Corporate
History and Recent Developments
We
were incorporated pursuant to the laws of the State of Nevada on March 20, 2002 under the name Integrated Brand Solutions Inc.,
and on February 6, 2006, we changed our name to Upstream Biosciences Inc. From 2006 to December 2009, our company operated as
a biotechnology company, and from 2010 until May 2013, our company had no operating business.
On
May 24, 2013, our then majority stockholders sold their interests in our company to RealSource Acquisition Group, LLC, a Utah
limited liability company, and Chesterfield Faring Ltd., a New York corporation, and on July 11, 2013, we changed our corporate
name to RealSource Residential, Inc. Our initial business strategy in 2013 was to engage in various real estate related businesses.
However, in 2016 we disposed of all of our real estate and other assets and continued operations as a
public “shell” company.
On
September 12, 2018, M1 Advisors, LLC, a Delaware limited liability company controlled by Michael Campbell, our current Chief Executive
Officer and a director of our company (“M1 Advisors”), acquired from certain then majority stockholders of our company
an aggregate of 440,256 shares (after giving effect to the subsequent reverse stock split described below) of our common stock,
which shares represented approximately 70% of the issued and outstanding shares of capital stock of our company at that time,
for aggregate cash payments amounting to $260,000.
On
September 12, 2018, following the closing of the change of control transaction described above, we entered into a Series A Preferred
Stock Purchase Agreement (the “Preferred Purchase Agreement”) with M1 Advisors, Piers Cooper, our newly appointed
President and director, and the other investors who were signatories thereto (collectively, the Purchasers”). Pursuant to
the Preferred Purchase Agreement, the Purchasers purchased from us an aggregate of 15,600,544 shares of Series A preferred stock,
par value $0.001 per share (“Series A Preferred Stock”), for an aggregate purchase price of $15,600.54, or $0.001
per share. Of the shares sold, 9,320,414 shares were purchased by M1 Advisors and 4,674,330 shares were purchased by Mr. Cooper.
All of such shares of preferred stock were converted into shares of our common stock on December 20, 2018.
After
the consummation of the change of control transaction and the sale of the Series A Preferred Stock on September 12, 2018 (the
“Change of Control Transactions”), our company remained a shell company with no operating business. As a result of
the September 12, 2018 transactions, our current executive officers and directors acquired effective control of our company and,
in connection with such transactions, our board of directors determined to establish our company in the rapidly-growing legal
cannabis industry, initially in the State of California. In order to fund such proposed business plan, we intend to raise additional
funds from investors by issuing our common stock, preferred stock and/or debt securities to fund future operations, including
the acquisition of manufacturing facilities and equipment.
On
August 28, 2018, we filed a Certificate of Change to our Articles of Incorporation with the Secretary of State of the State of
Nevada to (i) reduce our authorized shares of common stock from 100,000,000 shares to 4,000,000 shares and (ii) to effectuate
a stock combination or reverse stock split whereby every 25 outstanding shares of our common stock were converted into one share
of common stock. This amendment became effective on August 30, 2018. All share and per share amounts in this Report have been
restated to give effect to such reverse stock split.
On
December 20, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State
of Nevada to (i) change our corporate name from “RealSource Residential, Inc.” to “CalEthos, Inc.” and
(ii) to increase our authorized shares of common stock from 4,000,000 shares to 100,000,000 shares. This amendment became effective
immediately upon filing on December 20, 2018.
Plan
of Operations
Immediately
prior to the consummation of the Change of Control Transactions, our company was a shell company with no operating business. As
a result of the Change of Control Transactions, Mr. Campbell acquired control of our company. It is the intention of Mr. Campbell
to establish our company in the rapidly-growing legal cannabis industry, initially in the State of California, and our current
management is currently exploring a number of business opportunities for engaging our company in such a business. In order to
fund our proposed business plan, we intend to raise funds from investors by issuing common stock, preferred stock and/or debt
securities. Upon the consummation of such fundraising efforts and the commencement of such operations, it is expected that our
company will cease being a shell company.
At
this time, the primary activity of our management is to seek, investigate and, if such investigation warrants, acquire an interest
in business opportunities in the California cannabis industry. We will not restrict our search to any specific business, segment
of the cannabis industry or geographical location and we may participate in a business venture of virtually any kind or nature.
This
discussion of our proposed business is purposefully general and is not meant to be restrictive of our virtually unlimited discretion
to search for and enter into potential business opportunities. Management anticipates that, initially, we may be able to participate
in only one potential business venture because we have nominal assets and limited financial resources. This lack of diversification
should be considered a substantial risk to our shareholders because it will not permit us to offset potential losses from one
venture against gains from another.
We
may seek a business opportunity with entities that have recently commenced operations, or that wish to utilize the public marketplace
in order to raise additional capital in order to expand into new products or markets, to develop a new product or service, or
for other corporate purposes. We may acquire assets and establish wholly-owned subsidiaries in various businesses or acquire existing
businesses as subsidiaries.
We
anticipate that the selection of a business opportunity in which to participate will be complex and extremely risky. Due to general
economic conditions, rapid technological advances being made in some industries and shortages of available capital. Our management
believes there are numerous firms seeking the perceived benefits of a publicly-registered corporation. Such perceived benefits
may include facilitating or improving the terms on which additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, and providing liquidity (subject to restrictions of applicable statutes) for
all shareholders, among other factors. Available business opportunities may occur in many different segments of the cannabis industry
and at various stages of development, all of which will make the task of comparative investigation and analysis of such business
opportunities extremely difficult and complex.
Our
officers have only limited experience in managing a shell company similar to ours and will rely upon their own efforts in accomplishing
our business purposes. Nevertheless, we anticipate we will locate and make contact with possible target businesses primarily through
the efforts of our officers and directors, who will meet personally with existing management and key personnel, visit and inspect
material facilities, assets, products and services belonging to such prospects, and undertake such further reasonable investigation
as they deem appropriate. Management has a network of business contacts, including our outside lawyers and accountants, and believes
that prospective target businesses will be referred to us through this network.
We
also anticipate that prospective target businesses will be brought to our attention from various other non-affiliated sources,
including securities broker-dealers, investment bankers, venture capitalists, bankers, and other members of the financial community.
We have neither the present intention, nor does the present potential exist for us, to consummate a business combination with
a target business in which our management or their affiliates or associates directly or indirectly have a pecuniary interest,
although no existing corporate policies would prevent this from occurring. We may engage the services of professional firms that
specialize in finding business acquisitions and pay a finder’s fee or other compensation.
The
analysis of new business opportunities will be undertaken by, or under the supervision of, our officers and directors. In analyzing
prospective business opportunities, management will 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 that may be available and the depth of that
management; the potential for further research, development or exploration; specific risk factors not now foreseeable but that
then may be anticipated to impact the proposed activities of our company; the potential for growth or expansion; the potential
for profit; the perceived public recognition of, or acceptance of, products, services or trades; name identification; the regulatory
landscape relating to the proposed business; and other relevant factors. Our officers and directors expect to meet personally
with management and key personnel of the business opportunity as part of their investigation. To the extent possible, we intend
to utilize written reports and investigation to evaluate the above factors. We will not acquire or merge with any company for
which audited financial statements cannot be obtained within a reasonable period of time after closing of the proposed transaction.
Our limited funds and the lack of full-time management, however, will likely make it impracticable to conduct a complete and exhaustive
investigation and analysis of a target business before we commit our capital or other resources thereto. Management decisions,
therefore, will likely be made without detailed feasibility studies, independent analysis, market surveys and the like which would
be desirable if we had more funds available. We will be particularly dependent in making decisions upon information provided by
the promoter, owner, sponsor or others associated with the business opportunity seeking our participation.
We
will not restrict our search to any specific kind of business, but we may acquire a venture that is in its preliminary or development
stage, which is already in operation, or in essentially any stage of its corporate life. It is impossible to predict at this time
the status of any business in which we may become engaged, in that such business may need to seek additional capital, may desire
to have its shares publicly traded, or may seek other perceived advantages which we may offer.
It
is anticipated that we will incur expenses in the implementation of the business plan described herein, and such expenses may
be substantial. However, we currently have only limited capital with which to pay these anticipated expenses.
The
time and costs required to select and evaluate a target business (including conducting a due diligence review) and to structure
and consummate the business combination (including negotiating relevant agreements and preparing requisite documents for filing
pursuant to applicable securities laws and state “blue sky” and corporation laws) cannot presently be ascertained
with any degree of certainty. Our officers and directors only devote a limited portion of their time to the operations of our
company, and, accordingly, consummation of a business combination may require a greater period of time than if they devoted their
full time to our company’s affairs. However, our officers and directors will devote such time as they deem reasonably needed.
In
implementing a structure for a particular business opportunity, we may become a party to a merger, consolidation, reorganization,
joint venture or licensing agreement with another corporation or entity. We may also acquire the stock or assets of an existing
business. Upon the consummation of a transaction, it is possible that our present management and shareholders will no longer be
in control of our company. In addition, our directors may, as part of the terms of the acquisition transaction, resign and be
replaced by new directors without a vote of our current shareholders or may sell their stock in our company. Any and all such
sales will only be made in compliance with the securities laws of the United States and any applicable state.
It
is anticipated that any securities issued in any such reorganization will be issued in reliance upon exemption from registration
under applicable federal and state securities laws. In some circumstances, however, as a negotiated element of its transaction,
we may agree to register all or a part of such securities immediately after the transaction is consummated or at specified times
thereafter. If such registration occurs, of which there can be no assurance, it will be undertaken by the surviving entity after
we have successfully consummated a merger or acquisition and we are no longer considered a “shell” company. Until
such time as this occurs, we do not intend to register any additional securities. The issuance of substantial additional securities
and their potential sale into any trading market that may develop in our securities may have a depressive effect on the value
of our securities in the future, if such a market develops, of which there is no assurance.
As
a general rule, federal and state tax laws and regulations have a significant impact upon the structuring of business combinations.
We will evaluate the possible tax consequences of any prospective business combination and will endeavor to structure a business
combination so as to achieve the most favorable tax treatment for us, the target company and their respective stockholders. However,
there can be no assurance that the Internal Revenue Service (“IRS”) or relevant state tax authorities will ultimately
assent to our tax treatment of a particular consummated business combination.
To
the extent the IRS or any relevant state tax authorities ultimately prevail in recharacterizing the tax treatment of a business
combination, there may be adverse tax consequences to us, the target business and their respective stockholders. Tax considerations
as well as other relevant factors will be evaluated in determining the precise structure of a particular business combination,
which could be effected through various forms of a merger, consolidation or stock or asset acquisition.
While
the actual terms of a transaction to which we may be a party cannot be predicted, it may be expected that the parties to the business
transaction will find it desirable to avoid the creation of a taxable event and thereby structure the acquisition in a so-called
“tax-free” reorganization under Sections 368(a) (1) or 351 of the Internal Revenue Code of 1986, as amended (the “Code”).
In order to obtain tax-free treatment under the Code, it may be necessary for the owners of the target business to own 80% or
more of the voting stock of the surviving entity. In such event, our shareholders would retain less than 20% of the issued and
outstanding shares of the surviving entity, which would result in significant dilution in the equity of such shareholders. Nonetheless,
there can be no assurance that the IRS or relevant state tax authorities will ultimately assent to our tax treatment of a particular
consummated business combination.
With
respect to any merger or acquisition, negotiations with the target company’s management is expected to focus on the percentage
of our company that the target company shareholders would acquire in exchange for all of their shareholdings in the target company.
Depending upon, among other things, the target company’s assets and liabilities, it is possible that our shareholders will
hold a substantially lesser percentage ownership interest in our company following any merger or acquisition. The percentage ownership
may be subject to significant reduction in the event we acquire a target company with substantial assets. Any merger or acquisition
effected by us can be expected to have a significant dilutive effect on the percentage of shares held by our then shareholders.
We
will participate in a business opportunity only after the negotiation and execution of appropriate written agreements. Although
the terms of such agreements cannot be predicted, generally such agreements will require some specific representations and warranties
by all of the parties thereto, will specify certain events of default, will detail the terms of closing and the conditions which
must be satisfied by each of the parties prior to and after such closing, will outline the manner of bearing costs, including
costs associated with our attorneys and accountants, will set forth remedies on default and will include miscellaneous other terms.
As
stated hereinabove, we will not acquire or merge with any entity that cannot provide independent audited financial statements
within a reasonable period of time after closing of the proposed transaction. We are subject to all of the reporting requirements
included in the Exchange Act. Included in these requirements is the affirmative duty to file independent audited financial statements
as part of our Current Report on Form 8-K to be filed with the Securities and Exchange Commission upon consummation of a merger
or acquisition, as well as the audited financial statements included in our annual report on Form 10-K. If such audited financial
statements are not available at closing, or within time parameters necessary to insure our compliance with the requirements of
the Exchange Act, or if the audited financial statements provided do not conform to the representations made by the candidate
to be acquired in the closing documents, the closing documents will provide that the proposed transaction will be voidable, at
the discretion of our present management.
We
do not intend to provide our security holders with any complete disclosure documents, including audited financial statements,
concerning an acquisition or merger candidate and its business prior to the consummation of any acquisition or merger transaction.
Our
company will remain an insignificant participant among the firms that engage in the acquisition of business opportunities in the
cannabis industry, particularly in the State of California. There are many established venture capital and financial concerns
that have significantly greater financial and personnel resources and technical expertise than we have. In view of our combined
extremely limited financial resources and limited management availability, we will continue to be at a significant competitive
disadvantage compared to our competitors.
We
have had in the past, and continue to have, discussions with potential acquisition targets, or merger or acquisition partners,
and while we do not have a definitive agreement in place with any potential acquisition target or partner to do so, we anticipate
issuing shares of our common stock, and possibly preferred stock, as part of any merger or acquisition with a merger or acquisition
partner.
Recent
Developments
Over
the course of 2019, our Chief Executive Officer, Michael Campbell, and our President, Piers Cooper, developed a plan to build
a chain of large-format retail store and event center facilities to serve the needs of the rapidly-growing Southern California
cannabis market. As currently contemplated, each cannabis store/event center will be called SHOWCASE and include fifteen to twenty
thousand square feet of retail showroom and three to five thousand square feet of conference space for daily educational events,
classes, workshops and seminars. Our goal is to become a dominate cannabis retailer in the Southern California market by operating
up to ten SHOWCASE facilities over the next three years that are strategically located in cities with upscale demographics. Numerous
reports in the cannabis industry project that the Southern California market for cannabis products could be worth $7+ billion
per year by 2025.
As
previously announced, on January 16, 2020, we entered into a Stock Purchase Agreement dated as of January 15, 2020 (the “Purchase
Agreement”) with Terra Tech Corp., a Nevada corporation (the “Seller”), pursuant to which we agreed to purchase
from the Seller (the “Share Purchase”) all of the issued and outstanding capital stock of 1815 Carnegie Santa Ana
Corp., a California corporation and a wholly-owned subsidiary of the Seller (“Carnegie Corp.”), for an aggregate purchase
price of $6.0 million consisting of (i) $3.0 million in cash and (ii) $3.0 million in shares of the Company’s common stock
(the “Share Consideration”).
The
primary assets of Carnegie Corp. are the state and local licenses and permits required to operate a cannabis dispensary at the
approximately 29,500-square-foot industrial building located at 1815 Carnegie Avenue, Santa Ana, California (the “Property”).
The Purchase Agreement contemplates that in connection with the closing of the Share Purchase, we will enter into a five-year
real property lease of the Property from an affiliate of the Seller. Pursuant to the Purchase Agreement, the closing is conditioned
upon, among other things, our raising a minimum of $4 million of gross proceeds from the sale of debt or equity securities and
other customary closing conditions. The Purchase Agreement also provides for limited termination rights, including, among others,
a right of termination by the Seller in the event the Share Purchase had not been consummated before February 28, 2020, which
condition was not met.
We
are currently in discussions with the Seller regarding the certain proposed amendments to the Purchase Agreement, including an
amendment to extend the date by which we must raise the necessary capital to finance the purchase. However, there can be no assurance
that we will reach an agreement with the Seller regarding any such amendments or that the Seller will not terminate the Purchase
Agreement prior to executing any amendments.
We
are also pursuing other opportunities to purchase or lease facilities in Los Angeles, Orange and San Diego counties that currently
have the required state and local licenses and permits for a dispensary business.
Competition
As
we currently have no operations, this section is not applicable.
Intellectual
Property
Currently
we have no intellectual property
Employees
We
currently do not have any employees and our officers and directors are serving our company as consultants and independent contractors.
We
are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information
under this item.
Item 1B.
|
Unresolved Staff Comments.
|
None.
We
do not own any real property. Our executive office is located at 11753 Willard Avenue, Tustin, California 92782, in the office
of Michael Campbell, our Chief Executive Officer. We are not charged rent for the use of this space. We believe our existing facilities
are sufficient for our current operations.
Item 3.
|
Legal Proceedings.
|
We
know of no material active or pending legal proceeding against our company, nor are we involved as a plaintiff in any material
proceeding or pending litigation.
Item 4.
|
Mine Safety Disclosures.
|
Not
Applicable.
Notes
to the Financial Statements
Note
1 - Organization and Accounting Policies
CalEthos,
Inc. (the “Company”) was incorporated on March 20, 2002 under the laws of the State of Nevada. Since the second quarter
of 2016, the Company has been a “shell” company, as defined in Rule 12b-2 under the Exchange Act.
On
December 20, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State
of Nevada to change the Company name from “RealSource Residential, Inc.” to “CalEthos, Inc.”This amendment
became effective immediately upon filing on December 20, 2018.
Change
in Control
On
May 16, 2018, certain majority stockholders of the Company, including certain former directors and officers of the Company, entered
into a stock purchase agreement dated May 16, 2018 (the “Control Purchase Agreement”) with RealSource Acquisition
Group, LLC, a Utah limited liability company (“RealSource Acquisition”), whereby RealSource Acquisition agreed to
purchase an aggregate of 11,006,356 shares (440,256 shares after giving effect to the Reverse Stock Split (see Note 3) (the “Control
Shares”) of the Company’s issued and outstanding shares of common stock for an aggregate purchase price of $180,000.
Immediately prior to the closing under the Control Purchase Agreement on September 12, 2018 (the “Closing Date”),
RealSource Acquisition assigned its rights under the Control Purchase Agreement to M1 Advisors, LLC, a Delaware limited liability
company (“M1 Advisors”), pursuant to a purchase agreement and assignment and assumption of contract rights dated as
of August 28, 2018 between RealSource Acquisition and M1 Advisors. M1 Advisors paid RealSource Acquisition $80,000 as consideration
for such assignment.
Effective
on the Closing Date, and in accordance with the amended and restated bylaws of the Company and the requirements of the Control
Purchase Agreement, (a) each of Michael S. Anderson, Nathan W. Hanks and V. Kelly Randall resigned as directors of the Company,
(b) Michael Campbell, the sole member of M1 Advisors, and Piers Cooper were elected to the Company’s board of directors,
and (c) Mr. Hanks also resigned as president and chief executive officer of the Company, Mr. Randall also resigned as chief operating
office and chief financial officer of the Company, Mr. Campbell was appointed the chief executive officer of the Company and Piers
Cooper was appointed president of the Company.
On
the Closing Date, the Company entered into a series A preferred stock purchase agreement dated as of the Closing Date (the “Preferred
Purchase Agreement”) with M1 Advisors, which is an entity controlled by Michael Campbell, the Company’s chief executive
officer and a director of the Company at such time, Piers Cooper, the Company’s president and a director of the Company
at such time, the members of RealSource Acquisition, and the other investors who were signatories thereto (collectively, the Purchasers”).
Pursuant to the Preferred Purchase Agreement, the Company sold to the Purchasers an aggregate of 15,600,544 shares of the Company’s
series A preferred stock, which has since been re-designated as Founder preferred stock (“Founder Preferred Stock”),
for an aggregate purchase price of $16,000, or $0.001 per share. Of the Founder Preferred Stock purchased, 9,320,414 shares were
purchased by M1 Advisors, 4,674,330 shares were purchased by Mr. Cooper and an aggregate of 1,195,000 shares were purchased by
the members of RealSource Acquisition or their assigns.
Immediately
following the above transactions, an aggregate of 15,600,544 shares of Founder Preferred Stock and 630,207 shares of common stock
was issued and outstanding. At such time, the shares of Founder Preferred Stock and common stock owned by M1 Advisors represented
approximately 60.14% of the issued and outstanding shares of capital stock of the Company on a fully-diluted basis and the shares
of Founder Preferred Stock owned by Mr. Cooper represented approximately 28.80% of the issued and outstanding shares of capital
stock of the Company on a fully-diluted basis. The shares of Founder Preferred Stock acquired by M1 Advisors were purchased with
funds that M1 Advisors borrowed from another entity controlled by Mr. Campbell.
Business
Activity
Following
the change in control, as described above, the board of directors determined to establish the Company in the rapidly-growing cannabis
industry, initially in the State of California. The primary activity of the Company’s management is to seek and investigate
various opportunities in the California cannabis industry, and if such investigation warrants, acquire assets and create a business
around them, acquire part or all of an operating cannabis business and or invest or joint venture with other more established
companies already in the cannabis industry. The Company will not restrict its search to any specific business, segment of the
cannabis industry or geographical location and the Company may participate in a business venture of virtually any kind or nature
that is beneficial to the Company and its shareholders.
Accounting
Policies
The
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective,
or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted
accounting principles.
Basis
of Presentation
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
no established operations.
Going
Concern and Liquidity
The
Company incurred a net loss of approximately $1,499,000 for the year ended December 31, 2019, and had an accumulated deficit of
approximately $9,326,000 as of December 31, 2019. The Company has financed its activities principally through debt and equity
financing and shareholder contributions. Management expects to incur additional losses and cash outflows in the foreseeable future
in connection with its operating activities.
The
Company’s financial statements have been presented on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company is subject to a number of risks similar to those of other similar stage companies, including dependence on key individuals;
successful development, marketing and branding of products; uncertainty of product development and generation of revenues; dependence
on outside sources of financing; risks associated with research and development; dependence on third-party suppliers and collaborators;
protection of intellectual property; and competition with larger, better-capitalized companies. Ultimately, the attainment of
profitable operations is dependent on future events, including obtaining adequate financing to fund its operations and generating
a level of revenues adequate to support the Company’s cost structure.
The
Company will need to raise debt or equity financing in the future in order to continue its operations and achieve its growth targets.
However, there can be no assurance that such financing will be available in sufficient amounts and on acceptable terms, when and
if needed, or at all. The precise amount and timing of the funding needs cannot be determined accurately at this time, and will
depend on a number of factors, including market demand for the Company’s products and services, the success of product development
efforts, the timing of receipts for customer deposits, the management of working capital, and the continuation of normal payment
terms and conditions for purchase of goods and services. The Company believes its cash balances and cash flow from operations
will not be sufficient to fund its operations and growth for the next twelve months from the issuance date of these financial
statements. If the Company is unable to substantially increase revenues, reduce expenditures, or otherwise generate cash flows
from operations, then the Company will likely need to raise additional funding from investors or through other avenues to continue
as a going concern.
Reclassification
Certain
amounts for 2018 have been reclassified to conform to the classification for 2019.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
periods.
Fair
Value Disclosures of Financial Instruments
The
Company has estimated the fair value of its financial instruments using the available market information and valuation methodologies
considered to be appropriate and has determined that the book value of the Company’s prepaid expenses, accounts payable
and accrued expenses, as of December 31, 2019 and 2018, respectively, approximate fair value based of their short-term nature.
Fair
Value Measurement
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as
of the measurement date. Applicable accounting guidance provides an established 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. Observable inputs are inputs that market participants would use in valuing the asset or liability
and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect
the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There
are three levels of inputs that may be used to measure fair value:
Level
1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 - Other inputs that are directly or indirectly observable in the marketplace.
Level
3 - Unobservable inputs which are supported by little or no market activity.
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
As
of and for the year ended December 31, 2019, the Company had no assets or liabilities that require fair value measurement.
Cash
Equivalents
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
At December 31, 2019 and 2018, the Company held only cash deposits at a financial institution.
Related
Parties
The
Company follows FASB Accounting Standards Codification (“ASC”) section 850-10 for the identification of related parties
and disclosure of related party transactions.
Pursuant
to ASC section 850-10-20 the related parties include (a.) affiliates of the Company (“Affiliate” means, with respect
to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled
by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act);
(b.) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option of ASC section 825–10–15, to be accounted for by the equity method by the investing entity;
(c.) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship
of management; (d.) principal owners of the Company; (e.) management of the Company; (f.) other parties with which the Company
may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g.) other parties that
can significantly influence the management or operating policies of the transacting parties or that have an ownership interest
in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
The
financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a.) the nature of the relationship(s) involved; (b.) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other
information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c.) the dollar
amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and (d.) amounts due from or to related parties as of
the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments
and Contingencies
The
Company follows ASC section 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the financial
statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events
occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted
claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted
claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed.
Debt
Discounts
The
Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes
in accordance with ASC 470-20, Debt with Conversion and Other Options. These costs are classified on the balance
sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as
interest expense-debt discount in the statement of operations.
Warrants
In
connection with financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding
warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity
awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date.
Stock-Based
Compensation
We
account for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the
fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and
is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting
for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments
or that may be settled by the issuance of those equity instruments.
We
use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair
value of options. The stock based fair value compensation is determined as of the date of the grant (measurement date) and is
recognized over the vesting periods.
Basic
and Diluted Net Loss per Common
Basic
net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during
the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. Since the
Company had a net loss for the year ended December 31, 2019, the series A convertible preferred stock and the outstanding warrants
would be considered anti-dilutive.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740, Income Taxes, deferred tax assets and liabilities are computed
based on the difference between the financial reporting and income tax bases of assets and liabilities using the enacted marginal
tax rate. ASC 740 requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.
The
Company is a United States Company, incorporated in the state of Delaware and has its office in California. The Company has no
foreign operations.
The
tax reform bill that Congress voted to approve December 20, 2017, also known as the “Tax Cuts and Jobs Act”, made
sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions,
and a move to a territorial system for corporations that have overseas earnings. The act replaced the prior-law graduated corporate
tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%.
The
Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized
in the Company’s financial statements or tax returns. The measurement of current and deferred tax assets and liabilities
is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. If necessary,
the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based
on available evidence.
The
Company has adopted guidance related to the accounting for uncertainty in income taxes which prescribes rules for recognition,
measurement and classification in the financial statements of tax positions taken or expected to be taken in a tax return. The
guidance prescribes a two-step approach which involves evaluating whether a tax position will be more likely than not (greater
than 50 percent likelihood) sustained upon examination based on the technical merits of the position. The second step requires
that any tax position that meets the more likely than not recognition threshold be measured and recognized in the financial statements
at the largest amount of benefit that is a greater than 50 percent likelihood of being realized upon settlement.
The
Company’s policy is to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
The Company is not currently under examination by any taxing authority nor has the Company been notified of a pending examination.
The statute of limitations for which the Company is generally no longer subject to federal or state income tax examinations by
tax authorities is for years before 2012.
Note
2 – Cash Held by Officer
With
the transition of the new Company management in September 2018, the Company’s previous bank account was closed. The new
management was not able to set up a new bank account. The fourth quarter, of 2018, operating expenses, of approximately $38,000
were paid from a bank account held in the name of the Company’s Chief Executive officer.
Also,
the $50,000 raised from the issuance of the Series A convertible preferred stock, in the fourth quarter of 2018 (see note 5),
was transferred into a bank account held in the name of the Chief Executive Officer.
The
amounts for cash held by officer of $12,000, as of December 31, 2018, was a net amount. During the first quarter of 2019, the
Company has its own bank account and funds of the Company have been transferred into the Company’s bank account.
Note
3 – Related Party Transactions
During
the years ended December 331, 2019 ad 2018, the Company paid approximately $180,000 and $45,000 to M1 Advisors for the services
of the Company’s CEO and miscellaneous operating expenses.
Note
4 – Convertible Promissory Notes
During
the year ended December 31, 2019, the Company issued convertible promissory notes in the amount of $506,000 (the “Notes”).
The total proceeds were approximately $460,000, due to approximately $46,000 of original issue discount. The Notes are non-interest
bearing with the principal due and payable starting in February 2020. Any amount of unpaid principal on the date of maturity will
accrue interest at rate of 10% per annum (default interest). The principal amount and all accrued interest are convertible into
shares of the Company’s common stock, as of the date of issuance, at a rate of $1.00 per share (“Conversion Rate”).
The conversion rate is adjustable if, at any time when any principal amount of the Notes remains unpaid or unconverted, the Company
issues or sells any shares of the Company’s common stock for no consideration or for a consideration per share (before deduction
of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith), which is less than the
Conversion Rate in effect on the date of such issuance (or deemed issuance) of such shares of common stock (a “Dilutive
Issuance”). Immediately upon a Dilutive Issuance, the Conversion Rate will be reduced to the amount of the consideration
per share received by the Company in such Dilutive Issuance. Events of default include failure to issue conversion shares, the
occurrence of a breach or default under any other agreement, instrument or document involving any indebtedness for borrowed money
of more than $100,000 in the aggregate, bankruptcy filing, application for the appointment of a custodian, trustee or receiver,
insolvency, the Company’s common stock delisted, or dissolution, winding up, or termination of the business of the Company.
In
connection with the issuance of the Notes, the Company issued to the purchasers of the Notes stock purchase warrants to purchase
an aggregate of 253,000 shares of the Company’s common stock for a purchase price of $1.50 per share, subject to adjustments.
In
accordance with ASC 470 - Debt, the Company has allocated the cash proceeds amounts of the Notes among the Notes, the warrants
and the conversion feature. The relative fair value of the warrants issued totaled approximately $205,000 and of the beneficial
conversion totaled approximately $239,000, which amounts are being amortized and expensed over the term of the Notes. For the
year ended December 31, 2019, the amortization expense was approximately $277,000.
The
Company determined that the conversion feature of the Notes would not be an embedded feature to be bifurcated and accounted for
as a derivative in accordance with ASC 818-15 Derivatives and Hedging.
As
of December 31, 2019, convertible promissory notes consisted of the following:
Principal Amount
|
|
$
|
506,000
|
|
Original issue discount
|
|
|
(19,000
|
)
|
Warrant discount
|
|
|
(79,000
|
)
|
Conversion feature discount
|
|
|
(85,000
|
)
|
Net balance
|
|
$
|
323,000
|
|
The
discounts of $166,000, as of December 31, 2019, will be amortized and expensed over the remaining contractual life of the convertible
promissory notes. The amortization expense will be approximately $166,000 for the year ending December 31, 2020.
As of the date
of release of these financial statements, approximately $242,000 of the convertible promissory notes, were not repaid as of
the maturity date. The note holders have not requested payment.
Note
5 – Stockholders’ (Deficit) Equity
Shares
Authorized
On
August 28, 2018, the Company filed a Certificate of Change to the Articles of Incorporation with the Secretary of State of the
State of Nevada to (i) reduce the authorized shares of common stock from 100,000,000 shares to 4,000,000 shares and (ii) to effectuate
a stock combination or reverse stock split whereby every 25 outstanding shares of the Company’s common stock were converted
into one share of common stock. This amendment became effective on August 30, 2018. All share and per share amounts in these financial
statements have been restated to give effect to such reverse stock split.
On
December 20, 2018, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of
the State of Nevada to increase the Company’s authorized shares of common stock from 4,000,000 shares to 100,000,000 shares.
This amendment became effective immediately upon filing on December 20, 2018.
The
Company is authorized to issue 200,000,000 shares of which 100,000,000 shares shall be preferred stock, par value $0.001 per share,
and 100,000,000 shares shall be common stock, par value $0.001 per share.
Common
Stock
In
accordance with the Control Purchase Agreement, the Company was required to effectuate a reverse stock split of the Company’s
common stock (the “Reverse Stock Split”). The Company’s board of directors approved the Reverse Stock Split
of the Company’s authorized, issued and outstanding shares of common stock at a ratio of one for twenty-five. In connection
with the Reverse Stock Split, which was effected on September 11, 2018, the issued and outstanding shares of the Company’s
common stock decreased from 15,719,645 shares to 630,207 shares as of December 31, 2017. The par value was amended to be $0.001
per share. All share information has been retroactively restated for the Reverse Stock Split.
During
the year ended December 31, 2018, the Company issued 250,000 shares of the Company’s common stock for $250.
Preferred
Stock
Founders
Preferred Stock
On
September 12, 2018, the Company’s board of directors approved, and the Company filed with the Secretary of State of the
State of Nevada, a certificate of designation pursuant to which 15,754,744 shares of the Company’s authorized preferred
stock were designated as Series A Preferred Stock. The Series A Preferred Stock had one vote per share, had other rights, including
upon liquidation of the Company, identical to those of the Company’s common stock, and was automatically convertible into
shares of the Company’s common stock, initially on a one-for-one basis, upon any increase in the Company’s authorized
but unissued shares of the Company’s common stock to a number that will allow for the issued and outstanding shares of Series
A Preferred Stock to be converted in full.
On
September 12, 2018, the Company issued and sold an aggregate of 15,754,744 shares of Series A Preferred Stock for an aggregate
purchase price of $16,000.
On
October 14, 2018, the board of directors of Company approved, and on October 22, 2018, the holders of all of the outstanding shares
of the Company’s Series A Preferred Stock consented to, an amendment to the certificate of designation that the Company
filed with the Secretary of State of the State of Nevada to create the outstanding Series A Preferred Stock, to change the designation
of the outstanding Series A Preferred Stock from “Series A Preferred Stock” to “Founder Preferred Stock.”
An amendment to the Certificate to effect such change was filed with the Secretary of State of Nevada on October 29, 2018.
On
December 20, 2018, all of the Founder Preferred Stock was converted into 15,754,744 shares of the Company’s common stock.
Series
A Convertible Preferred Stock
In
January 2019, the Company issued and sold an aggregate of 50,000 shares of Series A Preferred Stock for an aggregate purchase
price of $69,000, or $1.38 per share.
The
Company initiated a private placement of shares of series A convertible preferred stock. During the years ended December 31, 2019
and 2018, the Company sold 50,000 and 35,975, respectively, shares of Series A for total proceeds of approximately$69,000 and
$50,000, respectively, or $1.38 per share.
The
Series A is convertible into shares of the Company’s common stock at the rate of $1.38 per share, subject to adjustments
based on the Company’s future sales of financial instruments at a value less than $1.38 per share. The holders of the Series
A have the right to convert any time after the date of issuance. With the issuance of the convertible promissory notes, as explained
in Note 4 above, the Series A’s conversion rate adjusted to $1.00 per share. In accordance with ASC - 470, the Company has
calculated the effect of the conversion rate adjustment, which was approximately $36,000. The conversion rate adjustment
has been treated as a deemed dividend, which has been presented in the Statement of Changes in Stockholders’ Deficit.
The
Series A is mandatorily convertible upon (i) the closing of the sale of shares of the Company’s common stock to the public
in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended,
resulting in at least $10,000,000 of gross proceeds to the Company, (ii) the close of business on the sixtieth consecutive day
on which the closing price of the Company’s common stock on the OTC Markets is at least $2.80 per share, subject to appropriate
adjustment in the event of any stock dividend, stock split, stock combination or other similar recapitalization with respect to
the common stock, or (iii) the affirmative vote of the holders of at least 66⅔% of the outstanding shares of Series A, given
at a meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders all outstanding
shares of Series A shall automatically be converted into shares of the Company’s common stock, at the then effective conversion
rate.
On
any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the
Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series A shall be entitled
to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A held by such
holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided
by law or by the other provisions of the Articles of Incorporation, holders of Series A shall vote together with the holders of
common stock as a single class.
From
and after the date of the issuance of any shares of Series A, a cumulative dividend on each outstanding share of Series A Preferred
Stock shall accrue at a rate per annum equal to ten percent of the Series A original issue price. Accrued dividends on the Series
A shall be paid in shares of the Company’s common stock, such shares to be valued for such purpose at the applicable series
A conversion price
Capital
Contributions
During
the quarter ended September 30, 2018, the Company did not have sufficient funds to pay off certain outstanding liabilities. The
then-majority shareholders of the Company assumed and paid off these liabilities of approximately $9,000.
Warrants
Issuance
of Stock Options
The
Company entered into three separate consulting agreements with provisions for the issuance of options under the Company’s
2019 Stock Options Plan to purchase 685,000, 250,000 and 15,000 shares of the Company’s common stock. The Options will have
a life of three years from the vesting date and an exercise price of $0.001 per share with the following vesting terms:
Option
to purchase 685,000 shares
|
i.
|
385,000
shares vest upon the signing of the consulting agreement; and
|
|
ii.
|
300,000
shares vest on the first anniversary of the date on which the consultant serves as the Vice President of Capital Markets of
the Company as a full-time employee.
|
Option
to purchase 250,000
|
i.
|
50,000
shares vest upon the completion of the Company’s first Retail Showcase Store;
|
|
ii.
|
100,000
shares vest on the first anniversary date on which the consultant serves as the Vice President of Retail Store Development
of the Company as full-time employee; and
|
|
iii.
|
100,000
shares to vest 1/12th per month thereafter.
|
Option
to purchase 15,000 shares
|
i.
|
15,000
shares to vest upon the completion of the Company’s first Retail Showcase Store.
|
The
options to be granted to the consultants will be performance-based awards to be vested once the individuals are considered to
be employees of the Company. Each of the consultants has the option to become a full-time employee when the Company has received
a minimum of $5,000,000 in debt or equity financing for the Company’s operations (the “Financing”). This is
the time that the Company would begin to operate and use the services of the three option holders. Until the Financing occurs,
the Company will be in the predevelopment stage of its intended business model.
An
option to purchase 385,000 shares of the Company’s common stock, for $0.001 per share, was granted and vested on April 1,
2019. For the year ended December 31, 2019, the compensation expense, classified as professional fees in the statement of operations,
was $577,000, which was calculated using the Black-Scholes fair value option-pricing model with key input variables provided by
management, as of the date of issuance: volatility of 324%, fair value of common stock $1.50, term of option 3 years, risk free
rate of 2.29% and dividend rate of $0.
The
table below summarizes the Company’s warrants activities for the reporting period ended December 31, 2019 and 2018 (all
share and per share data reflects the reverse stock split):
|
|
Number of
Warrant
Shares
|
|
|
Exercise
Price Range Per Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Relative Fair
Value
|
|
|
Aggregate
Intrinsic Value
|
|
Balance, January 1, 2018
|
|
|
184,800
|
|
|
$
|
12.50
|
|
|
$
|
12.50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2018
|
|
|
184,800
|
|
|
$
|
12.50
|
|
|
$
|
12.50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
385,000
|
|
|
|
0.001
|
|
|
|
.001
|
|
|
|
1.49
|
|
|
|
578,000
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2019
|
|
|
569,800
|
|
|
$
|
-
|
|
|
$
|
4.05
|
|
|
$
|
-
|
|
|
$
|
423,000
|
|
Earned and exercisable, Dec 31, 2019
|
|
|
569,800
|
|
|
$
|
-
|
|
|
$
|
4.05
|
|
|
$
|
-
|
|
|
$
|
423,000
|
|
Unvested, December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following table summarizes information concerning outstanding and exercisable warrants as of December 31, 2019:
|
|
|
Warrants Outstanding
|
|
|
|
|
|
Warrants Exercisable
|
|
Range of Exercise Prices
|
|
|
Number Outstanding
|
|
|
Average Remaining Contractual Life (in years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable
|
|
|
Average Remaining Contractual Life (in years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.001
|
|
|
|
385,000
|
|
|
|
2.25
|
|
|
|
.001
|
|
|
|
385,000
|
|
|
|
2.25
|
|
|
|
.001
|
|
$
|
12.50
|
|
|
|
184,800
|
|
|
|
.95
|
|
|
$
|
12.50
|
|
|
|
184,800
|
|
|
|
.95
|
|
|
$
|
12.50
|
|
Note
6 – Deferred Tax Assets and Income Tax Provision
Deferred
Tax Assets
At
December 31, 2019, the Company had net operating loss (“NOL”) carry–forwards for Federal income tax purposes
of $979,000 that may be offset against future taxable income through 2037, in general. No tax benefit has been reported
with respect to these net operating loss carry-forwards in the accompanying financial statements because the Company believes
that the realization of the Company’s net deferred tax assets of approximately $206,000 was not considered more likely
than not and accordingly, the potential tax benefits of the net operating loss carry-forwards are fully offset by a full valuation
allowance.
On
September 12, 2018, the Company believes that an “ownership change” has occurred within the meaning of Sections 382
and 383 of the Code. An ownership change is generally defined as a more than 50 percentage point increase in equity ownership
by “5 percent shareholders” (as that term is defined for purposes of Sections 382 and 383 of the Code) in any three-year
period or since the last ownership change if such prior ownership change occurred within the prior three-year period. As a result
of the ownership change on September 12, 2018, the limitations on the use of pre-change losses and other carry forward tax attributes
in Sections 382 and 383 of the Code apply and the Company will not be able to utilize any portion of their NOL carry forwards
from the years prior to December 31, 2017 and the portion of the NOL for 2018 allocable to the portion of the year prior to September
12, 2018. The utilization of the NOL for 2018 allocable to the portion of the year after September 12, 2018 and the NOLs from
subsequent years should not be affected by the ownership change on the September 12, 2018.
Deferred
tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the
deferred tax assets because of the uncertainty regarding its realization. The valuation allowance increased by approximately 161,000
for the year ended December 31, 2019.
Components
of deferred tax assets are as follows as of December 31:
|
|
2019
|
|
|
2018
|
|
Net deferred tax assets – Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
206,000
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(206,000
|
)
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
Tax Provision in the Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note
7 – Subsequent Events
The
Company has evaluated all events that occur after the balance sheet date through the date when the financial statements were issued
to determine if they must be reported. The following events occurred.
On
January 16, 2020, the Company entered into a Stock Purchase Agreement dated as of January 15, 2020 (the “Purchase Agreement”)
with Terra Tech Corp., a Nevada corporation (the “Seller”), pursuant to which the Company agreed to purchase from
the Seller (the “Share Purchase”) all of the issued and outstanding capital stock of 1815 Carnegie Santa Ana Corp.,
a California corporation and a wholly-owned subsidiary of the Seller (“Carnegie Corp.”), for an aggregate purchase
price of $6.0 million consisting of (i) $3.0 million in cash and (ii) $3.0 million in shares of the Company’s common stock
(the “Share Consideration”).
In
February 2020, the Company entered into a conversion agreement with the holders of the series A convertible preferred stock. The
holders agreed to exchange the 85,975 shares of series A convertible preferred stock, with a value of approximately $119,000 along
with undeclared dividends of approximately $15,000 for a total of $133,000, into convertible promissory notes with a principal
amount of approximately $147,000, which includes an original issuance discount of $14,000. Also, the holders received warrants
to purchase 73,304 shares of the Company’s common stock for $1.50 per share. The convertible promissory notes have a maturity
date of February 28,2021.