These competitors may have greater financial and other resources than
does the Company.
The
Company intends to differentiate itself from other forms of discount retail stores by targeting low to middle-class consumers
in strategic locations in northern California currently underserved by the dollar store channel.
If
the Company does enter the hotel and or residential property industry, it will encounter significant competition from other hotel,
residential and resort owners and operators. Primary competitors would include branded and independent hotel operating companies,
national and international hotel brands and ownership companies.
Strategic
Partners and Suppliers
The
Company believes that strategic partnerships will be a major component of the Company’s operating strategy and path to success.
The Company hopes to work with several strategic partners in important areas of its business and operations. However, currently,
the Company has no such strategic partners.
The
Company entered into a Purchase Agreement with Dollar Store Services, Inc. in October 2013. The Company worked with Dollar Store
Services, Inc. to develop, design and build out its first retail storefront. There
are no Current or future commitments under such agreement.
Marketing
Strategy
The
Company has conducted limited advertising and marketing to date as the primary focus of the Company since inception has been to
concentrate on beginning its construction and development efforts. The Company has, however, given substantial attention to constructing
the marketing strategy and plans that it will use once its project enters the marketplace.
Operations
The
Company believes that presentation of the store and customer service are important factors in each customer’s experience.
Therefore, the Company’s personnel regularly check the store to ensure items are appropriately placed and aisles are organized.
The stores are maintained to provide a clean, convenient shopping experience and employees offer friendly, knowledgeable customer
service.
Sales
Strategy
The
Company’s management has handpicked the products in the stores to offer quality products priced at 99 cents or less. Compared
to other dollar stores, the Company offers newer inventory and approximately one and a half times more inventory per square foot
than other dollar stores. The Company also incentivizes larger purchases by offering customers a 10% discount if they spend more
than $50.00 before tax.
Revenues
and Losses
Since
its inception, the Company has focused its efforts on conducting market research and development, and has devoted little attention
or resources to sales and marketing or generating near-term revenues and profits. The Company has limited revenues to date and
has not realized any operating profits as of yet. In order to succeed, the Company needs to develop a viable strategy to market
its Dollar Stores and hotels and residential properties once they have been acquired and developed.
The
Company has posted limited revenues from operations based on customer sales at its discount retail stores. The Company posted
revenues of approximately $10,000 and $54,000 during the years ended December 31, 2017 and 2016, respectively.
The
Company has not generated profits and has posted net losses since inception. The Company posted net losses of ($36,276,542)
for the full year ended December 31, 2017 and ($6,338,792) for the year ended December 31, 2017.
Equipment
Financing
The
Company has no existing equipment financing arrangements.
THE
COMPANY
Employees
Currently,
the Company has two employees and one consultant. Our employees are not represented by a labor union or by a collective
bargaining agreement.
Item
1A. Risk Factors
Not
Applicable
Item
1B. Unresolved Staff Comments
None
Item
2. Properties
The
Company currently uses the residence of Jason C. Chang for its corporate office at $1,200 per month based on a 19-month lease
entered into in June 30, 2017 running through December 31, 2018 and is reflected as a prepaid expense on the
Company’s Balance Sheet at December 31, 2017. The Company has no other properties and at this time and has no
agreements to acquire any properties.
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 2016 with a one year
option which ran through June 2017. The Company is currently operating at that location on a month to month arrangement
for $2,100 per month.
Item
3. Legal Proceedings
In
April 2014, the Company received notice that a shareholder had filed a lawsuit against the Company. The Company has settled on
a cost of this lawsuit will be approximately $83,000, and has reflected this amount in accrued litigation on its balance sheet
as of December 31, 2016 as the Company settled this liability in December 2017 for $90,000.
On
January 27, 2015 the Company filed a lawsuit to recover costs associated with the August 2014 closing of the first store due to
substandard electrical wiring by the landlord. The lawsuit was settled in 2016 for $15,887, which the Company received
in November and December 2017.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On
December 9, 2015 the Company began light trading on the NASDAQ bulletin board under the symbol “SSOK”.
Our
common stock trades under the symbol “SSOK” on the OCTQB. The following table sets forth, for the quarters indicated,
the high and low last sale price information for our common stock as reported by OTC Markets Inc., a research service that complies
quote information reported on the National Association of Securities Dealers composite feed or other qualified inter-dealer quotation
medium. These quotations reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.
| | |
High | | |
Low | |
| | |
| | |
| |
| Year ended
December 31, 2017: | |
| | | |
| | |
| First
Quarter | |
$ | 1.30 | | |
$ | 0.95 | |
| Second
Quarter | |
| 0.16 | | |
| 0.06 | |
| Third
Quarter | |
| 1.40 | | |
| 0.54 | |
| Fourth
Quarter | |
| 0.68 | | |
| 0.13 | |
| Year ended
December 31, 2016: | |
| | | |
| | |
| First
Quarter | |
$ | 1.25 | | |
$ | 1.10 | |
| Second
Quarter | |
| 1.35 | | |
| 1.23 | |
| Third
Quarter | |
| 1.40 | | |
| 0.95 | |
| Fourth
Quarter | |
| 1.40 | | |
| 0.95 | |
At
such time as it qualifies, the Company may choose to apply for quotation of its securities on the OTC Bulletin Board.
The
OTC Bulletin Board is a dealer-driven quotation service. Unlike the Nasdaq Stock Market, companies cannot directly apply to be
quoted on the OTC Bulletin Board, only market makers can initiate quotes, and quoted companies do not have to meet any quantitative
financial requirements. Any equity security of a reporting company not listed on the Nasdaq Stock Market or on a national securities
exchange is eligible.
At
such time as it qualifies, the Company may choose to apply for quotation of its securities on the Nasdaq Capital Market.
In
general, there is greater liquidity for traded securities on the Nasdaq Capital Market and less on the OTC Bulletin Board.
As
of December 31, 2017, there are 47,853,638 shares of common stock outstanding of which 28,286,911 shares are owned by officers
and directors of the Company. There are approximately 40 holders of our common stock.
The
shares of common stock held by current shareholders are considered “restricted securities” subject to the limitations
of Rule 144 under the Securities Act. In general, securities may be sold pursuant to Rule 144 after being fully-paid and held
for more than 12 months. While affiliates of the Company are subject to certain limits in the amount of restricted securities
they can sell under Rule 144, there are no such limitations on sales by persons who are not affiliates of the Company. In the
event non-affiliated holders elect to sell such shares in the public market, there is likely to be a negative effect on the market
price of the Company’s securities. There is no dividend policy currently in place.
Item
6. Selected Financial Data.
There
is no selected financial data required to be filed for a smaller reporting company.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
You
should read the following discussion and analysis in conjunction with our Consolidated Financial Statement and related Notes thereto
included in Part II, Item 8 of this Report before deciding to purchase, hold or sell our common stock.
Sunstock,
Inc., (“Sunstock”) 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.
Management
intends to develop the Company for the acquisition and operation of hotels and residential properties in the high demand areas
of California, particularly Southern California and the San Francisco Bay Area. In December 2015, the Company entered into the
investment in precious metals as listed on their Balance sheet of December 31, 2017 of $384,981. In September 2013, management
developed plans to open and operate two retail stores in Sacramento, California. On October 30, 2013, the Company entered into
a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build out a retail store which the Company began
operating in February 2014. Additionally, the Company entered into a lease agreement on October 30, 2013 for 2,239 square feet
of retail shop space for this store in Sacramento, California. The lease required monthly payments for rent and maintenance of
$3,733 for thirty six months beginning February 2014.
Management
opened an additional retail store in Sacramento, California in May of 2014 and entered into a retail shop lease for sixty-seven
months beginning May 2014 for approximately 4,756 square feet. The monthly base rent for this location was $4,756, with seven
months of free rent throughout the first eleven months. The base rent gradually increased until the term was to expire in 2019.
This lease terminated in December 2015.
The
Company currently operates one Store,
Business
opportunities may be available in many different industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities difficult and complex.
In
analyzing prospective business opportunities, Sunstock may consider such matters as the available technical, financial and managerial
resources; working capital and other financial requirements; history of operations, if any; prospects for the future; nature of
present and expected competition; the quality and experience of management services which may be available and the depth of that
management; the potential for further research, development, or exploration; specific risk factors not now foreseeable but which
may be anticipated; the potential for growth or expansion; the potential for profit; the perceived public recognition or acceptance
of products, services, or trades; name identification; and other relevant factors. This discussion of the proposed criteria is
not meant to be restrictive of the virtually unlimited discretion of Sunstock to search for and enter into potential business
opportunities.
As
of December 31, 2017, The Company has not posted operating income since inception. It has an accumulated deficit of approximately
($43.000.000) since inception. 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.
Critical
Accounting Policies
The
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires making estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimates are
based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Stock-Based
Compensation:
All
share-based payments are recognized in the consolidated financial statements based upon their fair values.
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows ASC Topic 505. The measurement date for the fair value of the equity instruments issued is determined at the earlier of
(i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity
instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired
in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset
to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes.
2017
Year-End Analysis Results of Operations
Comparison
of the Years Ended December 31, 2017 and 2016
As
of December 31, 2017, Sunstock has generated revenues of $10,497 on cost of revenue and costs of $17,433 with limited cash
flows from operations since inception. For the year ended December 31, 2017, Sunstock had sustained a net loss of approximately
($36,300,000) and had accumulated a deficit of approximately ($43,000,000).
Gross
profit (loss) for the year ended December 31, 2017 was ($6,936) down from $13,417 for 2016 due to reduced operating hours.
Operating
expenses were up to $35,589,608 as compared to $6,384,863 for the year ended December 31, 2017 over year end 2016.
Stock based compensation was the main part of that during the current year at approximately $35,200,000.
Liquidity
and Capital Resources
As
of December 31, 2017, the Company had $59,167 in cash, $393,772 in inventories and $37,438 in prepaid expenses and services.
During the year ended December 31, 2017, the Company raised $13,630 (including a write off a subscription receivable of $5,940)
in cash from stock sales and $559,295 from convertible notes payable.
Item
8. Financial Statements and Supplementary Data
The
financial statements for the years ended December 31, 2017 and 2016 are attached hereto.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item
9A. Controls and Procedures
Pursuant
to Rules adopted by the Securities and Exchange Commission. The Company carried out an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of
the end of the fiscal year under the supervision and with the participation of the Company’s principal executive officer
(who is also the principal financial officer). There have been no significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, he believes
that the Company’s disclosure controls and procedures are not effective in gathering, analyzing and disclosing information
needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized
and processed timely. The principal executive officer is directly involved in the day-to-day operations of the Company.
Management’s
Report of Internal Control over Financial Reporting
The
Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with
the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s officer, its president, conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. Based on this evaluation,
management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2017,
based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control
system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.
Material
Weaknesses:
A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not
be prevented or detected on a timely basis.
The
material weaknesses identified are:
1.
Inadequate number of personnel that could accurately and timely record and report the Company’s financial statements in
accordance with GAAP;
2.
We did not employ an adequate number of people to ensure a control environment that would allow for the accurate and timely reporting
of the financial statements.
3.
Ineffective controls to ensure that the accounting for transactions are recorded in accordance with GAAP financial statements.
4.
We have not performed a risk assessment and mapped our processes to control objectives.
Notwithstanding
the existence of these material weaknesses in internal control over financial reporting, we believe that the financial statements
in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition in conformity with U.S. generally
accepted accounting principles (GAAP). Further, we do not believe the material weaknesses identified had an impact on prior financial
statements.
Remediation:
As
part of our ongoing remedial efforts, we have and will continue to, among other things:
1.
Expanded our accounting policy and controls organization by recently hiring qualified accounting and finance personnel;
2.
Increase our efforts to educate both our existing and expanded accounting policy and control organization on the application of
the internal control structure;
3.
Emphasize with management the importance of our internal control structure;
4.
Seek outside consulting services where our existing accounting policy and control organization believes the complexity of the
existing exceeds our internal capabilities.
5.
Plan to implement improved accounting systems.
We
believe that the foregoing actions will improve our internal control over financial reporting, as well as our disclosure controls
and procedures. We intend to perform such procedures and commit such resources as necessary to continue to allow us to overcome
or mitigate these material weaknesses such that we can make timely and accurate quarterly and annual financial filings until such
time as those material weaknesses are fully addressed and remediated.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in the Company’s internal controls over financial reporting during its fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Item
9B. Other information
Not
applicable.
PART
III
Item
10. Directors, Executive Officers, and Corporate Governance
The
Directors and Officers of the Company are as follows:
| Name | |
Age | |
Positions
and Offices Held |
| | |
| |
|
| Jason
C. Chang | |
44 | |
President,
Secretary, Director |
| Dr.
Ramnik S. Clair | |
66 | |
Vice
President, Director |
Management
of Sunstock
Sunstock
has two employees and one consultant. Jason C. Chang and Dr. Ramnik S. Clair are the officers and directors of Sunstock
and shareholders. Mr. Chang, as president of Sunstock, and Mr. Clair as vice president, have allocated time to the activities
of Sunstock with minimal cash compensation.
There
are no agreements or understandings for the officer or director to resign at the request of another person and the above- named
officer and director is not acting on behalf of nor will act at the direction of any other person.
Set
forth below are the names of the directors and officers of the Company, all positions and offices with the Company held, the period
during which they have served as such, and the business experience during at least the last five years:
Jason
C. Chang, serves as a director, Chief Executive Officer and President of Sunstock. Mr. Chang began his career in the hospitality
industry as a child and continuing as an adult working in the family business operating several hotels throughout California.
Mr. Chang has now had over 20 years of hospitality management experience. In addition, as an entrepreneur, Mr. Chang has helped
fund numerous startup companies, primarily related to the technology sector.
Dr.
Ramnik Clair serves as a director and Senior Vice President of Sunstock. Dr. Clair received his medical degree in India and immigrated
to the United States in 1983. He completed his medical residency in New York and has subsequently served in his medical practice
as a solo practitioner. Dr. Clair intends to assist the Company in building long term relationships with its client base.
Conflicts
of Interest
Messrs.
Chang and Clair are not directors of, or sole beneficial shareholders of any other companies which have filed registration statements
on Form 10 for the registration of their common stock pursuant to the Securities Exchange Act.
There
are no binding guidelines or procedures for resolving potential conflicts of interest. Failure by management to resolve conflicts
of interest in favor of the Company could result in liability of management to the Company. However, any attempt by shareholders
to enforce a liability of management to the Company would most likely be prohibitively expensive and time consuming.
Code
of Ethics. The Company has not at this time adopted a Code of Ethics pursuant to rules described in Regulation S-K. The Company
has two persons who are the only shareholders and who serve as the directors and officers. The Company has limited operations
and business actually does not receive any revenues or investment capital. The adoption of an Ethical Code at this
time would not serve the primary purpose of such a code to provide a manner of conduct as the development, execution and enforcement
of such a code would be by the same persons and only persons to whom such code applied. Furthermore, because the Company does
not have any activities, there are activities or transactions which would be subject to this code. At the time the Company enters
into a business combination or other corporate transaction, the current officers and directors will recommend to any new management
that such a code be adopted. The Company does not maintain an Internet website on which to post a code of ethics.
Corporate
Governance.
For
reasons similar to those described above, the Company does not have a nominating compensation nor audit committee of the board
of directors. At this time, the Company consists of two shareholders who serve as the corporate directors and officers. The Company
has no activities, and receives no revenues. At such time that the Company enters into a business combination and/or has additional
shareholders and a larger board of directors and commences activities, the Company will propose creating committees of its board
of directors, including both a nominating and an audit committee. Because there are only two shareholders of the Company, there
is no established process by which shareholders to the Company can nominate members to the Company’s board of directors.
Similarly, however, at such time as the Company has more shareholders and an expanded board of directors, the new management of
the Company may review and implement, as necessary, procedures for shareholder nomination of members to the Company’s board
of directors.
To
the Company’s review that no other reports were required, during the fiscal year ended December 31, 2017 all Section
16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with.
Item
11. Executive Compensation
The
Company’s officers and directors receive minimal cash compensation for services rendered to the Company. The officers and
directors are not accruing any compensation pursuant to any agreement with the Company. For the years ended December 31,
2017 and 2016 the Company recorded the following:
| |
● |
During the year
ended December 31, 2016, the Company’s chief executive officer was granted 2,800,000 shares of common stock for services
performed during 2016. Based on the estimated fair value of the common shares, the Company recorded approximately $3,400,000
of compensation expense to the officer; as such shares were considered compensatory for services provided through December
31, 2016. |
| |
|
|
| |
● |
During the year
ended December 31, 2017, the Company’s chief executive officer 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. |
No
retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by the Company
for the benefit of its employees.
The
Company currently does not compensate its directors.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table sets forth, as of December 31, 2017, each person known by the Company to be the beneficial owner of five percent
or more of the Company’s common stock and the director and officer of the Company. The Company does not have any compensation
plans and has not authorized any securities for future issuance. Except as noted, the holder thereof has sole voting and investment
power with respect to the shares shown.
| | |
Amount
of | | |
Percent
of | |
| Name
and Address | |
Beneficial | | |
Outstanding | |
| of
Beneficial Owner | |
Ownership | | |
Stock
(1) | |
| | |
| | |
| |
| Jason
C. Chang | |
| | | |
| | |
| 111
Vista Creek Circle | |
| | | |
| | |
| Sacramento,
CA 92835 | |
| 27,226,411 | | |
| 57 | % |
| | |
| | | |
| | |
| Dr.
Ramnik C. Clair | |
| | | |
| | |
| 111
Vista Creek Circle | |
| | | |
| | |
| Sacramento,
CA 92835 | |
| 2,060,500 | | |
| 4 | % |
| | |
| | | |
| | |
| All
Executive officers and | |
| | | |
| | |
| Directors
as a Group ( 2 Persons) | |
| 29,286,911 | | |
| 61 | % |
| |
(1) |
Based
upon 47,853,638 Shares outstanding as of the date of December 31, 2017. |
Item
13. Certain Relationships and Related Transactions and Director Independence
The
combined parents to Jason C. Chang, the Company’s Chief Executive Officer and a director, worked for a combined total of
5,900,000 shares of the Company’s common stock for the year ended December 31, 2017, which were valued at approximately
$7,500,000 upon grant.
The
wife of Dr. Clair, a director of the Company, was issued 1,000,000 shares as compensation, which were valued at approximately
$1,200,000 upon grant.
During
the year ended December 31, 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.
During
the year ended December 31, 2017, the Company recorded compensation to its CEO for the following.
| |
● |
During
the year ended December 31, 2017, the Company’s chief executive officer 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. |
Sunstock
is not currently required to maintain an independent director as defined by Rule 4200 of the Nasdaq Capital Market nor does it
anticipate that it will be applying for listing of its securities on an exchange in which an independent directorship is required.
It is likely that neither Mr. Chang nor Dr. Clair would not be considered independent directors if it were to do so.
Item
14. Principal Accounting Fees and Services
Audit
Fees
The
aggregate fees billed or expected to be billed for each of the last two years for professional services rendered by the independent
registered public accounting firm for the audits of the Company’s annual financial statements review of financial statements
included in the Company’s Form 10-K and Form 10-Q reports, consents and services normally provided in connection
with statutory and regulatory filings or engagements were as follows:
| | |
Fiscal
Year Ended | | |
Fiscal
Year Ended | |
| | |
December 31, 2017 | | |
December 31, 2016 | |
| | |
| | |
| |
| Audit
Fees | |
| | | |
| | |
| Hall
& Company | |
| 55,000 | | |
| 40,000 | |
| | |
$ | 55,000 | | |
$ | 40,000 | |
AUDIT-RELATED
FEES
None.
TAX
FEES
None.
ALL
OTHER FEES
None.
AUDIT
COMMITTEE POLICIES AND PROCEDURES
The
Company does not currently have an audit committee serving and as a result its board of directors performs the duties of an audit
committee. The board of directors will evaluate and approve in advance, the scope and cost of the engagement of an auditor before
the auditor renders audit and non-audit services. The Company does not rely on pre- approval policies and procedures.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
(a)
Exhibits
23.1 Consent of Hall & Company – Independent Registered Public Accounting Firm
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
| |
SUNSTOCK,
INC. |
| |
|
|
| Dated:
April 6, 2018 |
By: |
/s/
Jason C. Chang |
| |
|
Jason
C. Chang |
| |
|
President,
Chief Executive Officer and Chairman
(Principal Executive and Financial Officer) |
Pursuant
to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
FINANCIAL
STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the shareholders and the board of directors of Sunstock, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Sunstock, Inc. (the "Company") as of December 31, 2017
and 2016, the related consolidated statements of operations, stockholders’ equity(deficit) and cash flows for each of the
two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Emphasis
of Matter Regarding Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and
has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
Hall & Company
We
have served as the Company’s auditor since 2014
Irvine,
CA
April
6, 2018
SUNSTOCK,
INC.
BALANCE
SHEETS
| | |
December
31, 2017 | | |
December
31, 2016 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| Current
assets | |
| | | |
| | |
| Cash | |
$ | 59,167 | | |
$ | 16,601 | |
| Other
receivable | |
| - | | |
| 1,000 | |
| Inventory
- products | |
| 8,791 | | |
| 4,681 | |
| Inventory
- silver | |
| 384,981 | | |
| 358,178 | |
| Prepaid
services | |
| 18,400 | | |
| 27,170 | |
| Prepaid
expenses | |
| 19,038 | | |
| 6,600 | |
| | |
| | | |
| | |
| Total
Current Assets | |
| 490,377 | | |
| 414,230 | |
| | |
| | | |
| | |
| Property
and equipment-net | |
| 7,937 | | |
| 5,091 | |
| | |
| | | |
| | |
| Total
assets | |
$ | 498,314 | | |
$ | 419,321 | |
| | |
| | | |
| | |
| LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
| Current
liabilities | |
| | | |
| | |
| Accounts
payable and accrued expenses | |
$ | 38,274 | | |
$ | 56,411 | |
| Accrued
litigation | |
| - | | |
| 82,660 | |
| Convertible
notes payable, net of discount | |
| 224,328 | | |
| - | |
| Derivative
liability - conversion feature | |
| 1,009,896 | | |
| - | |
| Total
Current Liabilities | |
| 1,272,498 | | |
| 139,071 | |
| | |
| | | |
| | |
| Total
liabilities | |
| 1,272,498 | | |
| 139,071 | |
| | |
| | | |
| | |
| Commitments
and contingencies | |
| | | |
| | |
| Stockholders’
equity (deficit) | |
| | | |
| | |
| Preferred
stock; $0.0001 par value, 20,000,000 shares authorized; zero shares issued and outstanding | |
| - | | |
| - | |
| Common
stock, $0.0001 par value, 300,000,000 shares authorized; 47,853,638 and 18,927,638 shares issued and outstanding as of December
31, 2017 and December 31, 2016, respectively | |
| 4,785 | | |
| 1,892 | |
| Additional
paid - in capital | |
| 42,543,835 | | |
| 7,324,620 | |
| Subscription
receivable | |
| - | | |
| - | |
| Accumulated
deficit | |
| (43,322,804 | ) | |
| (7,046,262 | ) |
| | |
| | | |
| | |
| Total
stockholders’ equity (deficit) | |
| (774,184 | ) | |
| 280,250 | |
| Total
liabilities and stockholders’ equity (deficit) | |
$ | 498,314 | | |
$ | 419,321 | |
The
accompanying notes are an integral part of the financial statements
SUNSTOCK,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
| | |
For the Years ended December 31, | |
| | |
2017 | | |
2016 | |
| | |
| | |
| |
| Revenues | |
$ | 10,497 | | |
$ | 54,036 | |
| Cost of revenue | |
| 17,433 | | |
| 40,619 | |
| Gross profit (loss) | |
| (6,936 | ) | |
| 13,417 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Professional fees | |
$ | 3,041,930 | | |
$ | 376,330 | |
| Compensation | |
| 32,123,688 | | |
| 5,874,803 | |
| Other operating expenses | |
| 417,054 | | |
| 147,147 | |
| | |
| | | |
| | |
| Operating loss | |
| (35,589,608 | ) | |
| (6,384,863 | ) |
| Other income (expense): | |
| | | |
| | |
| Unrealized gain on investments in precious metals | |
| 23,327 | | |
| 41,825 | |
| Realized gain on investments in marketable securities | |
| - | | |
| 5,046 | |
| Interest expense | |
| (810,758 | ) | |
| - | |
| Changes in fair value of derivative liability | |
| 101,297 | | |
| - | |
| | |
| | | |
| | |
| Loss before income tax | |
| (36,275,742 | ) | |
| (6,337,992 | ) |
| Income tax | |
| 800 | | |
| 800 | |
| | |
| | | |
| | |
| Net loss | |
$ | (36,276,542 | ) | |
$ | (6,338,792 | ) |
| | |
| | | |
| | |
| Loss per share - basic and diluted | |
$ | (0.98 | ) | |
$ | (0.48 | ) |
| | |
| | | |
| | |
| Weighted average number of common shares outstanding - basic and diluted | |
| 37,115,528 | | |
| 13,140,533 | |
The
accompanying notes are an integral part of the financial statements
SUNSTOCK,
INC.
Statement
of Changes in Stockholders’ Equity (Deficit)
For
the Years Ended December 31, 2017 and 2016
| | |
| | |
| | |
| | |
Stock | | |
| | |
| |
| | |
| | |
Common | | |
Additional Paid- | | |
Subscription | | |
Accumulated | | |
| |
| | |
Shares | | |
Stock | | |
In Capital | | |
Receivable | | |
Deficit | | |
Total | |
| Balance
at December 31, 2015 | |
| 10,482,103 | | |
$ | 1,048 | | |
$ | 1,007,034 | | |
$ | - | | |
$ | (707,470 | ) | |
$ | 300,612 | |
| Issuance
of common stock for cash | |
| 4,255,535 | | |
| 425 | | |
| 39,701 | | |
| - | | |
| - | | |
| 40,126 | |
| Estimated
fair value of common stock issued for services | |
| 4,190,000 | | |
| 419 | | |
| 6,277,885 | | |
| - | | |
| - | | |
| 6,278,304 | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
$ | (6,338,792 | ) | |
| (6,338,792 | ) |
| Balance
at December 31, 2016 | |
| 18,927,638 | | |
$ | 1,892 | | |
$ | 7,324,620 | | |
$ | - | | |
$ | (7,046,262 | ) | |
$ | 280,250 | |
| Issuance
of common stock for cash | |
| 17,859 | | |
| 2 | | |
| 19,568 | | |
| | | |
| | | |
| 19,570 | |
| Issuance
of common stock for convertible notes | |
| 200,000 | | |
| 20 | | |
| 18,500 | | |
| | | |
| | | |
| 18,520 | |
| Estimated
fair value of common stock issued for services, including shares issued in prior year | |
| 28,708,141 | | |
| 2,871 | | |
| 35,181,147 | | |
| | | |
| | | |
| 35,184,018 | |
| Net
loss | |
| | | |
| | | |
| | | |
| | | |
$ | (36,276,542 | ) | |
| (36,276,542 | ) |
| | |
| 47,853,638 | | |
| 4,785 | | |
| 42,543,835 | | |
| - | | |
| (43,322,804 | ) | |
| (774,184 | ) |
The
accompanying notes are an integral part of the financial statements
SUNSTOCK,
INC.
STATEMENTS
OF CASH FLOWS
| | |
For the Years ended | |
| | |
December 31, 2017 | | |
December 31, 2016 | |
| OPERATING ACTIVITIES | |
| | | |
| | |
| Net loss | |
$ | (36,276,542 | ) | |
$ | (6,338,792 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
| Realized gain on marketable securities, net | |
| - | | |
| (5,046 | ) |
| Loss on subscription receivable | |
| 5,940 | | |
| - | |
| Change in fair value of derivative liability | |
| (101,297 | ) | |
| | |
| Unrealized gain on investment in precious metals | |
| (23,327 | ) | |
| (41,825 | ) |
| Depreciation | |
| 5,528 | | |
| 3,555 | |
| Amortization of debt discount and issuance costs | |
| 236,042 | | |
| - | |
| Common stock issued for services including amortization of prepaid consulting | |
| 35,192,788 | | |
| 6,251,113 | |
| Excess fair value of derivative | |
| 552,016 | | |
| - | |
| Changes in operating assets and liabilities | |
| | | |
| | |
| Other Receivables | |
| 1,000 | | |
| - | |
| Inventories - products | |
| (4,110 | ) | |
| 22,633 | |
| Prepaid expenses & services | |
| (12,438 | ) | |
| (3,201 | ) |
| Accrued litigation | |
| (82,660 | ) | |
| 27,460 | |
| Accounts payable | |
| (11,449 | ) | |
| 17,104 | |
| Net cash used in operating activities | |
| (518,509 | ) | |
| (66,999 | ) |
| INVESTING ACTIVITIES | |
| | | |
| | |
| Inventories - silver | |
| (3,476 | ) | |
| (13,924 | ) |
| Purchase of property and equipment | |
| (8,374 | ) | |
| (917 | ) |
| Proceeds from sales of marketable securities | |
| - | | |
| 44,616 | |
| Cash provided by (used in) investing activities | |
| (11,850 | ) | |
| 29,775 | |
| | |
| | | |
| | |
| FINANCING ACTIVITIES | |
| | | |
| | |
| Proceeds from convertible notes payable | |
| 559,295 | | |
| - | |
| Proceeds from issuance of common stock | |
| 13,630 | | |
| 40,126 | |
| Net cash provided by financing activities | |
| 572,925 | | |
| 40,126 | |
| | |
| | | |
| | |
| Net change in cash | |
| 42,566 | | |
| 2,902 | |
| Cash, beginning of period | |
| 16,601 | | |
| 13,699 | |
| Cash, end of period | |
$ | 59,167 | | |
$ | 16,601 | |
| | |
| | | |
| | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES: | |
| | | |
| | |
| Interest | |
$ | - | | |
$ | - | |
| Income taxes | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH | |
| | | |
| | |
| Common stock issued as prepaid consulting | |
$ | 20,987,150 | | |
$ | 403,500 | |
| Shares issued in exchange for debt | |
$ | 18,520 | | |
$ | - | |
| Shares issued under stock subscription receivable | |
$ | - | | |
$ | 403,500 | |
| Fair value of derivatives recorded as debt discount | |
$ | 559,177 | | |
$ | - | |
The
accompanying notes are an integral part of the financial statements
SUNSTOCK,
INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE
OF OPERATIONS
Sunstock,
Inc. (“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 may
attempt to locate and negotiate with a business entity for the combination of that target company with Sunstock. 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. Sunstock has been formed to provide a method for a foreign or domestic private company
to become a reporting company with a class of securities registered under the Securities Exchange Act of 1934.
On
July 18, 2013, the Company has changed its name from Sandgate Acquisition Corporation to Sunstock, Inc.
On
July 18, 2013, Jason Chang and Dr. Ramnik S. Clair were named as the directors of the Company.
On
October 30, 2013, the Company entered into a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build
out a retail store which the Company opened in February 2014. The Company opened its second retail store in May 2014. On August
21, 2014 the first store was forced to close due to below code electrical wiring the landlord had provided. Perishable inventory
at this store was relocated to the second store as nonperishables were moved into storage along with fixed assets. The Company’s
second and currently only store was relocated in December of 2015 under lease running through June 2017 and operating on a month
to month lease currently. The Company plans to continue purchasing more precious metals in silver and currently searching for
a hotel in the Central California are as their previous selection in escrow during the 4th quarter of 2017 did not
close.
BASIS
OF PRESENTATION
The
summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial
statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted
in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing
the accompanying financial statements.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with 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 realizability and valuation of inventories and value
of stock-based transactions.
CONCENTRATION
OF RISK
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places
its cash with high quality banking institutions. The Company did not have cash balances in excess of the Federal Deposit Insurance
Corporation limit as of December 31, 2017 and 2016.
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 fair value. 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 per ounce. Likewise, the Company does not plan to sell its
gold holdings unless the market price exceeds $2,500 per ounce.
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.
PRECIOUS
METALS
Inventory
– silver: principally includes bullion and bullion coins and are acquired and initially recorded at fair market value. The
fair market value of the bullion and bullion coins is comprised of two components: 1) published market values attributable to
the costs of the raw precious metal, and 2) a published premium paid at acquisition of the metal. The premium is attributable
to the additional value of the product in its finished goods form and the market value attributable solely to the premium may
be readily determined, as it is published by multiple reputable sources. The Company’s inventory - silver are subsequently
recorded at their fair market values on a quarterly basis. The fair value of the inventory is determined using pricing and data
derived from the markets on which the underlying commodities are traded. Precious metals commodities inventory are classified
in Level 1 of the valuation hierarchy.
The
change in fair value of the precious metals was included in the financial statements herein as recorded on the Company’s
Statements of Operations as an Unrealized gain on investments on precious metals of $23,327 at December 31, 2017.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of 3
to 5 years. Any leasehold improvements are amortized at the lesser of the useful life of the asset or the lease term.
LONG-LIVED
ASSETS
The
Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the fair value
of the related asset. No impairment charges were incurred during the years ended December 31, 2017 and 2016. There can be no assurance,
however, that market conditions will not change or demand for the Company’s services will continue, which could result in
impairment of long-lived assets in the future.
REVENUE
RECOGNITION
The
Company recognizes revenues in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification
(“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.
INCOME
TAXES
The
Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are
determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities.
A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Therefore, the Company has recorded a full valuation allowance
against the net deferred tax assets. The Company’s income tax provision consists of state minimum taxes.
The
Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained.
The
total unrecognized tax benefit resulting in an increase in deferred tax assets and corresponding increase in the valuation allowance
at December 31, 2017 is $12,029,000. There are no unrecognized tax benefits included in the balance sheet that would, if
recognized, affect the effective tax rate.
The
Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company
had $0 accrued for interest and penalties on each of the Company’s balance sheets at December 31, 2017 and 2016.
The
Company is subject to taxation in the U.S. and the state of California jurisdictions. The Company’s tax years for 2013 and
forward for federal and state purposes are subject to examination by the U.S. and state of California tax authorities due to the
carry-forward of unutilized net operating losses. The Company does not foresee material changes to its gross uncertain income
tax position liability within the next twelve months.
EARNINGS
(LOSS) PER COMMON SHARE
Basic
earnings (loss) per share represent income (loss) available to common stockholders divided by the weighted-average number of common
shares outstanding during the period. 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 potential common 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.
For
the year ended December 31, 2017 and 2016 there were no potentially dilutive shares that were excluded from the diluted earnings
(loss) per share as their effect would have been antidilutive for the years then ended.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company measures the fair value of certain of its financial assets on a recurring basis. A fair value hierarchy is used to rank
the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories:
Level
1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as unadjusted quoted prices for similar
assets and liabilities, unadjusted quoted prices in the markets that are not active, or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
At
December 31, 2017 and 2016, the Company’s financial instruments include cash, accounts payable, and accrued litigation (2016).
The carrying amount of cash, accounts payable, and accrued litigation approximates fair value due to the short-term maturities
of these instruments.
NOTE
2 - GOING CONCERN
The
Company has not posted operating income since inception. It has an accumulated deficit of approximately $43,300,000 as
of December 31, 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
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 fiscal 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 negotiate with a business entity for the combination of that target company with the Company.
There
is no assurance that the Company will ever be profitable. The 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 FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers
(Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific
requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements
a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk
and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues
and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract
costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration
to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting
periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively
or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of
ASU 2014-09 will have on its Consolidated Financial Statements.
In
February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made
to align, where necessary, lessor accounting with the lessee accounting model and ASC 606, Revenue from Contracts with Customers.
The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize
lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business
entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. While we are
currently assessing the impact ASU 2016-02 will have on the financial statements, we expect the primary impact to the financial
position upon adoption will be the recognition, on a discounted basis, of the minimum commitments on the balance sheet under our
noncancelable operating lease resulting in the recording of a right of use asset and lease obligation.
In
August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern.” The amendments
in this update provide guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision
of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate
whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability
to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation
should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial
statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability
to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements
to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s
ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of
the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s
plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s
plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to
continue as a going concern. The amendments in this update are effective for interim and annual reporting periods after December
15, 2016 and early application is permitted. The Company his adopted this standard effective January 1, 2017 and it did not
have a significant compact on its financial statements.
NOTE
4 – PROPERTY AND EQUIPMENT
| | |
December
31, 2017 | | |
December
31, 2016 | |
| Furniture
and equipment | |
$ | 18,166 | | |
$ | 9,792 | |
| Less
– accumulated depreciation | |
| (10,229 | ) | |
| (4,701 | ) |
| | |
$ | 7,937 | | |
$ | 5,091 | |
Depreciation
expense for the year ended December 31, 2017 and 2016 was $5,528 and $3,555, respectively.
NOTE
5 - RELATED PARTY BALANCES
During
the year ended December 31, 2017, the Company’s chief executive officer 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
The
combined parents to Jason C. Chang, the Company’s Chief Executive Officer and a director, worked for a combined total of
5,900,000 shares of the Company’s common stock for the year ended December 31, 2017, which were valued at approximately
$7,500,000 upon grant.
The
wife of Dr. Clair, a director of the Company, was issued 1,000,000 shares as compensation, which were valued at approximately
$1,200,000 upon grant.
The
Company has not incurred any salaries and related expenses during 2017 and 2016 The parents of the Company’s officer have
contributed their time without compensation, nor any amounts due. They assist with operating the Company’s store (two stores
through August 2014). In addition, the Company receives consulting services from a shareholder without any compensation, nor any
amounts due. The Company approximates the annual expense would total $75,000 to hire and pay for comparable services. No such
amounts have been recorded for the year ended December 31, 2017 and 2016. See note 9 Shareholders Equity.
During
the years ended December 31, 2017 and 2016, the Company was provided a non-interest bearing, non-secured line of
credit by a shareholder. The line is due on demand. During the years ended December 31, 2017 and 2016, the Company had
net borrowings of approximately $0 and $30,000 respectively, which were due on demand which were included
in accounts payable in the accompanying balance sheet.
In
January 2015, the Company’s CEO had provided the Company with a revolving line of credit up to $120,000. All principal
and interest (5%) was due and payable in January 2016. There were no borrowings under the revolving line during the year ended
December 31, 2015. This expired in February 2016 and was not renewed.
During
the year ended December 31, 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
6 – 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 required 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. The Company has continued to operate at this location on a month
to month agreement for $2,100 per month.
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.
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. The Company had settled on the amount
$82,660 up from the December 31,2015 accrued amount of $55,200 and has reflected these amounts in accrued litigation on the accompanying
balance sheet as of December 31, 2016. Repayment was made in December 2017 for $90,000.
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. In connection with 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. 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 sheets.
NOTE
7 – OUTSTANDING DEBT
Convertible
notes are as follows as of December 31, 2017:
| | |
Outstanding
as of December 31, 2017 | | |
Debt
Discount | | |
Net
Amount | | |
Interest
rate | | |
Accrued
Interest | | |
Maturity
Maturity | |
| Auctus
May 24, 2017 | |
$ | 105,988 | | |
| (21,121 | ) | |
| 84,867 | | |
| 12 | % | |
$ | 1,499 | | |
| February
18, 2018 | |
| EMA
June 5, 2017 | |
| 109,680 | | |
| (46,877 | ) | |
| 62,803 | | |
| 10 | % | |
| 6,721 | | |
| June
5, 2018 | |
| Auctus
October 11, 2017 | |
| 85,000 | | |
| (59,698 | ) | |
| 25,302 | | |
| 12 | % | |
| 2,295 | | |
| October
11, 2018 | |
| EMA
October 11, 2017 | |
| 85,000 | | |
| (66,137 | ) | |
| 18,863 | | |
| 12 | % | |
| 1,896 | | |
| October
11, 2018 | |
| Power
Up October 21, 2017 | |
| 108,000 | | |
| (81,677 | ) | |
| 26,323 | | |
| 12 | % | |
| 2,414 | | |
| October
21, 2018 | |
| Crown
Bridge December 8, 2017 | |
| 65,000 | | |
| (61,062 | ) | |
| 3,938 | | |
| 8 | % | |
| 728 | | |
| December
8, 2018 | |
| Power
Up December 21, 2017 | |
| 53,000 | | |
| (50,768 | ) | |
| 2,232 | | |
| 12 | % | |
| 209 | | |
| September
30, 2018 | |
| | |
$ | 611,668 | | |
$ | (387,340 | ) | |
$ | 224,328 | | |
| - | | |
$ | 15,762 | | |
| - | |
| Derivative
liability | |
$ | 1,009,896 | | |
| | | |
| | | |
| | | |
| | | |
| | |
During
the year ended December 31, 2017, the Company recorded an aggregate of approximately $560,000 of debt discount and $550,000 of
excess derivative fair value to interest expense upon issuance of the convertible notes.
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 was 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 $112,500 of debt discount upon issuance including issuance costs of $12,750. 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.
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, and the Company recorded approximately $115,000 of debt discount upon issuance, including issuance
costs of $15,000. 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.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
October 11, 2017, Sunstock, Inc. (the “Company” or “we”) entered into a securities purchase agreement
(“SPA AUC”) with Auctus Fund, LLC, upon the terms and subject to the conditions of SPA3, we issued a convertible promissory
note in the principal amount of $85,000.00 (the “Note”) to Auctus. The Company received proceeds of $77,000 in cash
from Auctus. Interest accrues on the outstanding principal amount of the Note at the rate of subject 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 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 two (2) lowest trading days during the twenty-five
(25) Trading Day period ending on the last complete Trading Day prior to the Conversion Date. The variable conversion term was
a derivative liability, and the Company recorded approximately $74,131 of debt discount upon issuance, including issuance costs
of $10,750 The prepayment amount ranges from 135% to 150% of the outstanding principle plus accrued interest. 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) 140%
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 $8,000 for its expenses and legal fees.
On
October 11, 2017, the “Company” entered into a securities purchase agreement (“SPA4”) with EMA Financial,
LLC (“EMA2), upon the terms and subject to the conditions of SPA4, we issued a convertible promissory note in the principal
amount of $85,000.00 (the “Note 4) to EMA. The Company received proceeds of $79,395 in cash from EMA2. Interest accrues
on the outstanding principal amount of the Note4 at the rate of 10% per year. The Note4 is due and payable on October 11, 2018.
The Note4 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%. The variable conversion term
was a derivative liability, and the Company recorded approximately $85,000 of debt discount upon issuance, including issuance
costs of $5,100. The Company shall have the right, exercisable on not less than five (5) trading days’ prior written
notice to EMA2, 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 Note4 becomes immediately due and payable.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
October 24, 2017, the “Company” entered into a securities purchase agreement (“SPA5”) with Powerup Lending
Group, LTD (“POWER), upon the terms and subject to the conditions of SPA5, we issued a convertible promissory note in the
principal amount of $108,000.00 (the “Note5”) to POWER. The Company received proceeds of $108,000 in cash from POWER.
Interest accrues on the outstanding principal amount of the Note3 at the rate of 12% per year. The Note 5 is due and payable on
July 30, 2018. The Note 5 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) 61%
of the lowest sale price for the common stock during the twenty (20) 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 69% figure mentioned above shall be reduced to 35%. The variable
conversion term was a derivative liability, and the Company recorded approximately $108,000 net of debt discount of $108,000
upon issuance, including issuance costs of $3,000. The prepayment amount ranges from 135% to 150% of the outstanding
principle plus accrued interest of the note. The Company shall have the right, exercisable on not less than five (5) 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 151st 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 150% of all unpaid principal and interest per annum and the Note 5 becomes immediately
due and payable.
On
December 8, 2017, the “Company” entered into a securities purchase agreement (“SPA3”) with Crown Bridge
Partners, LLC (“CROWN), upon the terms and subject to the conditions of SPA7, we issued a convertible promissory
note in the principal amount of $65,000.00 (the “Note6”) to CROWN. The Company received proceeds of $56,000 in cash
from CROWN. Interest accrues on the outstanding principal amount of the Note 6 at the rate of 8% per year. The Note6 is due and
payable on December 8, 2018. The Note6 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) 55% 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 $0.10 or less. (as appropriately and equitably adjusted
for stock splits, stock dividends, stock contributions and similar events), then such 55% figure mentioned above shall be reduced
to 45%. The variable conversion term was a derivative liability, and the Company recorded approximately $65,000 of debt discount
upon issuance, including issuance costs of $2,500. The prepayment amount ranges from 135% to 150% of the outstanding principle
plus accrued interest of the note. If the shares are not delivered to CROWN within two business days of the Company’s receipt
of the conversion notice, the Company will pay CROWN 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 CROWN. CROWN 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 CROWN, to prepay the outstanding
balance on this Note for (i) 135% of all unpaid principal and interest if paid within 60 days of the issue date and (ii) 150%
up to 180% of all unpaid principal and interest starting on the 61st 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 150% of all
unpaid principal and interest per annum and the Note6 becomes immediately due and payable.
NOTE
7 – OUTSTANDING DEBT (CONTINUED)
On
December 21, 2017, the “Company” entered into a securities purchase agreement (“SPA7”) with Powerup Lending
Group, LTD (“POWER2), upon the terms and subject to the conditions of SPA7 we issued a convertible promissory note in the
principal amount of $53,000.00 (the “Note7”) to POWER2. The Company received proceeds of $50,000 in cash from POWER2.
Interest accrues on the outstanding principal amount of the Note7 at the rate of 12% per year. The Note7 is due and payable on
September 30, 2018. The Note7 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) 61% of the lowest sale price for the common stock during the twenty (20) consecutive trading days immediately preceding the
conversion date. If the closing sale price at any time fall below $0.10 or less. (as appropriately and equitably adjusted for
stock splits, stock dividends, stock contributions and similar events), then such 61% figure mentioned above shall be reduced
to 51%. The variable conversion term was a derivative liability, and the Company recorded approximately $53,000 of debt discount
upon issuance, including issuance costs of $3,000. The prepayment amount ranges from 135% to 150% of the outstanding principle
plus accrued interest of the note. The Company shall have the right, exercisable on not less than five (5) trading days’
prior written notice to POWER2, 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 151st 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 150% of all unpaid principal and interest per annum and the Note7 becomes immediately
due and payable.
During
the year ended December 31, 2017, the Company amortized approximately $236,000 of debt discount to interest expense.
NOTE
8 – 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 December
31, 2017.
| | |
For
the Year
ended
December 31, 2017 | |
| | |
| |
| Annual
Dividend yield | |
| 0 | % |
| Expected
life (years) | |
| 0.15
-0.94 | |
| Risk-free
interest rate | |
| 1.66 | % |
| Expected
volatility | |
| 75%
- 254 | % |
NOTE
8 – DERIVATIVE LIABILITIES (CONTINUED)
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 the year ended December 31, 2017:
| Balance December
31, 2016 | |
$ | - | |
| Issuance
of embedded conversion feature | |
| 1,111,193 | |
| Change
in fair value | |
| (101,297 | ) |
| Balance
as of December 31, 2017 | |
$ | 1,009,896 | |
NOTE
9 - STOCKHOLDER’S EQUITY (DEFICIT)
The
Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 of preferred stock.
During
the year ended December 31, 2017, the Company received an aggregate of $13,570 (net of approximately $6,000 subscription
receivable forgiven) from the issuance of 17,589 shares of its common stock. In addition, the Company issued upon conversion of
issued notes payable and accrued interest of approximately $18,500 for convertible notes in relation to 200,000 shares of common
stock.
During
the year ended December 31, 2017, the Company issued 28,708,141 shares of fully vested non-forfeitable shares of common stock
to certain employees and consultants for future services. The fair value of the shares issued was determined to be approximately
$32,660,000, and the remaining amount was recorded as prepaid consulting. During the year ended December 31, 2017, the Company
amortized approximately $32,642,000 to stock based compensation expense related to these issuances. In addition, the Company
recorded approximately $2,520,000 of compensation expense related to the vesting of shares issued in 2016.
During
the year ended December 31, 2016, the Company’s chief executive officer was granted 2,800,000 shares of common stock
for services performed during 2016. Based on the estimated fair value of the common shares, the Company recorded approximately
$3,400,000 of compensation expense to the officer; as such shares were considered compensatory for services provided through
December 31, 2016.
During
the year ended December 31, 2017, the Company’s chief executive officer was awarded 18.05 shares million of the Company’s
common stock for services rendered in 2017 and valued at an aggregate of approximately $19,500,000 (based on the
closing price on the measurement date), of which $9050 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
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 Company also received proceeds of $720. The shares were valued at $403,500
(based on the closing market price on the measurement date) and have been recorded as prepaid consulting in the accompanying condensed
balance sheet. The Company has amortized $376,330 of such expense during the year ended December 31, 2016.
During
the year ended December 31, 2016, the Company issued an aggregate of 6,660,000 shares of restricted common stock to certain employees
for future services (see Note 5).
During
the year ended December 31, 2016, the Company received an aggregate of $39,847 (including $5,530 that was received with shares
issued for services noted above) from the issuance of 1,455,535 shares of common stock.
NOTE
10 - INCOME TAXES
The
Company is subject to taxation in the United States of America and the state of California. The provision for income taxes for
the years ended December 31, 2017 and 2016 is summarized below:
| | |
December
31, 2017 | | |
December
31, 2016 | |
| Current: | |
| | | |
| | |
| Federal | |
$ | - | | |
$ | - | |
| State | |
| 800 | | |
| 800 | |
| Total
current | |
| 800 | | |
| 800 | |
| Deferred: | |
| | | |
| | |
| Federal | |
| 12,675,722 | | |
| 2,308,380 | |
| State | |
| 2,140,461 | | |
| 480,923 | |
| Change
in valuation allowance | |
| (14,816,183 | ) | |
| (2,789,303 | ) |
| Total
deferred | |
| - | | |
| - | |
| Income
tax provision(benefit) | |
$ | 800 | | |
$ | 800 | |
A
reconciliation of income taxes computed by applying the statutory U.S. income tax rate to the Company’s loss before income
taxes to the income provision is as follows:
| | |
December
31, 2016 | | |
December
31, 2016 | |
| U.S.
federal statutory tax rate | |
| 34.00 | % | |
| 34.00 | % |
| State
tax benefit, net | |
| (0.0023 | )% | |
| (0.30 | )% |
| Stock
based compensation | |
| (33.0975 | )% | |
| (30.80 | )% |
| Other | |
| 0.00 | % | |
| 0.00 | % |
| Valuation
allowance | |
| (0.09010 | )% | |
| (3.20 | )% |
| Effective
income tax rate | |
| (0.0023 | )% | |
| 0.00 | % |
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred
tax assets are as follows:
| | |
December
31, 2017 | | |
December
31, 2016 | |
| Deferred
tax assets: | |
| | | |
| | |
| NOL’s | |
$ | 659,748 | | |
$ | 299,698 | |
| State
taxes | |
| - | | |
| - | |
| Inventory
and other reserves | |
| - | | |
| - | |
| Depreciation
and amortization | |
| - | | |
| - | |
| NQ
stock option expense | |
| 14,156,435 | | |
| 4,658,597 | |
| Total
deferred tax assets | |
| 14,816,183 | | |
| 4,958,295 | |
| Valuation
allowance | |
| (14,816,183 | ) | |
| (4,958,295 | ) |
| Net
deferred tax assets | |
$ | - | | |
$ | - | |
NOTE
10 INCOME TAXES (CONTINUED)
Realization
of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $9,900,000
for the year ended December 31, 2017.
As
of December 31, 2017, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,743,000
which expire beginning in the year 2032. As of December 31, 2017, the Company had net operating loss carryforwards for state income
tax purposes of approximately $1,743,000 which expire beginning in the year 2032.
Utilization
of the net operating losses may be subject to substantial annual limitation due to federal and state ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such annual limitations could result in the expiration of
the net operating losses ad credits before their utilization. The Company has not performed an analysis to determine the limitation
of the net operating loss carryforwards.
NOTE
11 – SUBSEQUENT EVENTS
On
January 30, 2018, but effective on February 5, 2018, the Company entered into an agreement to provide services for the purpose
of assisting developing and secure public investors as filed on their Form 8 – K on February 8, 2018.
During
the first quarter of 2018, 3,650,000 shares of the Company’s common stock were issued related to conversions
of the Company’s convertible notes and accrued interest.
