UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 000-54830
SUNSTOCK, INC.
(Exact Name of Registrant as Specified in its Charter)
SANDGATE ACQUISITION CORPORATION
(Former Name of Registrant as Specified in its Charter)
| Delaware | 46-1856372 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
111 Vista Creek Circle
Sacramento, California 95835
(Address of principal executive offices) (zip code)
916-860-9622
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if smaller reporting company) | Smaller reporting company [X] |
| Emerging growth company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.
| Class | Outstanding at November 19, 2018 | |||
| Common Stock, par value $0.0001 | 249,417,449 | |||
Documents incorporated by reference: None
TABLE OF CONTENTS
| Part I Financial Information | ||
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 |
| Item 4. | Controls and Procedures | 20 |
| Part II Other Information | 22 | |
| Item 1. | Legal Proceedings | 22 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 |
| Item 3. | Defaults Upon Senior Securities | 22 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 23 |
| Item 5. | Other Information | 23 |
| Item 6. | Exhibits | 24 |
| Signatures | 25 | |
| 2 |
PART I — FINANCIAL INFORMATION
| 3 |
SUNSTOCK, INC.
| September 30, 2018 | December 31, 2017 | |||||||
| (unaudited) | (audited) | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 8,360 | $ | 59,167 | ||||
| Inventory - products | 12,981 | 8,791 | ||||||
| Inventory – silver | 332,908 | 384,981 | ||||||
| Prepaid services | - | 18,400 | ||||||
| Prepaid expenses | 9,665 | 19,038 | ||||||
| Total current assets | 363,914 | 490,377 | ||||||
| Property and equipment net | 3,942 | 7,937 | ||||||
| Total assets | $ | 367,856 | $ | 498,314 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 834,830 | $ | 38,274 | ||||
| Notes payable to officer | 219,000 | - | ||||||
| Convertible notes payable, net of discount | 4,505,624 | 224,328 | ||||||
| Derivative liability - conversion feature | 17,519,949 | 1,009,896 | ||||||
| Total current liabilities | 23,079,403 | 1,272,498 | ||||||
| Total liabilities | 23,079,403 | 1,272,498 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ 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; 92,467,449 and 47,853,638 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 9,247 | 4,785 | ||||||
| Additional paid - in capital | 42,874,460 | 42,543,835 | ||||||
| Accumulated deficit | (65,595,254 | ) | (43,322,804 | ) | ||||
| Total stockholders’ deficit | (22,711,547 | ) | (774,184 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 367,856 | $ | 498,314 | ||||
The accompanying notes are an integral part of the financial statements
| 4 |
SUNSTOCK, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 1,623 | $ | 1,601 | $ | 12,886 | $ | 8,386 | ||||||||
| Cost of revenue | 974 | 1,137 | 7,731 | 5,948 | ||||||||||||
| Gross profit | 649 | 464 | 5,155 | 2,438 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Professional fees | 213,666 | 32,335 | 463,317 | 114,097 | ||||||||||||
| Compensation | 99,877 | 10,235,006 | 118,277 | 28,828,079 | ||||||||||||
| Other operating expenses | 12,347 | 27,642 | 55,034 | 95,900 | ||||||||||||
| Total operating expenses | 325,890 | 10,294,883 | 636,628 | 29,038,076 | ||||||||||||
| Loss from operations | (325,241 | ) | (10,294,419 | ) | (631,473 | ) | (29,035,638 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Unrealized gain (loss) on investments in precious metals | (35,188 | ) | (1,042 | ) | (52,073 | ) | 17,050 | |||||||||
| Interest expense | (4,048,053 | ) | (69,479 | ) | (5,078,851 | ) | (156,406 | ) | ||||||||
| Changes in fair value of derivative liability | (14,471,995 | ) | (197,353 | ) | (16,510,053 | ) | (52,411 | ) | ||||||||
| Total other income (expense), net | (18,555,236 | ) | (265,790 | ) | (21,640,977 | ) | (191,767 | ) | ||||||||
| Loss before provision for income taxes | (18,880,477 | ) | (10,560,209 | ) | (22,272,450 | ) | (29,227,405 | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | $ | (18,880,477 | ) | $ | (10,560,209 | ) | $ | (22,272,450 | ) | $ | (29,227,405 | ) | ||||
| Loss per share - basic and diluted | $ | (0.22 | ) | $ | (0.24 | ) | $ | (0.33 | ) | $ | (0.87 | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | 84,763,101 | 43,105,377 | 67,236,841 | 33,653,785 | ||||||||||||
The accompanying notes are an integral part of the financial statements
| 5 |
SUNSTOCK, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the nine months ended | ||||||||
| September 30, 2018 | September 30, 2017 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (22,272,450 | ) | $ | (29,227,405 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Change in fair value of derivative liability | 16,510,053 | 52,411 | ||||||
| Unrealized loss/(gain) on investment in precious metals | 52,073 | (17,050 | ) | |||||
| Depreciation | 3,995 | 4,048 | ||||||
| Amortization of debt discount and issuance costs, net | 390,338 | 88,466 | ||||||
| Additional interest incurred on notes payable due to default penalties | 4,416,470 | - | ||||||
| Common stock issued for services including amortization of prepaid consulting | 118,278 | 28,055,190 | ||||||
| Excess fair value of derivative | - | 57,693 | ||||||
| Services for common stock payable | - | 800,060 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts Receivable | - | 1,000 | ||||||
| Inventories - products | (4,190 | ) | (4,035 | ) | ||||
| Prepaid expenses & services | 9,373 | (14,073 | ) | |||||
| Accounts payable and accrued expenses | 409,245 | (7,149 | ) | |||||
| Net cash used in operating activities | (366,815 | ) | (210,844 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Inventories - silver | - | (3,476 | ) | |||||
| Purchase of property and equipment | - | (8,374 | ) | |||||
| Net cash used in investing activities | - | (11,850 | ) | |||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from convertible notes payable | 53,000 | 199,750 | ||||||
| Proceeds from issuance of common stock | 44,008 | 13,570 | ||||||
| Proceeds from notes payable to officer | 219,000 | - | ||||||
| Net cash provided by financing activities | 316,008 | 213,320 | ||||||
| Net change in cash | (50,807 | ) | (9,374 | ) | ||||
| Cash, beginning of period | 59,167 | 16,601 | ||||||
| Cash, end of period | $ | 8,360 | $ | 7,227 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES: | ||||||||
| Interest | $ | - | $ | - | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH | ||||||||
| Common stock issued as prepaid consulting | $ | - | $ | 9,839,700 | ||||
| Shares issued under stock subscription receivable | $ | - | $ | 6,000 | ||||
| Fair value of derivative recorded as debt discount | $ | - | $ | 195,911 | ||||
| Conversion of notes payable and accrued interest common stock | $ | 191,201 | $ | - | ||||
The accompanying notes are an integral part of the financial statements
| 6 |
SUNSTOCK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Sunstock, Inc. (formerly known as Sandgate Acquisition Corporation) (“Sunstock” or “the Company”) was incorporated on July 23, 2012 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. Sunstock operations to date have been limited to issuing shares of its common stock. Sunstock may attempt to locate and negotiate with a business entity for the combination of that target company with Sunstock. The combination will normally take the form of a merger, stock-for-stock exchange or stock-for-assets exchange. In most instances, the target company will wish to structure the business combination to be within the definition of a tax-free reorganization under Section 351 or Section 368 of the Internal Revenue Code of 1986, as amended. No assurances can be given that Sunstock will be successful in locating or negotiating with any target company.
In December 2014, the Company purchased 100 ounces of silver. In 2015, the Company purchased additional precious metals for $302,429 and shifted more of its capital to the acquisition of precious metals. The Company holds physical coins and bullion rather than contracts for delivery of precious metals or certificates. In time of economic crisis, there may be no guarantee of the delivery of precious metals as contracts and certificates may exceed available stock.
Currently, the Company anticipates holding its precious metals as a long-term investment. Depending on market conditions, the Company anticipates holding its silver holdings until the market price exceeds $50. Likewise, the Company does not plan to sell its gold holdings unless the market price exceeds $2,500.
BASIS OF PRESENTATION
The condensed balance sheet as of December 31, 2017 which has been derived from audited financial statements and the interim unaudited condensed financial statements as of September 30, 2018 and 2017 have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8 of SEC Regulation S-X. These condensed financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2017, included in the Company’s Form 10-K.
The condensed financial statements included herein as of and for the three and nine months ended September 30, 2018 and 2017 are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of the Company’s management, are necessary to present fairly the condensed financial position of the Company as of September 30, 2018, and the condensed cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or any future interim periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made by the Company’s management include but are not limited to derivative liabilities, realizability of inventories and value of stock-based transactions.
| 7 |
INVENTORIES
Inventories consist of merchandise for sale and are stated at the lower of cost or market determined on a first-in, first-out (FIFO) method. When a purchase contains multiple copies of the same item, they are stated at average cost.
Inventories – silver consists primarily of silver and small amounts of gold held for sale and are stated at cost. Currently, the Company anticipates holding its precious metals as a long-term investment. Depending on market conditions, the Company anticipates holding its silver holdings until the market price exceeds $50. Likewise, the Company does not plan to sell its gold holdings unless the market price exceeds $2,500.
At each balance sheet date, the Company evaluates its ending inventory quantities on hand and on order and records a provision for excess quantities and obsolescence. Among other factors, the Company considers historical demand and forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. In addition, the Company considers changes in the market value of components in determining the net realizable value of its inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventories.
REVENUE RECOGNITION
On January 1, 2018, the Company adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
The Company reviewed all contracts at the date of initial application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018. Therefore, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition, (“ASC 605”). The adoption of the new revenue recognition guidance was immaterial to our condensed consolidated statements of operations, balance sheet, and cash flows as of and for the nine months ended September 30, 2018.
The Company’s principal activity from which it generates revenue is product sales.
Revenue is measured based on consideration specified in the sale with a customer. A sale with a customer exists when we enter into an offer to sell with a customer. The sale is based on either the acceptance of standard terms and conditions on the websites for e-commerce customers and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These sales reflect buyers and sellers offer and acceptance to terms and conditions of the sale. Consideration is typically paid via credit card or cash before our products leave the store.
For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are sold to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. There was no reserve for sales returns and allowances, at September 30, 2018 and December 31, 2017, respectively.
The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to a customer when product is sold. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by it from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales
| 8 |
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period which excluded unvested restricted stock. Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income (loss) that would result from the assumed issuance. The 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.
As of September 30, 2018, there were no potentially dilutive shares that were excluded from the diluted earnings (loss) per share as their effect would have been antidilutive for each of the periods presented.
STOCK BASED COMPENSATION
ASC 718 “Compensation - Stock Compensation” prescribes accounting and reporting standards for all stock-based payment awards to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity’s past practices or stated policies. If a present obligation exists, the transaction is recognized as a liability; otherwise, the transaction is recognized as equity.
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50 “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
In July 2017, the FASB issued ASU No. 2017-11, which eliminates the requirement to classify financial instruments as derivative liabilities simply because they have down round pricing protection. The Company has often issued warrants with down round pricing protection as part of its financing activities. Currently, the Company has convertible notes payable and warrants with down round pricing protection that are classified as derivative liabilities. The Company revalues these warrant tranches each reporting period and records the valuation differences as a component of other income in the statement of operations. The adoption of this ASU will allow the Company to classify its remaining warrant derivatives as equity and future warrants that might be issued by the Company with down round price protection will qualify as equity rather than derivative liability for balance sheet presentation purposes. This ASU is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is determining the financial impact of this ASU.
In June 2018, the FASB issued ASU No. 2018-07, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to an issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The Company is determining the financial impact of this ASU.
| 9 |
Fair Value Measurements
Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The established fair value hierarchy prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and must be used to measure fair value whenever available.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. For example, level 3 inputs would relate to forecasts of future earnings and cash flows used in a discounted future cash flows method.
The Company’s financial instruments consist of cash, accounts payable, accrued expenses, notes payable and convertible notes payable. The carrying value for all such instruments approximates fair value due to the short-term nature of the instruments.
The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative convertible notes, preferred stock and warrant liabilities.
NOTE 2 - GOING CONCERN
The Company has not posted operating income since inception. It has an accumulated deficit of approximately $65,600,000 as of September 30, 2018. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders and/or other third parties.
These condensed financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next year. The continuation of the Company as a going concern is dependent upon financial support from its stockholders, the ability of the Company to obtain necessary equity financing to continue operations, successfully locating and negotiating with an acquisition target.
There is no assurance that the Company will ever be profitable. The condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
| 10 |
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on the Company’s financial statements.
NOTE 4 - RELATED PARTY BALANCES
During the year ended December 31, 2017, the Company was provided a non-interest bearing, non-secured line of credit by a shareholder for up to $30,000. The line is due on demand. At September 30, 2018 and year ended December 31, 2017, the Company had net borrowings of approximately $0 and $0, respectively, and the line is still available to draw down. See Note 7 for shares of stock issued to related parties.
During the quarter ended June 30, 2017, the Company entered a 19-month lease with the parents of Jason Chang for Corporate office space at $1,200 per month running through December 2018.
During the nine months ended September 30, 2018, the Company borrowed $150,000 from its CEO. The borrowings are due on demand, are non-interest bearing and are unsecured. The Company also borrowed an additional $69,000 from its CEO. That borrowing and accrued interest are due on December 31, 2018, bear interest at 6% per annum, and are unsecured.
The officers of the Company do not receive a fixed salary. During the nine months ended September 30, 2018 and 2017 the Company paid approximately $18,000 and $20,000 to the CEO as compensation. In addition, during the nine months ended September 30, 2018, the Company sold shares to the CEO at below market prices and approximately $100,000 was recorded to recognize the full fair value of the shares. Also, during the nine months ended September 30, 2017, approximately $19.5 million in stock was granted to the CEO, which were valued based on the closing stock price on the measurement dates.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company entered into a lease agreement in December 2015 for 2,700 square feet of retail shop space to replace their previous location below. The lease requires combined monthly payments of base rent of $1,950 for six months beginning January 2015 with an option for an additional one year running through June of 2017. This lease is currently on a month to month basis at September 30, 2018 for $2,100 per month.
During January of 2018, the Company entered into a three-month consulting agreement with PAG Group, LLC., to help develop business growth opportunities through March 2018 for $29,000.
During March of 2018, the Company entered into a legal consulting agreement with Destiny Aigbe for $350,000. The agreement is expected to last approximately six (6) months.
LITIGATION
In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation. Management believes the outcomes of currently pending claims could have a material effect on our financial position and results of operations. See Part II, Item 1 Legal Proceedings for further discussion. Also, see Note 6 below in regards to specific notes defaults information.
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INDEMNITIES AND GUARANTEES
The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain actions or transactions. The Company indemnifies its directors, officers, employees and agents, as permitted under the laws of the State of Delaware. About its facility leases, the Company has agreed to indemnify its lessors for certain claims arising from the use of the facilities. The duration of the guarantees and indemnities varies and is generally tied to the life of the agreement. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company entered into a lease agreement in December 2015 for 2,700 square feet of retail shop space. The lease requires combined monthly payments of base rent of $1,950 for six months beginning January 2015 with an option for an additional one year running through June of 2017. Currently the Company is on a month to month agreement for $2,100 per month.
Historically, the Company has not been obligated nor incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities and guarantees in the accompanying balance sheet.
NOTE 6 – OUTSTANDING DEBT
Convertible notes payable are as follows as of September 30, 2018:
| Outstanding as of September 30, 2018 | Debt Discount | Net Amount | Interest rate | Accrued Interest | Original Maturity (2) | |||||||||||||||||
| Auctus May 24, 2017 | $ | 440,638 | $ | - | $ | 440,638 | 12 | % | $ | 61,638 | February 24, 2018 | |||||||||||
| EMA June 5, 2017 | 488,160 | - | 488,160 | 10 | % | 98,790 | June 5, 2018 | |||||||||||||||
| Auctus October 11, 2017 | 420,000 | (1,884 | ) | 418,116 | 12 | % | 63,465 | October 11, 2018 | ||||||||||||||
| EMA October 11, 2017 | 570,000 | (2,408 | ) | 567,592 | 12 | % | 116,680 | October 11, 2018 | ||||||||||||||
| Power Up October 21, 2017 | 633,540 | - | 633,540 | 12 | % | 80,241 | October 21, 2018 | |||||||||||||||
| Crown Bridge December 8, 2017 | 412,500 | (11,815 | ) | 400,685 | 8 | % | 22,718 | December 8, 2018 | ||||||||||||||
| Power Up December 21, 2017 | 789,000 | - | 789,000 | 12 | % | 110,347 | September 30, 2018 | |||||||||||||||
| Power Up April 16, 2018 | 789,000 | (21,107 | ) | 767,893 | 12 | % | 104,198 | January 30, 2019 | ||||||||||||||
| $ | 4,542,838 | (1) | $ | (37,214 | ) | $ | 4,505,624 | $ | 658,077 | |||||||||||||
| Derivative liability | $ | 17,519,949 | ||||||||||||||||||||
| (1) | Included in this amount are estimated aggregate penalties of approximately $3,866,588 resulting from various events of default. The related penalties are estimates and the actual amounts to be paid could be significantly different. See discussions in ITEM 1 LEGAL PROCEEDINGS under PART II - OTHER INFORMATION. |
| (2) | All notes are currently in default and due on demand. |
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NOTE 6 – OUTSTANDING DEBT (CONTINUED)
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 note is currently in default. The principle amount of the Auctus Note and all accrued interest is convertible at the option of the holder at the lower of (a) 55% multiplied by the average of the two lowest trading prices during the 25 trading days prior to the date of the note and (b) 55%, (a 45% discount) multiplied by the average market price (the trading period preceding 25 days of the conversion date). The variable conversion term was a derivative liability and the Company recorded approximately $100,000 of debt discount upon issuance. The prepayment amount ranges from 135% to 140% of the outstanding principle plus accrued interest of the note, depending on when such prepayment is made. In addition, the Company recognized issuance costs of $12,750 on the funding date and amortized such costs as interest expense over the term of the note. The Company recorded approximately $329,000 in default penalty that was added to the note as of September 30, 2018.
On June 5, 2017, the Company entered a Convertible Promissory Note with EMA Financial, LLC., (“EMA”) in the principle amount of $115,000 (the “EMA Note”). The EMA Note bears interest at the rate of 10% per annum (24% upon an event of default) and is due and payable on June 5, 2018. The principle amount of the EMA Note and all accrued interest is convertible at the option of the holder at the lower of (a) the closing sales price 50% and (b) (a 50% discount) multiplied by the average market price (the trading period preceding 25 days of the conversion date) or the closing bid price. The variable conversion term was a derivative liability, see Note 7, and the Company recorded approximately $115,000 of debt discount upon issuance and is amortizing such costs to interest expense over the term of the note. The prepayment amount ranges from 135% to 150% of the outstanding principle plus accrued interest of the note, depending on when such prepayment is made. In addition, the Company recognized issuance costs of $6,900 on the funding date and is amortizing such costs as interest expense over the term of the note. The Company recorded approximately $373,000 in default penalty that was added to the note as of September 30, 2018.
On October 11, 2017, the Company 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 $77,000.00 in cash from Auctus. Interest accrues on the outstanding principal amount of the Note at the rate of subject 12% per annum (24% upon an event of default). 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 $74,000 of debt discount upon issuance, which is being amortized to interest expense over the life of the note Regarding the Note, the Company paid Auctus $10,750 for its expenses and legal fees. The Company recorded $335,000 in default penalty that was added to the note as of September 30, 2018.
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 “Note4”) to EMA. The Company received proceeds of $79,395.00 in cash from EMA2. Interest accrues on the outstanding principal amount of the Note4 at the rate of 10% per annum (24% upon an event of default). 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. The variable conversion term was a derivative liability and the Company recorded approximately $85,000 of debt discount upon issuance, which is being amortized to interest expense over the life of the note. 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%. In connection with the EMA Note, the Company paid EMA2 $5,100 for its expenses and legal fees. The Company recorded $485,000 in default penalty that was added to the note as of September 30, 2018.
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NOTE 6 – 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 Note5 at the rate of 12% per annum (22% upon an event of default). The Note5 is due and payable on July 30, 2018. The Note5 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 three sale prices for the common stock during the fifteen (15) consecutive trading days immediately preceding the conversion date. The variable conversion term was a derivative liability and the Company recorded approximately $108,000 of debt discount upon issuance, which is being amortized to interest expense over the life of the note. 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 61% figure mentioned above shall be reduced to 39%. In connection with the Note5, the Company paid POWER $3,000 for its expenses and legal fees. The Company recorded approximately $526,000 in default penalty that was added to the note as of September 30, 2018.
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 SPA6, 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 Note6 at the rate of 8% per annum (15% upon an event of default). 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, which is being amortized to interest expense over the life of the note. In connection with the Note6, the Company paid CROWN $2,500 for its expenses and legal fees. The Company recorded $347,500 in default penalty that was added to the note as of September 30, 2018.
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 (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 annum (22% upon an event of default). 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 three sale prices for the common stock during the fifteen (15) 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 39%. In connection with the Note7, the Company paid POWER2 $3,000 for its expenses and legal fees. The Company recorded $736,000 in default penalty that was added to the note as of September 30, 2018.
On April 16, 2018, the Company entered into a securities purchase agreement (“SPA8”) with Powerup Lending Group, LTD (“POWER3”), upon the terms and subject to the conditions of SPA8 we issued a convertible promissory note in the principal amount of $53,000.00 (the “Note8”) to POWER3. The Company received proceeds of $50,000 in cash from POWER3. Interest accrues on the outstanding principal amount of the Note8 at the rate of 12% per annum (22% upon an event of default. The Note8 is due and payable on January 30, 2019. The Note8 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 fifteen (15) consecutive trading days immediately preceding the conversion date. In connection with the Note8, the Company paid POWER3 $3,000 for its expenses and legal fees. The Company recorded $736,000 in default penalty that was added to the note as of September 30, 2018.
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NOTE 7 – DERIVATIVE LIABILITIES
The Company evaluates its debt instruments, or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
Certain of the Company’s embedded conversion features on debt are treated as derivatives for accounting purposes. The Company estimates the fair value of these embedded conversion features using the Black-Scholes Merton option pricing model (“Black-Scholes”). Based on these provisions, the Company has classified all conversion features and warrants as derivative liabilities at September 30, 2018.
For
the nine September 30, 2018 | ||||
| Annual Dividend yield | 0 | % | ||
| Expected life (years) | 0.75 | |||
| Risk-free interest rate | 2.09% - 2.59 | % | ||
| Expected volatility | 207% - 408 | % | ||
From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives. Accordingly, the Company has estimated the fair value of these embedded conversion features using Black-Scholes with the following assumptions:
The following table presents the changes in fair value of our embedded conversion features measured at fair value on a recurring basis for nine months ended September 30, 2018:
| Balance December 31, 2018 | $ | 1,009,896 | ||
| Issuance of embedded conversion feature | - | |||
| Change in fair value | 16,510,053 | |||
| Balance as of September 30, 2018 | $ | 17,519,949 |
NOTE 8 - STOCKHOLDER’S EQUITY
The Company is authorized to issue 300,000,000 shares of common stock and 20,000,000 shares of preferred stock. As of September 30, 2018, the Company does not have enough available shares to satisfy all potentially dilutive instruments.
During the nine months ended September 30, 2018, the Company issued 35,403,811 restricted and unregistered shares of common stock to certain holders of convertible notes per those agreements for the conversion of principal and accrued interest, of approximately $206,000 (including conversion fees of approximately $15,000). As of September 30, 2018, the Company did not have enough shares available to settle all of its convertible debentures. These shares were issued with a six month hold period, and as of September 30, 2018, the hold period had expired for 3,650,000 shares.
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During the nine months ended September 30, 2018, the Company issued 9,210,000 restricted and unregistered shares of common stock to its CEO in exchange for $44,008 in cash at prices ranging from $0.004 to $0.005 per share. $99,878 was recorded as compensation expense as the price paid per share was below fair value.
NOTE 9 - SUBSEQUENT EVENTS
In October and November 2018, 105,200,000 shares of common were sold and issued for $83,890 in cash at prices ranging from $0.001 to $0.004 per share.
In October and November 2018, 51,750,000 shares of common stock were issued for services.
On October 22, 2018, Sunstock, Inc. acquired all issued and outstanding shares of common stock of Mom’s Silver Shop, Inc. of Sacramento, California for the purchase price of $241,000. Included in the assets acquired is approximately $60,000 in precious metals inventory. Also included are any machinery, furniture and fixtures, leasehold improvements, licenses and permits, customer lists, logo, trade names, signs, and websites. Financing of the purchase is by a $10,000 deposit, $33,000 unsecured note payable with principle payments of $1,000 per week for 33 weeks starting January 1, 2019 with 4.5% annual interest accrued on the unpaid balance (total accrued interest due August 27, 2019), and the assumption of liabilities and lease obligations in the aggregate of approximately $198,000.
Mom’s Silver Shop had unaudited net revenues of approximately $4,800,000 for the year ended December 31, 2015, $4,000,000 for the year ended December 31, 2016, and $3,800,000 for the year ended December 31, 2017.
Mom’s Silver Shop specializes in buying and selling gold, silver, and rare coins, and is one of the leading precious metals retailers in the greater Sacramento metropolitan area.
Effective October 22, 2018, the Company purchased 100% of the stock of Mom’s Silver Shop. The following summarizes the transaction with Mom’s Silver Shop at closing on October 22, 2018:
| Inventory | $ | 60,548 | ||
| Property and Equipment, Net | 10,000 | |||
| Goodwill | 368,452 | |||
| Total Assets | $ | 439,000 | ||
| Accounts Payable and Accrued Expenses | $ | 198,000 | ||
| Net Purchase Price | $ | 241,000 |
The goodwill of $368,452 arising from the purchase of Mom’s Silver Shop consists primarily of the trade name and customer lists. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following unaudited supplemental pro forma information for the nine months ended September 30, 2018 and the year ended December 31, 2018 assumes the acquisition of Mom’s Silver Shop had occurred as of as of January 1, 2018 and 2017, giving effect to purchase accounting adjustments such as amortization of intangible assets. The pro forma data is for informational purposes only and may not necessarily reflect the actual results of operations had the assets of Mom’s Silver Shop been operated as part of the Company since January 1, 2018 and 2017.
| September 30, 2018 | December 31, 2017 | |||||||
| Revenues | $ | 2,303,926 | $ | 3,784,887 | ||||
| Gross Profit | 173,848 | 271,543 | ||||||
| Operating Expenses | 828,760 | 35,841,348 | ||||||
| Operating Loss | (654,912 | ) | (35,367,613 | ) | ||||
| Other Expense | (21,639,929 | ) | (688,326 | ) | ||||
| Net Loss | $ | (22,294,841 | ) | $ | (36,255,939 | ) | ||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the discussion and analysis included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 6, 2018, as well as the consolidated financial statements and related notes contained therein.
Forward Looking Statements
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements.
Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. 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 discussed elsewhere in this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We file reports with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
Overview
Sunstock, Inc., formerly Sandgate Acquisition Corporation (“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 continues to develop the Company for the acquisition and operation of hotels, discount retail stores, and residential properties in the high demand areas of California, particularly Southern California and the San Francisco Bay Area. In December 2014, the Company commenced their investment in precious metals. At September 30, 2018, the Company has $302,998 in the inventory - silver.
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 potential business opportunities.
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Going Concern
The Company has not posted operating income since inception. It has an accumulated deficit of approximately $65,600,000 as of September 30, 2018. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders and/or other third parties.
These condensed financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next 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 negotiating with an acquisition target.
There is no assurance that the Company will ever be profitable. The condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Critical Accounting Policies
There have been no material changes from the critical accounting policies as previously discussed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Results of Operations
Discussion of the Three Months ended September 30, 2018 and 2017
The Company generated revenues during the three months ended September 30, 2018 of $1,623 as compared to $1,601 in revenues posted for the three months ended September 30, 2017. The increase in revenues is primarily due to the increased emphasis on retail sales as opposed to a hotel management focus.
For the three months ended September 30, 2018 and 2017 cost of sales was $974 and $1,137, respectively, which was driven by the increase in revenues as disclosed above. Professional fees increased to $213,666 from $32,235 for the periods September 30, 2018 and 2017 respectively due to a 2nd quarter legal consulting agreement that is expected to last approximately six months. Compensation declined from September 30, 2017 of $10,235,006 to $99,877 primarily because of share-based compensation in the prior year. Other operating expenses decreased to $12,347 for the three months ended September 30, 2018 from $27,642 for the three months ended September 30, 2017.
Interest expense increased to $4,048,051 for the three months ended September 30, 2018 from $69,479 for the three months ended September 30, 2017, primarily due to loan default expense and higher interest rates due to loan defaults. Change in fair value of derivative liability increased to $14,471,997 for the three months ended September 30, 2018 from $197,343 for the three months ended September 30, 2017, primarily due to an increase in notes principal due to loan defaults and higher interest due to loan defaults.
During the three months ended September 30, 2018, the Company posted a net loss of $18,880,477 as compared to a net loss of $10,560,209 for the three months ended September 30, 2017. Such increase is primarily related to increases in settlement expenses, interest expense and amortization of debt discount, and change in fair value of derivative liability, net of a decrease in expenses related to share-based compensation .
The unrealized loss on investments in precious metals of $35,188 during the three months ended September 30, 2018, is related to the decrease in the market value of the underlying assets held as of September 30, 2018.
During the three months ended September 30, 2018, the Company borrowed $19,000 from its CEO. The borrowings and accrued interest are due on December 31, 2018, bear interest at 6% per annum, and are unsecured.
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Discussion of the Nine Months ended September 30, 2018 and 2017
The Company generated revenues during the nine months ended September 30, 2018 of $12,886 as compared to $8,386 in revenues posted for the nine months ended September 30, 2017. The increase in revenues is primarily due to the increased emphasis on retail sales to hotel management focus.
For the nine months ended September 30, 2018 and 2017 cost of sales was $7,731 and $5,948, respectively, which was driven by the increase in revenues as disclosed above. Professional fees increased to $463,317 from $114,097 for the periods ended September 30, 2018 and 2017 respectively due to a 2nd quarter legal consulting agreement that is expected to last approximately six months. Compensation declined from September 30, 2017 of $28,828,079 to $118,277 primarily because of share-based compensation in the prior year. Other operating expenses decreased to $55,034 for the nine months ended September 30, 2018 from $95,900 for the nine months ended September 30, 2017.
Interest expense increased to $5,078,849 for the nine months ended September 30, 2018 from $156,406 for the nine months ended September 30, 2017, primarily due to loan default expense and higher interest rates due to loan defaults. Change in fair value of derivative liability increased to $16,510,055 for the nine months ended September 30, 2018 from $52,411 for the nine months ended September 30, 2017, primarily due to an increase in notes principal due to loan defaults and higher interest due to loan defaults.
During the nine months ended September 30, 2018, the Company posted a net loss of $22,272,450 as compared to a net loss of $29,227,405 for the nine months ended September 30, 2017. Such increase is primarily related to increases in settlement expenses, interest expense and amortization of debt discount, and change in fair value of derivative liability, net of a decrease in expenses related to share-based compensation .
The unrealized loss on investments in precious metals of $52,073 during the nine months ended September 30, 2018, is related to the decrease in the market value of the underlying assets held as of September 30, 2018.
During the nine months ended September 30, 2018, the Company borrowed $150,000 from its CEO. The borrowings are due on demand, are non-interest bearing and are unsecured. The Company also borrowed an additional $69,000 from its CEO. That borrowing and accrued interest are due on December 31, 2018, bear interest at 6% per annum, and are unsecured.
Liquidity and Capital Resources
As of September 30, 2018, the Company had $8,360 in cash and $12,891 in inventory – products and $332,908 in inventory - silver.
Off-balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be considered material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information not required to be filed by Smaller reporting companies.
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ITEM 4. 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 September 30, 2018 based on the criteria establish in Internal Control Integrated Framework issued by the 2013 Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2018, 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 Quarterly Report on Form 10-Q 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.
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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; and
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 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 current fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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On June 18, 2018, Power Up Lending Group, LTD. (“Power Up”), filed in the Supreme Court of the State of New York that Sunstock and Jason Chang (president and CFO of Sunstock and board member) and Rammk Clair (board member of Sunstock) materially breached the October 24, 2017, December 19, 2017, and April 16, 2018 notes payable to Power Up by, in June 2018, changing Sunstock’s transfer agent in violation of the Notes and Agreements, and existing letter of instructions and authorizations, refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to maintain sufficient reserves of stock so as to permit and accommodate the conversion requests of Power Up to go forward. Power Up has requested judgment against Sunstock for $160,180 with default interest, judgment against Sunstock for reasonable legal fees and costs of litigation, three judgments against Jason Chang and Rammk Clair for $160,180 and interest for each judgment, and a temporary restraining order and a preliminary and permanent injunction directing Sunstock, Jason Chang, and Rammk Clair to take all steps necessary and proper to permit the conversion of debt into stock and to deliver the stock to Power Up.
On June 22, 2018, EMA Financial, LLC (“EMA”) sent a letter to Sunstock stating that Sunstock was in default on the June 5, 2017 note payable and the October 11, 2017 note payable to EMA. Among other defaults, the letter stated that Sunstock was in default due to refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to maintain sufficient reserves of stock. The letter asks for at least $332,884.
On July 9, 2018, the attorney for Auctus Fund, LLC (“Auctus”) sent a letter to Sunstock stating that Sunstock was in default on the May 24, 2017 note payable and the October 11, 2017 note payable to Auctus. Among other defaults, the letter stated that Sunstock was in default due to changing Sunstock’s transfer agent in violation of the note, and existing letter of instructions and authorizations, refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to maintain sufficient reserves of stock so as to permit and accommodate the conversion requests of Auctus to go forward. The letters ask for at least $277,397 regarding the May 24, 2017 note payable and at least $299,247 regarding the October 11, 2017 note payable.
On July 10, 2018, the attorney for Crown Bridge Partners, LLC (“Crown Bridge”), sent a letter to Sunstock stating that Sunstock was in default on the December 8, 2017 note payable to Crown Bridge. The letter stated that Sunstock was in default due to changing Sunstock’s transfer agent in violation of the note, and existing letter of instructions and authorizations, refusing to provide a replacement irrevocable letter of instruction from the newly appointed transfer agent and also failing to maintain sufficient reserves of stock so as to permit and accommodate the conversion requests of Crown Bridge to go forward. The letter requested that Sunstock immediately contact Crown Bridge to demonstrate compliance with the note. On August 15, 2018, the attorney for Crown Bridge sent another letter to Sunstock stating that Sunstock owed Crown Bridge $221,470, and that if Sunstock did not respond by August 21, 2018 in regards to payment, then a lawsuit would be filed. No lawsuit has been filed as of August 24, 2018 to the Company’s knowledge.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2018, we issued the following unregistered securities:
We issued an aggregate of 35,403,811 restricted and unregistered shares of our common stock in relief of convertible notes of approximately $206,000 of principal, interest and conversion fees (including conversion fees of approximately $15,000). These shares were issued with a six month hold period, and as of September 30, 2018, the hold period had expired for 3,650,000 shares.
We issued an aggregate of 9,210,000 shares of our common stock to our CEO in exchange for $44,008 that are restricted and unregistered.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
| 22 |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
(a) Not applicable.
(b) Item 407(c)(3) of Regulation S-K:
During the quarter covered by this Report, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
| 23 |
(a) Exhibits
| 9.1 | Business Purchase Agreement | |
| 31.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| 24 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUNSTOCK, INC. | ||
| Dated: November 19, 2018 | By: | /s/ Jason C. Chang |
| Jason C. Chang | ||
| President, Chief Financial Officer | ||
| (Principal Executive and Accounting Officer) | ||
| 25 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
I, Jason C. Chang, certify that:
1. I have reviewed this Form 10-Q for the period ended September 30, 2018 of Sunstock, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and | |
| d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
| a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 19, 2018 | By: | /s/ Jason C. Chang |
| Jason C. Chang | ||
| President, Chief Financial Officer | ||
| (Principal Executive and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned officer of Sunstock Inc. (the “Company”), hereby certify to my knowledge that:
The Report on Form 10-Q for the period ended September 30, 2018 of the Company fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| Dated: November 19, 2018 | By: | /s/ Jason C. Chang |
| Jason C. Chang | ||
| President, Chief Financial Officer | ||
| (Principal Executive and Accounting Officer) |
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