The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements
Notes to Condensed Consolidated Financial Statements
Note 1: Organization and Nature of Operations
Jacksam Corporation dba Convectium is a technology company focused on developing and commercializing products of vaporizer cartridge filling & capping, pre-roll filling, and other automation systems. The Company’s product line primarily consisted of the 710 Shark cartridge filling machine, the 710 Captain cartridge capping machine, the “PreRoll-ER” pre-roll & cone filling machine, customizable and C-Cell cartridges, and accessories. The Company’s customers are primarily businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors and growers, multi-state operators, and distributors. The Company utilizes its direct sales force, website, strategic partners’ sales force, independent sales representatives, and a wide range of referral network to sell its products.
The Company was originally organized under the laws of the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Effective November 16, 2009, management at that time changed the name of Fulton Ventures, Inc. to China Grand Resorts, Inc. After the September 30, 2014 10-Q filing, the management of China Grand Resorts, Inc. abandoned the Company and its subsidiaries were taken back by Chinese national companies in China who owned them. The remaining parent company, China Grand Resorts, Inc., became a dormant company until 2016 when a new shareholder Bryan Glass became the majority shareholder and owner of the Company.
On September 14, 2018 (the “Merger”), the Company’s wholly owned subsidiary, Jacksam Acquisition Corp., a corporation formed in the State of Nevada on September 11, 2018, or the Acquisition Sub, merged with and into Jacksam, a corporation incorporated in the State of Delaware in August 2013.
On November 5, 2018, current management merged Jacksam into the parent Company, China Grand Resorts, Inc. In connection with the transaction, current management amended our articles of incorporation to change the Company’s name from China Grand Resorts, Inc. to Jacksam Corporation dba Convectium.
Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business.
Note 2: Significant Accounting Policies
Basis of Preparation
The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) under the accrual basis of accounting. These financial statements are presented in U.S. dollars and are prepared on a historical cost basis, except for certain financial instruments which are carried at fair value.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Jacksam Corporation and its wholly owned subsidiary. All intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements is in conformity with U.S. GAAP and requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.
Risks and Uncertainties
The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company has experienced, and in the future, expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold, (iii) general economic conditions, and (iv) the related volatility of prices pertaining to the cost of sales.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost and consist of cash on hand and demand deposits placed with banks or other financial institutions, and all highly liquid investments with an original maturity of three months or less. Federal Deposit Insurance Corporation (“FDIC”) deposit insurance covers $250,000 per depositor, per FDIC-insured bank, per ownership category.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. As of September 30, 2021 and December 31, 2020, the Company had recorded an allowance for doubtful accounts of $74,000.
Inventory
Inventories are stated at the lower of cost, determined on the first-in, first-out (“FIFO”) method or net realizable value. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.
The September 30, 2021 and December 31, 2020 inventory consisted entirely of finished goods. The Company will maintain an allowance based on specific inventory items that have shown no activity over a 24-month period. The Company tracks inventory as it is disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. As of September 30, 2021 and December 31, 2020, the Company has determined that no inventory allowance is required.
Property and Equipment
Property and equipment are measured at cost, less accumulated depreciation, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
|
·
|
Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
·
|
Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; Quoted prices for similar assets or liabilities in active markets; Inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
·
|
Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and an approximate of their fair values because of the short maturity of these instruments.
Binomial Calculation Model
The Company uses a binomial calculator model to determine fair market value of derivative liabilities, warrants and options issued.
Revenue Recognition
The Company derives revenues from the sale of machines and non-machine products (customizable and C-Cell cartridges and accessories). The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.
Revenue is recognized based on the following five step model:
|
|
-
|
Identification of the contract with a customer
|
|
|
-
|
Identification of the performance obligations in the contract
|
|
|
-
|
Determination of the transaction price
|
|
|
-
|
Allocation of the transaction price to the performance obligations in the contract
|
|
|
-
|
Recognition of revenue when, or as, the Company satisfies a performance obligation
|
Performance Obligations
Sales of machines and non-machine products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. The customer has a 10-day period to inspect the equipment and may return the product if it does not meet the agreed-upon specifications. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. Historically, the Company’s contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized at a point in time related to the sale of machines and non-machine products.
Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Payment terms between invoicing and when payment is due is less than one year. As of September 30, 2021, none of the Company’s contracts contained a significant financing component.
The Company elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with an end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year.
The majority of the Company’s contracts offer an assurance-type warranty of the products at no additional cost for a period of 3 years. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. At the time a sale is recognized, the Company estimated future warranty costs, which were trivial.
Transaction Price Allocated to the Remaining Performance Obligations
At a given point in time, the Company may have collected payment for future sales of product to begin production. These transactions are deferred until the product transfers to the customer and the performance obligation is considered complete. As of September 30, 2021, $698,980 in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The Company expects to recognize all of our unsatisfied (or partially unsatisfied) performance obligations as revenue in the next twelve months.
Contract Costs
Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services.
Critical Accounting Estimates
Estimates are used to determine the amount of variable consideration in contracts, the standalone selling price among separate performance obligations and the measure of progress for contracts where revenue is recognized over time. The Company reviews and updates these estimates regularly.
Disaggregation of Revenue
All machine sales and most non-machine sales are completed in North America.
|
|
|
Three Months
Ended
September 30,
2021
|
|
|
Three Months
Ended
September 30,
2020
|
|
|
Nine Months
Ended
September 30,
2021
|
|
|
Nine Months
Ended
September 30,
2020
|
|
|
Machine sales
|
|
$
|
1,280,139
|
|
|
$
|
685,635
|
|
|
$
|
4,465,754
|
|
|
$
|
1,802,305
|
|
|
Non-machine sales
|
|
|
699,253
|
|
|
|
49,969
|
|
|
|
914,861
|
|
|
|
200,002
|
|
|
Total sales
|
|
$
|
1,949,392
|
|
|
$
|
735,604
|
|
|
$
|
5,380,615
|
|
|
$
|
2,022,307
|
|
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises that are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation.
The following table presents the effect of potential dilutive issuances for the three and nine months ended September 30, 2021 and 2020:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
September 30,
2021
|
|
|
September 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(115,429
|
)
|
|
|
(2,165,693
|
)
|
|
$
|
179,828
|
|
|
$
|
(5,395,866
|
)
|
|
Preferred stock dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
4,315
|
|
|
|
-
|
|
|
Derivative (gain) loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,171,242
|
)
|
|
|
-
|
|
|
Interest expense associated with convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
715,401
|
|
|
|
-
|
|
|
Net income (loss) for dilutive calculation
|
|
$
|
(115,429
|
)
|
|
|
(2,165,693
|
)
|
|
$
|
(271,698
|
)
|
|
$
|
(5,395,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
73,645,455
|
|
|
|
62,803,497
|
|
|
|
71,490,810
|
|
|
|
62,531,289
|
|
|
Dilutive effect of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,400,000
|
|
|
|
-
|
|
|
Dilutive effect of convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
3,969,136
|
|
|
|
-
|
|
|
Dilutive effect of common stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted average shares outstanding for diluted net income (loss) per share
|
|
|
73,645,455
|
|
|
|
62,803,497
|
|
|
|
76,859,946
|
|
|
|
62,531,289
|
|
During the three and nine months ended September 30, 2021, the impact of 11,189,056 warrants to purchase common stock were excluded from the calculation above as their impact would be dilutive. For the nine months ended September 30, 2021, 3,969,136 shares issuable under convertible debt were excluded from the calculation of dilutive earnings per share as the impact would be anti-dilutive.
Additionally, 583,333 shares of common stock issued during the year ended December 31, 2020 under a share lending arrangement, 2,777,778 shares related to conversions of notes payable in fiscal year 2020 that have not yet been issued, and 2,222,223 shares to be issued as part of the share payable equity balance are excluded from the calculation of weighted-average shares outstanding.
Going Concern
The Company’s financial statements are prepared using U.S. GAAP to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have a source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully execute the business plan and attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the SEC, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.
Historically, it has mostly relied upon convertible notes payable and cash flows from operations to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective and will not have a material effect on its consolidated financial position or results of operations upon adoption.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.
Note 3: Property and Equipment
Property and equipment consist of the following:
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
10,425
|
|
|
$
|
10,425
|
|
|
Equipment
|
|
|
7,579
|
|
|
|
7,579
|
|
|
Trade show display
|
|
|
2,640
|
|
|
|
2,640
|
|
|
Total
|
|
|
20,644
|
|
|
|
20,644
|
|
|
Less: Accumulated depreciation
|
|
|
(18,807
|
)
|
|
|
(17,296
|
)
|
|
Property and equipment, net
|
|
$
|
1,836
|
|
|
$
|
3,348
|
|
Depreciation expense amounted to $1,512 and $9,428 for the nine months ended September 30, 2021 and 2020, respectively.
Note 4: Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
456,789
|
|
|
$
|
279,207
|
|
|
Credit cards payable
|
|
|
-
|
|
|
|
23,445
|
|
|
Accrued interest
|
|
|
5,265
|
|
|
|
4,931
|
|
|
Sales tax payable
|
|
|
144,398
|
|
|
|
141,803
|
|
|
Accrued officer consulting cost
|
|
|
55,000
|
|
|
|
178,750
|
|
|
Other
|
|
|
42,222
|
|
|
|
53,303
|
|
|
Total Accounts payable and Accrued expenses
|
|
$
|
703,674
|
|
|
$
|
681,439
|
|
Note 5: Notes Payable
A summary of Notes Payable are as follows:
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Note payable December 2019
|
|
|
54,813
|
|
|
|
107,146
|
|
|
SBA loan May 2020
|
|
|
148,627
|
|
|
|
149,900
|
|
|
Note payable September 2021
|
|
|
722,516
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
925,957
|
|
|
|
257,046
|
|
|
Less: current portion
|
|
|
(77,262
|
)
|
|
|
(109,104
|
)
|
|
Long-term portion of notes payable
|
|
$
|
848,695
|
|
|
|
147,942
|
|
On September 29, 2021, the Company entered into a Revenue Loan and Security Agreement with an investor for up to a total amount of $1,000,000. Upon drawing from the facility and continuing thereafter until maturity or earlier prepayment in full, the Company shall pay monthly to the lender an amount equal to the product of (i) all revenue of the Company for the immediately preceding month multiplied by (ii) an applicable revenue percentage. On September 29, 2021, the Company borrowed $750,000 under the agreement and received initial cash proceeds of $727,500. The Company also paid an additional $5,000 in fees to the investor to secure the loan for total deferred financing fees of $27,500.
Note 6: Convertible Notes Payable and Derivative Liabilities
Convertible Notes Payable
The following table summarizes outstanding convertible notes as of September 30, 2021 and December 31, 2020:
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
June 2019 Notes, maturing March 25, 2020
|
|
$
|
444,444
|
|
|
$
|
448,888
|
|
|
June 2020 Note 1, maturing June 4, 2021
|
|
|
-
|
|
|
|
119,078
|
|
|
June 2020 Note 2, maturing June 24, 2021
|
|
|
-
|
|
|
|
87,779
|
|
|
June 2020 Note 3, maturing June 24, 2021
|
|
|
-
|
|
|
|
87,779
|
|
|
November 2020 Note, maturing November 23, 2021
|
|
|
-
|
|
|
|
305,000
|
|
|
February 2021 Note, maturing February 15, 2022
|
|
|
300,000
|
|
|
|
-
|
|
|
Total
|
|
|
744,444
|
|
|
|
1,048,524
|
|
|
Less: Debt discount and deferred finance costs on short-term convertible notes
|
|
|
(167,670
|
)
|
|
|
(239,282
|
)
|
|
Less: Current convertible notes payable, net of discount
|
|
|
(576,774
|
)
|
|
|
(809,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term convertible notes payable, net
|
|
$
|
-
|
|
|
$
|
-
|
|
In June and July 2019, the Company issued convertible notes to 10 investors with an original principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes matured on March 25, 2020 and are convertible into the Company’s common stock at a per share price of $0.35 at any time subsequent to the issuance date. The June 2019 Notes contain a down round feature, whereby any sale of common stock or common stock equivalent at a price per share lower than the conversion price of the June 2019 Notes will result in the conversion price being lowered to the new price. The warrants contain the same down round feature as the notes. As a result of a dilutive issuance during the year ended December 31, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.18 per share.
During the year ended December 31, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into the right to receive 7,883,599 shares of common stock, of which 5,105,821 were issued by September 30, 2021 and 2,777,778 were part of subscriptions payable liability balance of $499,999.
Following two previous extensions and on July 9, 2021, the holder of $444,444 of the notes agreed to extend the repayment period to December 31, 2021. There were no other changes to terms of the convertible notes payable, and the amendments were accounted for as a debt modification.
On February 15, 2021, the Company entered into a convertible note agreement with an institutional investor for a principal amount of $675,000 (the “February 2021 Note”) bearing interest at 10% with an original issue discount of $67,500 and a maturity date of February 15, 2022. The Company paid $37,500 of deferred finance costs and issued 200,000 shares of common stock to the lender of the February 2021 Note as deferred finance costs, valued at $72,000 based on the closing price of the stock at the date of borrowing. This lender also received 767,045 common stock warrants with an exercise price of $0.44 and a term of 3 years valued at $179,699. If the note is in default, the holder has the right to convert the outstanding principal and accrued interest balance into shares of common stock at the closing bid price of the Company’s common stock immediately prior to conversion. As a result of the variable conversion price on the Company’s outstanding notes payable and reset provisions, the conversion option and the warrants were accounted for as a derivative liability. The original balance of this note was $675,000 as of September 30, 2021. The Company used proceeds from this note payable to pay in full the June 2020 Notes and the November 2020 Note. To date, the Company has repaid $375,000 of the note balance in cash and the balance of this note was $300,000 as of September 30, 2021.
On February 22, 2021, the Company entered into a settlement agreement with the holder of the June 2020 Note 2. The agreement allowed for the holder to convert all principal into 414,930 shares of common stock in full settlement of the note. The holder also received 207,465 warrants to purchase shares of common stock at an exercise price of $0.18 per share. The warrants had a fair value of $55,273 and were recorded as a derivative liability due to the variable number of shares to be issued under the Company’s dilutive instruments. The Company recognized a loss of $137,506 under this settlement agreement.
The Company amortized $579,978 and $1,594,924 of debt discount and deferred finance costs to interest expense related to convertible notes payable during the nine months ended September 30, 2021 and 2020, respectively. Accrued interest on notes payable and convertible notes payable was $35,108 and $4,931 as of September 30, 2021 and December 31, 2020, respectively.
Derivative Liabilities
The fair values of the conversion option of outstanding convertible notes payable and common stock warrants with reset provisions were estimated using a binomial model with the following assumptions:
|
|
|
As of September 30, 2021
|
|
|
|
|
Conversion
Option
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
114.32
|
%
|
|
114.32-117.50
|
%
|
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free rate
|
|
|
0.05
|
%
|
|
0.09-0.53%
|
|
|
Expected term
|
|
0.50 year
|
|
|
1-3 years
|
|
|
Stock price
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
Exercise price
|
|
$
|
0.18-0.20
|
|
|
$
|
0.18-0.44
|
|
|
Derivative liability fair value
|
|
$
|
57,497
|
|
|
$
|
497,080
|
|
All fair value measurements related to the derivative liabilities are considered significant unobservable inputs (Level 3) under the fair value hierarchy of ASC 820.
The table below presents the change in the fair value of the derivative liability during the nine months ended September 30, 2021:
|
Fair value as of December 31, 2020
|
|
$
|
1,305,106
|
|
|
Fair value on the date of issuance of new derivatives
|
|
|
493,671
|
|
|
Extinguishment due to repayment of debt
|
|
|
(19,747
|
)
|
|
Extinguishment due to exercise of warrant
|
|
|
(72,958
|
)
|
|
Gain on change in fair value of derivatives
|
|
|
(1,151,494
|
)
|
|
Fair value as of September 30, 2021
|
|
$
|
554,577
|
|
Note 7: Equity
Common Stock
In February 2021, the Board of Directors of the Company increased the authorized common shares to be 170,000,000. The Company is authorized to issue up to 10,000,000 shares of preferred stock.
During the nine months ended September 30, 2021, the Company issued 3,086,420 shares of common stock related to the conversion of $73,578 of Convertible Notes Payable.
During the nine months ended September 30, 2021, the Company received $250,000 of cash proceeds related to sale of 1,388,889 common stock units at $0.18 per unit. Each $0.18 unit consists of a share of common stock and a warrant to purchase half a share of common stock at an exercise price of $0.27, for a period of three years from issuance. These shares have not yet been issued. During the nine months ended September 30, 2021, the Company issued 3,868,883 shares related to common stock unit subscriptions from the year ended December 31, 2020, with 2,222,223 shares remaining to be issued.
The Company also issued 3,086,420 shares related to conversions of notes payable during the year ended December 31, 2020 associated with the subscription payable liability balance and recognized a loss of $58,642. As of September 30, 2021, there are 2,777,778 shares remaining to be issued related to 2020 debt conversions, with 2,160,494 of those shares remaining to be issued to Mark Adams and David Hall.
During the nine months ended September 30, 2021, the Company issued a total of 200,000 shares of common stock to a lender in connection with the convertible notes payable issued during the period. These shares had a fair value of $72,000 and were recorded as deferred finance costs.
On April 15, 2021, 860,000shares under the share lending arrangements with debt holders were returned to the Company and cancelled in connection with retirement of the convertible notes payable during the nine months ended September 30, 2021.
During the nine months ended September 30, 2021, the Company issued 143,609 shares of common stock with a fair value of $15,228 for professional services.
Series A Redeemable Preferred Stock
On May 26, 2021, the Company, entered into a subscription agreement (the “Preferred Stock Agreement”) with Mark Adams, Chief Executive Officer, President, and a member of Board of Directors of the Company. Mark Adams paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09.
Scott Wessler, Chairman of Board of Directors of the Company, paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09.
The Company created the 2,800,000 shares of Series A Preferred Stock out of the 10,000,000 shares of preferred stock authorized by the Company’s articles of incorporation by filing a certificate of designation as authorized by the Company’s board of directors (the “Certificate of Designation”).
The Series A Preferred Stock bears a cumulative dividend of 5.0% per annum on the original purchase price and is redeemable by the Company or upon a class vote by the holders of the Series A Preferred Stock at the original purchase price, plus any unpaid dividends then owing, payable in 4 equal quarterly payments. The Series A Preferred Stock converts into the Company’s common stock at a ratio of 2:1, subject to revision on the basis of standard weighted average anti-dilution protective provisions, at the option of the holders of the Series A Preferred Stock or automatically upon the occurrence of a merger, sale of the Company’s assets, or upon another Deemed Liquidation Event as defined in the Certificate of Designation. In the absence of an anti-dilution adjustment, the 2,800,000 shares of Series A Preferred Stock will convert into 1,400,000 shares of the Company’s common stock.
The Series A Preferred Stock votes with the Company’s common stock, as a single class, at a rate of 20 votes for each share of Series A Preferred Stock. The Series A Preferred Stock carries a liquidation preference and is participating. The Series A Preferred Stock carries standard protective provisions that preclude the Company from amending its articles of incorporation, bylaws or the terms of the Certificate of Designation adversely to the holders of the Series A Preferred Stock without their prior approval.
Due to the redemption feature, the Company accounts for the Series A Preferred Stock as temporary equity in accordance with ASC 480. The Series A Preferred Stock is accounted for at redemption value.
The Company accrued $4,315 in dividends for the nine months ended September 30, 2021. The redemption value of the Series A Preferred Stock as of September 30, 2021 was $256,315, reflected as temporary equity on the Company’s consolidated balance sheet.
Stock Warrants
A summary of stock warrant information is as follows:
|
|
|
Aggregate
Number
|
|
|
Aggregate
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
9,378,056
|
|
|
$
|
1,921,200
|
|
|
$
|
0.20
|
|
|
Granted
|
|
|
2,578,045
|
|
|
|
562,343
|
|
|
|
0.34
|
|
|
Exercised
|
|
|
(767,045
|
)
|
|
|
337,500
|
|
|
|
0.44
|
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at September 30, 2021
|
|
|
11,189,056
|
|
|
$
|
2,646,044
|
|
|
$
|
0.24
|
|
The weighted average remaining contractual life is approximately 2.39 years for stock warrants outstanding with no intrinsic value of as of September 30, 2021. All of the above warrants were fully vested.
Note 8: Related Party
Mark Adams, CEO, and David Hall, EVP of Sales invested in the June 2019 Notes. Mark Adams and David Hall contributed $250,000 and $100,000 respectively, and converted their debt during the year ended December 31, 2020 into shares of common stock of 1,388,885 and 555,555, respectively, that have not yet to be issued. Mark Adams and David Hall will also receive an additional 154,321 and 61,728 shares of common stock once the shares are issued. Those shares were in subscriptions payable and presented on the balance sheet.
Mark Adams and Scott Wessler each contributed $126,000 to purchase the Series A Preferred Stock as discussed in Note 7.
Note 9: Commitments
Employment Agreement
In December 2017 (the “Effective Date”), the Company entered into an employment agreement with Daniel Davis and Mark Adams (the “Executive”). As of the Effective Date, and for one year of the date therefrom, the Executive’s annual salary shall be equal to $180,000 and $120,000, respectively, per annum (the “Annual Salary”). The Annual Salary shall be paid to the Executive in equal installments in accordance with the Company’s usual payroll practices.
Executive’s Annual Salary shall increase automatically at the rate of five percent (5%) per year for four years, beginning on the anniversary date of the Effective Date. In addition to the automatic raises set forth above, the Annual Salary may also be increased from time to time by merit and general increases in amounts determined by the Board.
Performance Bonus. In addition to the Annual Salary, the Executive is eligible to earn an annual bonus of up to thirty percent (30%) of Executive’s Annual Salary (the “Performance Bonus”). The amount of the Performance Bonus will be determined in good faith by the Board, based upon the following factors:
|
(a)
|
Fifty percent (50%) of the Performance Bonus shall be based upon the achievement of the Executive’s individual objectives, as defined in writing and presented to Executive annually by the Board.
|
|
|
|
|
(b)
|
Fifty percent (50%) of the Performance Bonus shall be based upon the achievement of Company objectives, which shall include specifically, meeting or exceeding the revenue targets and other objectives as determined by the Board.
|
The initial set of performance objectives, both for Executive individually and for the Company, will be reasonably established by the Board within sixty (60) days of the Effective Date of this Agreement. Subsequent performance objectives, both for Executive individually and for the Company, will be reasonably established by the Board within sixty (60) days of the beginning of the calendar year to which the Performance Bonus relates. The Performance Bonus shall be paid to Executive in the first regular payroll period after the Board makes a good faith determination that such Performance Bonus has been earned, but in no event shall the Performance Bonus be paid later than March 1 of the calendar year immediately following the calendar year in which the bonus was earned.
In addition to salary, the agreement provided for the option of 1,000,000 common shares of the Company, which shall vest at a rate of 28,000 share for each full one-month period worked from the Effective Date. If this Agreement is terminated pursuant to written notice by the Company to the Executive on or before the date that is one year after the Effective Date, all the options shall vest and the Executive shall retain the options subject to their terms and the terms hereof. The options may contain terms providing the issuer the right to accelerate vesting and/or require the exercise of options prior to the initial public offering and listing of the issuer. The Company may arrange for the grant of additional options to the Executive from time to time based on the Executive’s performance and other relevant factors as the Board may determine in its discretion.
All options to purchase Holdings Shares granted to the Executive shall be subject to the terms of the stock option agreement pursuant to which they are granted and the terms of the stock option plan under which they are granted in effect from time to time. Shares issuable on exercise of the options shall be subject to any escrow, trading restriction, or other requirement imposed by any stock exchange or securities regulatory authority upon initial public offering or listing of the shares. The Executive shall take such steps and execute and deliver such documents as may be required to affect the foregoing.
The Company may terminate Executive’s employment for Cause immediately upon Notice from the Company to Executive. For purposes of this Agreement, “Cause” shall mean the occurrence of any of the following: (i) Executive’s conviction of or plea of nolo contendere to any felony crime involving fraud, dishonesty, or moral turpitude; (ii) Executive’s commission of, or participation in, a fraud against the Company. In the event Executive’s employment is terminated for Cause, the Company shall have no further obligations to the Executive other than to pay all compensation and expense reimbursements owing for services rendered and reasonable business expenses incurred by Executive prior to the effective date of such termination.
Upon termination of this agreement pursuant, the Company shall provide to the Executive:
|
|
(a)
|
A lump sum payment equal to the greater of (i) twelve (12) months’ Annual Salary at the Executive’s then- current rate, or (ii) Executive’s Annual Salary for the remainder of the Term;
|
|
|
|
|
|
|
(b)
|
if applicable, to the extent permitted by the Company’s group insurance carrier and applicable law, continued group insurance benefits coverage, together with reimbursement of the individual life insurance premium for the period of time equal to the number of months in respect of which payment is due pursuant and;
|
|
|
|
|
|
|
(c)
|
any other amounts (including but not limited to any earned Performance Bonus during the Executive’s active employment that may be payable pursuant to this Agreement) accrued and earned by the Executive prior to the effective date of termination.
|
If a Change of Control occurs and the Executive is not offered continued employment on a comparable basis after the Change of Control, the Executive shall be entitled to receive, within thirty (30) days after the Change of Control, a sum equivalent to twelve (12) months’ Annual Salary, plus an additional 4% of Annual Salary in lieu of benefits, and any Performance Bonus that has been earned by Executive prior to the effective date of the Executive’s termination from the Company. Thereafter, the Company shall have no further obligations to the Executive under this Agreement other than payment of any other amounts accrued as owing to the Executive under this Agreement as of the date the Change of Control occurs.
On May 31, 2019, the Company entered into a consulting agreement with Daniel Davis related to his departure from employment with the Company. The agreement requires Daniel. Davis to provide limited consulting services to the Company for a period of up to three years beginning May 1, 2019 in exchange for $165,000 per year. During the year ended December 31, 2020, the Company and Daniel Davis agreed to accelerate the payment of a portion of the consulting agreement, with the maturity period ending three months earlier than the original agreement. The Company made payments of $192,500 through December 31, 2020, and payments of $137,500 during the nine months ended September 30, 2021, leaving a balance of $55,000 in accounts payable as of September 30, 2021. In addition, the Company entered into a lock up agreement with Daniel Davis that restricts the number of shares Daniel Davis can otherwise publicly sell for a period of up to three years to one third of the volume limits set forth under SEC Rule 144. Daniel Davis also agreed to a standstill agreement that provides that for a period of up to three years Daniel Davis will not seek to influence the governance of the Company, including by participation in any solicitation of other shareholders, promotion of any extraordinary transaction, nomination of any candidate to the Board or by seeking the removal of any existing directors.
Leases
The Company entered into a lease agreement on March 1, 2021, for a term beginning April 1, 2021 through February 28, 2022. The lease requires payments of $5,000 per month through the lease term, with no option to renew. Based on the short-term nature of the lease, no right-of-use asset or liability was recognized on the Company’s consolidated balance sheet.
The Company also maintains short-term rental agreements for certain storage facilities. Total rent expense for these rental agreements were $82,668 and $40,256 for the nine months ended September 30, 2021 and 2020, respectively.
Note 10: Accrued Liabilities – Other
Prior to the Merger, China Grand Resorts, Inc. recorded various liabilities that were incurred by former related parties. The current management team is not aware of any written agreements in place governing the terms of the loans nor have they been in contact with the debt holders however recognizes that China Grand Resorts, Inc. previously reported these amounts as liabilities of the Company. In accordance with ASC 405-20-40, the liabilities may only be removed from the Company’s financial statements if they are paid, formally settled or judicially released. Management believes the relevant statute of limitations has passed and that no enforceable legal claim exists in relation to these liabilities of $1,696,374, but does not believes that is sufficient to remove the liability from the financial statements. Management does not intend to remove these liabilities of $1,696,374 from the Company’s financial statements until such time that the liability is formally settled or judicially released in accordance with ASC 405-20-40. Due to the lack of written agreements and other factors noted above, management concluded to no longer accrue interest on these loans.
Note 11: Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the financial statements.
