The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Notes to Unaudited 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 utilizing an open-source technology platform. The Company services the medical and recreational cannabis, hemp and CBD segments of the larger e-cigarette and vaporizer markets.
Prior to July 2019, the Company’s product line primarily consisted of the 710 Shark cartridge filling machine, the 710 Captain cartridge capping machine, and proprietary cartridges. Since July 2019, the Company has added the eShark cartridge filling machine and PreRoll-Er cannabis pre-roll filling machine into its product line and discontinued the sales of proprietary cartridges.
During the fourth quarter of 2019, the Company entered into a strategic partnership with Jupiter Research, LLC. The partnership highlights the leverage of existing customer base and sales force of both companies to distribute the Company’s automation machines and pre-rack solution, and Jupiter Research’s C-Cell cartridges under a profit-sharing agreement.
During the second quarter of 2020, the Company entered into a strategic partnership with 14th Round Inc. The partnership highlights the sales force collaboration, equipment R&D collaboration, and marketing collaborations.
During the third quarter of 2020, the Company introduced the PreRoll-Er automatic cannabis pre-roll filling machine to the U.S. market.
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 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 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 the Company’s sole business.
In accordance with the terms of the Exchange Agreement, and in connection with the completion of the acquisition, on the Closing Date, the Company issued 45,000,000 shares of common stock at par value $0.001 per share to the Jacksam shareholders in exchange for all of the issued and outstanding shares of Jacksam. In addition, the previous owners of China Grand Resorts, Inc. returned 30,000,000 shares of common stock to the treasury of the Company. Following the acquisition, there was a total of 48,272,311 shares of common stock issued and outstanding, of which 3,272,311 were held by shareholders of the Company prior to the merger. In connection with the above transaction, $340,000 was paid to the former controlling shareholder related to the return of 30,000,000 shares of common stock.
In accordance with “reverse merger” or “reverse acquisition” accounting treatment, the historical financial statements of China Grand Resorts, Inc., as of period ends and for periods ended prior to the Merger, will be replaced with the historical financial statements of Jacksam, prior to the Merger, in all future filings with the SEC.
Note 2: Significant Accounting Policies
Basis of Preparation
The interim unaudited consolidated financial statements as of September 30, 2020, and for the three and nine months ended September 30, 2020 and 2019, have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes filed with the SEC for the year ended December 31, 2019.
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, 2020 and December 31, 2019 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, 2020 and December 31, 2019, the Company has determined that no allowance is required.
Revenue Recognition
The Company derives revenues from the sale of machines and consumable products. 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 consumable 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. Most the Company’s performance obligations are recognized at a point in time related to the sale of machines and consumable 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, 2020, 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, 2020, $986,905 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 the Company’s 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 consumable products sales are completed in North America.
|
|
|
Three Months
Ended
September 30,
2020
|
|
|
Three Months
Ended
September 30,
2019
|
|
|
Nine Months
Ended
September 30,
2020
|
|
|
Nine Months
Ended
September 30,
2019
|
|
|
Machine sales
|
|
$
|
685,635
|
|
|
$
|
945,199
|
|
|
$
|
1,802,305
|
|
|
$
|
2,166,652
|
|
|
Consumable product sales
|
|
|
49,969
|
|
|
|
357,854
|
|
|
|
200,002
|
|
|
|
2,087,076
|
|
|
Total sales
|
|
$
|
735,604
|
|
|
$
|
1,303,053
|
|
|
$
|
2,022,307
|
|
|
$
|
4,253,728
|
|
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. During the nine months ended September 30, 2020 and 2019, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.
The Company had 13,971,879 and 12,611,109 potentially dilutive securities that have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2020 and 2019, respectively, as they would be anti-dilutive. Additionally, as of September 30, 2020 there were a total of 11,089,433 shares to be issued related to conversions of debt and stock unit sales during the nine months September 30, 2020 that were excluded from the computation of weighted average shares outstanding.
Going Concern
The Company’s financial statements are prepared using U.S. GAAP applicable 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.
Note 3: Property and Equipment
Property and equipment consist of the following:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
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
|
|
|
(16,792
|
)
|
|
|
(7,364
|
)
|
|
Property and equipment net
|
|
$
|
3,852
|
|
|
$
|
13,280
|
|
Depreciation expense amounted to $504 and $9,428 for the three and nine months ended September 30, 2020, respectively, and $267 and $799 for the three and nine months ended September 30, 2019, respectively.
Note 4: Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
256,384
|
|
|
$
|
347,850
|
|
|
Credit cards payable
|
|
|
16,402
|
|
|
|
48,743
|
|
|
Accrued interest
|
|
|
24,186
|
|
|
|
4,778
|
|
|
Sales tax payable
|
|
|
140,303
|
|
|
|
130,262
|
|
|
Accrued officer consulting cost
|
|
|
233,750
|
|
|
|
165,000
|
|
|
Total Accounts payable and accrued expenses
|
|
$
|
671,025
|
|
|
$
|
696,633
|
|
Note 5: Notes Payable
A summary of Notes Payable are as follows:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
Note payable dated December 31, 2019, bearing interest at 3% monthly, maturing February 29, 2020 (amended on April 22, 2020)
|
|
|
-
|
|
|
$
|
164,835
|
|
|
Note payable dated February 6, 2020, bearing interest at 3% monthly, maturing May 27, 2022 (amended on April 22, 2020)
|
|
|
122,662
|
|
|
|
-
|
|
|
SBA PPP loan dated April 17, 2020, bearing interest at 1%, maturing April 17, 2022
|
|
|
399,000
|
|
|
|
-
|
|
|
SBA EIDL loan dated May 26, 2020, bearing interest at 3.75%, maturing May 26, 2050
|
|
|
149,900
|
|
|
|
-
|
|
|
Total notes payable
|
|
|
671,562
|
|
|
|
164,835
|
|
|
Less: unamortized discount and deferred financing costs
|
|
|
-
|
|
|
|
(19,504
|
)
|
|
Less: current portion
|
|
|
(366,946
|
)
|
|
|
(145,331
|
)
|
|
Long-term portion of notes payable
|
|
$
|
304,616
|
|
|
$
|
-
|
|
On December 31, 2019, the Company entered into an inventory financing arrangement with a single lender, whereby $150,000 was paid by the lender directly to a vendor to secure inventory for the sales to customers in January 2020. The Company will repay $164,835 of principal and interest by February 29, 2020. The interest and fees of $14,835 were recorded as debt discount and were amortized through the maturity date. The Company also paid a deferred finance cost of $5,000 which was amortized through the maturity date. The Company entered into a second agreement on February 6, 2020 with the same lander for an additional $43,000 of funding. The Company will repay $47,253 at maturity on April 6, 2020. On April 22, 2020, these two notes payable were refinanced with the lender into a single agreement whereby the Company will make an initial repayment of $74,231 and 24 monthly payments of $7,467, for total payments of $253,439. This amendment was accounted for as a modification of the debt.
In April 2020, the Company received $399,000 under the Small Business Administration’s Payroll Protection Program. The loan bears interest at a fixed rate of 1%, and matures on April 17, 2022, payable monthly with payments beginning six months after issuance. In accordance with the terms of the Payroll Protection Program, a portion of this loan may be forgiven if the loan proceeds are used for payroll, mortgage, rent and utility costs, but no more than 25% of the forgiveness amount can be related to nonpayroll costs.
On June 2, 2020, the Company received $150,000 under the Small Business Administration’s Economic Injury Disaster Loan. The loan bears interest at a fixed rate of 3.75%, and matures on May 26, 2050, payable monthly with payments of $731 beginning twelve months after issuance. The loan gives the Small Business Administration a security interest in all assets of the Company.
The Company amortized $23,757 of debt discount and deferred finance costs to interest expense related to notes payable.
Note 6: Convertible Notes Payable
The following table summarizes outstanding convertible notes as of September 30, 2020 and December 31, 2019:
|
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
2017 Notes, maturing December 2020, currently past due
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
June 2019 Notes, maturing March 25, 2020, currently past due
|
|
|
448,888
|
|
|
|
2,018,889
|
|
|
December 2019 Notes, maturing June 10, 2020
|
|
|
-
|
|
|
|
560,000
|
|
|
June 2020 Note 1, maturing June 4, 2021
|
|
|
175,000
|
|
|
|
-
|
|
|
June 2020 Note 2, maturing June 24, 2021
|
|
|
129,000
|
|
|
|
-
|
|
|
June 2020 Note 3, maturing June 24, 2021
|
|
|
129,000
|
|
|
|
-
|
|
|
Total
|
|
|
896,888
|
|
|
|
2,593,889
|
|
|
Less: Debt discount and deferred finance costs on short-term convertible notes
|
|
|
(113,222
|
)
|
|
|
(1,525,906
|
)
|
|
Less: Current convertible notes payable, net of discount
|
|
|
(783,666
|
)
|
|
|
(1,067,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term convertible notes payable, net
|
|
$
|
-
|
|
|
$
|
-
|
|
In June and July 2019, the Company issued convertible notes to 10 investors with a principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes had an original issue discount of $238,889, and the Company incurred an interest charge deducted from the gross proceeds of $358,333, based on a 15% stated rate. The total of $597,222 was recorded as debt discount. Additionally, the Company paid $132,848 of financing costs, which were recorded as a reduction of the carrying value of the debt. The deferred financing costs and debt discounts are being amortized using the effective interest method through the maturity of 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 six months ended June 30, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.18 per share. The convertible debt outstanding as of September 30, 2020 was convertible into 2,493,827 shares of common stock.
During the nine months ended September 30, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into 7,142,852 shares of common stock, of which 476,191 were issued by September 30, 2020. On May 19, 2020, the holder of $444,444 of the notes agreed to extend the repayment period to December 31, 2020. There were no other changes to terms of the convertible notes payable, and the amendment was accounted for as a debt modification.
In December 2019, the Company issued convertible notes to an institutional investor with a principal amount of $560,000 (the “December 2019 Notes”) with an original issue discount of $56,000 and a maturity date of June 10, 2020. The Company paid $44,000 of deferred finance costs. The Company also issued 186,667 shares of common stock to the lender of the December 2019 Notes as deferred finance costs, valued at $81,200 based on the closing price of the stock at the date of borrowing. This lender also received 933,333 shares of common stock valued at $406,000 as a share lending arrangement, which the company recorded as contra-equity. The shares were returned to the Company when the debt was repaid in full in June 2020, by the maturity date.
On June 4, 2020, the Company issued a convertible note to an institutional investor with a principal amount of $175,000 (the “June 2020 Note 1”) bearing interest at 15% with an original issue discount of $17,500 and a maturity date of June 4, 2021. The Company paid $17,100 of deferred finance costs. The Company also issued 116,667 shares of common stock to the lender of the June 2020 Note 1 as deferred finance costs, valued at $23,333 based on the closing price of the stock at the date of borrowing. In May 2020, the Company issued 100,000 shares of common stock to an investment bank that were recorded as a deferred finance costs, valued at $15,000 based on the closing price of the stock at the date of issuances. This lender also received 583,333 shares of common stock valued at $116,667 under a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense.
On June 24, 2020, the Company issued convertible notes to an institutional investor with a principal amount of $129,000 (the “June 2020 Note 2”) bearing interest at 15% with an original issue discount of $12,900 and a maturity date of June 24, 2021. The Company paid $13,500 of deferred finance costs. The Company also issued 86,000 shares of common stock to the lender of the June 2020 Note 2 as deferred finance costs, valued at $17,200 based on the closing price of the stock at the date of borrowing. This lender also received 430,000 shares of common stock valued at $86,000 as a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense.
On June 24, 2020, the Company entered into a convertible note agreement with an institutional investor for a principal amount of $129,000 (the “June 2020 Note 3”) bearing interest at 15% with an original issue discount of $12,900 and a maturity date of June 24, 2021. The proceeds of this loan were received in July 2020. The Company paid $13,500 of deferred finance costs. The Company issued 86,000 shares of common stock to the lender of the June 2020 Note 3 as deferred finance costs, valued at $17,200 based on the closing price of the stock at the date of borrowing. This lender also received 430,000 shares of common stock valued at $86,000 as a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense.
The Company amortized $1,572,817 and $486,458 of debt discount and deferred finance costs to interest expense related to convertible notes payable during the nine months ended September 30, 2020 and 2019, respectively. Accrued interest on notes payable and convertible notes payable was $24,186 and $4,776 as of September 30, 2020 and December 31, 2019, respectively.
The Company evaluated the embedded conversion features of the convertible debt instruments and the warrants discussed above and determined that the conversion options and the warrants should be accounted for as derivative liabilities. The fair values of the conversion option and the attached warrants were estimated using a binomial model with the following assumptions:
|
|
|
As of September 30, 2020
|
|
|
|
|
Conversion Option
|
|
|
Warrants
|
|
|
Volatility
|
|
|
126.13
|
%
|
|
93.4-101.8
|
%
|
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk-free rate
|
|
|
0.11
|
%
|
|
|
0.16
|
%
|
|
Expected term
|
|
0.50 years
|
|
|
3-4 years
|
|
|
Stock price
|
|
$
|
0.42
|
|
|
$
|
0.42
|
|
|
Exercise price
|
|
$
|
0.18
|
|
|
$
|
0.18-0.30
|
|
|
Derivative liability fair value
|
|
$
|
662,212
|
|
|
$
|
2,950,373
|
|
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, 2020:
|
Fair value as of December 31, 2019
|
|
$
|
504,750
|
|
|
Fair value on the date of issuance related to warrants issued
|
|
|
201,208
|
|
|
Extinguishment due to repayment of debt
|
|
|
(356,007
|
)
|
|
Extinguishment due to conversion of debt
|
|
|
(606,048
|
)
|
|
Loss on change in fair value of derivatives
|
|
|
3,868,682
|
|
|
Fair value as of September 30, 2020
|
|
$
|
3,612,585
|
|
Note 7: Equity
Common Stock
As of September 30, 2020, the authorized capital stock of the Company consists of 100,000,000 shares, of which 90,000,000 shares are designated as common stock and 10,000,000 shares of preferred stock.
During the nine months ended September 30, 2020, the Company issued 476,191 shares of common stock related to the conversion of $166,667 of Convertible Notes Payable. Additionally, principal of $1,333,333 was converted into 6,666,661 shares of common stock that have not yet been issued.
During the nine months ended September 30, 2020, the Company received $846,400 of cash proceeds related to sale of 2,525,000 common stock units at $0.20 per unit and 1,897,772 common stock units at $0.18 per unit. Each $0.20 unit and $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 $0.30 and $0.27, respectively, for a period of three years from issuance. The common shares related to these unit sales have not yet been issued as of September 30, 2020. As a result of the down round provision in the convertible debt described above, the fair value of the warrants was estimated using a binomial model and were accounted for as a derivative liability, due to the potentially unlimited number of shares that can be issued upon conversion of the debt instruments. Total shares to be issued related to convertible debt converted and stock units was 11,089,433 as of September 30, 2020.
During the nine months ended September 30, 2020, the Company issued a total of 388,667 shares of common stock to an investment banker and the various lenders in connection with the convertible notes payable issued during the period. These shares had a fair value of $72,733 and were recorded as deferred finance costs. Additionally, 1,443,333 shares of common stock with a fair value of $288,667 were issued to the convertible note lenders under a share lending arrangement, which the company recorded as contra-equity. The shares may be returned to the Company if the debt is satisfied in full by the maturity date. If the debt is not repaid by the maturity date or an event of default occurs, the shares are concerned fully earned, and the fair value of the shares will be amortized in full to expense. In connection with the repayment of the December 2019 convertible note in June 2020, the lender returned 933,333 shares previously issued under the share lending arrangement, which were cancelled.
Stock Warrants
A summary of stock warrant information is as follows:
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|
|
Aggregate
Number
|
|
|
Aggregate
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding at December 31, 2019
|
|
|
5,785,714
|
|
|
$
|
1,292,100
|
|
|
$
|
0.22
|
|
|
Warrants issued due to reset provisions
|
|
|
3,480,953
|
|
|
$
|
626,572
|
|
|
$
|
0.18
|
|
|
Warrants issued with common stock units
|
|
|
2,211,389
|
|
|
$
|
631,200
|
|
|
$
|
0.29
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited and cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at September 30, 2020
|
|
|
11,478,056
|
|
|
$
|
1,923,300
|
|
|
$
|
0.17
|
|
The weighted average remaining contractual life is approximately 2.86 years for stock warrants outstanding with a total intrinsic value of $2,897,483 on September 30, 2020. All of the above warrants were fully vested. During the nine months ended September 30, 2020, a total of 3,685,714 warrants associated with the June 2019 Notes had their exercise price reset to $0.18 as a result of the sale of common stock units described above.
Note 8: Related Party
Mark Adams, CEO, and David Hall, EVP of Sales invested in the June 2019 Notes. Mr. Adams and Mr. Hall contributed $250,000 and $100,000 respectively, and converted their debt during the nine months ended September 30, 2020 into shares of common stock of 1,388,885 and 555,555, respectively, that have not yet to be issued.
Note 9: Commitments
Employment Agreement
In December 2017, the Company entered into an employment agreement with Daniel Davis and Mark Adams. 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)
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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.
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|
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|
(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, a former executive of the Company, 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 nine months ended September 30, 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 $151,250 during the nine months ended September 30, 2020, leaving a balance of $233,750, included in accounts payable and accrued expenses on the consolidated balance sheet. 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 has a single operating lease for an office lease in Rancho Santa Margarita, California with an initial term of 37 months. Base monthly rent was approximately $3,200 per month plus net operating expenses. The office lease expired in February 2020, and the Company is currently continuing the lease on a month to month basis. Operating lease expense was $0 and $9,463 for the three months ended September 30, 2020 and 2019, respectively, and $9,463 and $28,389 for the nine months ended September 30, 2020 and 2019, respectively.
The Company also maintains short-term rental agreements for certain storage facilities. Total rent expense for these rentals was $18,343 and $11,186 for the three months ended September 30, 2020 and 2019, respectively, and $40,256 and $33,099 for the nine months ended September 30, 2020 and 2019, 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 $1,642,118 but does not believes that is sufficient to remove the liability from the financial statements. Management does not intend to remove these liabilities of $1,642,118 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 evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed.
