UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report under Section 13 or 15 (d) of

Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2015

 

Commission File Number 000-54118

 

Urban Hydroponics, Inc.

(Name of registrant as specified in its charter)

Nevada	72-1600437
(State of Incorporation)	(IRS Employer (ID Number)

 

c/o CKR Law LLP, 1330 Avenue of the Americas, 14^th Floor, New York, NY 10019

(561) 543-8882

(Address and telephone number of principal executive offices)

 

224 Datura Street, Suite 505

West Palm Beach, FL 33401

(Former Address of principal executive offices)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 last 90 days. YES ☒  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). 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,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller reporting company ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☒  NO ☐

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,800,000 shares of common stock, par value $0.001, as of November 10, 2015.

 

 

TABLE OF CONTENTS

 

FORM 10-Q

URBAN HYDROPONICS, INC.

INDEX

 

			Page Number
PART I. FINANCIAL INFORMATION
	Condensed Balance Sheets at September 30, 2015 (Unaudited) and June 30, 2015			4
	Condensed Statements of Operations for the Three Months Ended September 30, 2015 and 2014 (Unaudited)			5
	Condensed Statements of Cash Flows for the Three Months Ended September 30, 2015 and 2014 (Unaudited)			6
	Notes to the Condensed Financial Statements as of September 30, 2015 (Unaudited)			7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			14
Item 4.	Controls and Procedures			14
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings			16
Item 1A.	Risk Factors			16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			16
Item 3.	Defaults Upon Senior Securities			17
Item 4.	Mine Safety Disclosure			17
Item 5.	Other Information			17
Item 6.	Exhibits			17
SIGNATURES

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in our Form 10-K for the fiscal year ended June 30, 2015, filed with the SEC on October 13, 2015. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

 

 

URBAN HYDROPONICS, INC.
(A Development Stage Company)
Balance Sheets
(Stated in U.S. Dollars)

 

		(Unaudited)
		Three Months Ended				Year Ended
		September 30, 2015				June 30, 2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	2,105			$	45,115
Bridge Loans			1,226,000				1,211,000
Bridge loans accrued interest			131,362				100,325
Total current assets			1,359,467				1,356,440
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	337,805			$	265,904
Secured loans			1,970,000				1,935,000
Secured loans accrued interest			195,474				140,891
Loan from related party			56,162				56,162
Total current liabilities			2,559,441				2,397,957
STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 10,000,000 authorized; none issued at September 30, 2015 and 2014 respectively.			—				—
Common stock, $0.001 par value, 300,000,000 shares authorized; 34,800,000 shares issued and outstanding at September 30, 2015 and June 30, 2015 respectively.			34,800				34,800
Additional paid-in capital			221,400				221,400
Deficit accumulated during development stage			(1,456,174	)			(1,297,717	)
TOTAL STOCKHOLDERS’ EQUITY			(1,199,974	)			(1,041,517	)
TOTAL LIABILITITES AND STOCKHOLDERS’ EQUITY		$	1,359,467			$	1,356,440

 

See the accompanying notes to the condensed financial statements

 

 

URBAN HYDROPONICS, INC.
(A Development Stage Company)
Statement of Operations
(Stated in U.S. Dollars)
(Unaudited)

 

		Three Months Ended				Three Months Ended
		September 30, 2015				September 30, 2014
REVENUES
Revenues			—				—
TOTAL REVENUES		$	—			$	—
OPERATING COSTS
Administrative expenses			137,886				153,364
TOTAL OPERATING COSTS		$	137,886			$	153,364
OTHER EXPENSE
Interest expense			52,108				22,249
TOTAL OTHER EXPENSE			52,108				22,249
TOTAL EXPENSE		$	189,994			$	175,613
NET ORDINARY INCOME(LOSS)			(189,994	)			(175,613	)
OTHER INCOME/EXPENSE
Other income
Interest income			31,038				18,920
TOTAL OTHER INCOME/EXPENSE			31,038				18,920
NET INCOME(LOSS)		$	(158,956	)		$	(156,693	)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE		$	(0.03	)		$	(0.00	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING			34,800,000				34,400,000

 

See the accompanying notes to the condensed financial statements.

 

 

Urban Hydroponics, Inc.
(A Development Stage Company)
Statement of Cash Flows
(Stated in U.S. Dollars)
(Unaudited)

 

		Three Months Ended				Three Months Ended
		September 30, 2015				September 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss)		$	(158,956	)		$	(156,693	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Bridge Loans			(15,000	)			(120,000	)
(Accrued Interest bridge loans)			(31,037	)			(18,919	)
Changes in operating assets and liabilities:
Accounts receivable			—				—
Accounts payable and accrued expenses			74,876				(5,744	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			(130,117	)			(301,356	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan from related party			—				—
Proceeds of loan from shareholder			—				—
Proceeds from secured promissory notes			35,000				381,000
Accrued interest from secured promissory notes			52,107				22,249
Issuance of common stock			—				—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			87,107				101,893
NET INCREASE (DECREASE) IN CASH			(43,010	)			77
CASH AT BEGINNING OF PERIOD			45,115				—
CASH AT END OF PERIOD		$	2,105			$	101,970
NON-CASH INVESTING AND FINANCIAL ACTIVITIES
Increase in mining rights license
and long -term liabilities			—				—
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for :
Interest		$	—			$	—
Income Taxes		$	—			$	—

 

 

 

See the accompanying notes to the condensed financial statements.

 

 

Urban Hydroponics, Inc.

An Exploration Stage Company

Notes to Condensed Financial Statements

As of September 30, 2015

(Unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited interim financial statements of Urban Hydroponics, Inc. (f/k/a) Placer Del Mar, Ltd., have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Urban Hydroponics’ Form 10-K filed with SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2015 as reported in the Form 10-K, for the year ended June 30, 2015, have been omitted. It is management’s opinion that all adjustments necessary for a fair statement of the results of the interim periods have been made, and all adjustments are of a normal recurring nature. 

 

Note 2. Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. While the Company has reported revenue of $197,927 during the period from May 13, 2005 (inception) to September 30, 2015, the Company generated a net loss of $1,456,173 during the same period. This condition raises substantial doubt about the Company’s ability to continue as a going concern. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company will require additional funding for operations; this additional funding may be raised through debt or equity offerings. Management has yet to decide what type of offering the Company will use or how much capital the Company will attempt to obtain. There is no guarantee that the Company will be able to raise any capital through any type of offerings.  

 

Note 3. Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-10, which eliminated certain financial reporting requirements of companies previously identified as “Development Stage Entities” (Topic 915). The amendments in this ASU simplify accounting guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also reduce data maintenance and, for those entities subject to audit, audit costs by eliminating the requirement for development stage entities to present inception-to-date information in the statements of income, cash flows, and shareholder equity.   Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915.  The Company has adopted this standard and will not report inception to date financial information. 

 

In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.   The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition.  Public entities are required to adopt the revenue recognition standard for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter. Early adoption is not permitted for public entities.  The Company has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement, however it believes that there will be no material effect on the financial statements. 

 

 

Urban Hydroponics, Inc.

An Exploration Stage Company

Notes to Condensed Financial Statements

As of September 30, 2015

(Unaudited)

 

In June 2014, FASB issued Accounting Standards Update (ASU) No. 2014-12 Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.  A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved.  The guidance is effective for annual periods beginning after 15 December 2015 and interim periods within those annual periods. Early adoption is permitted.  Management has reviewed the ASU and believes that they currently account for these awards in a manner consistent with the new guidance. Therefore there is no anticipation of any effect to the financial statements.  

 

In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.    Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements—Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this Update should be followed to determine whether to disclose information about the relevant conditions and events.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  The Company will evaluate the going concern considerations in this ASU, however, at the currently, management does not believe that it has met conditions which would subject these financial statements for additional disclosure. 

 

We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. 

 

 

Urban Hydroponics, Inc.

An Exploration Stage Company

Notes to Condensed Financial Statements

As of September 30, 2015

(Unaudited)

 

Note 4. Unregistered Sale of Equity Securities 

 

On August 28, 2015, the Company closed on the offer and sale of $35,000 of its 10% Secured Convertible Promissory Notes (the “Investor Notes”) to one investor who is a non-US person. The Investor Notes were offered and sold as part of a private placement that had its initial closing on May 21, 2014 (the “Notes Offering”), pursuant to the exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(a)(2) of, and Regulation D and Regulation S under, the Securities Act. 

 

The Company used $15,000 of the gross proceeds derived from its issuance of the Investor Notes to provide additional bridge financing (“Bridge Financing”) to Urban Cultivator Inc., a British Columbia corporation, for working capital purposes. The Bridge Financing is evidenced by a Secured Bridge Loan Promissory Note from the Borrowers to the Company. 

 

Note 5. Loan from Shareholder

 

Loan from shareholder represents funds loaned to the company by an officer and director. As of September 30, 2015 the loan balance is $56,162. The funds provided to the Company are unsecured and he has agreed to forego any penalties or interest should the Company be unable to repay any funds provided. 

 

Note 6. Subsequent Events 

 

The Company evaluated all events or transactions that occurred after September 30, 2015 and up through date the Company issued these financial statements and determined there were no reportable events other than that indicated below: 

 

On October 30, 2015, the Company closed on the offer and sale of an additional $30,000 of its 10% Secured Convertible Promissory Notes to two investors. The Investor Notes were offered and sold as part of the Notes Offering to one accredited investor and one non-U.S. person pursuant to the exemptions from the registration requirements of the Securities Act provided by Section 4(a)(2) of, and Regulation D and Regulation S under, the Securities Act. 

 

On October 27, 2015, the Company entered into a business advisory services agreement with EGM Firm Inc. (“EGM”) pursuant to which in exchange for the provision of certain business development services the Company agreed to pay a cash fee of $15,000 and to issue to EGM 10,000 restricted shares of its common stock upon the signing of the agreement. The Company has not yet issued these shares to EGM. This issuance is exempt from the registration provisions of the Securities Act pursuant to Section 4(a)(2) thereof. 

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements 

 

Except for historical information, this report contains forward-looking statements within the meaning of the federal securities laws.  Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses.  Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause or contribute to such differences include, but are not limited to, those discussed herein. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission (“SEC”).  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. 

 

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. 

 

All references in this Form 10-Q to the “Company,” “we,” “us,” or “our” are to Urban Hydroponics, Inc. (formerly known as Placer Del Mar, Ltd.).

 

Going Concern

 

Our unaudited financial statements presented herein are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we do not have cash or other significant current assets, nor do we have an established source of revenues sufficient to cover our operating costs and to allow us to continue as a going concern.

 

In the course of its development activities, the Company has sustained loss of $158,956 and $156,693 in the three months ending September 30, 2015 and 2014, respectively. The Company expects to finance its operations primarily through one or more future financings and by the consummation of the Merger (as defined and described below) and transactions contemplated thereby. However, there exists substantial doubt about the Company’s ability to continue as a going concern for at least the next twelve months, because the Company will be required to obtain additional capital in the future to continue its operations and there is no assurance that it will be able to obtain such capital, through equity or debt financing, or any combination thereof, or on satisfactory terms or at all. 

 

Our independent auditors have included an explanatory paragraph in their report on our consolidated financial statements included in this report that raises substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.  We have generated minimal operating revenues since our inception. Our continuation as a going concern is dependent upon future events, including our ability to identify a suitable business combination, to raise additional capital and to generate positive cash flows.  Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which implies we will continue to meet our obligations and continue our operations for the next twelve months. 

 

 

Realization values may be substantially different from carrying values as shown, and our consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of the going concern uncertainty. Under the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading, or seeking protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. 

 

As described in Note 2 of our accompanying financial statements, our losses to date and our lack of any guaranteed sources of future capital create substantial doubt as to our ability to continue as a going concern. If our business plan does not work, we could remain as a start-up company with limited material operations, revenues, or profits. Although management has believes their plan for Urban Hydroponics, Inc. will generate revenue and profit, there is no guarantee their past experiences will provide Urban Hydroponics, Inc. with similar future successes. 

 

General Overview 

 

The Company was incorporated in the State of Nevada on May 13, 2005 as Placer Del Mar. Ltd. Historically, we were engaged in the business of exploring for minerals. In June 2013, management determined to discontinue mineral exploration activities and to focus on attempting to acquire other assets or business operations that would maximize shareholder value. 

 

Recent Developments 

 

Non-Binding Term Sheet  

 

On May 5, 2014, Valor Invest Ltd. (“Valor”), on our behalf, signed a non-binding term sheet (the “Term Sheet”) with 0838373 B.C. Ltd., a British Columbia corporation (“Numbered Company”), Urban Cultivator Inc., a British Columbia corporation (“UC”), BC Northern Lights Enterprises Ltd., a British Columbia corporation (“BCNL”), and W3 Metal Inc., a British Columbia corporation (“W3,” and together with Numbered Company, UC and BCNL, the “Target Companies”), regarding a possible business combination (the “Merger”) involving these companies.  The Target Companies are private companies engaged in the business of manufacturing and selling commercial and residential hydroponic growing systems. 

 

Binding letter of Intent with the Target Companies 

 

On October 3, 2014, we signed a Binding Letter of Intent (LOI), as amended on October 31, 2014 and February 23, 2015, to revise the terms of the proposed Merger with the Target Companies. This LOI replaced the non-binding Term Sheet dated May 5, 2014 and Valor was not a party to the LOI.  

 

Pursuant to the LOI, it is contemplated that a newly-formed, wholly-owned Canadian subsidiary of the Company will merge with and into the Target Companies, as a result of which the Target Companies will become wholly-owned subsidiaries of the Company. In connection with the LOI, as amended, and pursuant to its terms, the Company agreed to provide bridge financing (the “Bridge Financing”) to the Target Companies for working capital purposes.   To date, the Company has provided the Target Companies with an aggregate of $1,226,000 in Bridge Financing. The secured promissory notes issued by the Target Companies in the Bridge Financing bear interest at 10% per annum and are secured by a perfected security interest in all of the assets of the Target Companies, subject to certain limited exceptions.  

 

 

To finance the Bridge Financing and to provide working capital to the Company, the Company has sold an aggregate of $1,970,000 of its 10% Secured Convertible Promissory Notes (the “Investor Notes”) in a private placement to non-US persons in a number of closings from May 21, 2014 through August 5, 2015 (the “Notes Offering”), as further discussed below under “Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Recent Sales if Unregistered Securities.” We paid a finder $50,000 for introducing the purchasers of the Investor Notes to us.  

 

In addition to the Notes Offering, the Company intends to engage in an additional private placement of its securities for at least an additional $1,000,000 in gross proceeds to the Company (the “Subsequent Offering”) for working capital use post-Merger closing. The closing of the Subsequent Offering and the closing of the Merger is each a condition precedent to the other. There can be no assurances, however, that the Merger and the Subsequent Offering will close as currently planned or at all. 

 

Although the original LOI provides that the proposed Merger was expected to close on or before November 30, 2014, there has been a delay in the preparation of the audited financial statements of the Target Companies for the two fiscal years ended October 31, 2014 and it is now expected that the proposed Merger will close on or before October 31, 2015. There can be no certainty, however, that the Merger will close on that date or at all, that any transactions will be consummated with the Target Companies or that any other business projects will be identified and consummated. The Merger is subject to, among other things, the completion and delivery by the Target Companies to the Company, and the acceptance as satisfactory by the Company, of two year audited and six-month interim consolidated financial statements of the Target Companies.  

 

Because of the delay in the closing of the Merger, nineteen (19) of the Investor Notes in the aggregate principal amount of $970,000 have reached their maturity dates (some of which were previously extended) and are now due and payable in full along with accrued and unpaid interest. Because these Investor Notes are now in default, the interest rate on the Investor Notes has begun to accrue at an annual rate of 12% from the date of default. The Company is in the process of asking the purchasers of these Investor Notes to agree to extend the maturity dates on these Investor Noes to a date after the currently projected closing date of the Merger (October 31, 2015), but there can be no assurance that any of these purchasers will agree to such an extension. If one or more of the purchasers of the Investor Notes demands payment of the principal and accrued interest on his defaulted Investor Note, we might not be able to meet such demand.  

 

Because of the delay in the closing of the proposed Merger, our loans to the Target Companies in the aggregate amount of $1,000,000 became due and payable to us between January 20, 2015 and February 4, 2015. Under the terms of the LOI amendment dated February 23, 2015, we extended the maturity dates on these loans to May 31, 2015. Although these loans are now due and payable, we expect to further amend the LOI to further extend the maturity dates on these loans to a date after the expected closing date of the Merger. Because $1,000,000 of the loans to the Target Companies are now in default, we may be obligated to exercise our rights under the General Security Agreement with the Target Companies if we are not able to extend the maturity dates on the Investor Notes that are now in default.  

 

Upon the closing of the Merger, in accordance with the terms of the LOI, all loans to the Target Companies under the Bridge Financing, including accrued and unpaid interest, will be forgiven. There can be no guarantee, however, that the Merger will close.

 

 

Results of Operations

 

Three Month Period ended September 30, 2015 Compared to Three Month Period Ended September 30, 2014. 

 

Revenue and Other Income 

 

We did not generate any revenue for the three months ended September 30, 2015 or 2014. We generated $31,038 in interest income during the three months ended September 30, 2015. 

 

Expenses 

 

Operating expenses, consisting primarily of $137,886 in general and administrative expenses (including professional fees) and $52,108 in interest expense, totaled $189,994 in the three-month period ended March 31, 2015, compared to $175,613 in the three-month period ended September 30, 2015, which consisted of $153,364 in general and administrative expenses (including professional fees) and $22,249 in interest expense. 

 

Net Losses

 

As a result of the foregoing, we incurred a net loss of $158,956 for the three months ended September 30, 2015, compared to a net loss of $156,693 for the corresponding period ended September 30, 2014.

 

The following table provides selected financial data about our Company for the period ended September 30, 2015. 

 

	Balance Sheet Data:		9/30/2015
	Cash		$	2,105
	Total assets		$	1,359,467
	Total liabilities		$	2,559,441
	Shareholders’ equity		$	(1,199,973	)

  

Liquidity and Capital Resources 

 

Our cash in the bank at September 30, 2015 was $2,105. Cash provided by financing since inception was $10,000 from the sale of shares to our officer, $24,200 resulting from the sale of our common stock to 46 independent investors, and, through the date hereof, $1,970,000 resulting from the sale of our Investor Notes in the Notes Offering. Although we are raising funds through the financing of the Notes Offering, we have used $1,226,000 of the net proceeds derived from our issuance of the Investors Notes to provide Bridge Financing to the Target Companies for working capital, in accordance with the terms of the LOI. We are using the remainder of the net proceeds of the Notes Offering for general working capital purposes. 

 

We estimate our general and administrative costs will require approximately $475,000 for the remainder of fiscal year ending June 30, 2016, exclusive of any business acquisition or combination costs. We plan to raise the necessary funds through loans from affiliates or others. 

 

We may be unable to secure additional financing on terms acceptable to us, or at all, at times when we need such financing.  Our inability to raise additional funds on a timely basis could prevent us from achieving our business objectives and could have a negative impact on our business, financial condition, results of operations and the value of our securities.

 

  

If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders will be reduced and the securities that we may issue in the future may have rights, preferences or privileges senior to those of the current holders of our Common Stock.  Such securities may also be issued at a discount to the market price of our Common Stock, resulting in possible further dilution to the book value per share of Common Stock.  If we raise additional funds by issuing debt, we could be subject to debt covenants that could place limitations on our operations and financial flexibility.

 

Subsequent Event

 

On October 30, 2015, we closed on the offer and sale of an additional $30,000 of our 10% Secured Convertible Promissory Notes to two investors. The Investor Notes were offered and sold as part of the Notes Offering to one accredited investor and one non-U.S. person pursuant to the exemptions from the registration requirements of the Securities Act provided by Section 4(a)(2) of, and Regulation D and Regulation S under, the Securities Act. This additional capital is being applied towards our working capital needs.

 

Off-Balance Sheet Arrangements 

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act of 1934 (the “Exchange Act”), we are not required to provide disclosure under this Item 3.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures 

 

Our management, with the participation of our Chief Executive Officer/Chief Financial Officer, Frank Terzo, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act as of September 30, 2015. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

Based on management’s evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of September 30, 2015, our disclosure controls and procedures are not effective and are not presently designed at a level to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are: 

 

1.           As of September 30, 2015, we did not adequately segregate, or mitigate the risks associated with, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected. Accordingly, management concluded that this control deficiency constituted a material weakness. 

 

We are committed to improving our accounting and financial reporting functions. As part of this commitment, we have engaged consultants to assist in the preparation and filing of financial reports.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

Changes in Internal Controls Over Financial Reporting 

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. 

 

 

PART II – OTHER INFORMATION 

 

Item 1. Legal Proceedings 

 

We are not currently involved in any legal proceedings and we are not aware of any pending or potential legal actions. 

 

Item 1A. Risk Factors 

 

The extended delay in the closing of our proposed merger with the Target Companies could result in the failure of our business. 

 

Because of the delay in the closing of the Merger, twenty-three (23) of the Investor Notes in the aggregate principal amount of $1,530,000 have reached their previously amended maturity dates and are now in default. Also, our loans to the Target Companies in the aggregate amount of $1,000,000 became due and payable on May 31, 2015 and are now in default as well. If the purchasers of the Investor Notes in default do not agree to extend the maturity dates on those notes, we will not be able to repay those notes without raising additional capital, which capital might not be available to us. As a result, we might be forced to exercise our rights under our security agreement with the Target Companies to take possession of the Target Companies collateral (as that term is defined in the security agreement). In any case, we might not be able to repay the purchasers of the defaulted Investor Notes in full or at all. Such an outcome would have an extremely deleterious impact on our business. 

 

There have been no other material changes to the risk factors previously discussed in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Between May 21, 2014 and August 28, 2015, we held multiple closings of our Notes Offering in which we sold an aggregate of $1,970,000 in principal amount of our 10% Secured Convertible Promissory Notes to a total of twenty three (24) investors. The Investor Notes were offered and sold in the Notes Offering to a limited number of non-U.S. persons pursuant to the exemptions from the registration requirements of the Securities Act, provided by Section 4(a)(2) thereof, and Regulation S thereunder. 

 

On August 21, 2015, we entered into a professional relations and consulting agreement with Acorn Management Partners, LLC (“Acorn”) pursuant to which in exchange for the development of a market awareness program for us and along with certain cash compensation we agreed to issue to Acorn 25,000 restricted shares of our common stock upon signing, 25,000 additional restricted shares if we extend the agreement for a second three month period and an additional 25,000 restricted shares for every six month extension thereafter so long as certain benchmarks are met by Acorn. We have not yet issued the initial 25,000 shares to Acorn. This issuance is exempt from the registration provisions of the Securities Act, pursuant to Section 4(a)(2) of the Securities Act. 

 

On September 8, 2015, we entered into an investor relations services agreement with Hilton Advisory Group, Inc. (“Hilton”) pursuant to which in exchange for the provision of internet based corporate development services for us and along with certain cash compensation we agreed to issue to Hilton 20,000 restricted shares of our common stock upon signing. We have not yet issued these shares to Hilton. This issuance is exempt from the registration provisions of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act. 

 

 

On October 27, 2015, we entered into a business advisory services agreement with EGM Firm Inc. (“EGM”) pursuant to which in exchange for the provision of certain business development services we agreed to pay a cash fee of $15,000 and to issue to EGM 10,000 restricted shares of our common stock upon the signing of the agreement. We have not yet issued these shares to EGM. This issuance is exempt from the registration provisions of the Securities Act pursuant to Section 4(a)(2) thereof.

 

Item 3. Defaults Upon Senior Securities

 

Because of the delay in the closing of the Merger, twenty-three (23) of the Investor Notes in the aggregate principal amount of $1,530,000 have reached their maturity dates (some of which were previously extended) and are now due and payable in full along with accrued and unpaid interest. Because these Investor Notes are now in default, the interest rate on the Investor Notes has begun to accrue at an annual rate of 12% from the date of default. The Company is in the process of asking the purchasers of these Investor Notes to agree to extend the maturity dates on these Investor Noes to a date after the currently projected closing date of the Merger (on or about October 31, 2015), but there can be no assurance that any of these purchasers will agree to such an extension. If one or more of the purchasers of the Investor Notes demands payment of the principal and accrued interest on his defaulted Investor Note, we might not be able to meet such demand.

 

Item 4. Mining Safety Disclosures 

 

Not applicable. 

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

In reviewing the agreements included as exhibits to this Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements.  The agreements may contain representations and warranties by each of the parties to the applicable agreement.  These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and: 

•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

 

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.  Additional information about the Company may be found elsewhere in this Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. 

 

The following exhibits are included as part of this report: 

Exhibit No.		Description
10.1		Professional Relations and Consulting Agreement dated July 6, 2015 by and between the Registrant and Acorn Management Partners, LLC (1)
10.2		Investor Relations Service Agreement dated September 4, 2015 by and between the Registrant and Hilton Advisory Group, Inc. (2)
10.3*		Engagement letter dated October 27, 2015 by and between the Registrant and EGM Firm Inc.
31.1/31.2		Certification of the Chief Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1/32.2**		Certification of the Chief Executive and Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

 

*	Attached hereto.
**	This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference

  

(1)

Incorporated by reference to Exhibit 10.9 in the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the SEC (SEC File Number 000-54118) on October 13, 2015.

 

(2)

Incorporated by reference to Exhibit 10.10 in the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the SEC (SEC File Number 000-54118) on October 13, 2015.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 16, 2015.

 

	Urban Hydroponics, Inc.
	/s/ Frank Terzo
	By: Frank Terzo
	(Principal Executive Officer)