Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d) of
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2014
Commission File Number 000-54118
URBAN HYDROPONICS, INC.
(Name of registrant as specified in its charter)
Nevada 72-1600437
(State of Incorporation) (IRS Employer ID Number)
224 Datura Street, Suite 505
West Palm Beach, FL 33401
(561) 543-8882
(Address and telephone number of principal executive offices)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer, "accelerated filer,"
"non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 34,400,000 shares of common
stock, par value $0.001, as of February 13, 2015.
TABLE OF CONTENTS
FORM 10-Q
URBAN HYDROPONICS, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Balance Sheets at December 31, 2014 (Unaudited)
and December 30, 2013 4
Condensed Statements of Operations for the Three and Six Months
Ended December 31, 2014 and 2013 (Unaudited) 5
Condensed Statements of Cash Flows for the Six Months Ended
December 31, 2014 and 2013 (Unaudited) 6
Notes to the Condensed Financial Statements as of
December 31, 2014 (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Mine Safety Disclosure 20
Item 5. Other Information 20
Item 6. Exhibits 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and the rules
of the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
our Form 10-K for the fiscal year ended June 30, 2014, filed with the SEC on
October 14, 2014, as amended by our Form 10-K/A, filed with the SEC on October
21, 2014. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the periods presented have been reflected
herein. The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year.
3
URBAN HYDROPONICS, INC.
(A Development Stage Company)
Balance Sheets
(Stated in U.S. Dollars)
--------------------------------------------------------------------------------
(Unaudited)
Three Months
Ended Year Ended
December 31, June 30,
2014 2014
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,829 $ 77
Bridge Loans 1,000,000 520,000
Bridge loans accrued interest 47,920 5,379
------------ ------------
TOTAL CURRENT ASSETS 1,051,749 525,456
------------ ------------
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 239,835 $ 267,368
Secured loans 1,500,000 620,000
Secured loans accrued interest 62,402 6,422
Loan from related party 56,162 56,162
------------ ------------
TOTAL CURRENT LIABILITIES 1,858,399 949,952
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 10,000,000 authorized;
none issued at December 31, 2014 and June 30, 2014 respectively -- --
Common stock, $0.001 par value, 300,000,000 shares
authorized; 34,400,000 shares issued and outstanding at
December 31, 2014 and June 30, 2014 respectively 34,400 34,400
Additional paid-in capital 9,800 9,800
Deficit accumulated during development stage (850,849) (468,696)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (806,649) (424,496)
------------ ------------
TOTAL LIABILITITES AND STOCKHOLDERS' EQUITY $ 1,051,749 $ 525,456
============ ============
See the accompanying notes to the condensed financial statements
4
URBAN HYDROPONICS, INC.
(A Development Stage Company)
Statement of Operations
(Stated in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2014 2013 2014 2013
----------- ----------- ----------- -----------
REVENUES
Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
TOTAL REVENUES -- -- -- --
----------- ----------- ----------- -----------
OPERATING COSTS
Exploration expense -- -- -- --
Amortization of mineral rights license -- -- -- --
Administrative expenses 214,852 29,588 375,216 37,902
----------- ----------- ----------- -----------
TOTAL OPERATING COSTS 214,852 29,588 375,216 37,902
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest expense 33,730 -- 55,979 --
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE 33,730 -- 55,979 --
----------- ----------- ----------- -----------
OTHER INCOME/EXPENSE
Other income
Interest income 23,621 -- 42,541 --
Ordinary gain from June 30,2013
liability write-off -- -- -- --
----------- ----------- ----------- -----------
TOTAL OTHER INCOME/EXPENSE 23,621 -- 42,541 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (224,961) $ (29,588) $ (388,654) $ (37,902)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ (0.00) $ (0.00) $ (0.00) $ (0.00)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 34,400,000 34,400,000 34,400,000 34,400,000
=========== =========== =========== ===========
See the accompanying notes to the condensed financial statements.
5
Urban Hydroponics, Inc.
(A Development Stage Company)
Statement of Cash Flows
(Stated in U.S. Dollars)
(Unaudited)
--------------------------------------------------------------------------------
Six Months Six Months
Ended Ended
December 31, December 31,
2014 2013
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ (388,654) $ (37,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Discount of long term liabilities -- --
Amortization of mineral rights license -- --
Bridge Loans (480,000) --
(Accrued Interest bridge loans) (42,541) --
Changes in operating assets and liabilities:
Accounts receivable -- --
Accounts payable and accrued expenses (21,032) 18,593
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (932,227) (19,309)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -- --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan from related party -- 19,309
Proceeds of loan from shareholder -- --
Proceeds from secured promissory notes 880,000 --
Accrued interest from secured promissory notes 55,979
Issuance of common stock -- --
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 935,979 19,309
---------- ----------
NET INCREASE (DECREASE) IN CASH 3,752 --
CASH AT BEGINNING OF PERIOD 77 --
---------- ----------
CASH AT END OF PERIOD $ 3,829 $ --
========== ==========
NON-CASH INVESTING AND FINANCIAL ACTIVITIES
Increase in mining rights license
and long - term liabilities -- --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest $ -- $ --
========== ==========
Income Taxes $ -- $ --
========== ==========
See the accompanying notes to the condensed financial statements.
6
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Urban Hydroponics,
Inc. (the "Company") (f/k/a) Placer Del Mar, Ltd., have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission (the "SEC"), and
should be read in conjunction with the audited financial statements and notes
thereto contained in Urban Hydroponics' Form 10-K filed with SEC. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for fiscal 2014 as reported in the Form 10-K, for the year
ended June 30, 2014, have been omitted. It is management's opinion that all
adjustments necessary for a fair statement of the results of the interim periods
have been made, and all adjustments are of a normal recurring nature.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company reported revenue of $0
during the three and six months ended December 31, 2014, and generated a net
loss of $224,961 and $368,654, respectively, during the same periods. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. This condition raises substantial doubt about the Company's
ability to continue as a going concern. The Company will require additional
funding for operations; this additional funding may be raised through debt or
equity offerings. Management has yet to decide what type of offering the Company
will use or how much capital the Company will attempt to raise. There is no
guarantee that the Company will be able to raise any capital through any type of
offerings.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2014-10, which eliminated certain financial reporting
requirements of companies previously identified as "Development Stage Entities"
(Topic 915). The amendments in this ASU simplify accounting guidance by removing
all incremental financial reporting requirements for development stage entities.
The amendments also reduce data maintenance and, for those entities subject to
audit, audit costs by eliminating the requirement for development stage entities
to present inception-to-date information in the statements of income, cash
flows, and shareholder equity. Early application of each of the amendments is
permitted for any annual reporting period or interim period for which the
entity's financial statements have not yet been issued (public business
entities) or made available for issuance (other entities). Upon adoption,
entities will no longer present or disclose any information required by Topic
915. The Company has adopted this standard and will not report inception to date
financial information.
7
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers. The revenue recognition standard affects all
entities that have contracts with customers, except for certain items. The new
revenue recognition standard eliminates the transaction-and industry-specific
revenue recognition guidance under current GAAP and replaces it with a
principle-based approach for determining revenue recognition. Public entities
are required to adopt the revenue recognition standard for reporting periods
beginning after December 15, 2016, and interim and annual reporting periods
thereafter. Early adoption is not permitted for public entities. The Company has
reviewed the applicable ASU and has not, at the current time, quantified the
effects of this pronouncement, however it believes that there will be no
material effect on the financial statements.
In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12
Compensation -- Stock Compensation (Topic 718), Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be
Achieved after the Requisite Service Period. A performance target in a
share-based payment that affects vesting and that could be achieved after the
requisite service period should be accounted for as a performance condition
under Accounting Standards Codification (ASC) 718, Compensation -- Stock
Compensation. As a result, the target is not reflected in the estimation of the
award's grant date fair value. Compensation cost would be recognized over the
required service period, if it is probable that the performance condition will
be achieved. The guidance is effective for annual periods beginning after 15
December 2015 and interim periods within those annual periods. Early adoption is
permitted. Management has reviewed the ASU and believes that they currently
account for these awards in a manner consistent with the new guidance, therefore
there is no anticipation of any effect to the financial statements.
In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15
Preparation of Financial Statements - Going Concern (Subtopic 205-40),
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going
Concern. Under generally accepted accounting principles (GAAP), continuation of
a reporting entity as a going concern is presumed as the basis for preparing
financial statements unless and until the entity's liquidation becomes imminent.
Preparation of financial statements under this presumption is commonly referred
to as the going concern basis of accounting. If and when an entity's liquidation
becomes imminent, financial statements should be prepared under the liquidation
basis of accounting in accordance with Subtopic 205-30, Presentation of
Financial Statements--Liquidation Basis of Accounting. Even when an entity's
liquidation is not imminent, there may be conditions or events that raise
substantial doubt about the entity's ability to continue as a going concern. In
those situations, financial statements should continue to be prepared under the
going concern basis of accounting, but the amendments in this Update should be
followed to determine whether to disclose information about the relevant
conditions and events. The amendments in this Update are effective for the
annual period ending after December 15, 2016, and for annual periods and interim
8
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
periods thereafter. Early application is permitted. The Company will evaluate
the going concern considerations in this ASU, however, at the current period,
management does not believe that it has met conditions which would subject these
financial statements for additional disclosure.
We have reviewed the FASB issued Accounting Standards Update ("ASU") accounting
pronouncements and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. The Company has carefully considered
the new pronouncements that alter previous generally accepted accounting
principles and does not believe that any new or modified principles will have a
material impact on the corporation's reported financial position or operations
in the near term. The applicability of any standard is subject to the formal
review of our financial management and certain standards are under
consideration.
NOTE 4. LOAN FROM SHAREHOLDER
Loan from shareholder represents funds loaned to the company by an officer and
director. As of December 31, 2014 the loan balance is $56,162. The funds
provided to the Company are unsecured and he has agreed to forego any penalties
or interest should the Company be unable to repay any funds provided.
NOTE 5. SUBSEQUENT EVENTS
The Company evaluated all events or transactions that occurred after December
31, 2014 up through date the Company issued these financial statements and
determined there were the following reportable events:
On May 5, 2014, Valor Invest Ltd. ("Valor"), on the Company's behalf, entered
into a non-binding term sheet (the "Term Sheet"), pursuant to which it was
contemplated that a newly-formed, Canadian wholly-owned subsidiary of the
Registrant would merge with and into the Urban Cultivator Inc., a British
Colombia corporation ("UC"), BC Northern Lights Enterprises Ltd., a British
Colombia corporation ("BCNL"), and W3 Metal Inc., a British Colombia corporation
("W3," and together with UC and BCNL, the "Borrowers") (the "Merger"), as a
result of which the Company would acquire all of the issued and outstanding
capital stock of the Borrowers and the Borrowers would become wholly-owned
subsidiaries of the Registrant through its Canadian subsidiary. The Borrowers
are private companies engaged in the business of manufacturing and selling
commercial and residential hydroponic growing systems.
Pursuant to the terms of the Term Sheet, the Company agreed to provide bridge
financing (the "Bridge Financing") to the Borrowers in exchange for Bridge Notes
(defined below) and, between May 5, 2014 and October 9, 2014, the Company loaned
to the Borrowers an aggregate of $760,000 in Bridge Financing. To finance the
Bridge Financing, the Company sold an aggregate of $1,196,000 of its 10% Secured
9
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
Convertible Promissory Notes (the "Investor Notes"). The Company used the
balance of funds raised through the sale of the Investor Notes for working
capital purposes.
The Investor Notes were offered and sold in a private placement (the "Notes
Offering") to a limited number of non-U.S. persons pursuant to the exemptions
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), provided by Section 4(a)(2) of, and Regulation S under,
the Securities Act. The Investor Notes bear interest at a rate of 10% per annum
and are for a term of 8 months ("Maturity"). The Investor Notes are
automatically convertible, subject to a 4.99% conversion blocker, upon closing
of the Merger into units (the "Units"), at a conversion price of $0.30 per Unit.
Each Unit consists of one (1) share of the Registrant's common stock, $0.001 par
value per share (the "Common Stock"), and a warrant to purchase one (1) share of
Common Stock at an exercise price of $0.35 per share for two (2) years.
Upon the closing of the Merger, the Registrant shall issue to each of the
Investors warrants (the "Bridge Warrants") to purchase a number of shares of
Common Stock equal to one hundred percent (100%) of the number of shares of
Common Stock comprising the Units issuable upon conversion of the Investor
Notes, exercisable at a price of $0.35 per share, exercisable for two (2) years
from the closing of the Merger. The Bridge Warrants will have weighted average
anti-dilution protection. If the Merger does not close, the Investor Notes must
be repaid in full and with interest at maturity, and no Bridge Warrants will be
issued.
The Bridge Financing is evidenced by Secured Bridge Loan Promissory Notes (the
"Bridge Notes") from the Borrowers to the Company. The Investor Notes and the
Bridge Notes are secured by all of the assets of the Borrowers. This security
interest is subordinated to that of a certain bank providing an existing credit
facility to the Borrowers. The Bridge Notes are for a term of eight months from
the particular closings of the Bridge Financing pursuant to which the specific
Bridge Notes were issued. The Bridge Notes bear interest at the rate of 10% per
annum. All obligations under the Bridge Notes will be deemed repaid in full and
canceled upon the closing of the Merger. If the Merger does not close, the
Bridge Notes must be repaid in full, with interest, by the Borrowers.
The Investor Notes contain customary events of default and include a default by
the Borrowers under the Bridge Notes. If the Registrant defaults under the
Investor Notes, the full principal amount of the Investor Notes will, at the
Investor's option, become immediately due and payable in cash. In addition, upon
an event of default, the Investor Notes will begin to bear interest at a rate of
12% per annum, or such lower maximum amount of interest permitted to be charged
under applicable law.
10
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
A default by Borrowers under the Bridge Notes, including but not limited to the
failure to repay the Bridge Notes at Maturity if the Merger doesn't close, will
cause the full principal amount of the Bridge Notes, at the Registrant's option,
to become immediately due and payable in cash. In addition, upon an event of
default, the Bridge Notes will begin to bear interest at a rate of 12% per
annum, or such lower maximum amount of interest permitted to be charged under
applicable law, which interest rate will continue until all defaults are cured.
On October 3, 2014, the Company entered into a binding letter of intent (the
"LOI") with 0838373 B.C. Ltd. ("Numbered Company"), Urban Cultivator Inc., a
British Colombia corporation ("UC"), BC Northern Lights Enterprises Ltd., a
British Colombia corporation ("BCNL"), and W3 Metal Inc., a British Colombia
corporation ("W3," and together with Numbered Company, UC and BCNL, the "Target
Companies"). This LOI replaced and superseded the non-binding term sheet (the
"Term Sheet") dated May 5, 2014 entered into between Valor and the Target
Companies relating to the Merger.
Pursuant to the LOI, it is contemplated that a newly-formed, wholly-owned
Canadian subsidiary ("Subco") of the Company will merge with and into the Target
Companies, as a result of which the Target Companies will become wholly-owned
subsidiaries of the Company. The Merger will be conducted in a tax-efficient
manner under the tax laws of Canada and the United States, and pursuant to which
all of the outstanding shares of capital stock of the Target Companies will be
cancelled in exchange for exchangeable shares of Subco (the "Exchangeable
Shares"), which Exchangeable Shares must be exchanged by the holders thereof
into shares of common stock, par value $0.001 per share (the "Common Stock"), of
the Company on or before October 30, 2019. The Target Companies are private
companies engaged in the business of manufacturing and selling commercial and
residential hydroponic growing systems.
The Merger is subject to the completion and delivery by the Target Companies to
the Company, and the acceptance as satisfactory by the Company, of two year
audited consolidated financial statements of the Target Companies. Additionally,
the binding nature of the LOI is contingent upon the Company delivering to the
Borrowers by October 31, 2014 (or by November 7, 2014 at the latest), an
additional $120,000 in Bridge Financing (as defined and discussed in detail
below). These funds were delivered to the Borrowers in a timely manner.
Although the LOI provides that the proposed Merger is expected to close on or
before November 30, 2014, there has been a delay in the preparation of the
audited financial statements of the Target Companies and it is now expected that
the proposed Merger will close on or about March 15, 2015, although there can be
no assurance that this will, in fact, happen.
Pursuant to the terms of the LOI, the Company agreed to provide additional
bridge financing (the "Additional Bridge Financing") to the Borrowers on the
last day of each of the months of September and October 2014 in the amount of
$120,000 per month, on the same terms as those of the Bridge Financing. The
Company delivered the September $120,000 Bridge Financing installment to the
Borrowers on October 15, 2014. To date, the Company has provided the Borrowers
11
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
with an aggregate of $1,000,000 to finance the Bridge Financing and the
Additional Bridge Financing. To finance the Bridge Financing and the Additional
Bridge Financing, the Company has sold an aggregate of $1,500,000 of its
Investor Notes.
In addition to the sale of the Investor Notes and pursuant to the terms of the
LOI, the Company intends to engage in a private placement of its Units (defined
below) for at least an additional $1,500,000 in gross proceeds to the Company
(the "Subsequent Offering"). The closing of the Subsequent Offering and the
closing of the Merger is each a condition precedent to the other and both are
planned and expected to close concurrently.
As of the closing of the Merger and pursuant to the terms of the LOI, the
existing shareholders of the Company will retain 12,400,000 shares of Common
Stock, after giving effect to a split-off of the Company's legacy business and
the related contribution by the Company's current majority shareholder, and
cancellation of, 22,000,000 shares of Common Stock. The Target Companies will
receive 32,000,000 Exchangeable Shares which will be exchangeable for a like
number of shares of Common Stock. The Exchangeable Shares will be issued pro
rata, 5,000,000 shares to the shareholders of UC and 27,000,000 shares to the
shareholders of 0838373 B.C. Ltd., the sole shareholder of BCNL and W3. Holders
of the Investor Notes and purchasers of the Units will receive an aggregate of
10,000,000 shares of Common Stock and warrants to purchase an additional
15,000,000 shares of Common Stock. Brokers and finders may receive warrants to
purchase up to an aggregate of approximately 2,000,000 shares of Common Stock.
As an incentive to provide ongoing assistance with the management of the Company
post-Merger, the Company will allot to Tarren Wolfe, the principal stockholder
and officer of the Target Companies, or his designated assigns, an additional
10,000,000 restricted shares (the "Earn-Out Shares") of Common Stock for
allocation and release annually over a period of 5 years starting with fiscal
2015 and ending with fiscal 2019, with the first such release to occur following
completion of the Company's post-Merger 2015 audited financial statements, on
the basis of one (1) share of Common Stock to be issued for each $5 of revenue
earned in such fiscal year.
Upon the closing of the Merger, the Board of Directors of the Company (the
"Board") will consist of five (5) members, at least three (3) of whom will be
independent. Two (2) of the independent directors will be nominated by Valor and
the Target Companies upon mutual agreement and one (1) of the independent
directors will be nominated by Tarren Wolfe. The remaining two (2) directors
will be Tarren Wolfe, who will also be nominated as Chairman, and Eric Sloan.
After the Merger closing, the Board will appoint a Chief Financial Officer and
head of sales and marketing reasonably acceptable to all members of the Board.
Frank Terzo, the Company's current sole officer and director will resign upon
the Merger closing. The new executive officers of the Company and certain other
designated employees will enter into employment agreements with the Company
effective as of the closing of the Merger.
12
Urban Hydroponics, Inc.
An Exploration Stage Company
Notes to Condensed Financial Statements
As of December 31, 2014
(Unaudited)
--------------------------------------------------------------------------------
The holders of the Investor Notes, Bridge Warrants and Units will have certain
demand registration rights and, under certain circumstances, the holders of the
shares of Common Stock issuable upon exchange of the Exchangeable Shares and the
recipients of the Earn-Out Shares may have demand registration rights as well.
The Company has agreed to pay a finder a fee of $50,000 for introducing the
Investors to the Company. The Company may pay finders' fees and broker
commissions in connection with the offer and sale of Units in the Subsequent
Closing.
Because of the delay in the closing of the proposed Merger, the Company's
initial loan to the Target Companies in the amount of $400,000 became due and
payable on January 20, 2015 and a second loan to the Target Companies in the
amount of $120,000 became due and payable on February 4, 2015. The Company
intends to extend the maturity date on these loans until the Merger closes, upon
which time, in accordance with the terms of the LOI, these loans as well as the
additional $480,000 in Bridge Financing to the Target Companies will be
forgiven. There can be no guarantee, however, that the Merger will close.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this report contains forward-looking
statements within the meaning of the federal securities laws. Such
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding our business strategy, future revenues and
anticipated costs and expenses. Such forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results may differ
significantly from those projected in the forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed herein. You should carefully review the risks described
herein and in other documents we file from time to time with the Securities and
Exchange Commission ("SEC"). You are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date of this report.
We undertake no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
Although we believe that the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there are a number of risks and
uncertainties that could cause actual results to differ materially from such
forward-looking statements.
All references in this Form 10-Q to the "Company," "we," "us," or "our" are to
Urban Hydroponics, Inc. (formerly known as Placer Del Mar, Ltd.).
GOING CONCERN
Our unaudited financial statements presented herein are prepared using
accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. However, we do not
have cash or other significant current assets, nor do we have an established
source of revenues sufficient to cover our operating costs and to allow us to
continue as a going concern.
In the course of its development activities, the Company has sustained loss of
$224,951and $29,588 in the three months ending December 31, 2014 and 2013,
respectively. The Company expects to finance its operations primarily through
one or more future financings and by the consummation of the Merger (as defined
and described below) and transactions contemplated thereby. However, there
exists substantial doubt about the Company's ability to continue as a going
concern for at least the next twelve months, because the Company will be
required to obtain additional capital in the future to continue its operations
and there is no assurance that it will be able to obtain such capital, through
equity or debt financing, or any combination thereof, or on satisfactory terms
or at all.
Our independent auditors have included an explanatory paragraph in their report
on our consolidated financial statements included in this report that raises
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that may result from the
outcome of this uncertainty. We have generated minimal operating revenues since
our inception. Our continuation as a going concern is dependent upon future
events, including our ability to identify a suitable business combination, to
raise additional capital and to generate positive cash flows. Our consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which implies we will
continue to meet our obligations and continue our operations for the next twelve
months.
14
Realization values may be substantially different from carrying values as shown,
and our consolidated financial statements do not include any adjustments
relating to the recoverability or classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary as a result
of the going concern uncertainty. Under the going concern assumption, an entity
is ordinarily viewed as continuing in business for the foreseeable future with
neither the intention nor the necessity of liquidation, ceasing trading, or
seeking protection from creditors pursuant to laws or regulations. Accordingly,
assets and liabilities are recorded on the basis that the entity will be able to
realize its assets and discharge its liabilities in the normal course of
business.
As described in Note 2 of our accompanying financial statements, our losses to
date and our lack of any guaranteed sources of future capital create substantial
doubt as to our ability to continue as a going concern. If our business plan
does not work, we could remain as a start-up company with limited material
operations, revenues, or profits. Although management has believes their plan
for Urban Hydroponics, Inc. will generate revenue and profit, there is no
guarantee their past experiences will provide Urban Hydroponics, Inc. with
similar future successes.
GENERAL OVERVIEW
The Company was incorporated in the State of Nevada on May 13, 2005 as Placer
Del Mar. Ltd. Historically, we were engaged in the business of exploring for
minerals. In June 2013, our management determined to discontinue our minerals
exploration activities and to focus on attempting to acquire other assets or
business operations that would maximize shareholder value.
NON-BINDING LETTER OF INTENT
On May 5, 2014, Valor Invest Ltd., on our behalf, signed a non-binding term
sheet (the "Term Sheet") with Urban Cultivator Inc., a British Colombia
corporation ("UC"), BC Northern Lights Enterprises Ltd., a British Colombia
corporation ("BCNL"), and W3 Metal Inc., a British Colombia corporation ("W3,"
and together with UC and BCNL, the "Target Companies"), regarding a possible
business combination (the "Merger") involving these three companies. The Target
Companies are private companies engaged in the business of manufacturing and
selling commercial and residential hydroponic growing systems. At that time, no
definitive terms of the Merger were agreed to, and none of the party was bound
to proceed with any transaction. Pursuant to the terms of the Term Sheet, we
lent the Target Companies $760,000 in a secured bridge financing (the "Bridge
Financing") for the Target Companies' working capital needs.
NAME CHANGE
With the permission of the Target Companies, the Company changed its name to
Urban Hydroponics, Inc. to facilitate our discussions with the Target Companies.
Our new name was declared effective by the Financial Industry Regulatory
Authority ("FINRA") as of July 10, 2014, and FINRA approved our new ticker
symbol which is "URHY."
AUTHORIZED CAPITAL INCREASE
In addition to the inclusion of the name change, we amended and restated our
Articles of Incorporation to increase our authorized capital stock from
50,000,000 shares of common stock to 300,000,000 shares of common stock and from
no shares of undesignated, "blank check" preferred stock to 10,000,000 shares of
such preferred stock. The par value of each of these classes of stock is $0.001
per share. These changes were approved by the shareholder (the "Majority
Shareholder") holding a majority of our outstanding voting capital stock.
15
FORWARD STOCK SPLIT
On May 28, 2014, our Board of Directors approved a 20-for-1 forward stock split
on our common stock outstanding in the form of a dividend, with a Record Date of
June 19, 2014. FINRA approved the forward split with a payment date of June 19,
2014 (the "Payment Date"), an ex-dividend date of June 20, 2104 and a due bill
date of June 24, 2014.
This stock split in the form of a dividend entitled each common stock
shareholder as of the Record Date to receive nineteen (19) additional shares of
our common stock for each one (1) share owned. Additional shares issued as a
result of the stock split were distributed on the Payment Date.
EQUITY INCENTIVE PLAN AMENDMENT
On May 31, 2014, our Majority Shareholder approved an amendment (the "2012 Plan
Amendment") to our 2012 Equity Incentive Plan (the "2012 Plan"). Pursuant to the
2012 Plan Amendment, the number of shares of our common stock reserved for
issuance under the 2012 Plan has been reduced to 380,000 from 7,000,000 shares.
This reduction was adopted in view of our 20 for 1 forward stock split in the
form of a dividend, which, taking into account the automatic adjustment
provisions for stock dividends set forth in Section 14(a)(iii) of the 2012 Plan,
has resulted in 7,600,000 shares of our common stock being available for grant
under the 2012 Plan following effectiveness of the proposed forward stock split.
RECENT DEVELOPMENTS
BINDING LETTER OF INTENT WITH THE TARGET COMPANIES
On October 3, 2014, we signed a Binding Letter of Intent (LOI), as amended on
October 31, 2014, to revise the terms of the proposed Merger with the Target
Companies. This LOI replaced the Term Sheet dated May 5, 2014 which was
non-binding.
Pursuant to the LOI, it is contemplated that a newly-formed, wholly-owned
Canadian subsidiary ("Subco") of the Company will merge with and into the Target
Companies, as a result of which the Target Companies will become wholly-owned
subsidiaries of the Company. In connection with the LOI and pursuant to its
terms, the Company agreed to provide additional bridge financing (the
"Additional Bridge Financing") to the Target Companies on the last day of each
of the months of September and October 2014 in the amount of $120,000 per month.
The Company delivered the September $120,000 Additional Bridge Financing
installment to the Target Companies on October 15, 2014 and the October $120,000
Additional Bridge Financing installment to the Target Companies on November 7,
2014. To date, the Company has provided the Target Companies with an aggregate
of $1,000,000 in Bridge Financing and Additional Bridge Financing. To finance
the Bridge Financing and the Additional Bridge Financing, the Company has sold
an aggregate of $1,500,000 of its 10% Secured Convertible Promissory Notes (the
"Investor Notes"), to date. In addition to the Notes Offering (defined below),
the Company intends to engage in an additional private placement of its
securities for at least an additional $1,500,000 in gross proceeds to the
Company (the "Subsequent Offering") for working capital use post-Merger closing.
The closing of the Subsequent Offering and the closing of the Merger is each a
condition precedent to the other.
Although the LOI provides that the proposed Merger is expected to close on or
before November 30, 2014, there has been a delay in the preparation of the
audited financial statements of the Target Companies and it is now expected that
the proposed Merger will close on or about March 15, 2015. There is no
certainty, however, that the Merger will close on that date or at all, that any
16
transactions will be consummated with the Target Companies or that any other
business projects will be identified and consummated. The Merger is subject to,
among other things, the completion and delivery by the Target Companies to the
Company, and the acceptance as satisfactory by the Company, of two year audited
consolidated financial statements of the Target Companies.
On January 6, 2015, two of the Investor Notes which were to mature on January
20, 2015, in the aggregate principal amount of $500,000 were extended until
April 20, 2015. On February 2, 2015, one of the Investor Notes in the principal
amount of $120,000 was extended until June 3, 2015.
Because of the delay in the closing of the proposed Merger, our initial loan to
the Target Companies in the amount of $400,000 became due and payable on January
20, 2015 and a second loan to the Target Companies in the amount of $120,000
became due and payable on February 4, 2015. We intend to extend the maturity
date on these loans until the Merger closes, upon which time, in accordance with
the terms of the LOI, these loans as well as the additional $480,000 in Bridge
Financing to the Target Companies will be forgiven. There can be no guarantee,
however, that the Merger will close.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED DECEMBER 31, 2014 COMPARED TO THREE MONTH PERIOD ENDED
DECEMBER 31, 2013.
REVENUE AND OTHER INCOME
We did not generate any revenue for the three months ended December 31, 2014 or
2013. We generated $23,621 in interest income during the six months ended
December 31, 2014.
EXPENSES
Operating expenses, consisting primarily of $214,862 in general and
administrative expenses (including professional fees) and $33,730 in interest
expense, totaled $248,592 in the three-month period ended December 31, 2014,
compared to $29,588 in the three-month period ended December 31, 2013, which
consisted of $29,588 in general and administrative expenses (including
professional fees) and $0 in interest expense.
NET LOSSES
As a result of the foregoing, we incurred a net loss of $224,961 for the three
months ended December 31, 2014, compared to a net loss of $29,588 for the
corresponding period ended December 31, 2013.
The following table provides selected financial data about our Company for the
period ended December 31, 2014.
Balance Sheet Data: 12/31/2014
------------------- ----------
Cash $ 23,829
Total assets $ 1,071,749
Total liabilities $ 1,858,399
Shareholders' equity $ (786,649)
17
SIX MONTH PERIOD ENDED DECEMBER 31, 2014 COMPARED TO SIX MONTH PERIOD ENDED
DECEMBER 31, 2013.
REVENUE AND OTHER INCOME
We did not generate any revenue for the six months ended December 31, 2014 or
2013. We generated $42,541 in interest income during the six months ended
December 31, 2014.
EXPENSES
Operating expenses, consisting primarily of $355,216 in general and
administrative expenses (including professional fees) and $55,979 in interest
expense, totaled $411,195 in the six-month period ended December 31, 2014,
compared to $37,902 in the six-month period ended December 31, 2013, which
consisted of $37,902 in general and administrative expenses (including
professional fees) and $0 in interest expense.
NET LOSSES
As a result of the foregoing, we incurred a net loss of $368,654 for the six
months ended December 31, 2014, compared to a net loss of $37,902 for the
corresponding period ended December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Our cash in the bank at December 31, 2014 was $23,829. Cash provided by
financing since inception was $10,000 from the sale of shares to our officer,
$24,200 resulting from the sale of our common stock to 46 independent investors,
and $1,500,000 resulting from the sale of our Investor Notes in the Notes
Offering. Although we are raising funds through the financing of the Notes
Offering, we have used $1,000,000 of the net proceeds derived from our issuance
of the Investors Notes to provide Bridge Financing to the Target Companies for
working capital, in accordance with the terms of the LOI, we are using the
remainder of the net proceeds of the Notes Offering for general working capital
purposes.
We estimate our general and administrative costs will require approximately
$50,000 for the remainder of fiscal year ending June 30, 2015, exclusive of any
business acquisition or combination costs. We plan to raise the necessary funds
through loans from affiliates or others.
We may be unable to secure additional financing on terms acceptable to us, or at
all, at times when we need such financing. Our inability to raise additional
funds on a timely basis could prevent us from achieving our business objectives
and could have a negative impact on our business, financial condition, results
of operations and the value of our securities.
If we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentages of existing stockholders will be reduced
and the securities that we may issue in the future may have rights, preferences
or privileges senior to those of the current holders of our Common Stock. Such
securities may also be issued at a discount to the market price of our Common
Stock, resulting in possible further dilution to the book value per share of
Common Stock. If we raise additional funds by issuing debt, we could be subject
to debt covenants that could place limitations on our operations and financial
flexibility.
18
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act of
1934 (the "Exchange Act"), we are not required to provide disclosure under this
Item 3.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer/Chief
Financial Officer, Frank Terzo, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 under the Securities Exchange
Act as of December 31, 2014. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
Based on management's evaluation, our Chief Executive Officer/Chief Financial
Officer concluded that, as a result of the material weaknesses described below,
as of December 31, 2014, our disclosure controls and procedures are not
effective and are not presently designed at a level to provide reasonable
assurance that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. The material weaknesses, which relate
to internal control over financial reporting, that were identified are:
1. As of December 31, 2014, we did not adequately segregate, or mitigate
the risks associated with, incompatible functions among personnel to
reduce the risk that a potential material misstatement of the
financial statements would occur without being prevented or detected.
Accordingly, management concluded that this control deficiency
constituted a material weakness.
We are committed to improving our accounting and financial reporting functions.
As part of this commitment, we have engaged consultants to assist in the
preparation and filing of financial reports. We will continue to monitor and
evaluate the effectiveness of our disclosure controls and procedures and our
internal controls over financial reporting on an ongoing basis and are committed
to taking further action and implementing additional enhancements or
improvements, as necessary and as funds allow.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
We regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating processes.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings and we are not aware of
any pending or potential legal actions.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously discussed in
Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Since May 21, 2014, the Company has conducted a number of closings in which it
has sold its eight month 10% Secured Convertible Promissory Notes to a limited
number of non-U.S. persons in a private placement (the "Notes Offering")
pursuant to the exemptions from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), provided by Section 4(2) of, and
Rule 506 of Regulation D and Regulation S under, the Securities Act.
As referenced in Item 2 of Part I, on October 31, 2014, we signed the amended
LOI with the Target Company relating to the Bridge Financing which increased the
aggregate principal amount of the Notes Offering to $1,500,000. On October 3,
2014, October 9, 2014, November 7, 2014, November 17, 2014, December 3, 2014,
December 9, 2014 and December 17, 2014, the Company closed on the offer and sale
of $50,000, $247,000, $200,000, $10,000, $24,000, $30,000 and $40,000,
respectively, in principal amounts of the Investor Notes to certain investors.
Pursuant to the terms of the LOI, as amended, the Company delivered the October
$120,000 Bridge Financing installment to the Target Companies on November 7,
2014. As of December 31, 2014, the Company had closed on an aggregate principal
amount of $1,500,000 of the Investor Notes.
The Investor Notes contain customary events of default and include a default by
the Borrowers under the Bridge Notes. If the Company defaults under the Investor
Notes, the full principal amount of the Investor Notes will, at the option of
the Investors, become immediately due and payable in cash. In addition, upon an
event of default, the Investor Notes will begin to bear interest at a rate of
12% per annum, or such lower maximum amount of interest permitted to be charged
under applicable law.
On January 6, 2015, two of the Investor Notes which were to mature on January
20, 2015, in the aggregate principal amount of $500,000 were extended until
April 20, 2015. On February 2, 2015, one of the Investor Notes in the principal
amount of $120,000 was extended until June 3, 2015.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the period covered by this
report.
ITEM 4. MINING SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
In reviewing the agreements included as exhibits to this Form 10-Q, please
remember that they are included to provide you with information regarding their
terms and are not intended to provide any other factual or disclosure
information about the Company or the other parties to the agreements. The
agreements may contain representations and warranties by each of the parties to
the applicable agreement. These representations and warranties have been made
solely for the benefit of the parties to the applicable agreement and:
* should not in all instances be treated as categorical statements of
fact, but rather as a way of allocating the risk to one of the parties
if those statements prove to be inaccurate;
* have been qualified by disclosures that were made to the other party
in connection with the negotiation of the applicable agreement, which
disclosures are not necessarily reflected in the agreement;
* may apply standards of materiality in a way that is different from
what may be viewed as material to you or other investors; and
* were made only as of the date of the applicable agreement or such
other date or dates as may be specified in the agreement and are
subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual
state of affairs as of the date they were made or at any other time. Additional
information about the Company may be found elsewhere in this Form 10-Q and the
Company's other public filings, which are available without charge through the
SEC's website at http://www.sec.gov.
The following exhibits are included as part of this report:
Exhibit No. Description
----------- -----------
31.1/31.2 Certification of the Chief Executive and Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1/32.2* Certification of the Chief Executive and Financial Officer
pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
101.INS** XBRL Instance Document
101.SCH** XBRL Schema Document
101.CAL** XBRL Calculation Linkbase Document
101.LAB** XBRL Label Linkbase Document
101.PRE** XBRL Presentation Linkbase Document
101.DEF** XBRL Definition Linkbase Document
----------
* This certification is being furnished and shall not be deemed "filed" with
the SEC for purposes of Section 18 of the Exchange Act, or otherwise
subject to the liability of that section, and shall not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the registrant specifically
incorporates it by reference
** XBRL (Extensible Business Reporting Language) information is furnished and
not filed or a part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act is deemed not filed for purposes
of Section 18 of the Exchange Act and otherwise is not subject to liability
under these sections.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 23, 2015.
Urban Hydroponics. Inc.
/s/ Frank Terzo
--------------------------------------
By: Frank Terzo
(Principal Executive Officer)
2
