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EX-32.1 - CERTIFICATION - Sector 5, Inc. | sect_ex321.htm |
EX-31.1 - CERTIFICATION - Sector 5, Inc. | sect_ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission file number 333-181742
SECTOR 5, INC. |
(Exact name of registrant as specified in its charter) |
Nevada |
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45-5042353 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
200 Duke Street, Suite 110
Alexandria, Virginia 22314
(Address of principal executive offices)
(517) 348-1005
(Issuer’s telephone number, including area code)
______________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerate filer, a non-accelerated filer, a smaller reporting company or, an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
¨ |
Non-accelerated filer |
¨ |
Smaller reporting company |
¨ |
(Do not check if smaller reporting company) |
Emerging growth company |
x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
Class |
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Outstanding at January 30, 2018 |
Common Stock, par value $.001 per share |
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18,000,000 shares |
SECTOR 5, INC.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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CONDENSED BALANCE SHEETS | ||||||||
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June 30, 2017 |
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December 31, 2016 |
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(unaudited) |
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ASSETS | ||||||||
Current Assets: |
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Cash |
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$ | 6,538 |
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$ | 865 |
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Accounts receivable |
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- |
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413 |
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Inventory |
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1,125 |
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57,743 |
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Prepaid expenses |
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- |
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30,117 |
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Total Current Assets |
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7,663 |
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89,138 |
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Total Assets |
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$ | 7,663 |
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$ | 89,138 |
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Current Liabilities: |
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Accounts payable |
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$ | 33,479 |
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$ | 22,791 |
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Accrued interest, related party |
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7,134 |
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4,557 |
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Loans payable, related party |
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323,750 |
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293,528 |
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Total Current Liabilities |
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364,363 |
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320,876 |
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Total Liabilities |
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364,363 |
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320,876 |
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Commitments and Contingencies |
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- |
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- |
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Stockholders’ Equity (Deficit): |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,000,000 and 1,000,000 shares issued and outstanding, respectively |
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1,000 |
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1,000 |
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Common stock, $0.001 par value, 245,000,000 shares authorized; 18,000,000 and 18,000,000 shares issued and outstanding, respectively |
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18,000 |
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18,000 |
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Additional paid-in capital |
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62,650 |
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62,650 |
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Accumulated deficit |
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(438,350 | ) |
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(313,388 | ) |
Total stockholders' deficit |
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(356,700 | ) |
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(231,738 | ) |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
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$ | 7,663 |
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$ | 89,138 |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
3 |
Table of Contents |
CONDENSED STATEMENTS OF OPERATIONS (unaudited) | ||||||||||||||||
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Revenue |
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$ | 275,594 |
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$ | 23,159 |
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$ | 365,078 |
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$ | 23,159 |
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Cost of goods sold |
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269,685 |
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14,506 |
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361,221 |
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14,506 |
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Gross Margin |
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5,909 |
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8,653 |
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3,857 |
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8,653 |
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Operating Expenses: |
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Research and development |
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35 |
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33,010 |
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8,482 |
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33,010 |
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Advertising and promotion |
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- |
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- |
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2,695 |
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- |
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Professional fees |
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47,618 |
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46,479 |
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86,870 |
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48,354 |
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General and administrative |
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6,297 |
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21,919 |
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28,195 |
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22,014 |
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Total operating expenses |
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53,950 |
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101,408 |
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126,242 |
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103,378 |
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Loss from operations |
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(48,041 | ) |
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(92,755 | ) |
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(122,385 | ) |
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(94,725 | ) |
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Other Expense: |
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Interest expense |
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(1,281 | ) |
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- |
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(2,577 | ) |
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- |
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Total other expense |
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(1,281 | ) |
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- |
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(2,577 | ) |
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Net loss before provision for income taxes |
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(49,322 | ) |
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(92,755 | ) |
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(124,962 | ) |
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(94,725 | ) |
Provision for income taxes |
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- |
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- |
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- |
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- |
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Net Loss |
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$ | (49,322 | ) |
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$ | (92,755 | ) |
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$ | (124,962 | ) |
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$ | (94,725 | ) |
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Weighted Average Shares Outstanding, Basic & Diluted |
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$ | (0.00 | ) |
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$ | (0.00 | ) |
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$ | (0.01 | ) |
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$ | (0.00 | ) |
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Loss per Share, Basic & Diluted |
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18,000,000 |
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20,000,000 |
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18,000,000 |
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20,000,000 |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
4 |
Table of Contents |
CONDENSED STATEMENTS OF CASH FLOWS (unaudited) | ||||||||
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For the Six Months Ended June 30, |
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2017 |
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2016 |
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CASH FLOW FROM OPERATING ACTIVITES: |
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Net Loss |
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$ | (124,962 | ) |
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$ | (94,725 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation expense |
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- |
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104 |
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Changes in Operating Assets and Liabilities: |
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Accounts receivable |
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413 |
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- |
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Prepaids & other assets |
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30,117 |
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(36,366 | ) |
Inventory |
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45,698 |
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(105,536 | ) |
Accounts payable |
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10,688 |
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(14,462 | ) |
Accrued interest, related party |
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2,577 |
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- |
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Net Cash Used in Operating Activities |
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(35,469 | ) |
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(250,985 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of equipment |
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- |
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(5,010 | ) |
Net cash used in investing activities |
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- |
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(5,010 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from related party loans |
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185,974 |
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266,056 |
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Repayment of related party loans |
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(144,832 | ) |
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- |
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Net Cash Provided by Financing Activities |
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41,142 |
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266,056 |
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Net Increase in Cash |
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5,673 |
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10,061 |
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Cash at Beginning of Period |
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865 |
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62 |
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Cash at End of Period |
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$ | 6,538 |
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$ | 10,123 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
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$ | - |
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$ | - |
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Income taxes |
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$ | - |
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$ | - |
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The accompanying notes are an integral part of these unaudited condensed financial statements.
5 |
Table of Contents |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
SECTOR 5, INC. ("Sector 5" or the "Company") was incorporated in the State of Nevada on April 11, 2012. On March 18, 2016 there was a change in control of the Company as a result of a private sale of the Company’s common stock. The change in control includes plans to relaunch the Company to sell branded electronic products targeting the educational and consumer electronics markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying unaudited condensed financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair statement of the results of operations for the periods shown and are not necessarily indicative of the results to be expected for the full year ending December 31, 2017. These unaudited condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the financial statements for the six months ended June 30, 2017.
Revenue and cost recognition
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Accounts Receivable
Revenues that have been recognized but not yet received are recorded as accounts receivable. Losses on receivables will be recognized when it is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized to reduce the amount of receivables to its net realizable value. Any allowance for uncollectible amounts is evaluated quarterly.
Recently issued accounting pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02—Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its financial statements.
In June 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB’s Emerging Issues Task Force). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its cash flows.
6 |
Table of Contents |
In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016- from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied process of assessing the impact, if any, on its consolidated financial statements.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
As reflected in the accompanying financial statements, the Company has an accumulated deficit of $438,350 at June 30, 2017 and had a net loss of $124,962 for the six months ended month ended June 30, 2017. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that the Company will continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
While the Company is attempting to increase operations and revenues, our cash position may not be significant enough to support our daily operations. Management intends to raise additional funds by way of debt and equity financing. Management believes that the actions presently being taken to further implement our business plan and generate increased revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate increased revenues and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to further implement its business plan and generate increased revenues. The financial statements do not include any adjustments that might be necessary if the Company was unable to continue as a going concern.
NOTE 4 – INVENTORY
As of June 30, 2017, and December 31, 2016, the Company has $1,125 and $57,743, respectively of finished goods inventory. Inventory consists of Chromebooks and charging carts. Inventory is carried at the lower of cost or market.
NOTE 5 - RELATED PARTY TRANSACTIONS
On March 22, 2016, Company executed a promissory note with Sector Five, Inc., a privately held Delaware corporation, for the purchase of inventory in the amount of $120,006. The note is due in one year and bears interest at 5%. The balance of the note was subsequently reduced by $34,840 for $17,160 of inventory that was returned to the lender and $7,260 that was determined to be obsolete. As of June 30, 2017, there is $85,166 and $7,134 of principal and interest, respectively, due on this note. This note is currently past due.
Since the change in control, the Company’s CEO and Chairman has loaned funds to the Company in support of its operations by providing payments to the Company's vendors and advances for operations. These amounts are considered due on demand and are non-interest bearing. As of June 30, 2017, and December 31, 2016, the balance due for these advances is $186,747 and $185,011, respectively.
7 |
Table of Contents |
Since the change in control, Kirkland Holdings, Inc., a company with common management, has advanced funds to the Company for operations. The advances are unsecured, non-interest bearing and due on demand. As of June 30, 2017, and December 31, 2016, the balance due for these advances is $51,837 and $12,431, respectively.
NOTE 6 – PREFERRED STOCK
Preferred Stock
The company has 5,000,000 shares of preferred stock authorized, 1,000,000 of which have been designed Series A. Shares of Series A Preferred Stock may be converted at the holder’s election into shares of common stock, at the conversion rate of fifty shares of fully paid and nonassessable common stock for one share of Series A Preferred Stock. Series A is entitled to votes equal to the number of common shares into which the preferred could be converted into and has liquidation preferences of $2.00 per share.
On November 2, 2016, the Board approved the exchange of 14,000,000 shares of common stock for the issuance of 1,000,000 shares of Series A Preferred Stock. In addition, the Board approved a three for one forward stock split immediately following the surrender of the 14,000,000 common shares.
The above designation and forward split were approved by FINRA on February 14, 2017, and have been retroactively presented in these financial statements.
NOTE 7 – COMMON STOCK
On November 2, 2016, the Board approved the exchange of 14,000,000 shares of common stock for the issuance of 1,000,000 shares of Series A Preferred Stock.
NOTE 8 – SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the financial statement were available to be issued, and has determined that there are no additional material subsequent events exist that require disclosure in these financial statements.
8 |
Table of Contents |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing in this report and are hereby referenced. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. We believe it is important to communicate our expectations. However, our management disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
These forward-looking statements are based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. You should not rely upon these forward-looking statements as predictions of future events because we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify a forward-looking statement by the use of the forward-terminology, including words such as “may”, “will”, “believes”, “anticipates”, “estimates”, “expects”, “continues”, “should”, “seeks”, “intends”, “plans”, and/or words of similar import, or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. These forward-looking statements relate to, among other things: our sales, results of operations and anticipated cash flows; capital expenditures; depreciation and amortization expenses; sales, general and administrative expenses; our ability to maintain and develop relationship with our existing and potential future customers; and, our ability to maintain a level of investment that is required to remain competitive. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including, but not limited to: variability of our revenues and financial performance; risks associated with technological changes; the acceptance of our products in the marketplace by existing and potential customers; disruption of operations or increases in expenses due to our involvement with litigation or caused by civil or political unrest or other catastrophic events; general economic conditions, government mandates; and, the continued employment of our key personnel and other risks associated with competition.
Plan of Operation
Sector 5 sells branded electronic products targeting the educational and consumer electronics markets.
Sector 5 intends to take advantage of the educational market to initiate targeting the retail consumer electronics market using a supply-chain methodology involving Open Innovation. Sector 5 has relationships with Chinese suppliers employing American ingenuity that allows us to create products with latest technology, matching market expectations at the best pricing. We plan to accomplish this through the involvement of a talented staff, including designers and innovators, coupled with strong relationships with “best in class” suppliers.
Sector 5's distribution channel strategy includes both B2B (especially schools) as well as utilization of existing relationships with distributors that have retail channels looking for new innovative products. Furthermore, we intend to use mobile carriers as sales channels on some unique new 4G LTE products which employ mobile data networks. Building and maintaining good distribution relationships will be an essential element of our business. In our product planning efforts, we expect to both listen to these sales channels for what opportunity they have as well as provide them new product opportunities we are planning. The latter will become increasingly important as we intend to grow a portfolio of products uniquely ours.
Sector 5's foundation for success and promise to the world is defined by a pursuit of simplicity and a commitment to innovation. Quality, reliability and excellent customer support is an integral component of that commitment.
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Products
Our initial phase will focus on the education markets utilizing Chrome and Android Operating Systems. As we ramp up a sales staff, we intend to broadly target general consumer retail channels and possibly other B2B opportunities (e.g. hospitals). In this phase we will need to carefully and continuously balance growth in width (number of sales channels and product sku’s) versus depth (quality of service and support).
We are currently negotiating contracts with established sales and marketing individuals and companies who can get Sector 5 branded products placed in the major retail channels. Google is assisting in opening up relationships with major distributors for the US markets.
During the second phase, we plan to launch a number of products aimed at the educational market:
· | Chromebooks optimized for education 11.6” and 13” |
· | Charging carts for bulk charging and storage of Chromebooks (various models) |
· | Electronic whiteboard (1 model) |
· | Large touch screen (2 models) |
· | Classroom speakers (2 models) |
· | Classroom microphone (1 model) |
· | Chromebook HDMI connected monitor 24” |
Our third phase includes plans to launch the following products, integrating our intellectual property:
· | Chromebox with camera (our own patented design) |
· | Possibly Chromebooks with 4G LTE, to be distributed B2B and through wireless carriers |
· | Smart Pico Projector with 4G LTE |
· | Bedroom Smart Pico Projector/speaker/wall mount kit bundle |
· | Action camera with 4K resolution utilizing 4G LTE for connectivity |
We plan to continuously explore business opportunities, possibly expanding these product categories. Using the strength of our current partners manufacturing capabilities, Sector 5 has identified new product categories in which our key suppliers will assist in the development of new products accommodating our ideas and requirements. Our unique relationships with the leading electronics suppliers in China will enable us to gain advantages of not only low cost manufacturing but also achieving the best of the Open Innovation partnership making it possible for us to realize first-in-market, unique and affordable products. Our Chinese office is located in Shenzhen (called High Tech Zone) as it is a hub of Chinese innovation where many of the major Chinese electronics firms are located. Shenzhen is rapidly becoming the Chinese version of Silicon Valley. Late in our third phase we plan to create our first Android 5 portfolio of Smart TV solutions:
· | Smart TV box (possibly similar hardware as Chromebox) |
· | Smart TVs (larger sizes) |
· | Android tablets for education |
· | Premium speakers (Bluetooth, WiFi, Surround) |
· | Headsets & headphones |
Who We Sell To
Sector 5 plans to hire a sales staff with long standing relationships with the buyers of “Big Box” retailers. Sector 5 also plans on hiring staff that have relationship with reps in the educational market. Sector 5 has relationships with large companies who are currently dominating the online sales channels. Our target customers are anyone in need of consumer, education or business electronics seeking the best combination of value, simplicity, usability and reliability. Our customers are intelligent and informed decision makers who will not only judge us from our marketing messages but also seek objective input from independent reviews e.g. CNET, Engadget and others. For this reason we plan a budget that covers the traditional marketing efforts as well as efforts on performing critical product Quality Assurance and engagement with reviewers in enabling the best reviews. Getting good reviews is important for our brand reputation to get the best start.
Our planned marketing staffs will include members solely focused on the educational computing market and members solely focused on the consumer retail market. However, we plan to have a unified R&D effort that will aim at maximizing synergies in an effort to reduce R&D costs. On the education side, we plan to send out samples to the school with RFP’s that we have identified that currently have the resources to start buying our products now. Geographically we plan to target both the USA and Canada. Most of the business with the schools involves a bidding process and we plan on being the best priced on the market, coupled with superior features/performance. Features we plan to emphasize include better graphical processing and more school optimized enclosure with easy carry handles. We believe that we can be highly successful in the educational bidding process. Our supply chain allows nearly unlimited growth potential as it includes a very extensive list of product categories covering involving excellent engineering teams. We will continuously aim at enabling growth through presenting new business opportunities to buyers from within our vendor partner capabilities.
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Our goal is Educating America’s Children utilizing the power of Google and the Chromebook proven technology. We plan to achieve our goal by delivering the latest generation of technology, creating a new market expectation together with unique value added differentiation and introducing the latest Chromebook defined by Speed, Security and Simplicity at the best possible price.
Results of Operations for the Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016
Revenues. Sales revenue for the three months ended June 30, 2017 were $275,594 as compared to $23,159 for the three months ended June 30, 2016. The increase in sales for 2017 is the result of a sale of $269,000 to one of our major customers.
Cost of Goods Sold. Cost of goods sold for the three months ended June 30, 2017 were $269,685 as compared to $14,506 for the three months ended June 30, 2016. The increase in cost of goods sold is the result of the Company’s sales revenue during the three months ended June 30, 2017.
Research and Development Expenses. Research and development expenses for the three months ended June 30, 2017 were $35 as compared to $33,010 for the three months ended June 30, 2016. The decrease is due to an attempt to cut costs while in the process of implementing our new business model.
Advertising and Promotion. We had no advertising and promotion expenses for the three months ended June 30, 2017 or for the three months ended June 30, 2016.
Professional Fees. Professional fees for the three months ended June 30, 2017 were $47,618 as compared to $46,479 for the three months ended June 30, 2016. Professional fees consists of accounting, audit, legal and consulting expense.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2017 were $6,297 as compared to $21,919 for the three months ended June 30, 2016. The decrease in selling, general and administrative expenses is due to an attempt to cut costs while in the process of implementing our new business model.
Results of Operations for the Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016
Revenues. Sales revenue for the six months ended June 30, 2017 were $365,078 as compared to $23,159 for the six months ended June 30, 2016. The increase in sales for 2017 is the result of the Company’s change in business model to sell branded electronic products. In addition, we had a sale of $269,000 to one of our major customers.
Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2017 were $361,221 as compared to $14,506 for the six months ended June 30, 2016. The increase in cost of goods sold is the result of the Company’s sales revenue during the six months ended June 30, 2017. In addition, we had to sell some of our TV units below cost and we wrote off $520 for damaged units.
Research and Development Expenses. Research and development expenses for the six months ended June 30, 2017 were $8,482 as compared to $33,010 for the six months ended June 30, 2016. The decrease is due to an attempt to cut costs while in the process of implementing our new business model.
Advertising and Promotion. Advertising and promotion expenses for the six months ended June 30, 2017 were $2,695 as compared to $0 for the six months ended June 30, 2016. We have been keeping certain costs low while in the process of implementing our new business model.
Professional Fees. Professional fees for the six months ended June 30, 2017 were $86,870 as compared to $48,354 for the six months ended June 30, 2016. The increase in professional fees is due to consulting expenses related to the new plan of operations to sell branded electronic products.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six months ended June 30, 2017 were $28,195 as compared to $22,014 for the six months ended June 30, 2016. The increase in selling, general and administrative expenses is due to the change of control of the Company during March 2016 and establishing a new plan of operations to sell branded electronic products.
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Liquidity and Capital Resources
We measure our liquidity in a number of ways, including the following:
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As of June 30, 2017 |
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As of December 31, 2016 |
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Cash |
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$ | 6,538 |
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$ | 865 |
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Working Capital |
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(356,700 | ) |
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(231,738 | ) |
Debt (current) |
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(364,363 | ) |
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(320,876 | ) |
The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources.
Net Cash Used in Operating Activities
We used $35,469 of cash from operating activities for the six months ended June 30, 2017. The cash used in operating activities during this period was used to fund the net loss of $124,962. We experienced negative cash flow from operating activities for the six months ended June 30, 2016 in the amount of $250,985.
Net Cash Used in Investing Activities
The cash used in investing activities during the six months ended June 30, 2017 and 2016 was $0 and $5,010, respectively.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2017 was $41,142. Cash flow from financing activities consists of related party loans and repayments of those loans. Net cash provided by financing activities was $266,056 during the six months ended June 30, 2016.
Availability of Additional Funds
Based on our working capital as of June 30, 2017, we will need additional equity and/or debt financing to continue our operations during the next 12 months. We have limited funds to continue our operating activities. Future operating activities are expected to be funded by loans from officers, directors and major shareholders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 2 to the Financial Statements describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Financial Statements.
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We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.
We recognize deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities represent the expected future tax return consequences of those differences, which are expected to be either deductible or taxable when the assets and liabilities are recovered or settled. Future tax benefits have been fully offset by a 100% valuation allowance as management is unable to determine that it is more likely than not that this deferred tax asset will be realized.
Off Balance Sheet Arrangements
We have not entered into 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 and would be considered material to investors.
Material Commitments
There were no material commitments during the six months ended June 30, 2017.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02—Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its financial statements.
In June 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB’s Emerging Issues Task Force). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its cash flows.
In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016- from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied process of assessing the impact, if any, on its consolidated financial statements.
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Disclosure under this section is not required for a smaller reporting company.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Treasurer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our President and Treasurer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of our first fiscal quarter covered by this report. Based on the foregoing, our President and Treasurer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2017. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to initiate the following series of measures once we have the financial resources to do so:
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We will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to an audit committee resulting in a fully functioning audit committee, which will undertake the oversight in the establishment and monitoring of required internal controls and procedures, such as reviewing and approving estimates and assumptions made by management when funds are available to us. |
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Management believes that the appointment of outside directors to a fully functioning audit committee, would remedy the lack of a functioning audit committee. |
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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There are not presently any material pending legal proceedings to which the Company is a party or as to which any of our property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Part I Exhibits
No. |
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Description |
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31.2 |
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Chief Financial Officer Section 302 Certification |
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Part II Exhibits
No. |
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Description |
101.INS |
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XBRL Instance Document |
101.SCH |
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XBRL Taxonomy Extension Schema Document |
101.CAL |
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XBRL Taxonomy Calculation Linkbase Document |
101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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XBRL Taxonomy Label Linkbase Document |
101.PRE |
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XBRL Taxonomy Presentation Linkbase Document |
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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.
SECTOR 5, INC. |
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Date: February 14, 2018 |
By: | /s/ Erick Kuvshinikov | |
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Erick Kuvshinikov |
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Chairman, President, Chief Executive Officer and Treasurer (Principal Accounting Officer and Authorized Officer) |
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