Notes
to the Financial Statements
For
the years ended December 31, 2018 and 2017
Note
1 – Nature of the Business
Andover
National Corporation (the “Company”) was organized in the State of Utah on July 11, 2007, and reincorporated on March
20, 2014. The Company is a full XML, XBRL and HTML compliant EDGAR and XBRL filing company. The Company provides these filing
services to a limited number of small public companies that are required to file reports with the SEC pursuant to the Securities
Exchange Act of 1934 (“Exchange Act”), or file registration statements or other documents with the SEC pursuant to
the Securities Act.
On
September 25, 2018, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) by and among the
Company, its stockholders (collectively, the “Sellers”), John D. Thomas, P.C., as the Sellers’ representative,
and Windber National LLC, The Peter A. Cohen Revocable Trust, Blumenthal Family Investment Joint Venture, L.P., and Jeffrey C.
Piermont (collectively, the “Buyers”), pursuant to which the Buyers paid $450,000.00 in aggregate cash consideration
for (i) 2,340,000 shares of the Company’s Class A Common Stock, par value $0.001, from the Sellers, which shares constituted
99.96% of the Company’s issued and outstanding shares as of December 31, 2018 and (ii) the extinguishment and payment in
full of (A) an aggregate of approximately $307,371 in notes payable by the Company, and (B) an aggregate of approximately $54,187
in loans payable by the Company (the “Acquisition”). As a result of the sale of the shares of Class A Common Stock
by the Sellers, the Buyers held a controlling interest in the Company.
Effective
February 14, 2019, the Company completed a change of domicile to Delaware from Utah (the “Reincorporation”) by means
of a merger of the Company with and into the Company’s wholly-owned subsidiary, Andover National Corporation, a Delaware
corporation (“Andover”). The Company and Andover entered into an agreement and plan of merger on January 9, 2019,
which was previously disclosed and attached as an appendix to the definitive information statement on Schedule 14C filed with
the SEC on January 22, 2019. The certificate of merger was accepted by the state of Delaware on February 7, 2019. The Reincorporation
was approved by a majority of the Company’s stockholders acting by written consent, dated January 9, 2019. All share and
per share amounts have been retrospectively restated to reflect the Reincorporation.
Note
2 – Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Management
makes estimates that affect certain accounts including deferred income tax assets, accrued expenses, fair value of equity instruments,
and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the period in
which such adjustments are determined.
Reclassification
Certain
reclassifications have been made to conform the prior period’s financial information to the current period’s presentation.
These reclassifications had no effect on previously reported net loss or accumulated deficit.
Basis
of Presentation
The
accompanying consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”).
Cash
and Cash Equivalents
The
Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of
90 days or less, when purchased, to be cash. As of December 31, 2018 and 2017, the Company had no cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined
the credit exposure to be negligible.
Accounts
Receivable, Net of Allowance for Doubtful Accounts
The
Company extends unsecured credit to customers in the ordinary course of business but mitigates risk by actively pursuing past
due accounts. The allowance for doubtful accounts is based on customer financial condition, collection history and the aging of
the related accounts receivable. A significant number of the Company’s customers are entities with a history of operating
losses and limited cash flow that were historically affiliated with the majority stockholders of the Company prior to the Acquisition.
In addition, certain individuals that were historically affiliated with the majority stockholders of the Company prior to the
Acquisition have a history of facilitating the sale of the ownership control in those affiliated customer entities, at which time
proceeds from the sale of the ownership control in the entity provides funds for the Company to collect past due receivables from
services (See Note 3).
Revenue
Recognition
Adoption
of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”)
606, “
Revenue from Contracts with Customers
”
On
January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not
completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while
prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.
There
was no impact to the opening balance of accumulated deficit or revenues for the year ended December 31, 2018 as a result of applying
ASC 606.
The
Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract
with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating
the transaction price to the performance obligations in the contract, and (5) recognizing revenue when the performance obligation
is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to
the customer.
The
Company generates revenue from contracts to provide services to publicly traded companies. The Company has identified the promise
to provide these services as its performance obligation, which is satisfied over a short time. The Company has a right to consideration
from its customer an amount that corresponds directly with the value to the customer of the Company’s performance completed
to date. As allowed by a practical expedient in Topic 606, the entity recognizes revenue in the amount to which the entity has
a right to invoice. The term between invoicing and when payment is due is not significant.
Income
Taxes
The
Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities
are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect, when the differences are expected to be reversed. An allowance against
deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.
Related
Parties
The
Company follows ASC 850,
Related Party Disclosures,
for the identification of related parties and disclosure
of related party transactions. The Company’s financial statements disclose material related-party transactions, other than
compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business.
Warrants
The
Company relied on ASC 815, “
Derivatives and Hedging
,” which establishes a two-step process for evaluating whether
equity-linked financial instruments and embedded features are indexed to a company’s own stock for the purpose of determining
whether the scope exception described in ASC 815 applies. The warrants are classified as equity.
Preferred
Stock
The
Company accounts for preferred stock which is convertible into shares of its common stock as equity in accordance with ASC 480,
“
Distinguishing Liabilities from Equity
,” and ASC 815-40-15, “
Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity
.”
The
Company analyzed ASC 470 to determine if a beneficial conversion feature applied to the preferred stock issued, and determined
that none would apply based on the market price relative to the conversion price of the preferred stock.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings per share under ASC 260-10, “
Earnings Per Share
.” Basic earnings (loss) per share
is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average
number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed
by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities
convertible into common stock (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive.
There were 3,150,000 and zero potentially dilutive shares, which include outstanding common stock options, warrants, convertible
preferred stock and convertible notes, as of December 31, 2018 and 2017, respectively.
The
potential shares, which are excluded from the determination of basic and diluted net loss per share as their effect is anti-dilutive,
are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants to purchase common stock
|
|
|
3,150,000
|
|
|
|
-
|
|
Potential equivalent shares excluded
|
|
|
3,150,000
|
|
|
|
-
|
|
Fair
Value Measurements
Disclosures
about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance
sheet, where it is practicable to estimate that value.
In
accordance with ASC 820, “
Fair Value Measurements and Disclosures
,” the Company measures certain financial
instruments at fair value on a recurring basis. ASC 820 defines fair value, established a framework for measuring fair value in
accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
These tiers include:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies,
or similar techniques and at least one significant model assumption or input is unobservable.
The
carrying amounts of the Company’s financial assets and liabilities, including cash, accounts receivable, prepaid expenses,
accounts payable, accrued expenses, and other current liabilities, approximate their fair values because of the short maturity
of these instruments. The fair value of notes payable and convertible notes approximates their fair values since the current interest
rates and terms on these obligations are the same as prevailing market rates.
Going
Concern
The
Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S.
GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company has limited revenue and had a cumulative net loss from inception to December 31, 2018,
of $956,060. The Company had working capital of $87,750 as of December 31, 2018 due to the sale of equity late in September 2018,
and the settlement during change in ownership of approximately $452,000 in debt due to related parties (see Note 1 regarding the
Acquisition). The Company has not established an ongoing source of revenue sufficient to cover its operating costs and to allow
it to continue as a going concern. The accompanying financial statements for the period ended December 31, 2018, have been prepared
assuming the Company will continue as a going concern. The Company’s cash resources will likely be insufficient to meet
its anticipated needs during the next twelve months. The Company will require additional financing to fund its future planned
operations.
The
ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it establishes a revenue stream and becomes profitable. Management’s plans to continue as a going concern include
raising additional capital through sales of equity securities and/or borrowing. However, management cannot provide any assurances
that the Company will be successful in accomplishing any of its plans. If the Company is not able to obtain the necessary additional
financing on a timely basis, the Company will be required to delay, reduce the scope of or eliminate one or more of the Company’s
activities or perhaps even cease the operation of its business. The ability of the Company to continue as a going concern is dependent
upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt
about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying financial statements.
The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 is a comprehensive
revenue recognition standard that supersedes nearly all existing revenue recognition guidance under current U.S. GAAP and replace
it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer
obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity
expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08,
ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20, all of which clarify certain implementation guidance within ASU 2014-09.
ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. The standard can be adopted either
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).
The Company has reviewed ASU 2014-09 and using the modified retrospective method has determined that its adoption has had no impact
on its financial position, results of operations or cash flows. The Company adopted the provisions of this statement in the first
quarter of fiscal 2018.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
period presented in the financial statements. The Company has evaluated the expected impact and has determined that the standard
will not have a material impact on its financial statements and related disclosures due primarily to the fact that there are no
leases that are greater than 12 months in remaining duration.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.
The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require
an entity to apply modification accounting in ASC 718. The adoption of ASU 2017-09, which is effective for annual periods beginning
after December 15, 2017, and for interim periods within those annual periods, did not have any impact on the Company’s financial
statement presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or in management’s opinion will not have a material impact on the Company’s
present or future financial statements.
Note
3 – Accounts Receivable
As
of December 31, 2018 and 2017, accounts receivable consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
29,956
|
|
Allowance for bad debts
|
|
|
-
|
|
|
|
(17,808
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
12,148
|
|
Certain
of the Company’s accounts receivable are due from entities which are or were previously under the control or majority ownership
of the majority stockholders of the Company prior to the Acquisition. During the period ended December 31, 2018 management reviewed
the accounts receivable balance and allowance for bad debts and determined that both should be written off as of December 31,
2018.
Note
4 – Accounts Payable and Accrued Liabilities
As
of December 31, 2018 and 2017, current liabilities consisted of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Accounts payable ($227,787 and $31,500 due to related parties, respectively)
|
|
$
|
280,814
|
|
|
$
|
31,500
|
|
Accrued interest on notes payable, related party
|
|
|
-
|
|
|
|
24,777
|
|
Other accruals
|
|
|
-
|
|
|
|
4,096
|
|
Total
|
|
$
|
280,814
|
|
|
$
|
60,373
|
|
On
September 25, 2018, in conjunction with the sale of a controlling interest in the Company, certain accounts payable and accrued
interest which were due and payable to related parties (our former majority owners and officers) as of December 31, 2017, were
settled during change in ownership pursuant to the terms described for the Acquisition.
Note
5 – Related Party Notes and Loans Payable
On
September 25, 2018, in conjunction with the sale of a controlling interest in the Company, certain outstanding notes and loans
payable were paid pursuant to the terms described for the Acquisition. It was accounted for as a capital contribution because
the debts were to the former owners of the Company. The following debts were retired as of September 25, 2018:
|
|
December 31,
|
|
|
September 25,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
Loans Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth I. Denos P.C.
|
|
$
|
-
|
|
|
$
|
46,300
|
|
|
$
|
26,150
|
|
Acadia Group, Inc.
|
|
|
-
|
|
|
|
6,400
|
|
|
|
400
|
|
Other
|
|
|
-
|
|
|
|
987
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth I. Denos, P.C.
|
|
|
-
|
|
|
|
265,251
|
|
|
|
265,251
|
|
Acadia Group, Inc.*
|
|
|
-
|
|
|
|
38,700
|
|
|
|
38,700
|
|
Acadia Properties, LLC*
|
|
|
-
|
|
|
|
3,420
|
|
|
|
3,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Interest Payable
|
|
|
-
|
|
|
|
42,765
|
|
|
|
24,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Acadia Properties, LLC*
|
|
|
-
|
|
|
|
19,500
|
|
|
|
16,500
|
|
Other
|
|
|
-
|
|
|
|
28,387
|
|
|
|
19,096
|
|
Total
|
|
$
|
-
|
|
|
$
|
451,710
|
|
|
$
|
394,294
|
|
|
*
|
Kenneth
I. Denos controls Acadia Group, Inc. and Acadia Properties, LLC.
|
The
Loan Agreements with Kenneth I. Denos P.C., Acadia Group, Inc., and Acadia Properties, LLC were all dated in March 2014, do not
provide for interest, and provide for repayment of the indebtedness at the earlier of (a) the Company attaining three consecutive
months of net positive cash flow or (b) March 20, 2017.
Effective
January 1, 2017, the Company issued 8% demand promissory notes totaling $313,371 in settlement of the $313,371 non-interest bearing
loans payable outstanding at December 31, 2016. Kenneth I. Denos P.C., Acadia Group, Inc., and Acadia Properties, LLC are controlled
by Kenneth I. Denos (See notes 3 and 4).
Note
6 – Warrants
On
September 25, 2018, the Company issued to each of the Buyers (i) Class A warrants to purchase 1,250,000 shares of Class A Common
Stock (the “Original Class A Warrants”) and (ii) Class B warrants to purchase 1,250,000 shares of Class A Common Stock
(the “Original Class B Warrants,” and together with the Original Class A Warrants, the “Original Warrants”).
The
Original Class A Warrants were issued to the Buyers in exchange for a purchase price of $15,000. The exercise price of the Original
Class A Warrants was originally $3.00. The Original Class B Warrants were issued to the Buyers in exchange for a purchase price
of $10,000. The exercise price of the Class B Warrants was originally $5.00.
On
December 28, 2018, the Company and the Buyers agreed to amend and restate the Original Warrants to, among other things, (a) change
the classification of each Original Class A Warrant to now be referred to as a Class W-1 Warrant (the “Class W-1 Warrants”)
and each Original Class B Warrant to now be referred to as a Class W-2 Warrant (the “Class W-2 Warrants”, and together
with the Class W-1 Warrants, the “Amended and Restated Warrants”), (b) clarify language contained in the Amended and
Restated Warrants in order to maintain equity treatment of the Amended and Restated Warrants and thus avoid the burden of derivative
liability accounting, (c) reduce the number of shares underlying each Class W-1 Warrant and Class W-2 Warrant to (i) 225,000 shares
of Class A Common Stock for Blumenthal Family Investment Joint Venture, L.P. and (ii) 450,000 shares of Class A Common Stock for
each of Jeffrey C. Piermont, The Peter A. Cohen Revocable Trust, and Windber National LLC, and (d) increase the exercise price
of each Class W-1 Warrant to $12.50 and each Class W-2 Warrant to $15.00.
The
Amended and Restated Warrants were fully vested on the date of issuance by the Company and will become exercisable on September
25, 2023, except in the event of a change in control (as described in the Amended and Restated Warrants), or termination without
cause (as described in the Amended and Restated Warrants), and such right to exercise the Amended and Restated Warrants will expire
on September 25, 2028.
The
Amended and Restated Warrants are subject to anti-dilution adjustments in connection with stock splits, tender offers, and certain
other events (as described in the Amended and Restated Warrants), and (y) provide for a right for the holders of the Amended and
Restated Warrants to choose to require that the Amended and Restated Warrants be assumed by a successor entity or that the holder
of Amended and Restated Warrants receive the same consideration as stockholders upon certain change in control events. Each of
the Buyers was required to pay the applicable purchase price for the Amended and Restated Warrants, and did pay such amounts,
within 75 days of the issuance date of the Amended and Restated Warrants.
Pursuant
to the terms of the Amended and Restated Warrants, the aggregate number of shares underlying the Amended and Restated Warrants
were not adjusted in connection with, and upon effectiveness of, the Reincorporation.
The
Amended and Restated Warrants stipulate that if the registration statement is not filed there are no liquidated damages, accordingly
there was no accounting recognition for the registration rights. No underwriting commission or discounts were given or paid in
connection with the issuance and sale of the warrants.
The
Company relied on ASC 815-40-15 which establishes a two-step process for evaluating whether equity-linked financial
instruments and embedded features are indexed to a company’s own stock for the purpose of determining whether the scope
exception described in ASC 815 applies. The Amended and Restated Warrants are classified as equity.
Note
7 – Capital Stock
Subsequent
to December 31, 2018, and as discussed in Note 10, Subsequent Events, in connection with the Reincorporation, and effective upon
the effectiveness of the Reincorporation, each of the Company’s issued and outstanding shares of common stock, par value
$0.001 per share, automatically converted into and became one-fifth (
1
/
5
th
) of one validly issued,
fully paid and non-assessable share of Class A Common Stock, par value $0.001 per share (the “Class A Common Stock”),
of Andover, without any action on the part of the Company’s stockholders. In addition, each of the Company’s issued
and outstanding shares of Series A preferred stock, par value $0.001 per share, automatically converted into and became one-fifth
(
1
/
5
th
) of one validly issued, fully paid and non-assessable share of Class B Common Stock, par
value $0.001 per share (the “Class B Common Stock”), of Andover, without any action on the part of the Company’s
stockholders. All share and per-share amounts have been retrospectively restated.
The
authorized capital of the Company consisted of 72,500,000 shares of capital stock, consisting of 60,000,000 shares of Class A
Common Stock with a par value of $0.001 per share, 7,500,000 shares of Class B Common Stock with a par value of $0.001 per
share, and 5,000,000 shares of preferred stock with a par value of $0.001 per share. As of December 31, 2018, there were 2,340,000
shares of Class A Common Stock issued and outstanding and 1,500,000 shares of Class B Common Stock outstanding.
The
Company accounts for preferred stock convertible to shares of its common stock as equity in accordance with FASB ASC 480, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities
from Equity.
During
the year ended December 31, 2018, the Company issued 1,500,000 shares of Class B Common Stock in exchange for $450,000 in cash.
During
the year ended December 31, 2018, the Company did not issue additional shares of Class A Common Stock.
During
the year ended December 31, 2017, the Company issued 20,000 shares of Class A Common Stock to Brandon Pehrson for his services
as an independent Director of the Company. The $2,000 fair value ($0.10 per share) of the 20,000 shares of Class A Common Stock was expensed
as other operating expenses in the year ended December 31, 2017.
During
the year ended December 31, 2017, the Company sold a total of 250,000 restricted shares of Class A Common Stock to 32 investors
at $0.10 per share for total cash consideration of $25,000.
Class
A Common Stock
Holders
of Class A Common Stock are entitled to one vote per share on matters to be voted upon by stockholders. Holders of Class A Common
Stock have no preemptive rights to subscribe for or to purchase any additional shares of Class A Common Stock or other obligations
convertible into shares of Class A Common Stock which we may issue in the future.
All
of the outstanding shares of Class A Common Stock are fully paid and non-assessable. Holders of our Class A Common Stock are not
liable for further calls or assessments.
The
rights, preferences, and privileges of the holders of Class A Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of Class B Common Stock and any series of preferred stock that we may designate in the future.
Class
B Common Stock
Holders
of Class B Common Stock are entitled to fifty (50) votes per share on matters to be voted upon by stockholders. Holders of our
Class B Common Stock are entitled to elect, exclusively and as a separate class, three of our directors (the “
Class B
Directors
”), who may not be removed without cause without the affirmative vote of holders of a majority of the outstanding
shares of Class B Common Stock, voting as a separate class.
At
any time when shares of Class B Common Stock are outstanding, the Company may not, without the affirmative vote of a majority
of the shares of Class B Common Stock:
|
●
|
create,
or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock,
or increase the authorized number of shares of or issue additional shares of Class B Common Stock, or increase the authorized
number of shares of any additional class or series of capital stock;
|
|
●
|
create,
or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more other subsidiaries)
by the Company, or sell, transfer, or otherwise dispose of any capital stock of any of the Company’s direct or indirect
subsidiaries, or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license, or otherwise dispose
(in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary;
|
|
●
|
amend,
alter, or otherwise change the rights, preferences, or privileges of the Class B Common Stock, or amend, alter, or repeal
any provision of the Company’s certificate of incorporation or bylaws in a manner that adversely affects the powers,
preferences, or rights of the Class B Common Stock;
|
|
●
|
acquire,
by asset purchase, merger, stock purchase, or otherwise, any material assets or securities of any other corporation, partnership,
or other entity; or
|
|
●
|
liquidate,
dissolve, or wind-up the business and affairs of the Company, effect any merger or consolidation, or any other “Deemed
Liquidation Event” (as defined in the certificate of incorporation), or consent to any of the foregoing.
|
At
any time when shares of Class B Common Stock are outstanding, the Company may not, without the affirmative vote of a majority
of the Class B Directors:
|
●
|
increase
or decrease the authorized number of directors constituting the Company’s board of directors;
|
|
●
|
hire,
terminate, change the compensation of, or amend the employment agreements of the Company’s executive officers or the
executive officers of any of the Company’s subsidiaries, including approving any incentive compensation, option grants,
or stock awards to executive officers;
|
|
●
|
purchase
or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any
shares of the Company’s capital stock;
|
|
●
|
create,
or authorize the creation of, or issue, or authorize the issuance of, any debt security, or permit any subsidiary to take
any such action with respect to any debt security, if the Company’s aggregate indebtedness, including the indebtedness
of the Company’s subsidiaries, for borrowed money following such action would exceed $10,000, or guarantee, directly
or indirectly, or permit any of the Company’s subsidiaries to guarantee, directly or indirectly, any indebtedness except
for its trade accounts or any subsidiary arising in the ordinary course of business;
|
|
●
|
make,
or permit any subsidiary to make, any loan or advance outside of the ordinary course of business to any of the Company’s
employees or directors or any subsidiary, or to any subsidiary or other corporation, partnership, or other entity unless it
is wholly owned by the Company;
|
|
●
|
change
the principal business of the Company, enter new lines of business, or exit the current line of business;
|
|
●
|
enter
into any agreement, contract, arrangement, or corporate strategic relationship involving the payment, contribution, or assignment
by the Company or to the Company of money or assets greater than $250,000; or
|
|
●
|
enter
into or be a party to any transaction outside of the ordinary course of business with any of the Company’s directors,
officers, or employees or any “associate” (as defined in Rule 12b-2 promulgated under the Exchange Act) of any
such person or entity.
|
Holders
of the Class B Common Stock may convert each Class B Common Stock into one share of Class A Common Stock (the “
Class
B Conversion Ratio
”) at any time, from time to time, without payment of additional consideration. The Class B Conversion
Ratio is subject to adjustments upon the occurrence of certain events.
Note
8 – Related Party Transactions
On
September 25, 2018, the Board of Directors of the Company appointed Daniel E. Schmerin and Jeffrey C. Piermont as members of the
Board of Directors. Further, Mr. Schmerin was appointed as the Company’s Chief Executive Officer and Mr. Piermont was appointed
as the Company’s Chief Operating Officer, President, and Secretary.
Mr.
Schmerin owned or controlled 584,820 shares of the Company’s Class A Common Stock, owned or controlled 500,000 shares of
the Company’s Class B Common Stock, and owned or controlled 900,000 shares underlying the Amended and Restated Warrants.
Mr. Piermont owned or controlled 584,820 shares of the Company’s Class A Common Stock, owned or controlled 500,000 shares
of the Company’s Class B Common Stock, and owned or controlled 900,000 shares underlying the Amended and Restated Warrants.
Peter
A. Cohen, a director of one of the Company’s subsidiary, owned or controlled 584,820 shares of the Company’s Class
A Common Stock, owned or controlled 500,000 shares of the Company’s Class B Common Stock, and owned or controlled 900,000
shares underlying Amended and Restated Warrants.
George
Blumenthal owned or controlled 584,820 shares of the Company’s Common Stock and owned or controlled 450,000 shares underlying
Amended and Restated Warrants.
As
of December 31, 2018, $233,822 of the legal expenses and $227,787 of the accounts payable were related to a certain law firm.
One of the officers of the Company is related to one of the partners of this firm through marriage. The partner does not perform
legal services for the Company, is not consulted on any matters pertaining to the Company, and is not compensated directly from
the fees paid to the law firm by the Company.
Note
9 – Income Taxes
The
FASB has issued ASC 740-10, “
Income Taxes
.” ASC 740-10 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements. This standard requires a company to determine whether it is more likely than
not that a tax position will be sustained will be sustained upon examination based upon the technical merits of the position.
If the more-likely-than- not threshold is met, a company must measure the tax position to determine the amount to recognize in
the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax
positions in accordance with recognition and measurement standards established by ASC 740-10.
Deferred
taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
At December 31, 2018 the Company had net
operating loss carryforwards of approximately $900,000 that may be offset against future taxable income through 2037. No tax benefits
have been reported in the financial statements, because the potential tax benefits of the net operating loss carry forwards are
offset by a valuation allowance of the same amount.
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting
purposes are subject to annual limitations. Should a significant change in ownership occur, net operating loss carryforwards may
be limited as to use in the future.
Net
deferred tax assets consist of the following components:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
NOL Carryover
|
|
$
|
196,604
|
|
|
$
|
80,837
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
3,740
|
|
Valuation allowance
|
|
|
(196,604
|
)
|
|
|
(84,577
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax provision (benefit) differs from the amount of income tax determined by applying the U.S. federal income tax rate of
21% for 2018 and 34% for 2017 to pretax income due to the following:
|
|
Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax at 34% for 2017, 21% for 2018
|
|
$
|
(112,604
|
)
|
|
$
|
(28,902
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
680
|
|
Remeasurement of deferred income tax assets from 34% to 21% (a)
|
|
|
|
|
|
|
52,358
|
|
Change in valuation allowance
|
|
|
112,604
|
|
|
|
(24,136
|
)
|
Provision for (benefit from) income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(a)
|
As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, the United States corporate income
tax rate is 21% effective January 1, 2018. Accordingly, we reduced our deferred income tax asset relating to our net operating
loss carryforward (and the valuation allowance thereon) by $52,358 from $136,935 to $84,577 at December 31, 2017.
|
For
all periods presented, the Company had no unrecognized tax benefits that, if recognized, would affect the effective tax rate.
The
Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits
will significantly increase or decrease within the next 12 months.
The
Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements of operations
in the provision for income taxes. For all periods presented, the Company had no accrued interest or penalties.
All
tax years remain subject to examination by major taxing jurisdictions.
Note
10 – Subsequent Events
Effective
February 14, 2019, the Company completed the Reincorporation, which was approved by a majority of the Company’s stockholders
acting by written consent, dated January 9, 2019.
Capital
Stock
Subsequent
to December 31, 2018, in connection with the Reincorporation, and effective upon the effectiveness of the Reincorporation, each
of the Company’s issued and outstanding shares of common stock, par value $0.001 per share, automatically converted into
and became one-fifth (
1
/
5
th
) of one validly issued, fully paid and non-assessable share of Class
A Common Stock, of Andover, without any action on the part of the Company’s stockholders. In addition, each of the Company’s
issued and outstanding shares of Series A preferred stock, par value $0.001 per share, automatically converted into and became
one-fifth (
1
/
5
th
) of one validly issued, fully paid and non-assessable share of Class B Common
Stock, of Andover, without any action on the part of the Company’s stockholders. There are 2,340,000 issued and outstanding
shares of Class A Common Stock and 1,500,000 issued and outstanding shares of Class B Common Stock following the Reincorporation.
Class
A Common Stock
Holders
of Class A Common Stock are entitled to one vote per share on matters to be voted upon by stockholders. Holders of Class A Common
Stock have no preemptive rights to subscribe for or to purchase any additional shares of Class A Common Stock or other obligations
convertible into shares of Class A Common Stock which we may issue in the future.
All
of the outstanding shares of Class A Common Stock are fully paid and non-assessable. Holders of our Class A Common Stock are not
liable for further calls or assessments.
The
rights, preferences, and privileges of the holders of Class A Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of Class B Common Stock and any series of preferred stock that we may designate in the future.
Class
B Common Stock
Holders
of Class B Common Stock are entitled to fifty (50) votes per share on matters to be voted upon by stockholders. Holders of our
Class B Common Stock are entitled to elect, exclusively and as a separate class, three of our directors (the “
Class B
Directors
”), who may not be removed without cause without the affirmative vote of holders of a majority of the outstanding
shares of Class B Common Stock, voting as a separate class.
At
any time when shares of Class B Common Stock are outstanding, the Company may not, without the affirmative vote of a majority
of the shares of Class B Common Stock:
|
●
|
create,
or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock,
or increase the authorized number of shares of or issue additional shares of Class B Common Stock, or increase the authorized
number of shares of any additional class or series of capital stock;
|
|
●
|
create,
or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more other subsidiaries)
by the Company, or sell, transfer, or otherwise dispose of any capital stock of any of the Company’s direct or indirect
subsidiaries, or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license, or otherwise dispose
(in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary;
|
|
●
|
amend,
alter, or otherwise change the rights, preferences, or privileges of the Class B Common Stock, or amend, alter, or repeal
any provision of the Company’s certificate of incorporation or bylaws in a manner that adversely affects the powers,
preferences, or rights of the Class B Common Stock;
|
|
●
|
acquire,
by asset purchase, merger, stock purchase, or otherwise, any material assets or securities of any other corporation, partnership,
or other entity; or
|
|
●
|
liquidate,
dissolve, or wind-up the business and affairs of the Company, effect any merger or consolidation, or any other “Deemed
Liquidation Event” (as defined in the certificate of incorporation), or consent to any of the foregoing.
|
At
any time when shares of Class B Common Stock are outstanding, the Company may not, without the affirmative vote of a majority
of the Class B Directors:
|
●
|
increase
or decrease the authorized number of directors constituting the Company’s board of directors;
|
|
●
|
hire,
terminate, change the compensation of, or amend the employment agreements of the Company’s executive officers or the
executive officers of any of the Company’s subsidiaries, including approving any incentive compensation, option grants,
or stock awards to executive officers;
|
|
●
|
purchase
or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any
shares of the Company’s capital stock;
|
|
●
|
create,
or authorize the creation of, or issue, or authorize the issuance of, any debt security, or permit any subsidiary to take
any such action with respect to any debt security, if the Company’s aggregate indebtedness, including the indebtedness
of the Company’s subsidiaries, for borrowed money following such action would exceed $10,000, or guarantee, directly
or indirectly, or permit any of the Company’s subsidiaries to guarantee, directly or indirectly, any indebtedness except
for its trade accounts or any subsidiary arising in the ordinary course of business;
|
|
●
|
make,
or permit any subsidiary to make, any loan or advance outside of the ordinary course of business to any of the Company’s
employees or directors or any subsidiary, or to any subsidiary or other corporation, partnership, or other entity unless it
is wholly owned by the Company;
|
|
●
|
change
the principal business of the Company, enter new lines of business, or exit the current line of business;
|
|
●
|
enter
into any agreement, contract, arrangement, or corporate strategic relationship involving the payment, contribution, or assignment
by the Company or to the Company of money or assets greater than $250,000; or
|
|
●
|
enter
into or be a party to any transaction outside of the ordinary course of business with any of the Company’s directors,
officers, or employees or any “associate” (as defined in Rule 12b-2 promulgated under the Exchange Act) of any
such person or entity.
|
Holders
of the Class B Common Stock may convert each Class B Common Stock into one share of Class A Common Stock (the “
Class
B Conversion Ratio
”) at any time, from time to time, without payment of additional consideration. The Class B Conversion
Ratio is subject to adjustments upon the occurrence of certain events.
Related
Party Transactions
Subsequent
to December 31, 2018, as a result of the Reincorporation:
|
●
|
Mr.
Schmerin owns or controls 584,820 shares of Andover’s Class A Common Stock, owns or controls 500,000 shares of Andover’s
Class B Common Stock, and owns or controls 900,000 shares of Class A Common Stock underlying the Amended and Restated Warrant;
|
|
●
|
Mr.
Piermont owns or controls 584,820 shares of Andover’s Class A Common Stock, owns or controls 500,000 shares of Andover’s
Class B Common Stock, and owns or controls 900,000 shares of Class A Common Stock underlying the Amended and Restated Warrants;
|
|
●
|
Peter
A. Cohen, a director of Andover, owns or controls 584,820 shares of Andover’s Class A Common Stock, owns or controls
500,000 shares of Andover’s Class B Common Stock, and owns or controls 900,000 shares of Class A Common Stock underlying
Amended and Restated Warrants; and
|
|
●
|
George
Blumenthal owns or controls 584,820 shares of Andover’s Class A Common Stock and owns or controls 500,000 shares of Class
A Common Stock underlying Amended and Restated Warrants.
|