Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36546
MONTALVO SPIRITS, INC.
(Exact name of registrant as specified in its charter)
Nevada
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27-4004890
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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5301 N. Commerce Ave, Suite F, Moorpark, California
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93021
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(Address of principal executive offices)
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(Zip Code)
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(818) 266-9286
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 past 90 days.
xYes □ 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 (§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). x Yes □ 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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□
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Accelerated filer
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□
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Non-accelerated filer
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□
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes □ No x
As of February 25, 2014, the registrant had 73,880,843 shares of common stock issued and outstanding.
PART I – FINANCIAL INFORMATION
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Signatures
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Montalvo Spirits, Inc.
December 31, 2014 and 2013
Contents
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Page(s)
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Consolidated Balance Sheets at December 31, 2014 (Unaudited) and March 31, 2014
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F-2
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Consolidated Statements of Operations for the Three Months and Nine Months ended December 31, 2014 and 2013 (Unaudited)
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F-3
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Consolidated Statement of Stockholders’ Deficit for the period Ended December 31, 2014 (Unaudited)
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F-4
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Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2014 and 2013 (Unaudited)
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F-5
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Notes to the Consolidated Financial Statements (Unaudited)
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F-6
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- F1-
Montalvo Spirits, Inc.
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Consolidated Balance Sheets
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December 31, 2014
(Unaudited)
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March 31, 2014 | |||||||
ASSETS
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CURRENT ASSETS
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Cash
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$ | - | $ | 20,143 | ||||
Accounts receivable
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36,881 | 35,171 | ||||||
Inventories
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379,301 | 308,213 | ||||||
Prepaid expenses
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4,498 | - | ||||||
Total Current Assets
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420,680 | 363,527 | ||||||
TOTAL ASSETS
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$ | 420,680 | $ | 363,527 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES
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Accounts payable and accrued liabilites
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$ | 586,942 | $ | 619,909 | ||||
Bank overdraft
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668 | - | ||||||
Advance from stockholder
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8,700 | 8,700 | ||||||
Notes payable
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27,351 | 11,900 | ||||||
Current maturities of notes payable - related parties
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346,000 | 26,000 | ||||||
Total Current Liabilities
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969,661 | 666,509 | ||||||
LONG-TERM LIABILITIES
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Convertible notes payable, net of discount
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15,068 | - | ||||||
Derivative liability
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228,334 | - | ||||||
Notes payable - related parties, net of current maturities
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- | 320,000 | ||||||
Total Long-Term Liabilities
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243,402 | 320,000 | ||||||
Total Liabilities
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1,213,063 | 986,509 | ||||||
STOCKHOLDERS' DEFICIT
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Preferred stock par value $0.001: 10,000,000 shares authirozied;
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none issued or outstanding
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- | - | ||||||
Common stock par value $0.001: 300,000,000 shares authorized;
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73,655,843 and 70,157,512 shares issued and outstanding, respectively
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73,656 | 70,158 | ||||||
Additional paid-in capital
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2,302,147 | 2,106,072 | ||||||
Accumulated deficit
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(3,168,186 | ) | (2,799,212 | ) | ||||
Total Stockholders' Deficit
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(792,383 | ) | (622,982 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
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$ | 420,680 | $ | 363,527 | ||||
See accompanying notes to the consolidated financials statements.
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- F2-
Montalvo Spirits, Inc.
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For the Three and Nine Months Ended December 31, 2014 and 2013
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Consolidated Statements of Operations
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For the Three Months
Ended
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For the Three Months
Ended
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For the Nine Months
Ended
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For theNine Months
Ended
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December 31, 2014 | December 31, 2013 | December 31, 2014 | December 31, 2013 | ||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||
SALES
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$ | 24,251 | $ | 16,007 | $ | 110,151 | $ | 109,531 | |||||||||
COST OF GOODS SOLD
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6,764 | 5,922 | 32,806 | 36,612 | |||||||||||||
GROSS MARGIN
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17,487 | 10,085 | 77,345 | 72,919 | |||||||||||||
OPERATING EXPENSES
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Selling expense
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2,515 | 16,240 | 52,856 | 90,277 | |||||||||||||
Salaries and wages
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114,975 | 56,000 | 120,975 | 169,000 | |||||||||||||
Consulting fees
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15,388 | 19,200 | 23,825 | 61,953 | |||||||||||||
General and administrative
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37,522 | 41,038 | 95,331 | 148,286 | |||||||||||||
Total Operating Expenses
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170,400 | 132,478 | 292,987 | 469,516 | |||||||||||||
LOSS FROM OPERATIONS
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(152,913 | ) | (122,393 | ) | (215,642 | ) | (396,597 | ) | |||||||||
OTHER (INCOME) EXPENSE
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Financing expense
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- | - | - | 301,500 | |||||||||||||
Derivative expense
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- | - | 93,809 | - | |||||||||||||
Change in fair value of derivative liability
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10,627 | - | 12,965 | - | |||||||||||||
Interest expense
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12,602 | 520 | 46,558 | 1,910 | |||||||||||||
Total Other (Income) Expense
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23,229 | 520 | 153,332 | 303,410 | |||||||||||||
LOSS BEFORE INCOME TAX PROVISION
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(176,142 | ) | (122,913 | ) | (368,974 | ) | (700,007 | ) | |||||||||
Income tax provision
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- | - | - | - | |||||||||||||
NET LOSS
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$ | (176,142 | ) | $ | (122,913 | ) | $ | (368,974 | ) | $ | (700,007 | ) | |||||
Net Loss per Common Share
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- Basic and diluted
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$ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | |||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
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- Basic and diluted
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72,352,770 | 67,847,933 | 73,655,843 | 67,605,103 | |||||||||||||
See accompanying notes to the consolidated financials statements.
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- F3-
Montalvo Spirits, Inc.
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Consolidated Statement of Stockholders' Deficit
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For the Period from March 31, 2013 through December 31, 2014
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(Unaudited)
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Additional
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Total
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Common stock par value $0.001
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Paid-In
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Accumulated
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Stockholders'
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Number of Shares
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Amount
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Capital
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Deficit
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Deficit
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Balance, March 31, 2013
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67,112,512 | $ | 67,113 | $ | 1,358,352 | $ | (1,754,397 | ) | $ | (328,932 | ) | ||||||||||
Common stock issued for cash
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at $0.50 per share on June 15, 2013
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10,000 | 10 | 4,990 | 5,000 | |||||||||||||||||
Common stock issued for cash
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at $0.50 per share from July 5, 2013 to August 29, 2013
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146,000 | 146 | 72,854 | 73,000 | |||||||||||||||||
Common stock issued for services on July 15, 2013,
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valued at $0.50 per share
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111,000 | 111 | 55,389 | 55,500 | |||||||||||||||||
Common stock issued for notes payable and
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accrued interest on July 15, 2013, valued at $0.50 per share
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32,500 | 32 | 16,218 | 16,250 | |||||||||||||||||
Common stock issued for commitment shares
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on August 29, 2013, valued at $0.50 per share
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603,000 | 603 | 300,897 | 301,500 | |||||||||||||||||
Common stock issued for cash
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at $0.20 per share on September 3, 2013
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10,000 | 10 | 1,990 | 2,000 | |||||||||||||||||
Common stock issued for cash
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at $0.20 per share on Novmber 13, 2013
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20,000 | 20 | 4,980 | 5,000 | |||||||||||||||||
Common stock issued for cash
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at $0.242 per share on Novmber 13, 2013
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100,000 | 100 | 24,140 | 24,240 | |||||||||||||||||
Common stock issued for cash
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at $0.234 per share on Novmber 15, 2013
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100,000 | 100 | 23,300 | 23,400 | |||||||||||||||||
Common stock issued for cash
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at $0.20 per share on December 3, 2013
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100,000 | 100 | 17,900 | 18,000 | |||||||||||||||||
Common stock issued for cash
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at $0.15 per share of February 28, 2014
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166,667 | 167 | 24,833 | 25,000 | |||||||||||||||||
Common stock issued for services
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vauled at $0.15 per share on February 28, 2014
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145,833 | 146 | 21,729 | 21,875 | |||||||||||||||||
Common stock issued for services,
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valued at $0.12 per share on March 28, 2014
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1,500,000 | 1,500 | 178,500 | 180,000 | |||||||||||||||||
Net loss
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(1,044,815 | ) | (1,128,761 | ) | |||||||||||||||||
Balance, March 31, 2014
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70,157,512 | 70,158 | 2,106,072 | (2,799,212 | ) | (622,982 | ) | ||||||||||||||
Common stock issued for services
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at $0.10 per share on June 16, 2014
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11,111 | 11 | 1,100 | 1,111 | |||||||||||||||||
Common stock issued for services
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at $0.10 per share on June 23, 2014
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11,111 | 11 | 1,100 | 1,111 | |||||||||||||||||
Common stock issued for services
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at $0.10 per share on June 30, 2014
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11,111 | 11 | 1,100 | 1,111 | |||||||||||||||||
Common stock issued for services
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at $0.10 per share from July 7, 2014 to August 15, 2014
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144,443 | 144 | 14,300 | 14,444 | |||||||||||||||||
Common stock issued for cash
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at $0.075 per share of August 20, 2014
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200,000 | 200 | 14,800 | 15,000 | |||||||||||||||||
Common stock issued for services
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at $0.075 per share from August 25, 2014 to September 15, 2014
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112,500 | 113 | 8,325 | 8,438 | |||||||||||||||||
Common stock issued for commitment shares
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on September 12, 2014, valued at $0.0711 per share
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400,000 | 400 | 28,040 | 28,440 | |||||||||||||||||
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Common stock issued for services
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at $0.077 per share on October 6, 2014
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11,111 | 11 | 844 | 856 | |||||||||||||||||
Common stock issued for services
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at $0.077 per share on October 13, 2014
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11,111 | 11 | 689 | 700 | |||||||||||||||||
Common stock issued for services
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at $0.066 per share on October 15, 2014
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37,500 | 38 | 2,438 | 2,475 | |||||||||||||||||
Common stock issued for services
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at $0.05 per share on November 13, 2014
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2,000,000 | 2,000 | 98,000 | 100,000 | |||||||||||||||||
Common stock issued for services
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at $0.055 per share on November 17, 2014
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377,500 | 378 | 20,385 | 20,763 | |||||||||||||||||
Common stock issued for services
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at $0.03 per share on December 15, 2014
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170,833 | 171 | 4,954 | 5,125 | |||||||||||||||||
Net loss
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(368,974 | ) | (368,974 | ) | |||||||||||||||||
Balance, September 30, 2014
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73,655,843 | $ | 73,656 | $ | 2,302,147 | $ | (3,168,186 | ) | $ | (792,383 | ) | ||||||||||
See accompanying notes to the consolidated financials statements.
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- F4-
Montalvo Spirits, Inc.
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For the Nine Months Ended December 31, 2014
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Consolidated Statements of Cash Flows
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For the Nine Months |
For the Nine Months
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Ended |
Ended
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December 31, 2014 | December 31, 2013 | |||||||
(Unaudited) |
(Unaudited)
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OPERATING ACTIVITIES:
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Net loss
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$ | (368,974 | ) | $ | (700,007 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
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Common stock issued for financing expenses
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- | 301,500 | ||||||
Amortization of debt issuance and discount fee
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15,068 | - | ||||||
Derivative expense
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93,809 | - | ||||||
Change in fair value of derivative liability
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12,965 | - | ||||||
Stock based compensation
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156,133 | 55,500 | ||||||
Changes in operating assets and liabilities:
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Accounts receivable
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(1,710 | ) | (42,331 | ) | ||||
Inventories
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(71,088 | ) | 41,006 | |||||
Prepaid expenses
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(4,498 | ) | - | |||||
Bank overdraft
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668 | - | ||||||
Accounts payable and accrued liabilites
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(32,967 | ) | 164,566 | |||||
Net Cash Used in Operating Activities
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(200,594 | ) | (179,766 | ) | ||||
FINANCING ACTIVITIES:
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Proceeds from subscription receivable
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- | 16,500 | ||||||
Advances from stockholder
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- | 700 | ||||||
Proceeds from notes payable
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89,100 | - | ||||||
Repayment of notes payable
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(73,649 | ) | - | |||||
Proceeds from convertible notes payable
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150,000 | - | ||||||
Proceeds from sale of common stock
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15,000 | 150,640 | ||||||
Net Cash Provided by Financing Activities
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180,451 | 167,840 | ||||||
NET CHANGE IN CASH
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(20,143 | ) | (11,926 | ) | ||||
CASH AT BEGINNING OF PERIOD
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20,143 | 23,291 | ||||||
CASH AT END OF PERIOD
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$ | - | $ | 11,365 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
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Interest paid
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$ | 3,185 | $ | 1,390 | ||||
Income tax paid
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$ | - | $ | - | ||||
NON CASH FINANCING AND INVESTING ACTIVITIES:
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Debt discount due to coversion feature
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150,000 | - | ||||||
Common stock issued for debt
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$ | - | $ | 16,250 | ||||
See accompanying notes to the consolidated financials statements.
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- F5-
Montalvo Spirits, Inc.
December 31, 2014 and 2013
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Operations
Montalvo Spirits, Inc. (Formerly Advanced Cloud Storage, Inc.)
Montalvo Spirits, Inc. (the “Company”) was incorporated on November 18, 2010 under the laws of the State of Nevada under the name of Advanced Cloud Storage, Inc. The Company originally intended to market and sell its planned secure online data storage through its intended website.
Amendment to the Certificate of Incorporation
On December 21, 2012, holders of a majority of the Company’s outstanding Common Stock voted to amend the Company’s Articles of Incorporation to: (i) change its name to “Montalvo Spirits, Inc.” (the “Company”), (ii) increase the number of its authorized shares of capital stock from 75,000,000 shares to 310,000,000 consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock and (iii) effectuate a forward split on a 1:32.4552 basis (“the Amendment”).
CASA Montalvo Holdings, Inc.
CASA Montalvo Holdings, Inc. (“Casa Montalvo”) was incorporated under the laws of the State of California on April 4, 2011. Casa Montalvo develops markets and/or distributes alcoholic beverages, primarily in the United States.
Formation of Montalvo Imports LLC
On August 9, 2012, the Company formed Montalvo Imports LLC (“LLC” or “Imports”) under the laws of the State of Delaware. The LLC, of which the Company is the sole member, was formed to provide the same services as that of the Company.
Acquisition of CASA Montalvo Treated as a Reverse Acquisition
On December 21, 2012, the Company, entered into and consummated the Agreement and Plan of Share Exchange (the “Exchange Agreement”) with Casa Montalvo and the shareholders of Casa Montalvo (the “Exchange”). Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of Casa Montalvo.
Pursuant to the Exchange Agreement, the Company agreed to acquire all of the issued and outstanding capital stock of Casa Montalvo in exchange for the issuance of an aggregate for 59,000,016 shares of the Registrant’s common stock, par value $0.001 per share (the “Exchange Shares”). As a result of the Exchange, Casa Montalvo became a wholly-owned subsidiary of the Registrant. The shareholders of Casa Montalvo beneficially owned approximately eighty-eight and one half percent (88.5%) of the issued and outstanding Common Stock of the Registrant immediately after the consummation of the Exchange. Pursuant to the terms of the Exchange Agreement, the Registrant’s principal shareholder agreed to retire 10,000,000 shares of the Registrant’s Common Stock.
As a result of the controlling financial interest of the former stockholder of Casa Montalvo, for financial statement reporting purposes, the merger between the Company and Casa Montalvo has been treated as a reverse acquisition with Casa Montalvo deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of Casa Montalvo (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Casa Montalvo which are recorded at their historical cost. The equity of the Company is the historical equity of Casa Montalvo retroactively restated to reflect the number of shares issued by the Company in the transaction.
- F6-
Formation of Cannabis Beverage Group, Inc.
On March 27, 2014, the Company formed Cannabis Beverage Group, Inc. (“CBG”) under the laws of the State of Colorado. CBG, of which the Company is the shareholder, was formed to explore entry into the cannabis based beverage industry. CBG is currently inactive.
Note 2 – Summary of Significant Accounting Policies
The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of Presentation - Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended March 31, 2014 and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on June 30, 2014.
Fiscal Year-End
The Company elected March 31st as its fiscal year ending date.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, in which the parent’s power to control exists.
The Company's consolidated subsidiary and/or entity is as follows:
Name of consolidated subsidiary or entity
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State or other jurisdiction of incorporation or organization
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Date of incorporation or formation
(date of acquisition, if applicable)
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Attributable interest
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CASA Montalvo Holdings, Inc.
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The State of California
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April 4, 2011
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100%
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Montalvo Imports LLC
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The State of Delaware
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August 9, 2012
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100%
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Cannabis Beverage Group, Inc.
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The State of Colorado
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March 27, 2014
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100%
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The consolidated financial statements include all accounts of the Company as of December 31, 2014 and 2013 and for the interim periods then ended.
All inter-company balances and transactions have been eliminated.
- F7-
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reporting period.
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimate(s) and assumption(s) affecting the financial statements were:
(i) | Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. |
(ii) | Allowance for doubtful accounts: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole. |
(iii) | Inventory Obsolescence and Markdowns: The Company’s estimate of potentially excess and slow-moving inventories is based on evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts. |
(iv) |
Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
|
(v) | Estimates and assumptions used in valuation of derivative liability and equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liability and share options and similar instruments. |
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
- F8-
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by paragraph 820-10-35-37 of the FASB Accounting Standards Codification are described below:
Level 1
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
Level 2
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
Level 3
|
Pricing inputs that are generally observable inputs and not corroborated by market data.
|
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 fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, approximate their fair values because of the short maturity of these instruments.
The Company’s notes payable approximates the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2014 and March 31, 2014.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis
The Company’s non-financial assets include inventories. The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.
Level 3 Financial Liabilities – Derivative conversion features and warrant liabilities
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of December 31, 2014:
Fair Value Measurement Using Level 3 Inputs
|
||||||||||||||||||||
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
Derivative conversion features and warrant liabilities
|
$
|
228,334
|
$
|
-
|
$
|
-
|
$
|
228,334
|
$
|
228,334
|
- F9-
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of March 31, 2014:
Fair Value Measurement Using Level 3 Inputs
|
||||||||||||||||||||
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
Derivative conversion features and warrant liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended December 31, 2014:
Fair Value Measurement Using Level 3 Inputs
|
||||||||
Derivative Liabilities
|
Total
|
|||||||
Balance, March 31, 2014
|
$
|
-
|
$
|
-
|
||||
Total (gains) or losses (realized/unrealized) included in consolidated statements of operations
|
12,965
|
12,965
|
||||||
Purchases, issuances and settlements
|
215,369
|
215.369
|
||||||
Transfers in and/or out of Level 3
|
-
|
-
|
||||||
Balance, December 31, 2014
|
$
|
228,334
|
$
|
228,334
|
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.
Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.
The Company had no bad debt expense for the reporting period ended December 31, 2014 or 2013.
The Company does not have any off-balance-sheet credit exposure to its customers.
- F10-
Inventories
Inventory Valuation
We record inventory on the first-in, first-out (“FIFO”) method. In accordance with generally recognized trade practice, maturing spirits inventories are classified as current assets, although the majority of these inventories ordinarily will not be sold within one year, due to the duration of aging processes. Maturing spirits inventory includes costs of production such as warehousing and insurance. Inventory provisions are recorded to reduce inventory to the lower of cost or market value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory turns, product spoilage and specific identification of items, such as product discontinuance, material changes, or regulatory-related changes.
Inventory Obsolescence and Markdowns
The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
There was no inventory obsolescence for the reporting period ended December 31, 2014 or 2013.
There was no lower of cost or market adjustments for the reporting period ended December 31, 2014 or 2013.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to section 850-10-20 the related parties include a) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
- F11-
Derivative Instruments and Hedging Activities
The Company accounts for derivative instruments and hedging activities in accordance with paragraph 815-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 815-10-05-4”). Paragraph 815-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.
Derivative Liabilities
The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.
The Company marks to market the fair value of the embedded derivative warrants at each balance sheet date and records the change in the fair value of the embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).
The Black-Scholes option valuation model which approximated the Binomial Lattice Model is used to estimate the fair value of the warrants or options granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the warrants or options granted.
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
- F12-
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Revenue Recognition
The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Shipping and Handling Costs
The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.
Stock-Based Compensation for Obtaining Employee Services
The Company accounts for share-based payment transactions issued to employees under the guidance of the Topic 718 Compensation—Stock Compensation of the FASB Accounting Standards Codification (“ASC Topic 718”).
Pursuant to ASC Section 718-10-20 an employee is an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (“IRS”) Revenue Ruling 87-41. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to non-employee directors for their services as directors. Awards granted to non-employee directors for other services shall be accounted for as awards to nonemployees.
Pursuant to ASC Paragraphs 718-10-30-2 and 718-10-30-3 a share-based payment transaction with employees shall be measured based on the fair value of the equity instruments issued and an entity shall account for the compensation cost from share-based payment transactions with employees in accordance with the fair value-based method, i.e., the cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued or the fair value of the liabilities incurred/settled.
Pursuant to ASC Paragraphs 718-10-30-6 and 718-10-30-9 the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date. As such, the fair value of an equity share option or similar instrument shall be estimated using a valuation technique such as an option pricing model. For this purpose, a similar instrument is one whose fair value differs from its intrinsic value, that is, an instrument that has time value.
- F13-
If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in its most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
|
The exercise price of the option.
|
b.
|
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
|
c.
|
The current price of the underlying share.
|
d.
|
The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
|
e.
|
The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
|
f.
|
The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
|
- F14-
Pursuant to ASC Paragraphs 718-10-30-11 and 718-10-30-17 a restriction that stems from the forfeitability of instruments to which employees have not yet earned the right, such as the inability either to exercise a non-vested equity share option or to sell non-vested shares, is not reflected in estimating the fair value of the related instruments at the grant date. Instead, those restrictions are taken into account by recognizing compensation cost only for awards for which employees render the requisite service and a non-vested equity share or non-vested equity share unit awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date.
Pursuant to ASC Paragraphs 718-10-35-2 and 718-10-35-3 the compensation cost for an award of share-based employee compensation classified as equity shall be recognized over the requisite service period, with a corresponding credit to equity (generally, paid-in capital). The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the vesting period. The total amount of compensation cost recognized at the end of the requisite service period for an award of share-based compensation shall be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed). An entity shall base initial accruals of compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change. Previously recognized compensation cost shall not be reversed if an employee share option (or share unit) for which the requisite service has been rendered expires unexercised (or unconverted).
Under the requirement of ASC Paragraph 718-10-35-8 the Company made a policy decision to recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under the guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.
- F15-
Pursuant to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which the counterparty's performance is complete. If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
|
The exercise price of the option.
|
b.
|
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
|
c.
|
The current price of the underlying share.
|
d.
|
The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
|
e.
|
The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
|
f.
|
The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
|
- F16-
Pursuant to ASC paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
Deferrerd Tax Assets and Income Taxes Provision
The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13.addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Tax years that remain subject to examination by major tax jurisdictions
The Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15.
Earnings Per Share
Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
Pursuant to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied. Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid stock subscriptions (see paragraph 260–10–55–23). Anti-dilutive contracts, such as purchased put options and purchased call options, shall be excluded from diluted EPS. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29 and 260-10-55-4 through 55-5.) c. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted EPS computation.
- F17-
The total amount of potentially outstanding dilutive common shares from the conversion of the convertible debt would be 3,097,574 and 0 for the reporting period ended December 31, 2014 and 2013, respectively.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued the FASB Accounting Standards
The amendments update No. 2014-09 "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09").
This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
1.
|
Identify the contract(s) with the customer
|
2.
|
Identify the performance obligations in the contract
|
3.
|
Determine the transaction price
|
4.
|
Allocate the transaction price to the performance obligations in the contract
|
5.
|
Recognize revenue when (or as) the entity satisfies a performance obligations
|
The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:
1.
|
Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
|
2.
|
Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
|
3.
|
Assets recognized from the costs to obtain or fulfill a contract.
|
ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.
In June 2014, the FASB issued the FASB Accounting Standards Update 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” (“ASU 2014-12”).
The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.
- F18-
The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.
In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
a.
|
Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
|
b.
|
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
|
c.
|
Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
|
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
a.
|
Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
|
b.
|
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
|
c.
|
Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
|
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
- F19-
Note 3 – Going Concern
The Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had an accumulated deficit at December 31, 2014, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenue and in its ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 – Notes Payable
Notes payable consisted of the following:
December 31 2014
|
March 31, 2014
|
|||||||
Note payable, issued February 13, 2014, in the principal amount of $15,000 with six minimum monthly payments totaling $16,800 in aggregate. The Company has repaid the note.
|
$ | - | $ | 11,900 | ||||
Note payable, issued June 10, 2014, in the principal amount of $75,000 with eighteen weekly payments of $5,000. The Company has repaid $45,000 towards the note.
|
25,000 | - | ||||||
Note payable, issued July 22, 2014, in the principal amount of $6,000 with six minimum monthly payments of $6,720 in aggregate. The Company has repaid $1,200 towards the note
|
2,351 | - | ||||||
Notes payable
|
$ | 27351 | $ | 11,900 |
- F20-
Note 5 – Convertible Notes Payable
On September 15, 2014, Montalvo Spirits, Inc. (the “Registrant”) effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $5,000 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. Pursuant to the Agreement and a Registration Rights Agreement, for the nine months following the date of the Agreement, if the Registrant offers Common Stock (or other equity securities convertible into or exchangeable for Common Stock) registered for sale under the Securities Act or proposes to file a registration statement (“Registration Statement”) with the Securities and Exchange Commission covering any of its securities other than (i) a registration on Form S-8 or S-4, or any successor or similar forms; and (ii) a shelf registration under Rule 415 for the sole purpose of registering shares to be issued in connection with the acquisition of assets, the Registrant will give the Investor the option to include the Commitment Shares and any shares of Common Stock into which the Debentures are convertible into in such Registration Statement.
The first Debenture was issued in the principal amount of $150,000 (the "Debenture") and is shown as a long-term liability net of discounts of $134,932 for a net value of $15,068.
An additional Debenture in the principal amount of $100,000 may be issued by the Registrant to the Investor anytime sixty-one (61) days thereafter subject to the satisfaction of the terms and conditions set forth in the Agreement (the “Second Closing”). A third Debenture in the principal amount of $100,000 may be issued by the Registrant to the Investor anytime sixty-one (61) days following the Second Closing subject to the satisfaction of the terms and conditions set forth in the Agreement.
Conversion Feature – Convertible Notes
Because these conversion features are variable, management has concluded that the features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
- F21-
Note 6 – Derivative Liabilities
The Company identified derivative liabilities associated with the convertible debt issued in 2014.
As a result of the application of ASC No. 815, the fair values of the Company’s derivative liabilities are summarized as follows:
Derivative liability – March 31, 2014
|
$
|
-
|
||
Fair value at the commitment date
|
215,369
|
|||
Fair value mark to market adjustment
|
12,965
|
|||
Derivative liability – December 31, 2014
|
$
|
228,334
|
||
Current portion
|
$
|
-
|
||
Non-current portion
|
$
|
228,334
|
The Company recorded debt discount to the extent of the net proceeds of each note, and immediately expensed the remaining derivative value if it exceeded the net proceeds.
The fair value of the Company’s derivative liabilities at the commitment and re-measurement dates were based upon the following management assumptions as of the commitment date and December 31, 2014:
Commitment Date
|
Re-measurement Date
|
|||||
Expected dividends
|
0%
|
0%
|
||||
Expected volatility
|
198%
|
219%
|
||||
Expected term:
|
3.00 years
|
2.70 years
|
||||
Risk free interest rate
|
1.07 %
|
1.10 %
|
Note 7 – Commitments and Contingencies
Employment with the President
On November 13, 2014, the Company and Sergio Gonzalez (“SG”), entered into an Employment Agreement (the “Employment Agreement”), to employ CG as the Company’s President. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, SG is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Chief Operating Officer
On November 13, 2014, the Company and Carlos Gonzalez (“CG”), entered into an Employment Agreement (the “Employment Agreement”), to employ CG as the Company’s Chief Operating Officer. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, CG is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Chief Executive Officer
On November 13, 2014, the Company and Alex Viecco (“AV”), entered into an Employment Agreement (the “Employment Agreement”), to employ AV as the Company’s Chief Executive Officer. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, AV is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Director of Sales
On November 13, 2014, the Company and Daniel Cahill (“DC”), entered into an Employment Agreement (the “Employment Agreement”), to employ DC as the Company’s Director of Sales. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, DC is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
- F22-
Note 8– Related Party Transactions
Related Parties
Related parties with whom the Company had transactions are:
Related Parties
|
Relationship
|
|
Alex Viecco
|
Chief Executive Officer and significant stockholder of the Company
|
|
Point Loma Capital, Inc.
|
An entity owned and controlled by a significant stockholder of the Company
|
|
CMFD Group LLC
|
An entity owned and controlled by a significant stockholder of the Company
|
Notes Payable - Related Parties
Notes payable – related parties consisted of the following:
December 31, 2014
|
March 31, 2014
|
|||||||
Note payable to Chief Executive Officer, issued on June 6, 2011, with interest at 8% per annum, with principal and interest due on June 6, 2013, The note is currently past due.
|
$ | 1,000 | $ | 1,000 | ||||
Note payable to stockholder, issued on June 21, 2011, with interest at 8% per annum, with principal and interest due on June 21, 2013, The note is currently past due.
|
10,000 | 10,000 | ||||||
Note payable to stockholder, issued on January 3, 2012, with interest at 8% per annum, with principal and interest due on January 20, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
Note payable to stockholder, issued on January 20, 2012, with interest at 8% per annum, with principal and interest due on January 20, 2014, The note is currently past due
|
2,000 | 2,000 | ||||||
Note payable to stockholder, issued on March 1, 2012, with interest at 8% per annum, with principal and interest due on March 31, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
Note payable to stockholder, issued on April 1, 2012, with interest at 8% per annum, with principal and interest due on March 31, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
Note payable to stockholder, issued on March 23, 2012, with interest at 8% per annum, with principal and interest due on March 23, 2014, The note is currently past due
|
6,000 | 6,000 | ||||||
Note payable to a relative of the Chief Executive Officer, issued November 20, 2012, with interest at 8% per annum, with principal and interest due on November 20, 2013, The note is currently past due
|
1,000 | 1,000 | ||||||
Note payable to Destiladora Huerta Real, S.A. de C.V., an entity controlled by the President and Chief Operating Officer, with interest at 5% per annum, with principal and interest due on August 23, 2015
|
320,000 | 320,000 | ||||||
346,000 | 346,000 | |||||||
Current maturities of notes payable – related parties
|
(346,000 | ) | (26,000 | ) | ||||
Notes payable – related parties, net of current maturities
|
$ | - | $ | 320,000 |
- F23-
Advances from Stockholder
From time to time, stockholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand.
Note 9 – Stockholders’ Deficit
Shares Authorized
Upon formation the total number of shares of common stock which the Company is authorized to issue is Seventy Five Million (75,000,000) shares, par value $0.001 per share. In December 2012, an increase of the authorized shares of the Company’s common stock from 75,000,000 shares to 310,000,000, $0.001 par value, consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock was ratified, effective upon the filing of an amendment to the Company’s Certificate of Incorporation .
Common Stock
Immediately prior to the consummation of the Exchange Agreement on December 21, 2012, the Company had 332,251,996 common shares issued and outstanding.
Upon consummation of the Exchange Agreement on December 21, 2012, the then majority stockholders of the Company surrendered 324,552,000 shares of the Company's common stock which was cancelled upon receipt and the Company issued 59,000,016 shares of its common stock pursuant to the terms and conditions of the Exchange Agreement.
Sale of Common Stock
On December 21, 2012 the Company issued 200,000 shares of its common stock at $0.50 per share for $100,000, $83,500 of which was received and the remaining $16,500 was recorded as stock subscription receivable and received by the Company on April 30, 2013.
On February 12, 2013 the Company sold 12,500 shares of its common stock to one investor at $0.40 per share or $5,000.
On June 15, 2013 the Company sold 10,000 shares of its common stock to one investor at $0.05 per share or $5,000. Payment was received by the Company on July 2, 2013.
From July 1, 2013 to August 1, 2013 the Company issued 46,000 shares of its common stock at $0.50 per share, or $23,000, to five (5) individuals.
On July 15, the Company entered into a Conversion and Release Agreement, whereby the Company issued 32,500 shares of its Common Stock in exchange for the cancellation of $16,250 in notes payable, including $15,000 in principal plus accrued interest of $1,250, at $0.50 per share.
On August 29, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.50 per share or $50,000.
On September 3, 2013 the Company issued 10,000 shares of its common stock to one investor at $0.20, or $2,000.
On November 13, 2013 the Company issued 20,000 shares of its common stock to one investor at $0.20, or $5,000.
On November 13, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.242 per share or $24,200.
On November 15, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.234 per share or $23,400
- F24-
On December 3, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.180 per share or $18,000.
On February 27, 2014 the Company issued 166,667 shares of its common stock to two investors at $0.15, or $25,000.
On August 20, 2014, the Company issued 200,000 shares of its common stock to one investor at $0.075 per share, or $15,000.
Common Shares Issued for Obtaining Employee Services
On March 29, 2013 the Company issued 200,000 shares to a newly appointed member of the Company’s Board of Advisors. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent volume PPM price of the Company’s common stock, or $100,000 on the date of grant and were expensed upon issuance.
On March 28, 2014 the Company issued 250,000 shares to each of its four board members in exchange for their services on the Board of Directors. These shares are fully vested and non-forfeitable. These shares were valued at $0.12 per share, the closing price of the Company’s common stock on the date of issuance, or $120,000 on the date of grant and were expensed upon issuance.
On November 13, 2014 the Company issued 500,000 shares to each of its four board members in exchange for their services for being the members of the Board of Directors. These shares are fully vested and non-forfeitable. These shares were valued at $0.05 per share, the closing price of the Company’s common stock on the date of issuance, or $100,000 on the date of grant and were expensed upon issuance.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
On July 15, 2013 the Company entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year from the date of signing in exchange for 111,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent PPM price of the Company’s common stock or $55,000 on the date of grant and were expensed upon issuance.
On February 27, 2014 the Company entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year for from the date of signing in exchange for 145,833 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.15 per share, the closing price of the Company’s common stock on the date of issuance, or $21,875 on the date of grant and were expensed upon issuance.
On March 28, 2014 the Company entered into a Contribution Agreement with five individuals to provide marketing services for a period of one (1) year from the date of signing in exchange for an aggregate of 500,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.12 per share, the close price of the Company’s common stock on the date of issuance, or $60,000 on the date of grant and were expensed upon issuance.
On each of June 16, 2014, June 23, 2014 and June 30, 2014, the Company issued 11,111 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.10 per share, the closing price of the Company’s common stock on the date of issuance, or $1,111 on the date of grant and were expensed upon issuance.
On each of July 7, 2014, July 14, 2014, July 21, 2014, July 28, 2014, August 4, 2014, August 11, 2014, August 18, 2014, August 25, 2014, September 1, 2014, September 8, 2014, September 15, 2014, September 22, 2014,, September 29, 2014, October 6, 2014, and October 13, 2014, the Company issued 11,111 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued from $0.063 to $0.10 per share, the closing price of the Company’s common stock on the date of issuance.
- F25-
On each of July 15, 2014, August 15, 2014, September 15, 2014, October 15, 2014, November 15, 2014, and December 15, 2014, the Company issued 37,500 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued from $0.03 to $0.075 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On September 15, 2014, Montalvo Spirits, Inc. (the “Registrant”) effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $5,000 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. The shares were valued at $0.0711 per share, the closing price of the Company’s common stock on the date of issuance.
On November 17, 2014 the Company entered into a Contribution Agreement with three individuals to provide marketing services for a period of one (1) year from the date of signing in exchange for an aggregate of 377,500 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.055 per share, the close price of the Company’s common stock on the date of issuance, or $20,763 on the date of grant and were expensed upon issuance.
On December 15, 2014, the Company issued 133,333 shares of its common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
Note 10 – Lincoln Park Purchase Agreement
On August 29, 2013, the Company entered into a purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park or LPC”), (the “Purchase Agreement”) pursuant to which Lincoln Park agreed to purchase up to $10,050,000 of Company common stock (subject to certain limitations) from time to time over a twenty-four (24) month period. Also on August 29, 2013, Montalvo entered into a Registration Rights Agreement, (the “Registration Rights Agreement”), with Lincoln Park, in which Montalvo filed with the SEC the registration statement to register for resale under the Securities Act of 1933, as amended, or the Securities Act, the shares that have been or may be issued to Lincoln Park under the Purchase Agreement.
Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and LPC is obligated to purchase up to $10,050,000 in shares of the Company’s Common Stock, subject to certain limitations, from time to time, over the 24 month period commencing on November 7, 2013, the date that the registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Lincoln Park Registration Rights Agreement, was declared effective by the SEC. The Company may, from time to time and at its’ sole discretion, direct Lincoln Park to purchase shares of Company common stock in amounts up to 100,000 shares on any single business day so long as at least one business day has passed since the most recent purchase or up to $500,000 per purchase plus an additional “accelerated amount” under certain circumstances. There are no trading volume requirements or restrictions under the Purchase Agreement, and Montalvo will control the timing and amount of any sales of common stock to Lincoln Park. The purchase price of the shares that may be sold to Lincoln Park under the Purchase Agreement will be based on the market price of our common stock immediately preceding the time of sale as computed under the Purchase Agreement without any fixed discount; provided that in no event will such shares be sold to Lincoln Park when the closing sale price is less than $0.25 per share, subject to adjustment as provided in the Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. The Company may at any time in its’ sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business day notice. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
In connection with the entry into the Purchase Agreement the Company issued 603,000 shares of its common stock to an institutional investor in exchange for the investor committing to purchase up to $10,050,000 of the Company’s common stock over the next 24 months, subject to certain terms and conditions. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent PPM price of the Company’s common stock or $301,500 on the date of grant and were expensed as financing expense upon issuance.
- F26-
Note 11 – Concentrations and Credit Risk
Customers and Credit Concentrations
Customer concentrations and credit concentrations are as follows:
Net Sales
|
||||||||
For the NineMonths Ended December 31, 2014
|
For the Nine Months Ended December 31, 2013
|
|||||||
Customer A
|
56
|
%
|
0
|
%
|
||||
Customer B
|
30
|
%
|
0
|
%
|
||||
86
|
%
|
0
|
%
|
No customer in accounts receivable were over 10% at December 31, 2014 or 2013.
A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial condition.
Note 12 – Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that the following subsequent events were required to be disclosed as follows:
On each of January 15, 2015 and February 17, 2015, the Company issued 37,500 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued from $0.04 to $0.08 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On January 15, 2015, the Company issued 100,000 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.04 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On February 17, 2015 the Company issued 50,000 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.08 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
- F27-
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should,” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
Although these forward-looking statements reflect the good faith judgment of our management, such statements can only be based upon facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors.” For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Annual Report on Form 10-K for the year ended March 31, 2014. Readers should carefully review the risk factors disclosed in the Form 10-K and other documents filed by the Company with the SEC.
Investors are also advised to refer to the information in our previous filings with the Securities and Exchange Commission (SEC), especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks and uncertainties or potentially inaccurate assumptions.
As used in this report, the terms "Company", "we", "our", "us" and "TQLA" refer to Montalvo Spirits, Inc., a Nevada corporation.
Results of Operations
For the three and nine months ending December 31, 2014, respectively, we had sales of $24,251 and $110,151 as compared to sales of $16,037 and $109,531 for the three and nine months ending December 31, 2013. The result is an increase of 51% for the three months ending December 31, 2014 and an increase of 1% for the nine months ending December 31, 2014 over the same periods ending December 31, 2013. This increase is primarily due to the company implementing a change in distributors in certain territories from smaller, boutique distributors with lower volumes to larger distributors, which should result in higher sales volumes. The Company signed an exclusive distribution agreement with Southern Wine & Spirits in California during the three months ending December 31, 2014.
Gross margin decreased to $17,487, or 72% of sales and $77,345, or 70%, respectively, for the three and nine months ending December 31, 2014 from $10,085, or 63% of sales and $72,919, or 67% of sales for the three and nine months ending December 31, 2013. This increase is primarily due to the change in distribution strategy described above.
Operating expenses for the three and nine months ended December 31, 2014 decreased to $170,400 and $292,987 as compared to expenses of $132,478 and $469,516 from the three and nine months ending December 31, 2013. The decrease was attributable to the lowering of overhead costs related to support staff needed for the Company’s smaller, boutique distributors as well as increased efficiency as it relates to costs of maintaining its fully reporting status as a public company.
Total operating loss for the three and nine months ended December 31, 2014 was $152,913 and $215,642 as compared to $122,913 and $396,597 for the three and nine months ended December 31, 2013.
-2-
Capital Resources and Liquidity
Our auditors have issued a “going concern” opinion, meaning that there is substantial doubt if we can continue as an on-going business for the next twelve months unless we obtain additional capital. No substantial revenues are anticipated until we have completed the financing from this offering and implemented our plan of operations. With the exception of cash advances from our Officers and Directors, our only source for cash at this time is investments by others in this offering. We must raise cash to implement our strategy and stay in business. The amount of the offering will likely allow us to operate for at least one year.
As of December 31, 2014, we had $0 in cash, $36,881 in accounts receivable, $4,498 in prepaid expenses, and $379,301 in inventories totaling $420,680 in assets as compared to $363,527 in total assets for March 31, 2014. The funds available to the Company will not be sufficient to fund the planned operations of the Company. If we do not substantially increase our sales, we will require funding to continue our operations of which there can be no assurance that we will be able to raise funds or that if we do so that they will be on grounds that are favorable to the Company.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and is not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On November 17, 2014 the Company entered into a Contribution Agreement with three individuals to provide marketing services for a period of one (1) year from the date of signing in exchange for an aggregate of 377,500 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.055 per share, the close price of the Company’s common stock on the date of issuance, or $20,763 on the date of grant and were expensed upon issuance.
The securities described above were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder. The documents executed in connection with these issuances contain representations to support the Company’s reasonable belief that the investor had access to information concerning the Company’s operations and financial condition, the investors acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the investors are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Company made no solicitation in connection with the sale other than communications with the investors; the Company obtained representations from the investors regarding their investment intent, experience and sophistication; and the investors either received or had access to adequate information about the Company in order to make an informed investment decision.
-3-
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On February 19, 2015, Montalvo Spirits, Inc. (the “Registrant”) amended a Securities Purchase Agreement (the “Agreement”) entered into on September 15, 2014 with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). Pursuant to the amended Agreement, the Company issued a second debenture in the face amount of $17,000 to the Investor (the “Second Debenture”). The Second Debenture does not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion.
Item 6. Exhibits.
Exhibit No.
|
Description
|
||||||||
31.1
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Executive Officer
|
||||||||
31.2
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Financial Officer
|
||||||||
32.1
|
Section 1350 Certification of Chief Executive Officer
|
||||||||
32.2 | Section 1350 Certification of Chief Financial Officer | ||||||||
101.INS | XBRL Instance Document** | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document** | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
-4-
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.
MONTALVO SPIRITS, INC.
|
|||||
Date: February 25, 2015
|
By:
|
/s/ Alex Viecco
|
|||
Name: Alex Viecco
|
|||||
Title: Chief Executive Officer
(Principal Executive Officer)
|
Date: February 25, 2015
|
By:
|
/s/ Carlos Gonzalez Rivera
|
|||
Name: Carlos Gonzalez Rivera
|
|||||
Title: Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
|