Notes to the Financial Statements
NOTE 1
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
The Company was incorporated on September 27, 2010 under the laws of the State of Florida, as Development Capital Group, Inc. The Company has two wholly-owned subsidiaries, Clearance.Co, and Development Tech, Inc. The Company seeks to identify and invest in early-stage technology companies that have the potential to revolutionize traditional industries and transform markets. Clearance.Co, a California corporation, was incorporated on April 22, 2013 (Date of Inception) and is an online retailer offering discount brand name, non-brand name and closeout merchandise for sale on its website to primarily consumers. Development Tech, Inc., a Nevada corporation, operates the website RealtyValuator.com., an application that supports real estate investors by identifying available properties and providing tools to easily evaluate prospective investment properties.
On March 31, 2014, the Company completed a reverse merger with privately-held Clearance.Co. In exchange for all of Clearance.Co
s outstanding shares, the Company issued 77,527,735 shares common shares for approximately 73.5% interest in the Company. Clearance.Co
s convertible note obligations totaling $799,988 were also assumed by the Company as part of the transaction.
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, and are expressed in U.S. dollars.
Year end
The Company
s year-end is March 31.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 period. Actual results could differ significantly from those estimates.
Cash and cash equivalents
For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
Concentration of credit risk
The Company primarily transacts its business with one financial institution. The amount on deposit in that one institution may from time to time exceed the federally-insured limit.
Stock-based compensation
The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 1
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2014. The respective carrying value of certain on- balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses, accounts payable, accrued expense, and notes payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
Level 1
: The preferred inputs to valuation efforts are
quoted prices in active markets for identical assets or liabilities,
with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2
: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.
Level 3
: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as
unobservable,
and limits their use by saying they
shall be used to measure fair value to the extent that observable inputs are not available.
This category allows
for situations in which there is little, if any, market activity for the asset or liability at the measurement date
. Earlier in the standard, FASB explains that
observable inputs
are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
As of March 31, 2014:
Fair Value Measurements
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|
|
Level 1
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Level 2
|
Level 3
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Total Fair Value
|
Assets
|
|
|
|
|
| |
Notes Receivable
|
|
|
|
$ 304,865
|
|
$ 304,865
|
Liabilities
|
|
|
|
|
| |
Convertible Notes Payable
|
|
|
|
$ 799,988
|
|
$ 799,988
|
Inventory
Inventories consist of merchandise held for sale in the ordinary course of business, including cost of freight and other miscellaneous acquisition costs, and are stated at the lower of cost, or market determined on the first-in-first-out basis. The Company records a write-down for inventories, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of inventory each period that considers multiple factors including demand forecasts, market conditions, product life cycle status, product development plans and current sales levels. If future demand or market conditions for the Company
s products are less favorable than forecasted or if unforeseen changes negatively affect the utility of the Company
s inventory, it may be required to record additional write-downs, which would negatively affect gross margins in the period when the write-downs are recorded. If actual market conditions are more favorable, the Company may have higher gross margins when products incorporating inventory that were previously written down are sold.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 1
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment
The Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the assets or the lease term, whichever is shorter. Leasehold improvements include the cost of the Company
s internal development and construction department. Depreciation periods are as follows:
-
Computer equipment 3 years
-
Furniture and fixtures 7 years
Stock based compensation
The Company records stock-based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
Revenue recognition
Revenue is recognized in accordance with Staff Accounting Bulletin (
SAB
) No. 101,
Revenue Recognition in Financial Statements,
as revised by SAB No. 104. As such, the Company recognizes revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectability is probable. Sales are recorded net of sales discounts.
The Company allows refunds for only incorrect items or a damaged or defective item within 15 days of receiving the product. The Company does not honor warranties for damaged or defective items beyond
15 days of receiving the product.
Advertising and marketing costs
The Company expenses all costs of advertising and marketing costs as incurred. Advertising and marketing costs totaled $2,170,317 for the period of inception (April 22, 2013) to March 31, 2014.
Income taxes
The Company follows ASC Topic 740 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 1
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes (continued)
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of March 31, 2014, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.
The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next 12 months.
The Company classifies tax-related penalties and net interest as income tax expense. As of March 31, 2014, no income tax expense has been incurred.
Loss per common share
Net loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (
EPS
) and diluted EPS on the face of the statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares outstanding. Loss per common share has been computed using the weighted average number of common shares outstanding during the year.
New recent pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company
s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company
s financials properly reflect the change. There are no new accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
NOTE 2
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and marketing. As a result, the Company incurred accumulated net losses for the period of inception (April 22, 2013) to March 31, 2014 of $2,112,218. In addition, the Company
s development activities for the period of inception (April 22, 2013) to March 31, 2014 have been financially sustained through convertible debt financing and sales of common stock.
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock or through debt financing and, ultimately, the achievement of significant operating revenues and cost control measures. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 3
NOTES RECEIVABLE
On October 30, 2013, the Company loaned $20,000 to an entity as part of a convertible promissory note with a related party. The entity is a limited liability company owned and controlled by the President of the Company. The note bears interest at 5% per annum and is due the earlier of October 3, 2014 or on the next equity financing raise of at least $200,000. The principal and accrued interest shall be converted at the Company
s option at 30% discount on the price per share of the next equity financing raise.
On December 19, 2013, the Company loaned $54,500 to an entity as part of a convertible promissory note. The note bears interest at 10% per annum and is due the earlier of June 18, 2014 or upon merger or share exchange with a public entity. The principal and accrued interest shall be converted into 250,000 shares of post-merger shares with a public entity.
On December 30, 2013, the Company loaned $349,097 to an entity controlled by the CEO as part of a non-interest bearing promissory note. The note balance at March 31, 2014 was $230,365.
During the year ended March 31, 2014, the interest income was $1,920. As of March 31, 2014, the balance in accrued interest receivable was $1,920.
NOTE 4
INVENTORY
The following is a summary of inventories:
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March 31, 2014
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Finished Goods
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$ 131,854
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NOTE 5
FIXED ASSETS
The following is a summary of fixed assets:
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March 31, 2014
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Computer Equipment
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$ 5,356
|
Less: accumulated depreciation
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(818)
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Fixed Assets, Net
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$ 4,358
|
Depreciation expense for the period of inception (April 22, 2013) to March 31, 2014 was $818.
NOTE 6
NOTES PAYABLE
CURRENT
On June 5, 2013, the Company executed an unsecured promissory note with a third party for $20,000. The loan was repaid in full with accrued interest of $1,400 on December 9, 2013.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 7
CONVERTIBLE NOTES PAYABLE
LONG TERM
On September 1, 2013, the Company executed an unsecured promissory note with a third party for $303,000. The loan bears 12% interest and is due on September 1, 2015 with a balloon payment of principal and accrued interest. The note is convertible into shares of the Company
s common stock at $0.1389 per share. During the period of inception (April 22, 2013) to March 31, 2014, accrued interest expense was $21,019.
On December 12, 2013, the Company executed an unsecured promissory note with a third party for $200,000. The loan bears 12% interest and is due on December 12, 2015 with a balloon payment of principal and accrued interest. The note is convertible into shares of the Company
s common stock at $0.1389 per share. During the period of inception (April 22, 2013) to March 31, 2014, accrued interest expense was $7,167.
On February 1, 2014, the Company executed an unsecured promissory note with a third party for $300,000. The loan bears 12% interest and is due on February 1, 2016 with a balloon payment of principal and accrued interest. The note is convertible into shares of the Company
s common stock at $0.1389 per share. During the period of inception (April 22, 2013) to March 31, 2014, accrued interest expense was $5,635.
NOTE 8
LEASE OBLIGATIONS
The Company leases its office space under an operating lease agreement that expires August 12, 2014. Future minimum lease payments for the upcoming year through lease expiration are approximately $20,200.
NOTE 9
STOCKHOLDERS
EQUITY
The Company is authorized to issue 500,000,000 shares of its $0.001par value common stock.
Common stock
For the period of inception (April 22, 2013) to March 31, 2014, the Company sold and issued 12,132,000 shares of its common stock for total proceeds of $578,825. On March 31, 2014, the Company issued 77,527,735 shares in connection with the Clearance.Co transaction as more fully described in Note 1.
NOTE 10
RELATED PARTY TRANSACTIONS
On August 1, 2013, the Company entered into a consulting agreement with an entity that is owned and controlled by the President of the Company which is effective until Mr. Ricard is removed as an officer of the Company. The monthly fee was $5,000. The payments were ceased in May 2014.
On August 1, 2013, the Company entered into a consulting agreement with an entity that is a shareholder of the Company which is effective until either party provides 30 days
notice of termination. The monthly fee was $4,500. The payments were ceased in May 2014.
As of March 31, 2014, the Company had notes receivable due a related party limited liability company controlled by the CEO and shareholder totaling $230,365. The note receivable is due upon demand and bears no interest.
As of March 31, 2014, the Company had a notes receivable of $20,000 and accrued interest receivable of $164 due from a related party. The related party is a limited liability company owned and controlled by the President of the Company.
Development Capital Group, Inc. and Subsidiaries
Notes to the Financial Statements
NOTE 11
INCOME TAXES
At March 31, 2014, the Company had a federal operating loss carry-forwards of $2,708,303, which begin to expire in 2033.
Components of net deferred tax assets, including a valuation allowance, are as follows at March 31,
2014:
| |
Deferred tax assets:
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|
Net operating loss carryforward
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$ 947,906
|
Total deferred tax assets
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947,906
|
Less: Valuation allowance
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(947,906)
|
Net deferred tax assets
|
$
-
|
The valuation allowance for deferred tax assets as of March 31, 2014 was $947,906 which will begin to expire 2033. In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred tax assets would not be realized as of March 31, 2014 and maintained a full valuation allowance.
Reconciliation between the statutory rate and the effective tax rate is as follows at March 31, 2014:
| |
Federal statutory rate
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35.0%
|
State taxes, net of federal benefit
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0.00%
|
Valuation allowance
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(35.0%)
|
Effective tax rate
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0.0%
|