UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 June 30, 2016
[  ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from __________  to __________
	Commission File Number: 000-53498

 

Stratean, Inc.

(Exact name of Registrant as specified in its charter)

 

Nevada	87-044945
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

70 North Main Street, Ste. 105 Bountiful, Utah 84010

(Address of principal executive offices)

 

(801) 244-4405

(Registrant’s telephone number)

_______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

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

[X] 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

[  ] Large accelerated filer	[  ] Accelerated filer
[  ] Non-accelerated filer	[X] 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 [X] No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,684,420 common shares as of August 19, 2016.

 

 

 

 

	TABLE OF CONTENTS	Page
PART I – FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4:	Controls and Procedures	10
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	11
Item 1A:	Risk Factors	11
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3:	Defaults Upon Senior Securities	11
Item 4:	Mine Safety Disclosure	11
Item 5:	Other Information	11
Item 6:	Exhibits	12

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

Our financial statements included in this Form 10-Q are as follows:

 

F-1	Balance Sheets as of June 30, 2016 and September 30, 2015 (unaudited);

F-2	Statements of Operations for the three and nine months ended June 30, 2016 and 2015 (unaudited);

F-3	Statements of Cash Flow for the nine months ended June 30, 2016 and 2015 (unaudited);

F-4	Notes to Financial Statements.

 

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the interim period ended June 30, 2016 are not necessarily indicative of the results that can be expected for the full year.

 

 

STRATEAN INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

			June 30, 2016				September 30, 2015
ASSETS
Current assets
Cash		$	81,854			$	88,533
Prepaid expense			11,912				24,391
Total current assets			93,766				112,924
Deposits			589				2,358
Fixed Assets			635,495				657,647
Intangible assets			51,175				44,470
Total assets			781,025				817,399
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities		$	60,189			$	53,967
Due to related parties			1,473				1,473
Total current liabilities			61,662				55,440
Total liabilities			61,662				55,440
Stockholders' equity (deficit)
Common stock; $0.001 par value; 100,000,000 shares authorized; 21,058,415 and 20,378,415 shares issued and outstanding   as of June 30, 2016 and  September 30, 2015, respectively			21,086				20,37
Preferred stock;  $0.001 par value; 10,000,000 shares authorized; 1,000,000 and 400,000 shares issued and outstanding as of June 30, 2016 and  September 30, 2015, respectively			1,000				400
Additional paid-in capital			4,987,424				4,635,459
Accumulated earnings (deficit)			(4,290,147	)			(3,894,278	)
Total stockholders' equity (deficit)			719,363				761,959
Total liabilities and stockholders' equity (deficit)		$	781,025			$	817,399

 

The accompanying notes are an integral part of these financial statements.

 

 

STRATEAN INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

			For the Three Months Ended								For the Nine Months Ended
			June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
Revenues		$	—			$	—			$	—			$	—
Cost of revenues			—				—				—				—
Gross Profit			—				—				—				—
Operating expenses
Professional fees			54,403				45,713				268,560				3,336,369
Research and development			50,000				74				51,826				52,288
General and administrative expenses			15,674				8,258				42,293				39,170
Depreciation and amortization			13,426				731				33,911				2,060
Total operating expenses			133,503				54,776				396,590				3,429,887
Loss from operations			(133,503	)			(54,776	)			(396,590	)			(3,429,887	)
Other income (expense)
Interest expense			—				—				—				(5,144	)
Gain on disposal of assets			—				—				721				—
Total other income (expense)			—				—				721				(5,144	)
Net income (loss)		$	(133,503	)		$	(54,776	)		$	(395,869	)		$	(3,435,031	)
Basic income (loss) per common share		$	(0.01	)		$	(0.00	)		$	(0.02	)		$	(0.18	)
Basic weighted average common shares outstanding			21,058,415				20,378,415				20,842,065				18,841,734

  

 

The accompanying notes are an integral part of these financial statements.

 

 

STRATEAN INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended
	June 30, 2016					June 30, 2015
Cash Flows from Operating Activities
Net loss		$	(395,869	)		$	(3,435,031	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Imputed interest on related party debt			—				5,143
Stock based consulting			149,126				3,228,517
Depreciation and amortization			33,267				2,060
Changes in assets and liabilities
(Increase) decrease in prepaid expense			(850	)			1,143
(Increase) decrease in deposits			1,769				(2,358	)
Increase (decrease) in accounts payable			6,222				(3,381	)
Increase (decrease) in accounts payable related party			—				—
Net cash from operating activities			(206,335	)			(203,907	)
Cash Flows from investing
Purchase of intangible assets			(6,315	)			(2,594	)
Purchase of fixed assets			(9,750	)			(26,304	)
Gain on disposal of fixed assets			721				—
Net cash used in investing activities			(15,344	)			(28,898	)
Cash Flows from Financing Activities
Proceeds from issuance of common stock			215,000				242,000
Net cash from financing activities			215,000				242,000
Net increase (decrease) in Cash			(6,679	)			9,195
Beginning cash balance			88,533				116,741
Ending cash balance		$	81,854			$	125,936
Supplemental disclosure of cash flow information
Cash paid for interest		$	—			$	—
Cash paid for tax		$	—			$	—
Non-Cash investing and financing transactions
Shares issued for debt		$	—			$	50,000
Shares issued for services		$	11,666			$	690,000
Options and warrants for services		$	138,005			$	2,556,296

  

The accompanying notes are an integral part of these financial statements.

 

  

STRATEAN INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

1. BASIS OF PRESENTATION AND GOING CONCERN

The accompanying unaudited interim financial statements of the Company 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 the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. 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 period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.

 

Going concern – The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred cumulative net losses of $(4,290,147) since its inception and requires capital for its contemplated operational and marketing activities to take place. The Company’s ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional financing, the successful development of the Company’s contemplated plan of operations, and its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 

2. SUMMARY OF SIGNIFICANT POLICIES

 

This summary of significant accounting policies of Stratean Inc. is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

 

Use of estimates – The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

 

Cash and cash equivalents – For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. There was $81,854 and $88,533 in cash and cash equivalents as of June 30, 2016 and September 30, 2015, respectively.

 

Fair Value of Financial Instruments – The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

  

The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Revenue recognition – The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition.” In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured. For the periods ended June 30, 2016 and 2015, the Company reported revenues of $nil and $nil, respectively.

 

Long-lived Assets – In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment," the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.

 

Stock-based compensation – The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation,” which provides investors and other users of financial statements with more complete and neutral financial information, by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. ASC 718-10 covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As of June 30, 2016, the Company has not implemented an employee stock based compensation plan.

 

Non-Employee Stock Based Compensation – The Company accounts for stock based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50. The Company may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services.

 

Earnings (loss) per share – The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 260-10 “Earnings Per Share,” which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.

 

Recently Issued Accounting Pronouncements –The Company has evaluated the all recent accounting pronouncements through ASU 2016-14, and believes that none of them will have a material effect on the Company's financial position, results of operations or cash flows. 

 

 

3. FIXED ASSETS

 

Fixed assets consist of the following as of June 30, 2016 and September 30, 2015:

 

	June 30, 2016				September 30, 2015
Machinery and equipment	$	665,006			$	654,918
Tenant improvements		-				1,533
Furniture and fixtures		2,202				1,475
Total		667,208				657,926
Less: accumulated depreciation		(31,713	)			(279	)
Fixed assets, net	$	635,495			$	657,647

 

Depreciation expense for the nine months ended June 30, 2016 and 2015 was $31,825 and $187, respectively.

 

4.    INTANGIBLE AND OTHER ASSETS

 

Intangible assets consist of the following as of June 30, 2016 and September 30, 2015:

 

	June 30, 2016				September 30, 2015
Patents	$	60,387			$	51,596
Less: accumulated amortization		(9,212	)			(7,126	)
Intangible assets, net	$	51,175			$	44,470

 

Amortization expense for the nine months ended June 30, 2016 and 2015 was $2,086 and $1,873, respectively.

 

On April 26, 2016, the Company entered into Stock Purchase Agreement with James Harper (the "Agreement") to acquire a patent from Mr. Harper as represented in an Assignment of even date. Specifically, the Agreement grants 7,500, shares of the Company’s common stock to Mr. Harper in exchange for the Assignment of United States Patent No. 8,342829 issued January 8, 2013 by the United States Patent and Trademark Office (the “Patent”). The Assignment transfers the Patent and all rights associated therewith to the Company.

 

Through this Assignment, the Company is now the sole owner of the Patent, which is an invention entitled Electrolytic Reactor and Related Methods for Supplementing the Air Intake of an Internal Combustion Engine. The Company anticipates integrating this technology, in whole or in part, into its downdraft gasification system, enabling the capture and conversion of process byproducts into incremental energy.

 

5. RELATED PARTY TRANSACTIONS

 

On October 1, 2014 the Company entered into a Consulting agreement with Matthew Schultz, its Chief Financial Officer for management services. In accordance with this agreement, Mr. Schultz provides services to the Company in exchange for $7,500 per month plus reimbursable expenses incurred. The term of the agreement is one month and automatically renews each month until cancelled by either party. During the nine months ending June 30, 2016, Mr. Schultz was paid $67,500 in accordance with this agreement. 

 

6. PREPAID EXPENSES

 

The Board of Directors created a Board of Advisors to provide the Officers and Directors with advice and insight and appointed Brad Patee to serve as a member of the board of advisors for a period of one year.

 

As compensation for his appointment, Mr. Patee was granted 180,000 non-statutory options under the following terms: non-transferable, fully vest on March 31, 2015, expire five years from the date of grant, strike price of $0.083 and become immediately exercisable upon the occurrence of a significant liquidating, restructuring or change of control event.

 

 

The 180,000 stock options were valued at $54,411 using the Black-Scholes option pricing model based upon the following assumptions: term of 5 years, risk free interest rate of 2.11%, a dividend yield of 0% and volatility rates of 110%.   The amount was capitalized as a prepaid expense and will be amortized over a twelve-month term; during the nine months ended June 30, 2016 the Company recorded an expense of $24,232. 

 

On January 22, 2016, the Company appointed Mr. Greg Gohlinghorst as a member of the Company’s board of advisors. He was issued 35,000 shares of common stock for his appointment.  The shares were valued at $11,666 or $0.33 per share. The amount was capitalized as a prepaid expense and will be amortized over a twelve-month term; during the nine months ended June 30, 2016 the Company recorded an expense of $7,299. 

 

On January 15, 2016, we entered into an Investor Relations Consulting Agreement with Hayden IR (“HIR”) to serve as our investor relations firm for a period of twelve months. Under the Agreement, HIR’s responsibilities include: implementing and maintaining an ongoing market support system to expand awareness of our company in the investment community; arranging conference calls and interviews; providing feedback on expectations of results and company value; assisting with the presentation of periodic results of operations; monitoring newswires and industry publications; and drafting and coordinating press releases, among other services.

 

As compensation for the services under the Agreement, we agreed to pay HIR a cash monthly fee of $3,500 for the first six months of the Agreement. The monthly fee will increase to $6,500 for the last six months of the Agreement. We also agreed to issue to HIR 20,000 shares of restricted common stock within 30 days of execution. The shares were valued at $6,720 or $0.33 per share. The Stock compensation has been recorded as a prepaid expense and will be amortized evenly over the twelve-month service period. As of June 30, 2016, the company has recorded $3,075 in stock based compensation associated with this agreement.

 

7. STOCKHOLDERS’ EQUITY (DEFICIT)

Overview

Our authorized capital stock consists of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2016, there were 21,058,415 shares of our common stock issued and outstanding and 1,000,000 shares of preferred stock issued and outstanding. 

Description of Common Stock

Our common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise required by law or provided in any resolution adopted by our board of directors with respect to any series of preferred stock, the holders of our common stock will possess all voting power. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by proxy, subject to any voting rights granted to holders of any preferred stock. Holders of our common stock representing fifty percent (50%) of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as a liquidation, merger or an amendment to our articles of incorporation.

Subject to any preferential rights of any outstanding series of preferred stock created by our board of directors from time to time, the holders of shares of our common stock will be entitled to such cash dividends as may be declared from time to time by our board of directors from funds available therefor.

Subject to any preferential rights of any outstanding series of preferred stock created from time to time by our board of directors, upon liquidation, dissolution or winding up, the holders of shares of our common stock will be entitled to receive pro rata all assets available for distribution to such holders.

In the event of any merger or consolidation of our company with or into another company in connection with which shares of our common stock are converted into or exchangeable for shares of stock, other securities or property (including cash), all holders of our common stock will be entitled to receive the same kind and amount of shares of stock and other securities and property (including cash). Holders of our common stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.

Description of Preferred Stock

 

Our board of directors is authorized to divide the authorized shares of our preferred stock into one or more series, each of which must be so designated as to distinguish the shares of each series of preferred stock from the shares of all other series and classes. Our board of directors is authorized, within any limitations prescribed by law and our articles of incorporation, to fix and determine the designations, rights, qualifications, preferences, limitations and terms of the shares of any series of preferred stock, including, but not limited to, the following:

 

·

the rate of dividend, the time of payment of dividends, whether dividends are cumulative, and the date from which any dividends accrue;

 

·

whether shares may be redeemed, and, if so, the redemption price and the terms and conditions of redemption;

 

·

the amount payable upon shares in the event of voluntary or involuntary liquidation;

 

·

sinking fund or other provisions, if any, for the redemption or purchase of shares;

 

·

the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion;

 

·

voting powers, if any, provided that if any of the preferred stock or series thereof have voting rights, such preferred stock or series shall vote only on a share for share basis with the common stock on any matter, including, but not limited to, the election of directors, for which such preferred stock or series has such rights; and,

 

·

subject to the foregoing, such other terms, qualifications, privileges, limitations, options, restrictions, and special or relative rights and preferences, if any, of shares or such series as the board of directors may, at the time so acting, lawfully fix and determine under the laws of the State of Nevada.

  

On April 15, 2015, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the Nevada Secretary of State. The Certificate of Amendment authorized ten million (10,000,000) shares of preferred stock. The Company’s Board of Directors and a majority of its shareholders approved the Certificate of Amendment.

 

On April 15, 2015, pursuant to Article IV of our Articles of Incorporation, the Company’s Board of Directors voted to designate a class of preferred stock entitled Series A Preferred Stock, consisting of up to one million (1,000,000) shares, par value $0.001. Under the Certificate of Designation, holders of Series A Preferred Stock will be entitled to quarterly dividends on 2% of our earnings before interest, taxes and amortization. The dividends are payable in cash or common stock. The holders will also have a liquidation preference on the state value of $0.02 per share plus any accumulated but unpaid dividends. The holders are further entitled to have the Company redeem their Series A Preferred Stock for three shares of common stock in the event of a change of control and they are entitled to vote together with the holders of the Company’s common stock on all matters submitted to shareholders at a rate of forty-five (45) votes for each share held.

 

On June 30, 2016, the Company issued a total of 600,000 shares of its Series A Preferred Stock to the four members of the Company’s board of directors for services rendered. 

 

During the period commencing October 1, 2015 through March 31, 2016, the Company received $215,000 from 16 investors pursuant to private placement agreements with the investors to purchase 645,000 shares of Stratean $0.001 par value common stock and warrants to purchase 64,500 shares of Stratean $0.001 par value common stock at a purchase price equal to $0.33 for each share of Common stock and 10% warrant coverage. The warrant allows the holder to purchase shares of the Company's $0.001 par value common stock at $0.367 per share. The Company did not accept any private placements during the quarter ending June 30, 2016.

 

 

8. STOCK WARRANTS

 

The following is a summary of warrants activity during the year ended September 30, 2015 and nine months ending June 30, 2016. 

 

	Number of Shares				Weighted Average Exercise Price
Balance, September 30, 2014	60,000			$	0.36
Warrants granted and assumed	8,037,600			$	0.10
Warrants expired	—				—
Warrants canceled	—				—
Warrants exercised	—				—
Balance, September 30, 2015	8,097,600			$	0.10
Warrants granted and assumed	514,500			$	0.36
Warrants expired	—				—
Warrants canceled	—				—
Warrants exercised	—				—
Balance, June 30, 2016	8,612,100			$	0.11

 

As of June 30, 2016, 8,612,100 warrants are exercisable.

 

On January 22, 2016, the Company issued warrants to purchase 450,000 shares of common stock to a Mr. Greg Gohlinghorst for business advisory services. The warrants were valued at $116,811 using the Black Scholes option pricing model based upon the following assumptions: term of 5 years, risk free interest rate of 1.49%, a dividend yield of 0% and volatility rate of 110%. The warrants were fully earned and vested on January 31, 2016. 

 

9. DEFINITIVE AGREEMENTS

 

Combustion Resources, Inc.

On December 5, 2014, the Company and Combustion Resources, Inc. ("Combustion Resources") executed a Service Agreement ("Agreement") to independently test the Company’s Gasifier to further establish its capability of producing large volumes of clean, renewable energy from any carbon compound (Municipal Solid Waste (MSW), Coal, Sewage Sludge) into clean Synthesis Gas.

 

The testing will be comprised of seven stages. As of the date of this filing, Combustion Resources had completed stages one through five. Upon completion of the fifth stage an initial project report was published outlining the results and suggested improvements. The Company is preparing the suggested improvements and anticipates that the cost of these improvements will be between $50,000 and $75,000. It is anticipated that improvements and the remaining stages will be completed prior to December 31, 2016. Each of the seven stages are briefly outlined below.

 

1.

Characterize Feedstock: The feedstock selected for use in the Gasifier will be fully characterized to assist in understanding how the Gasifier performs for that feedstock.

 

2.

Review Design Data: A full understanding of the installation and operation of the Gasifier will be outlined, including configuration, construction, thermochemical calculations and theoretical operating conditions and performance.

 

3.

Prepare Gasifier for Test Runs: The Gasifer will be installed for testing at Utah State University’s Carbon Energy Innovation Center.

 

4.

Preliminary Test Runs of Gasifier: Baseline testing will be completed to ensure all systems and support equipment are operating properly.

 

 

5.

Perform Baseline Run of Gasifier: Baseline test will be performed during which samples of gas, liquid, and solid effluent streams will be collected and analyzed. During the testing process conditions will be monitored and upon completion the data will be inspected and analyzed to determine how the Gasifier operated during the baseline testing. After completion of the test run Petersen Inc. will inspect and verify mechanical operations and integrity of the gasifier.

 

6.

Perform Extended Run of Gasifier: An extended run of the Gasifier will be performed following a successful baseline test run. The test run will be used to demonstrate extended operation of the Gasifier, and if there are any effects of extended operation of the Gasifier or associated support equipment. During the extended test run samples of gas, liquid, and solid effluent streams will be collected and analyzed. During the testing process conditions will be monitored and upon completion the data will be inspected and analyzed to determine how the Gasifier operated during the extended testing. After completion of the test run Petersen Inc. will inspect and verify mechanical operations and integrity of the Gasifier.

 

7.

Project Report: A report will be prepared at the conclusion of the study describing the results of the evaluation of the Gasifier. The report will provide a detailed discussion of the results of the tests, and will make recommendations of possible process revisions and additional work that can provide insights and direction for optimizing the Gasifier performance. The report will also provide recommendations for addition testing and items to be considered regarding feasibility of commercial operation of the Gasifier.

 

Pursuant to the Agreement, the Company will make payments totaling $147,144. On December, 9, 2014, the Company made an initial payment of $50,000 to begin the project. Another $50,000 will be due upon completion of task five and the balance of $47,144 is due upon delivery of the Final Project report. As of the date of this filing Combustion Resources has not issued a request for payment or an invoice for the second payment: the Company intends to remit payment upon presentation of this such notice.

 

Appointment of Corporate Secretary

Effective May 2, 2016, the Company entered into an agreement with Mr. Thompson to act as the Company’s Secretary. The agreement will have an initial term of 180 days with a right for the Company to renew following the term. Under the agreement, the Company agreed to compensate Mr. Thompson, based on his performance, with a combination of shares of common stock and cash, not to exceed 150,000 shares of common stock and $150,000. As of the date of this filing no Compensation has earned or been paid.

 

10. COMMITMENTS AND CONTINGENCIES

 

On January 22, 2016, the Company terminated its lease agreement at 2391 South 1560 West, Unit B, Woods Cross Utah and relocated its corporate office to 70 north Main Street, Suite 105, Bountiful Utah 84010. The Company executed a one-year lease agreement that calls for the Company to make payments of $850 per month. The Company has prepaid rent for January 2017.

 

11.    SUBSEQUENT EVENTS

 

On July 1, 2016, Stratean, Inc. and Cleanspark II, LLC, a wholly-owned subsidiary of Stratean, Inc. (together, the “Company”), entered into an Asset Purchase Agreement, as amended (the “Purchase Agreement”) with CleanSpark Holdings LLC, CleanSpark LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc. (together, the “Seller”). The closing of the transactions contemplated by the Purchase Agreement, as amended, occurred on July 1, 2016 (the “Closing Date”).

 

 

On the Closing Date, pursuant to the Purchase Agreement, the Company acquired all the assets (the “Assets”) and assume certain liabilities (the “Assumed Liabilities”) related to Seller and its line of business. The Assets the Company purchased from Seller include:

 

• Equipment and other tangible assets;

• Domain names, websites and intellectual property;

• All rights to causes of action, lawsuits, judgments, claims and demands of any nature available to or being pursued by the Seller;

• Contracts to which Seller is bound;

• Current and future customer accounts, including accounts receivable;

• All investments, including the holdings that CleanSpark Holdings LLC has in CleanSpark LLC, CleanSpark Technologies LLC and Specialized Energy Solutions, Inc., and any investments those subsidiaries have as well; and

• Any other assets of any nature whatsoever that are related to or used in connection with the business of Seller and its goodwill.

On July 20, 2016, the parties to the Purchase Agreement entered into an amendment (the “Amendment”) that revised the assets to be acquired under the Purchase Agreement. Specifically, the parties decided on the following:

 

• Specialized Energy Solutions, Inc. would transfer and assign the ability to use its name and all of its Intellectual Property to Cleanspark II, LLC, and thereafter Specialized Energy Solutions, Inc. will not be included in the Assets acquired.

• Clean Spark Technologies, LLC agrees to transfer and assign all of its Intellectual Property to Cleanspark II, LLC, and thereafter Clean Spark Technologies, LLC will not be included in the Assets acquired.

 

The Amendment also included an option to acquire Specialized Energy Solutions, Inc. and Clean Spark Technologies, LLC, which the parties agreed upon as follows:

 

• Cleanspark II, LLC is hereby granted a 3-year exclusive option to purchase Specialized Energy Solutions, Inc. for 1,000 shares of Stratean Common Stock; and

• Cleanspark II, LLC is hereby granted a 3-year exclusive option to purchase Clean Spark Technologies, LLC for 1,000 shares of Stratean Common Stock.

On August 19, 2016, the parties to the Purchase Agreement entered into a second amendment that revised the Closing Date to July 1, 2016.

 

In exchange for the Assets, the Company assumed the Assumed Liabilities, consisting of certain accounts payable amounting to approximately $200,000 arising out of the Assets. The Company also issued to Seller six million (6,000,000) shares of common stock and two-year warrants to purchase four million five hundred thousand (4,500,000) shares of common stock at an exercise price of $1.50 per share.

 

Simultaneously with the Purchase Agreement, the Company entered into certain ancillary agreements (the “Ancillary Agreements”) with Seller, consisting of a bill of sale, intellectual property assignment and lock-up/leak-out agreement. The lock-up/leak-out agreement prevents Seller from selling the Company’s securities in the public market for a year.

 

The Purchase Agreement contains customary representations, warranties and covenants. In addition, the Company and Seller agreed to certain post-closing covenants, including the following:

 

• The board of directors of the Company shall have approval and oversight over a management developed budget to exploit the Assets and will work with the management of CleanSpark II, LLC, to which the Assets have been transferred. For a period of nine months from the Closing Date, the Company agrees to fund on a monthly basis all pre-approved budgetary needs for CleanSpark II, LLC to achieve its business objectives.

• The strategic management of Cleanspark II, LLC shall be determined by the board of directors of the Company. Management shall be appointed for Cleanspark II, LLC and they shall control the day-to-day operations of Cleanspark II, LLC, subject to the oversight of the Company and its board of directors. Employment agreements for appointed management of Cleanspark II, LLC will be negotiated prior to close but will hold an effective date post-closing. The parties shall jointly agree to a business plan for Cleanspark II, LLC within sixty (60) days of closing.

• Within thirty (30) days of the Closing Date, the Company agrees to appoint one (1) candidate chosen by Seller to the board of directors of the Company. The Company’s board of directors still maintains exclusive rights to accept the suggested appointment and in the case the suggested appointment is rejected by the board, Seller will have the right to present a new candidate until such time as the candidate is approved by the Company’s board of directors. The term of the appointment of Seller’s member of the board shall be in accordance with the Company’s bylaws.

• The Company will appoint an accounting firm of its choosing to maintain Seller’s financial records to ensure compliance with US GAAP. Within 71 days of closing, Seller shall provide the Company with an audit for the two latest fiscal year periods and reviewed financials for an interim period ending June 30, 2016 prepared by Seller’s independent auditor, satisfactory to the Company.

 

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

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.  Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.

 

Company Overview

 

Stratean Inc. is in the business of acquiring, licensing and marketing patents and technology to create sustainable energy for its energy customers.

 

We recently entered into an asset purchase agreement and amendment thereto (the “Purchase Agreement”), and acquired substantially all of the assets of CleanSpark Holdings, LLC. As a result of the Purchase Agreement and the acquisition of the assets, we intend to take over the CleanSpark business as another opportunity in the energy sector, along with our existing Gasifier business. We believe that that synergies created from these businesses will strengthen our overall capacity to obtain financing, increase our customer base, open new distribution channels and increase our competitive strength in the energy market, all to the ultimate benefit of our shareholders.

 

Our Flex Power System Business

 

Integral to CleanSpark’s business is the Flex Power System (the “System”), which we acquired in the acquisition of the assets. The System provides secure, sustainable energy with significant cost savings for its energy customers. The System allows customers to efficiently manage renewable energy generation, storage and consumption. By having control over the facets of energy usage and storage, customers are able to reduce their dependency on utilities, thereby keeping energy costs relatively constant over time. The overall aim is to transform energy consumers into energy producers by supplying power that anticipates their routine instead of interrupting it.

 

Around the world, the aging grid is becoming unstable and unreliable due to increases in loads and lack of new large-scale generation facilities. This inherent instability is compounded by the push to integrate a growing number and variety of renewable but intermittent energy generators and advanced technologies into outdated electrical systems. Simultaneously, defense installations, industrial complexes, communities, and campuses across the world are turning to virtual power plants and microgrids as a means to decrease their reliance from the grid, utilize cleaner power, and enhance energy security and surety.

 

The convergence of these factors has created a “perfect storm” in the power supply optimization and energy management arena. Efficiently building and operating the macro- and microgrids of tomorrow, while maximizing the use of sustainable energy to produce affordable, stable, predictable, and reliable power on a large scale, is a significant opportunity that first-movers can leverage to capture a large share of this emerging global industry.

 

 

The System works with software that uses generation, consumption, and utility data to decide whether to use or store energy based on prioritized end-user benefits, including cost savings and critical loads. The flexible modular design gives users a turn-key solution that is capable of managing energy based on the needs of its user.

 

mPulse software suite

The Company is currently completing the development of version 2.0 of mPulse software suite. mPulse provides a full solution with a focus on Scheduling, Automation, Load forecasting and Resource forecasting and allows the user to view site-specific information relevant to each type of system and user. The Company anticipates the financing needed to complete the development of the software will be approximately $30,000 and will be completed during the quarter ending September 30, 2016.

 

MicroGrid Development Projects

The Company was awarded a design and engineering contract to develop a Microgrid for a secure facility on Camp Pendleton for the United States Marine Corps. The microgrid solution, arranged in the FractalGrid pattern, will be combined as part of a 10MW power system with plans to expand to true sustainable net-zero in the near future.

 

The Company has begun the first stage which is composed of a $75,000 engineering and design contract. The Contract also allows for the option to engage the Company for a $60,000 optimization and control logic development and a $2,362,472 Construction, integration and commissioning. The Company expects the developer to exercise these options. The Company anticipates the requirement of $500,000 to $750,000 in additional funding to complete this project. As of the date of this filing the Company has completed billings of $40,000 in relation to the Engineering and design contract.

 

This project is an example of the far reaching capabilities of the CleanSPark System and the variety of applications that are available as plug and play solutions. The Company is pursuing additional MicroGrid projects and anticipates the need for additional financing of $750,000 over the next nine months to execute on these proposals.

 

Our Gasifier Business

 

Integral to our existing business is the Gasifier. Recently, the U.S. Patent and Trademark Office issued us Patent No. 9,359,567, protecting our gasification technology and process for using feedstock comprising gaseous fuel. Our technology converts any organic material into SynGas. SynGas can be used as clean, renewable, environmentally friendly, warming fuel for power plants, motor vehicles, and as feedstock for the generation of DME (Di-Methyl Ether). DME is the premier energy carrier and offers a range of important benefits:

 

• Simple and low cost of production
• An environmentally-benign propellant and coolant
• Clean-burning and high energy efficiency
• Lower transportation and distribution costs
• Easily converted into other fuels and chemicals

The Stratean Gasifier converts the following materials into clean, reusable, renewable, and affordable energy:

 

• Municipal Solid Waste (MSW)
• Municipal sewage sludge
• Food and cooking waste
• Petroleum sludge and oily wastes
• Animal manures
• Cellulosic and non-cellulosic biomass
• Energy crops
• Scrap tires
• Coal

 

The process involves the grinding, drying, separating, mixing, and then pelletizing of solid waste. These pellets constitute the feedstock for the Gasifier. Gasifying the pellets produces SynGas. SynGas can be converted into multiple forms of energy including motor vehicle and jet fuels. The SynGas produced is so clean that it generally does not require hot-gas cleanup. SynGas is mostly hydrogen and carbon monoxide. Hydrogen and carbon monoxide are primary building blocks for fuels and chemicals. SynGas is a clean burning fuel suitable for use in duel-fuel diesel engines, gas turbines, and steam boilers.

 

We believe that the Stratean process will turn the world’s waste problem into an abundant, renewable resource of energy. The Stratean production can be adapted to the specific energy requirements of a given area. Communities are expected to benefit from the countless options created including inexpensive green electric power for homes, clean-burning fuel for garbage trucks, street maintenance equipment, or for resale to other municipalities. Because of the modular nature of the components intrinsic to the process, the plant could provide one energy source, then be converted to provide a different energy product. A Stratean facility could produce additional electric power during the peak demand part of the day and produce fuels during the rest of the day.

 

Our market segmentation is vast as we expect to apply our technology to anything that is carbon based. The markets for which we have focused our efforts include: the electric utility market, municipal waste, processing plants, the refining sector, stranded natural gas fields, and Canadian oil sands.

 

We have begun pursuing opportunities to utilize the assets and intellectual properties purchased. We aim to further develop these technologies in order to pursue licensing, manufacturing and direct sales agreements for our Gasifier technology.

 

The technologies and prototype will begin undergoing clinical lab testing to further establish its capability of producing large volumes of clean, renewable energy from any carbon compound (Municipal Solid Waste (MSW), Coal, Sewage Sludge) into clean Synthesis Gas. Our Gasifier is still under development and a commercially viable Gasifier is not expected to be sellable until the first quarter of 2017. In December of 2014, we executed an agreement with Combustion Resources, LLC to independently test our production model prototype. Combustion was engaged to independently test the Gasifer's performance and certify the results of its performance. We believe the results of these independent tests will provide the results needed to prove its commercial viability, at which time we would begin to actively market our Gasifer units. We anticipate Combustion’s final project report will be completed during the quarter ending December 31, 2016.

 

As of the date of this filing, Combustion Resources has completed the first five stages of testing. Upon completion of the fifth stage an initial project report was published outlining the results and suggested improvements. The Company is preparing the suggested improvements and anticipates that the cost of these improvements will be between $50,000 and $75,000. For completing stage five of testing, we are also required to pay Combustion Resources $50,000 upon a request for payment or an invoice for the second payment; the Company intends to remit payment upon presentation of this such notice.

 

We have not engaged in any significant negotiations to sell our Gasifier products to any major customers. Once completed, we intend to distribute our products through advertisements and sales calls on potential customers with demonstrations of how the products work. We anticipate the need for a project financing partner, which we have not yet identified to support manufacturing and at least $250,000 in financing to support the required sales activities. The failure to acquire customers to generate revenues will negatively affect our financial performance and anticipate the need for at least $750,000 in financing over the next twelve months to execute on our business plans.

 

Results of operations for the three months ended June 30, 2016 and 2015

 

Revenues

 

We did not earn any revenues during the three months ending June 30, 2016 and 2015, respectively. We anticipate earning revenues through technology acquisitions beginning in July of 2016. However, because we only just acquired CleanSpark and given the contractual contingencies with CleanSpark’s customers and its early stage of operation, we are unable to estimate with any degree of certainty the amount of future revenues, if any, from existing contracts. Also, we do not anticipate earning significant revenues from our Gasifier business until such time that we have fully developed our technology and are able to market our products.

 

 

Operating Expenses

 

The Company had operating expenses of $133,503 for the three months ended June 30, 2016, as compared with $54,776 for the three months ended June 30, 2015.

 

Professional fees decreased to $54,403 for the three months ended June 30, 2016 from $45,713 for the same period ended June 30, 2015. Our professional fees expenses for the three months ended June 30, 2016 consisted mainly of stock based compensation to members of our board of advisors of $3,500, legal, accounting and investor relations fees of $28,404 and consulting fees of $22,500 paid to an officer of the Company.

 

Research and development fees increased to $50,000 for the three months ended June 30, 2016 from $74 for the same period ended June 30, 2015. Our research and development expenses for the three months ended June 30, 2016 consisted mainly of expenses incurred to during the independent testing of our Gasifier.

 

General and administrative fees increased to $15,674 for the three months ended June 30, 2016 from $8,258 for the same period ended June 30, 2015. Our general and administrative expenses for the three months ended June 30, 2016 and 2015 consisted mainly of rent expenses of $2,550, travel expenses of $6,596 and $6,528 in other general expenses incurred for ongoing operations.

 

Depreciation and amortization expense increased to $13,426 for the three months ended June 30, 2016 from $731 for the same period ended June 30, 2015.

 

Other Expenses

 

We had other expenses of $nil for the three months ended June 30, 2016, compared with other expenses of $nil for the three months ended June 30, 2015.

 

Other Income

 

We had other income of $nil for the three months ended June 30, 2016, compared with other income of $nil for the three months ended June 30, 2015.

 

Net Loss

 

We recorded a net loss of $133,503 for the three months ended June 30, 2016, as compared with a net loss of $54,776 for the three months ended June 30, 2015.

 

Results of operations for the nine months ended June 30, 2016 and 2015

 

Revenues

 

We did not earn any revenues during the nine months ending June 30, 2016 and 2015, respectively. Our current expectation of revenues is set forth above.

 

Operating Expenses

 

The Company had operating expenses of $396,590 for the nine months ended June 30, 2016, as compared with $3,429,887 for the nine months ended June 30, 2015.

 

Professional fees decreased to $268,560 for the nine months ended June 30, 2016 from $3,336,369 for the same period ended June 30, 2015. Our professional fees expenses for the nine months ended June 30, 2016 consisted mainly of stock based compensation to members of our board of advisors of $146,742, legal, accounting and investor relations fees of $54,318 and consulting fees of $67,500 paid to an officer of the Company.

 

 

Research and development fees decreased to $51,826 for the nine months ended June 30, 2016 from $52,288 for the same period ended June 30, 2015. Our research and development expenses for the nine months ended June 30, 2016 consisted mainly of expenses incurred to during the independent testing of our Gasifier.

 

General and administrative fees decreased to $42,293 for the nine months ended June 30, 2016 from $39,170 for the same period ended June 30, 2015. Our general and administrative expenses for the nine months ended June 30, 2016 and 2015 consisted mainly of rent expenses of $9,830, filing fees of $8,200, travel expenses of $7,814 and $21, 925 in general expenses incurred for ongoing operations.

 

Depreciation and amortization expense increased to $33,911 for the nine months ended June 30, 2016 from $2,060 for the same period ended June 30, 2015.

 

Other Expenses

 

We had other expenses of $nil for the nine months ended June 30, 2016, compared with other expenses of $5,144 for the nine months ended June 30, 2015. Our other expenses for the nine months ended June 30, 2015 consisted of amortization of imputed interest on officer loans and amortization of debt discount.

 

Other Income

 

We had other income of $721 for the nine months ended June 30, 2016, compared with other income of $nil for the nine months ended June 30, 2015. The income of $721 for the nine months ended June 30, 2016 was a result of the sale of office equipment upon relocation of the corporate offices.

 

Net Loss

 

We recorded a net loss of $395,869 for the nine months ended June 30, 2016, as compared with a net loss of $3,435,031 for the nine months ended June 30, 2015.

 

Liquidity and Capital Resources

 

As of June 30, 2016, we had total current assets of $93,766, consisting of cash and prepaid expenses, and total assets in the amount of $781,025. Our total current liabilities as of June 30, 2016 were $61,662. We had working capital of $32,104 as of June 30, 2016.

 

Operating activities used $206,335 in cash for the nine months ended June 30, 2016. Our net loss of $395,869 was the main component of our negative operating cash flow, offset mainly by stock based consulting of $149,126 and depreciation and amortization of $33,267.

 

Cash flows used by investing activities during the nine months ended June 30, 2016 was $15,344 as a result of the purchase of fixed and intangible assets.

 

Cash flows provided by financing activities during the nine months ended June 30, 2016 amounted to $215,000 and consisted of $215,000 in proceeds from our private offering of common stock and warrants.

 

Despite the efforts we have made to raise money and to settle debt, based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all.

 

Off Balance Sheet Arrangements

 

As of June 30, 2016, there were no off balance sheet arrangements.

 

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

Use of estimates – The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

 

Cash and cash equivalents – For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. There was $81,854 and $88,533 in cash and cash equivalents as of June 30, 2016 and September 30, 2015, respectively.

 

Fair Value of Financial Instruments – The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items. The Company does not hold any investments that are available-for-sale.

 

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The three levels of the fair value hierarchy are described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

Revenue recognition – The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability is reasonably assured. For the periods ended June 30, 2016 and 2015 the Company reported revenues of $nil and $nil, respectively.

 

Long-lived Assets – In accordance with the Financial Accounting Standards Board ("FASB") Accounts Standard Codification (ASC) ASC 360-10, "Property, Plant and Equipment," the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value.

 

Stock-based compensation – The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation”, which provides investors and other users of financial statements with more complete and neutral financial information, by requiring that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. ASC 718-10 covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As of June 30, 2016, the Company has not implemented an employee stock based compensation plan.

 

 

Non-Employee Stock Based Compensation – The Company accounts for stock based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50. The Company may issue compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication, financial and administrative consulting services.

 

Earnings (loss) per share – The Company reports earnings (loss) per share in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 260-10 “Earnings Per Share”, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4.     Controls and Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2016. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2016, our disclosure controls and procedures were not effective due to the presence of material weaknesses in internal control over financial reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that, as of June 30, 2016, our disclosure controls and procedures were not effective: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

 

Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting

 

Our company plans to take steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our fiscal year ending December 31, 2016: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended June 30, 2016 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A. Risk Factors

 

See risk factors included in our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2016 for 2015. See also risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 19, 2014.

 

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

 

There was no issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in an Annual Report on Form 10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K.

 

Item 3.     Defaults upon Senior Securities

 

None

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None

 

 

Item 6.      Exhibits

 

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101**	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 formatted in Extensible Business Reporting Language (XBRL).
**Provided herewith

 

 

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.

 

Date:	August 22, 2016
	By: /s/ S. Matthew Schultz S. Matthew Schultz Title:    Chief Executive Officer
Date:	August 22, 2016
	By: /s/Zachary K. Bradford Zachary K Bradford Title:    Chief Financial Officer