Monarch America, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION - Monarch America, Inc.	btfl_ex311.htm
EX-31.2 - CERTIFICATION - Monarch America, Inc.	btfl_ex312.htm
EX-32.2 - CERTIFICATION - Monarch America, Inc.	btfl_ex322.htm
XML - IDEA: XBRL DOCUMENT - Monarch America, Inc.	R9999.htm
EX-32.1 - CERTIFICATION - Monarch America, Inc.	btfl_ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 000-54798

MONARCH AMERICA, INC.

(Exact name of registrant as specified in its charter)

Nevada		99-0372219
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1150 W. Custer Place

Denver, CO 80223

(Address of Principal Executive Offices, Zip Code)

(844) 852-1537

(Registrant'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 Securities Exchange Act of 1934 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a 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 o No x

As of August 17, 2015, 108,923,623 shares of common stock, par value $0.001 per share, were issued and outstanding.

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		20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29

Item 4.	Controls and Procedures		30

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		31

ItemIA.	Risk Factors		31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 3.	Defaults Upon Senior Securities		31

Item 4.	Mine Safety Disclosures		31

Item 5.	Other Information		31

Item 6.	Exhibits		32

SIGNATURES			33

INDEX TO EXHIBITS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Monarch America Inc.

Condensed Consolidated Financial Statements (Unaudited)

(Expressed in US dollars)

For the period ended June 30, 2015

Condensed Consolidated Balance Sheets (unaudited)		4

Condensed Consolidated Statements of Operations (unaudited)	5

Condensed Consolidated Statements of Cash Flows (unaudited)	6

Notes to the Condensed Consolidated Financial Statements (unaudited)	7

Monarch America Inc.

Condensed Consolidated Balance Sheets

(Expressed in US dollars)

(unaudited)

	June 30, 2015 $			December 31, 2014 $
	Successor			Predecessor
ASSETS
Cash		177,146			13,018
Inventory		452,717			277,610
Prepaid expenses and deposits		23,776			5,326

Total Current Assets		653,639			295,954

Note Receivable – Related party		28,243			–
Property and equipment		357,990			7,289
Goodwill		5,927,587			–

Total Assets		6,967,459			303,243

LIABILITIES
Current Liabilities

Accounts payable and accrued liabilities		540,057			254,330
Due to related parties		–			68,194
Convertible debenture (less unamortized discount and debt issuance costs of $317,136 and $0, respectively)		16,198			–
Derivative liability		457,829			–
Current portion of promissory notes payable		1,482,801
Current portion of promissory notes payable to related parties		1,000,000			–

		3,496,885			322,524

Promissory notes payable to related parties		750,000

Total Liabilities		4,246,885			322,524

STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred Stock
Authorized: 10,000,000 shares, par value of $0.001 per share
Series A Preferred Stock, 5,500,000 shares authorized 274,998 shares issued and outstanding		275			–
Series B Preferred Stock, 750,000 shares authorized 38,897 shares issued and outstanding		39			–

Common Stock
Authorized: 2,610,000,000 shares, par value of $0.001 per share
Issued and outstanding: 105,148,623 shares		105,149			5,000

Additional paid-in capital		4,883,054			5,459
Accumulated deficit		(2,267,943	)		(29,740	)

Total Stockholders’ Equity (Deficit)		2,720,574			(19,281	)

Total Liabilities and Stockholders’ Equity (Deficit)		6,967,459			303,243

(The accompanying notes are an integral part of these unaudited consolidated financial statements)

Monarch America Inc.

Condensed Consolidated Statements of Operations

(Expressed in US dollars)

(unaudited)

	Three months ended June 30, 2015 $			Three months ended June 30, 2014 $			Six months ended June 30, 2015 $			Six months ended June 30, 2014 $
	Successor			Predecessor			Successor			Predecessor

Revenues		1,134,979			923,284			2,292,367			1,610,179
Cost of sales		(790,590	)		(680,963	)		(1,534,609	)		(1,134,187	)

Gross Margin		344,389			242,321			757,758			475,992

Operating Expenses

General and administrative		(617,910	)		(154,842	)		(1,476,801	)		(290,257	)

Net (Loss) Income Before Other Expenses		(273,521	)		87,479			(719,043	)		185,735

Other Expenses

Loss on change in fair value of derivative liability		(221,163	)		–			(221,163	)		–
Interest expense		(80,238	)		(29	)		(139,963	)		(67	)
Interest income		520			2,613			1,066			5,426

Net (Loss) Income		(574,402	)		90,063			(1,079,103	)		191,094

Less: Series B preferred stock dividends		(4,655	)		–			(9,259	)		–

Net (Loss) Income Attributable to Common Shareholders		(579,057	)		90,063			(1,088,362	)		191,094
Net (Loss) Income per Common Share – Basic and Diluted		(0.01	)					(0.01	)
Weighted Average Common Shares Outstanding – Basic and Diluted		105,148,623						103,552,230

(The accompanying notes are an integral part of these unaudited consolidated financial statements)

Monarch America Inc.

Condensed Consolidated Statements of Cash Flows

(Expressed in US dollars)

(unaudited)

	Six months ended June 30, 2015 $			Six months ended June 30, 2014 $
	Successor			Predecessor

Operating Activities
Net (loss) income		(1,079,103	)		191,094

Adjustments to reconcile net (loss) income to net cash used in operating activities:
Accretion of discount on convertible debenture		16,198			–
Depreciation		2,761			9,552
Common stock issued for services		377,515			–
Loss on change in fair value of derivative liability		221,163			–

Changes in operating assets and liabilities:
Prepaid expenses		(15,950	)		(1,038	)
Accrued interest on notes receivable		(1,040	)		–
Accrued interest on notes payable		123,726			–
Accounts payable and accrued liabilities		(32,627	)		(16,816	)
Inventory		(167,390	)		(62,366	)

Net Cash Provided by (Used In) Operating Activities		(554,747	)		120,426

Investing Activities
Cash paid for the acquisition of The Big Tomato, Inc, net of cash acquired		(386,982	)		–
Purchase of property and equipment		(306,068	)		–

Net Cash Used In Investing Activities		(693,050	)		–

Financing Activities
Payment of note payable – related party		(262,500	)		–
Borrowing on debt		1,219,467			–
Distribution		–			(100,825	)

Net Cash (Used in) Provided by Financing Activities		956,967			(100,825	)

Increase (Decrease) in Cash		(290,830	)		19,601
Cash – Beginning of Period		467,976			41,522

Cash – End of Period		177,146			61,123


Supplemental Disclosures:
Interest paid		–			–
Income tax paid		–			–

Non-Cash Transactions:
Notes payable related to Plan of Merger		2,000,000			–
Common stock issued pursuant to Plan of Merger		3,564,000			–
Extinguishment of related party debt at acquisition		55,694			–
Debt discount from derivative liability		236,666			–
Accounts payable for property and equipment		42,840			–

(The accompanying notes are an integral part of these unaudited consolidated financial statements)

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

1.	Nature of Operations and Continuance of Business

Monarch America Inc. (the “Company”) was incorporated in the state of Nevada on September 14, 2010. The Company was formerly a mineral exploration company with the purpose of acquiring and developing mineral properties. The Company’s principal business is now focusing on various opportunities in the recreational and medical marijuana industry. Effective January 1, 2015, the Company completed a Plan of Merger with Jeremy N. Stout, Inc. (d/b/a The Big Tomato), which is now The Big Tomato, Inc. (“TBT”), a Colorado corporation, whereby the Company acquired all of the outstanding shares of TBT. TBT is an established Denver area store, warehouse distribution facility, and online hydroponics and indoor garden supplier.

Going Concern

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As of June 30, 2015, the Company has a working capital deficit of $2,843,246, and has an accumulated deficit of $2,267,943. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management is currently seeking out other opportunities to execute consulting arrangements with grow facilities. Large warehouse grow operations would require large supply orders, which would be fulfilled by the TBT. The Company is also seeking out other sources for financing and other partners to invest into the Company.

2.
Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K filed on March 31, 2015, with the SEC.

The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position at June 30, 2015, and the results of its operations and cash flows for the six months ended June 30, 2015 and 2014. The results of operations for the three months and six months ended June 30, 2015, are not necessarily indicative of the results to be expected for future quarters or the full year.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, HBH Industries Inc., and The Big Tomato, Inc. (f/k/a Jeremy N. Stout, Inc. (d/b/a The Big Tomato)). Intercompany balances and transactions are eliminated upon consolidation.

On January 14, 2015, Monarch acquired TBT (See Note 3). The operations of Monarch were insignificant in comparison to those of The Big Tomato, so the consolidated financial statements are presented under predecessor reporting wherein the prior historical information consists of solely the Tomato’s results of operations and cash flows. The consolidated financial statements included herein are presented for the three and six months ended June 30, 2015, and 2014, under predecessor entity reporting. The results of operations and cash flows obtained through the use of January 1, 2015, rather than January 14, 2015, are not considered to be materially different; therefore, the successor period is presented beginning January 1, 2015.

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with ASC 350 "Intangibles-Goodwill and Other" ("ASC 350"). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.

Revenue Recognition

The Tomato derives the majority of its revenue from the sale of hydroponic and indoor garden supplies at its retail store, in which the products are delivered to the customer immediately. The Tomato also has an online store, but there are minimal e-commerce sales. Monarch is primarily in the business of providing management and consulting services, along with retail sales of its own branded indoor gardening supplies. Monarch has not yet earned revenue in relation to its management and consulting services, and any retail sales are due upon delivery and have been paid in full. The Company recognizes revenue, net of sales tax, when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured which is typically when the customer takes possession of the merchandise at the point of sale, or if from the online store, when title transfers upon shipment from the Company’s warehouse. The Company is not in the practice of taking cash payments in advance from customers for inventory yet to be exchanged, but in such an event, the Company would recognize the amount received as deferred revenue until the sale or service is complete.

Stock-based Compensation

The Company accounts for the grant of stock awards in accordance with ASC 718, “Compensation-Stock Compensation.” ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of stock based compensation. Pursuant to ASC Topic 505-50 for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, in accordance with ASC 815-15 “Derivative and Hedging” the Company valued the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or noncurrent based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As at June 30, 2015, the Company had $457,829 of derivative liability.

Financial Instruments

ASC 825 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. Fair value is the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants. A liability is quantified at the price it would take to transfer the liability to a new obligor, not at the amount that would be paid to settle the liability with the creditor.

Fair Value Hierarchy

ASC 825 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 825 establishes three levels of inputs that may be used to measure fair value.

Level 1

Level 1 applies to assets and liabilities for which there are quoted prices in active markets for identical assets or liabilities. Valuations are based on quoted prices that are readily and regularly available in an active market and do not entail a significant degree of judgment.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

Level 2

Level 2 applies to assets and liabilities for which there are other than Level 1 observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance:

Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced; and Determining whether a market is considered active requires management judgment.

Level 3

Level 3 applies to assets and liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, we perform a detailed analysis of our assets and liabilities that are measured at fair value. All assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

All financial liabilities that are measured at fair value have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. The carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, inventory, note receivable, accounts payable and accrued liabilities, amounts due to related parties and notes and loans payable. The fair value of the Company’s convertible note payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.

The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2015:

June 30, 2015
	Amount		Level 1		Level 2		Level 3

Embedded conversion derivative liabilities	$	457,829	$	–	$	–	$	457,829

Total	$	457,829	$	–	$	–	$	457,829

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 9 for additional information.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

Recently Adopted Accounting Policy

During the six months ended June 30, 2015, the Company adopted guidance codified in ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method pursuant to ASC 835-30-35-2 through 35-3. The Company elected to early adopt the requirements of ASU 2015-03 effective during the six months ended June 30, 2015 and has applied this guidance retrospectively to all prior periods presented in the Company's financial statements.

The reclassification does not impact net income (loss) as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on average cost basis. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Periodic inventory counts are performed in order to reconcile physically present inventory at the warehouse and retail store to the inventory listing.

Depreciation

Equipment is stated at cost and is depreciated on a straight-line basis over its estimated useful life, as follows:

Furniture and equipment	5 years
Leasehold improvements	3 years
Software and website	3 years
Vehicles	7 years

Property and equipment is presented net of accumulated depreciation.

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to the recoverability of intangible assets, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

3.
Acquisition

On January 14, 2015, the Company completed a Plan of Merger with Jeremy N. Stout, Inc. (d/b/a The Big Tomato), whereby the Company agreed to acquire all of the outstanding shares of The Big Tomato in consideration for cash of $400,000, promissory notes in the aggregate amount of $2,000,000 and 8,100,000 shares of restricted common stock with a fair value, based on the closing market price on the acquisition date, of $3,564,000. Each note will be payable in eight equal installments of $125,000 plus interest at 8% per annum, commencing April 1, 2015. Each note will be secured by all of the assets and shares of the The Big Tomato, Inc.

As a result of the acquisition, amounts owed to Monarch America by The Big Tomato were extinguished. These amounts relate to $25,539 of trade payables and $30,156 of a note payable and accrued interest. Even though the amounts continued to be carried on The Big Tomato’s standalone accounting records, the amounts are eliminated upon consolidation.

The operations of Monarch were insignificant in comparison to those of The Big Tomato, so the consolidated financial statements are presented under predecessor reporting wherein the prior historical information consists of solely the Tomato’s results of operations and cash flows. The consolidated financial statements included herein are presented for the six months ended June 30, 2015, and 2014, under predecessor entity reporting. The results of operations and cash flows obtained through the use of January 1, 2015, rather than January 14, 2015, are not considered to be materially different; therefore, the successor period is presented beginning January 1, 2015. The allocation of the purchase price and the estimated fair market values of the assets acquired and liabilities assumed are summarized in the table below.

	$

Cash		13,018
Prepaid expenses and deposits		5,326
Inventory		277,610
Property and equipment		7,289
Accounts payable and accrued liabilities		(254,330	)
Loans payable to related parties		(12,500	)
Goodwill		5,927,587

Net assets acquired		5,964,000

4.
Inventory

Inventory consists of the following:	June 30, 2015 $		December 31, 2014 $
	Successor		Predecessor

Finished Goods		452,717		252,072
Inventory on Consignment		–		25,538
Raw Materials		–		–

Total		452,717		277,610

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

5.	Property and Equipment

	Cost $		Accumulated Depreciation $		June 30, 2015 Net Carrying Value $		December 31, 2014 Net Carrying Value $
					Successor		Predecessor

Furniture and equipment		59,636		54,565		5,071		5,618
Leasehold Improvements		376,511		24,747		351,764		–
Software and website		34,191		34,191		–		–
Vehicles		11,493		10,338		1,155		1,671

Total		481,831		123,841		357,990		7,289

As a result of the licensing complication between Green Sky, Inc., and the Custer warehouse lessor (further described in footnote 13.c), subsequent to June 30, 2015, Monarch entered into plans to sell the Leasehold Improvements, which are part of the Monarch segment of the Company, to an outside party. The assets were not determined held for sale until after the balance sheet date of June 30, 2015, at which point management had then embarked on serious plans to dispose of the assets by the end of the 2015 calendar year. The subsequent determination of the assets being held for sale triggered the need for impairment testing in accordance with ASC 360. Management has assessed the improvements for impairment as of June 30, 2015 and has determined that no impairment exists.

6.
Notes Receivable – Related Party

On August 15, 2014, the Company issued a Promissory Note to a related party, Steve Brandt, whereby the Company agreed to lend up to an aggregate of $3,000,000, which bears interest at 8% per annum, is unsecured and matures on August 15, 2017. Steve Brandt is a large shareholder of Monarch, holding more than 10% of shares outstanding. The borrower may borrow in increments of up to $750,000. On August 21, 2014, the Company advanced $60,000 under the Promissory Note. During the year ended December 31, 2014, the borrower repaid $34,000 of principal. As at June 30, 2015, the Company has recognized accrued interest receivable of $2,243 on the outstanding $26,000. On August 4, 2015, Steve Brandt paid his note in full with Monarch for $28,243.

7.
Promissory Notes Payable

	a)	On December 5, 2014, the Company issued a promissory note to Glamis Capital SA (the “Lender”), which provides that the Company can borrow up to an aggregate of $1,500,000 from the Lender until January 30, 2015, in any amount in increments of up to $350,000. Interest accrues on the outstanding principal amount at the rate of 8% and is payable quarterly beginning August 15, 2015. Principal and all accrued interest thereon is due and payable on the earlier to occur of: (i) January 30, 2016; (ii) an issuance by the Company or an acquisition of voting securities of the Company of 30% or more of the then outstanding shares or the combined voting power of the Company’s then outstanding voting securities; (iii) the individuals who are currently members of the Board of Directors of the Company cease for any reason to constitute at least two-thirds of the members of the Board; (iv) a merger, consolidation or other business combination with or into another company; or (v) the sale or other disposition of all or substantially all of the assets of the Company. As of June 30, 2015, the Company borrowed an aggregate of $1,482,801 from the Lender pursuant to this agreement and no further borrowings may be made. As at June 30, 2015, the Company has recognized accrued interest of $49,969.

	b)	On January 1, 2015, the Company issued two promissory notes of $1,000,000 to each of the former shareholders of The Big Tomato pursuant to the Plan of Merger (Note 3). Each note is payable in eight equal installments of $125,000 plus interest at 8% per annum commencing April 1, 2015. At June 30, 2015, the Company had made the initial instalment payments totaling $250,000. Each note is secured by all of the assets of the Company and the shares of the Company. As at June 30, 2015, the Company has recognized accrued interest of $74,027. Subsequent to June 30, 2015, the Company modified the notes, refer to Note 15(a).

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

8.
Convertible Notes Payable

On April 29, 2015, the Company entered into a Securities Purchase Agreement with Redwood Management LLC, a Florida limited liability company (“Redwood”), for the sale of an original issue discount convertible debenture (the “Debenture”) in the principal amount of $1,000,000. The Debenture was issued for an original issue discount of 10%, and interest on the Debenture accrues at the rate of 10% per annum, payable in six equal tranches, the first of which was paid on April 29, 2015 and the remainder is due on each of the first five monthly anniversaries of the issuance of the Debenture. Pursuant to the terms of the Secured Redwood Note described below, on each of May 29th and the next consecutive four months, Redwood will pay the Company $150,000 as long as certain conditions are met. As of June 30, 2015, the Company had received $236,666 net of the original discount of $33,334, interest payments of $33,334 and issuance costs of $30,000.

Convertible note	$	333,334
Original issuance discount		(33,334	)
Prepaid interest		(33,334	)
Debt issuance costs		(30,000	)
Derivative liability		(236,666	)
Amortization of discount		16,198

Balance at June 30, 2015	$	16,198

The Debenture, which is due on April 29, 2016, is convertible into shares of the Company’s common stock at the election of Redwood at any time at a conversion price equal to 65% of the lowest trading price of the common stock during the 20 trading day period prior to conversion. The Company has the right to prepay any portion of the Debenture upon ten days’ notice and payment of a 130% prepayment penalty.

In connection with the issuance of the above convertible note, the Company evaluated the conversion option for derivative treatment under ASC 815-15, Embedded Derivatives, and determined the note and conversion feature qualified as derivatives. The Company classified the conversion feature as a derivative liability at fair value.

The fair value of the conversion feature was determined to be $424,551 using a Black-Scholes option-pricing model. Upon the issuance dates $236,666 was recorded as debt discount and $187,885 was recorded as a loss on derivative. As of June 30, 2015, the aggregate unamortized discount is $16,198.

On April 29, 2015, Redwood issued the Company a $750,000 collateralized secured promissory note (the “Secured Redwood Note”). The Secured Redwood Note is secured by the 10% membership interests of Redwood owned by Gary Rogers and John DeNobile.As both the Debenture, and the Secured Redwood Note allow for the offset of the two notes, the Company has offset the remaining unpaid balance of the Secured Redwood Note with the Debenture.

9.
Derivative Liability

The Company has determined that the conversion feature associated with the convertible debenture described in Note 8 qualifies as a derivative liability and is accounted pursuant to ASC 815.

The Company records the fair value of the conversion feature in accordance with ASC 815using a Black-Scholes option-pricing model. During the six months ended June 30, 2015, the Company recorded a loss on the change in fair value of derivative liabilities of $221,163 (June 30, 2014 - $Nil). At June 30, 2015, the Company recorded a derivative liability of $457,829.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

The table below sets forth a summary of changes the Company’s loss on the change in fair value of derivative liabilities:

Day one loss on derivative liability	$	187,885
Change in fair value of conversion features		33,278

Three months and six months ended June 30, 2015	$	221,163

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:

Balance at December 31, 2014	$	-
Fair value of conversion features issued		424,551
Change in fair value of conversion features		33,278

Balance at June 30, 2015	$	457,829

The following are the assumptions used for derivative instruments valued using the Black Scholes option pricing model:

	At Issuance			June 30, 2015
65% of market value of stock on measurement date	$0.05- 0.056			$	0.046
Risk-free interest rate	0.25%-0.26		%		0.28	%
Dividend yield		0	%		0	%
Volatility factor		178	%		183	%
Term	0.92-1.00				0.83

10.
Related Party Transactions

	a)	During the six months ended June 30, 2015, the Company incurred consulting fees of $8,250 (2014 - $nil) to directors and officers of the Company.

	b)	During the six months ended June 30, 2015, the Company incurred fees of $75,882 (2014 - $nil) to Jeremy N. Stout and Josh Field pursuant to the agreements described in Note 13(f).

11.
Preferred Stock

On June 23, 2014, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (“Series A Stock”) designating 5,500,000 shares of the Company’s authorized preferred stock as Series A Stock, par value $0.001 per share. The Series A Preferred Stock is convertible at any time at the option of the holder into shares of common stock at a conversion ratio of 200 shares of common stock for each share of Series A Stock. A holder of Series A Stock shall be entitled to the number of votes per share equal to the number of shares of common stock into which such Series A Stock is convertible.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

On June 10, 2014, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Stock”) designating 750,000 shares of the Company’s authorized preferred stock as Series B Stock, par value $0.001 per share. The Series B Preferred Stock is convertible at any time at the option of the holder into shares of common stock at a conversion ratio of 6 shares of common stock for each share of Series B Stock. Dividends accrue on each share of Series B Stock, at the rate of 4% per annum of the price paid for each share or $12 per share. Until November 30, 2016, the Company has the right to pay the dividend in additional shares of Series B Stock. A holder of Series B Stock shall be entitled to the number of votes per share equal to the number of shares of common stock into which such Series B Stock is convertible.

On August 5, 2014, the Company filed a Certificate of Amendment to Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (“Series B Stock”), whereby the Company removed the payment of dividends in additional shares of Series B Stock, reduced the conversion rate of the Series B Stock to 24 shares of common stock, and eliminated the right of holders of the Series B Stock to have a veto right on the ability of the Company to issue debt.

For both Series A and B preferred stock, the Company analyzed the embedded conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the conversion option should be classified as equity. The Company also analyzed the conversion option for beneficial conversion features consideration under ASC 470-20 “Convertible Securities with Beneficial Conversion Features” and noted none.

12.
Common Stock

	a)	On January 1, 2015, the Company issued 8,100,000 shares of common stock with a fair value of $3,564,000 pursuant to the Plan of Merger with The Big Tomato (Note 3). Of the fair value of the shares issued, $55,694 was allocated to the extinguishment of amounts owed to Monarch America by The Big Tomato as result of the acquisition.

	b)	During the six months ended June 30, 2015, the Company issued 2,494,005 shares of common stock with a fair value of $377,515 for consulting services.

13.
Commitments

	a)	The Company entered into a lease for office premises which originally commenced April 2, 2007. On October 27, 2010 and November 1, 2013, the Company entered into amendment agreements to extend the term of the lease. Under the terms of the November 1, 2013 amendment agreement, the term was extended to October 31, 2018, and the Company must pay base rent of $25,600 in the first 2 years of the lease, $27,200 in the next 2 years of the lease, and $28,800 in the last year of the lease.

	b)	The Company entered into a Shopping Center Lease Agreement which commenced April 1, 2014, and terminates on March 31, 2019. The minimum base rent due under the lease agreement is $5,235 per month for the first year, $5,413 per month for the second year, and $5,568 per month for the remaining term.

	c)	Beginning January 1, 2015, the Company entered into a management contract with Green Sky, Inc., a company wholly-owned by Steve Brandt, to build-out a warehouse located in Denver, Colorado for cultivation purposes. Green Sky entered into a lease agreement with the lessor of the warehouse, through which, Monarch agreed to assume responsibility of the rent from January 2015 through August 2015, during the build-out phase of the agreement. However, the Custer warehouse lessor had performance obligations to deliver a cultivation license to Green Sky which have not been met, so neither Green Sky nor Monarch America have paid rent from June 2015 on, unless and until the issue is remediated or an alternative solution is found. Monarch and Green Sky are working with other parties to seek out other opportunities for the space. Although the management contract that Monarch has entered into with Green Sky has provided for Green Sky to make payments to Monarch, currently, it is unlikely that Monarch will be able to collect any management fees from Green Sky. Monarch has determined subsequent to June 30, 2015 that its Leasehold Improvements at the Custer warehouse qualify as held for sale. See footnote 5 for further discussion.

	d)	Total lease commitments based on the minimum base rent due, excluding common area maintenance charges, over the next five years are as follows:

2015	$	45,545
2016		93,551
2017		94,283
2018		90,816
2019		16,704

Total	$	340,899

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

	e)	On July 27, 2014, the Company entered into a Professional Relations and Consulting Agreement for consulting services effective on July 29, 2014 and ending on July 29, 2015. For the first 6 month period, the Company agreed to pay $12,500 per month and issue $150,000 worth of restricted common stock of the Company, determined by dividing $150,000 by the closing share price on the day preceding the execution of the agreement. For the remaining 6 month period, the Company agreed to pay $12,500 per month and issue $150,000 worth of restricted common stock of the Company, determined by dividing $150,000 by the average closing share price for the 5 trading days preceding January 15, 2015.The agreement was terminated in April 2015, resulting in the forfeiture of the unvested stock award.

	f)	On January 14, 2015, the Company entered into a two-year employment agreement (the “Employment Agreement”) with each of Jeremy N. Stout and Josh Field for an annual base salary of $120,000 each. Each individual will also be entitled to a bonus based upon the TBT’s annual net income for 2015 and 2016 as follows: (i) $2,500 for every $10,000 of net income generated between $400,000 and $460,000, and (ii) $15,000 plus 7.5% of net income over $460,000. The agreement prohibits the individuals from competing with the business of the Company during the term of the agreement and for one year thereafter, except if the employee is terminated without cause or as a result of a constructive termination.

	g)	On June 24, 2015, the Company entered into a five-year consulting agreement with FSST Pharms, LLC, a limited liability company organized under the laws of the Flandreau Santee Sioux Tribe (“FSST”). The term of the Consulting Agreement will automatically renew for subsequent one-year terms unless terminated by either party upon 30-days’ prior written notice to the other party. The Company will serve as FSST’s exclusive independent contractor to provide consulting services to FSST related to medicinal and recreational marijuana and marijuana-related products. In addition, FSST may purchase nutrients, lights, equipment and other supplies from the Company at a 25% discount to the retail prices offered by the Company. Either party may terminate the Consulting Agreement for cause in accordance with the terms of the Consulting Agreement.

		As consideration for the consulting services provided by the Company, FSST will pay the Company a consulting fee equal to a percentage of total net revenues generated by the sale of marijuana and/or marijuana products by FSST. “Total Net Revenues” is defined in the Consulting Agreement as total gross revenues minus the cost of goods sold, other expenses directly related to the cultivation, processing, and sale of inventory, depreciation, and taxes. The consulting fee shall be paid monthly and no later than 30 days’ following receipt of total gross revenues by FSST.

		If FSST structures, leads to the structuring, or assists with the structuring of a consulting or other development agreement between the Company and another tribe, tribally owned company, or any other type of business entity, the Company agrees to pay FSST a percentage of all revenue generated as a result of such agreement by the Company, to be paid to FSST in cash within 10 business days of receipt by the Company; provided, however, that if FSST decides to utilize such proceeds to purchase common stock of the Company, it will be entitled to a purchase price discount of the then volume weighted average price of the common stock for the 20 days prior to receipt by the Company of such notification by FSST. Until the execution of such an agreement, this arrangement does not need to be evaluated for derivative treatment.

14.
Segment Reporting

The Company’s Chief Executive Officer (“CEO”) serves as the Company’s chief operating decision maker (“CODM”). Management evaluates the performance of the Company's operating segments based on several factors, including net sales to external customers and operating income. Net sales are recorded on a segment basis and intersegment sales are eliminated as part of the financial consolidation process. There are two reportable operating segments, being soil distribution and hydroponics retail operations.

The management and consulting segment relates to Monarch America Inc., and its wholly-owned subsidiary, HBH Industries Inc. and is positioned to provide management and consulting services for building out indoor grow and cultivation facilities. This segment also has some exclusive rights for branded products (Monarch America lights, ballasts, and other indoor gardening supplies), and exclusive distribution arrangements (AgriAloe, MiraClays, Ivory Coco, REM international flavored beverage profiles). Coats AgriAloe LLC is a Texas-based developer of patented and proprietary soil amendment products. MiraClays is microscopic crystalline calcium clay, rich in over 70 other minerals and trace elements. The Ivory Coco arrangement consists of an exclusive distribution agreement with Ivory Coco International, LLC, a Colorado-based importer and supplier of Coco Coir, an all-natural soil additive utilized by indoor and outdoor gardening operations.

The retail operations segment relates to The Big Tomato and consists of supplying hydroponics and indoor gardening supplies in Denver, Colorado. The Big Tomato sells various types of products of indoor gardening products; grow boxes, grow lights, hydroponic systems, ballasts, bulbs, nutrients and additives, and other high-end hydroponic and gardening items.

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

The following tables summarize selected financial data for segment disclosures for the three and six months ended June 30, 2015, and 2014.

2015 – (Successor)	Management/Consulting Operations $			Retail Operations $			Total $

Current assets		72,179			581,460			653,639

Total assets		452,185			6,515,274			6,967,459

*Six Months Ended*
Revenues		56,054			2,236,313			2,292,367
Cost of sales		(41,644	)		(1,492,965	)		(1,534,609	)
General and administrative		(1,175,021	)		(301,780	)		(1,476,801	)

Operating (loss) income		(1,160,611	)		441,568			(719,043	)

*Three Months Ended*
Revenues		4,200			1,130,779			1,134,979
Cost of sales		(2,644	)		(787,946	)		(790,590	)
General and administrative		(470,970	)		(146,940	)		(617,910	)

Operating (loss) income		(469,414	)		195,893			(273,521	)

2014 – (Predecessor)	Management/Consulting Operations $		Retail Operations $			Total $

Current assets		–		272,737			272,737

Total assets		–		278,864			278,864

*Six Months Ended*
Revenues		–		1,610,179			1,610,179
Cost of sales		–		(1,134,187	)		(1,134,187	)
General and administrative		–		(290,257	)		(290,257	)

Operating income		–		185,735			185,735

*Three Months Ended*
Revenues		–		923,284			923,284
Cost of sales		–		(680,963	)		(680,963	)
General and administrative		–		(154,842	)		(154,842	)

Operating (loss) income		–		87,479			87,479

Monarch America Inc.

Notes to the Condensed Consolidated Financial Statements

(Expressed in US dollars)

(unaudited)

15.
Subsequent Events

	a)	On July 1, 2015, the Company had agreed to make a $125,000 interest payment to each of the noteholders described in Note 7(b). In consideration for deferring the $125,000 payment due July 1, 2015, each noteholder will be issued 1,562,500 shares of common stock of the Company and paid $25,000. The $125,000 payment shall be due and payable on January 2, 2017.

	b)	On July 21, 2015, the Company entered into an arrangement with a Board Member, Kevin Malone, who will be entitled to $3,000 per month as long as he serves in that capacity.

	c)	On July 21, 2015, the Company added Robert Shepherd to the Board of Directors. Since January 2015, the new director was entitled to receive $5,000 in shares of common stock, based on the volume weighted average for the previous 20 days, and $1,500 in cash on a monthly basis. As a result of the execution of the consulting agreement described in Note 13(g) the director shall be entitled on a monthly basis (1) $5,500 in shares of common stock and (2) $5,500 in cash. The director is expected to represent the Company at no less than five conferences during the year at a cost of $3,000 per conference to the Company.

	d)	On August 4, 2015, Steve Brandt paid off the $28,243 note described in Note 6 in full.

	e)	The Company needs to formally issue 244,005 shares of its common stock to Robert Shepard pursuant to the terms of a letter agreement with such individual. This issuance will be conducted in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.

	f)	The Company needs to formally issue 50,000 shares of its Series B Convertible Preferred Stock to FSST Pharms, LLC, a limited liability company organized under the laws of the Flandreau Santee Sioux Tribe in consideration for $600,000. The company received funds on July 9, 2015.

	g)	The Company needs to issue 1,562,500 shares of common stock to Jeremy Stout in consideration for the postponement of the liability owed to Mr. Stout.

	h)	The Company needs to issue 1,562,500 shares of common stock to Josh Field in consideration for the postponement of the liability owed to Mr. Field.

	i)	In the time subsequent to June 30, 2015, the Company issued 50,000 shares of common stock with a fair value of $3,500 for products to sell at the Tomato, and 600,000 shares of common stock with a fair value of $42,000 to employees at the Tomato as a retention bonus.

	j)	Subsequent to June 30, 2015, Monarch put the Leasehold Improvements of the Custer warehouse facility up for sale, which are part of the Monarch segment of the Company. See footnotes 5 and 13.c for further discussion.

	k)	Subsequent to June 30, 2015, Monarch executed a management and consulting agreement with Mary JaneCo, LLC, in which Monarch will provide advisory and consulting services related to the cultivation, CO2 extraction and cultivation facility design, and construction management for Mary JaneCo’s facility in Auburn, Washington. The terms of this agreement require Mary JaneCo to pay Monarch an hourly fee for services rendered by Monarch personnel and a surcharge on the cost of the cost of the buildout of the facility.

Item 2. Management’s Discussion and Analysis or Plan of Operations.

As used in this Quarterly Report on Form 10-Q (this “Report”), unless the context otherwise indicates, references to the “Company,” the “Registrant,” “we,” “our,” “us,” or “Monarch” refer to Monarch America, Inc. and its wholly-owned subsidiaries. Jeremy N. Stout, Inc. d/b/a The Big Tomato was acquired by and is now a wholly-owned subsidiary of Monarch America as of January 14, 2015, effective January 1, 2015. References to “the Tomato” refer to what is now The Big Tomato, Inc., formerly Jeremy Stout, Inc. d/b/a The Big Tomato, Inc.

Forward-Looking Statements

Certain statements contained in this Report, including statements regarding our business, financial condition, our intent, belief or current expectations, primarily with respect to the future operating performance of the Company and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. Future filings with the Securities and Exchange Commission, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may contain forward-looking statements. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by federal securities and any other applicable law.

Overview

The Company is actively involved in the business of being a vertically-integrated cannabis management company. Since current management has taken control of the Company in March 2014, we are involved in the sale and distribution of hydroponic lights and equipment as a result of our acquisition of The Big Tomato, we are aiming to generate sales of specialty soil additives used in the growth of marijuana and other hydroponics and we have acquired certain intellectual property, including trademarks and domain names, used by the Company in branding and marketing its products and services.

Monarch also provides turnkey solutions, management, and consulting services to the legally regulated marijuana industry. While not directly engaged in the sale of marijuana, Monarch offers a spectrum of capabilities that we believe to elevate the business of marijuana and hydroponic cultivation from the erratically-stocked, sparsely-staffed and managed, independent-store model to that of an efficient and consistently managed organization.

Monarch aims to oversee and manage all facets of retail operations: from property management, technology and equipment leasing to inventory control, staffing, and day-to-day operational management.

The Company recently became the exclusive consultant to the Flandreau Santee Sioux Tribe for a recreational consumption lounge in South Dakota.

Corporate History

Monarch America, Inc

The Company was incorporated in the State of Nevada on September 14, 2010. On March 19, 2014, John Ngitew and Grace Parinas, the former principal shareholders of the Company, formerly known as Lingas Ventures, Inc., entered into a Stock Purchase Agreement which provided for the sale of shares of common stock of the Company representing 50% of the issued and outstanding share capital of the Company on a fully-diluted basis to Eric Hagen, Jonathan Hunt and Steven Brandt. The consideration paid for the shares was $21,750. In connection with the transaction, Mr. Ngitew released the Company from all debts owed to him. Effective as of March 19, 2014, in connection with the sale of the shares to Messrs. Hagen, Hunt and Brandt, both John Ngitew and Grace Parinas resigned from all their respective positions as officers and directors of the Company. The Board of Directors of the Company elected Eric Hagen as President and Chief Executive Officer, Jonathan Hunt as Vice President and Secretary and Steven Brandt as Vice President and Treasurer, and said three individuals became the directors of the Company.

On May 19, 2014, the Company changed its name to "Cannabis Kinetics Corp." and effectuated a 1 for 10 reverse stock split. As a result of an amendment to the Company's Articles of Incorporation, the Company is authorized to issue 10,000,000 shares of blank check preferred stock. The number of authorized shares of common stock of the Companny, 2,610,000,000, par value $.001 per share, was not affected by the amendment.

On September 11, 2014, the Company acquired substantially all of the assets of REM International, LLC, a Colorado limited liability company (“REM”) pursuant to an asset purchase agreement, dated June 6, 2014 by and among the Company, REM, and Robert E. Matuszewki, the owner of all of the issued and outstanding equity interests in REM. The consideration paid by the Company for the assets was $118,500 and the issuance 1,500,000 shares of the Company’s common stock. Pursuant to an amendment to the asset purchase agreement, dated as of September 11, 2014, the Company agreed to pay REM $7,000 for the five months and commencing March 2015 $12,750 for the subsequent six months. The assets purchased consist of certain intellectual property, including trademarks and domain names. The Company did not assume any liabilities in connection with the acquisition.

On March 26, 2014, the Company borrowed $175,000 from Backenald Trading, Ltd. pursuant to the terms of a promissory note. Interest accrues on the outstanding principal amount at the rate of 8% and is payable quarterly beginning August 31, 2015. Principal and all accrued interest thereon is due and payable on the earlier to occur of: (i) March 26, 2016; (ii) an issuance by the Company or an acquisition of voting securities of the Company of 30% or more of the then outstanding shares or the combined voting power of the Company’s then outstanding voting securities; (iii) the individuals who are currently members of the Board of Directors of the Company cease for any reason to constitute at least two-thirds of the members of the Board; (iv) a merger, consolidation or other business combination with or into another company; or (v) the sale or other disposition of all or substantially all of the assets of the Company.

On March 26, 2014, the Company borrowed $175,000 from Adams Ale, Inc. pursuant to the terms of a promissory note. Interest accrues on the outstanding principal amount at the rate of 8% and is payable quarterly beginning August 31, 2015. Principal and all accrued interest thereon is due and payable on the earlier to occur of: (i) March 26, 2016; (ii) an issuance by the Company or an acquisition of voting securities of the Company of 30% or more of the then outstanding shares or the combined voting power of the Company’s then outstanding voting securities; (iii) the individuals who are currently members of the Board of Directors of the Company cease for any reason to constitute at least two-thirds of the members of the Board; (iv) a merger, consolidation or other business combination with or into another company; or (v) the sale or other disposition of all or substantially all of the assets of the Company.

On December 5, 2014, the Company borrowed $75,000 from Glamis Capital SA (Glamis Capital) pursuant to the terms of a promissory note. The note provides that the Company can borrow up to an aggregate of $1,500,000 from Glamis until January 30, 2015. Interest accrues on the outstanding principal amount at the rate of 8% and is payable quarterly beginning August 15, 2015. Principal and all accrued interest thereon is due and payable on the earlier to occur of: (i) January 30, 2016; (ii) an issuance by the Company or an acquisition of voting securities of the Company of 30% or more of the then outstanding shares or the combined voting power of the Company’s then outstanding voting securities; (iii) the individuals who are currently members of the Board of Directors of the Company cease for any reason to constitute at least two-thirds of the members of the Board; (iv) a merger, consolidation or other business combination with or into another company; or (v) the sale or other disposition of all or substantially all of the assets of the Company. As of March 30, 2015, the Company borrowed an aggregate of $1,150,000 from Glamis Capital.

On December 18, 2014, the Company effectuated a 3-1 forward stock split and shareholders owning shares on such record date received 2 shares of the Company in addition to each share they owned as of such date. As of December 26, 2014, the Company changed its name from Lingas Ventures, Inc. to Monarch America, Inc.

On April 29, 2015, the Company issued to Redwood Management LLC, a Florida limited liability company (“Redwood”), an original issue discount convertible debenture (the “Debenture”) in the principal amount of $1,000,000. The Debenture was issued for an original issue discount of 10%, and interest on the Debenture accrues at the rate of 10% per annum, payable in six equal tranches, the first of which was paid on April 29, 2015 and the remainder are due on each of the first five monthly anniversaries of the issuance of the Debenture. On each of May 29th and the next consecutive four months, Redwood will pay the Company $150,000 as long as (a) the Company shall have duly honored all conversions submitted by Redwood, if any, (b) the Company shall have paid all liquidated damages and other amounts owing to the Redwood, (c) the Common Stock is trading, (d) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares then issuable to Redwood, (e) there is no existing event of default under the Debenture, (f) there has been no public announcement of a pending or proposed fundamental transaction or change of control that has not been consummated, (g) the daily dollar trading volume for the common stock exceeds an average of $15,000 per trading day, (h) the Company’s common stock must be DTC and DWAC Eligible and not subject to a “DTC Chill” and (i) the Company has timely filed all reports required to be filed by the Company after the date hereof pursuant to the Securities Exchange Act of 1934, as amended. Notwithstanding, upon at least 2 business days the Company may prohibit Redwood from making any prepayment otherwise due under the Secured Redwood Note. The Debenture, which is due on April 29, 2016, is convertible into shares of the Company’s common stock at the election of Redwood at any time at a conversion price equal to 65% of the lowest trading price of the common stock during the 20 trading day period prior to conversion. Failure of the Company to deliver shares to Redwood within three days of conversion results the Company paying $10 per trading day for the first four days and $20 per day thereafter.

The Big Tomato

Founded in May 2001, The Big Tomato provides thousands of indoor gardeners and commercial growers with top quality hydroponic and indoor gardening supplies at competitive costs. The Big Tomato sells various types of products of indoor gardening products; grow boxes, grow lights, hydroponic systems, ballasts, bulbs, nutrients and additives, and other high-end hydroponic and gardening items.

On January 14, 2015, the Company completed the acquisition of Jeremy N. Stout, Inc. d/b/a The Big Tomato, a Colorado Corporation (“The Big Tomato”) pursuant to which The Big Tomato, Inc., a Colorado corporation and a wholly-owned subsidiary of the Company was merged with and into The Big Tomato. In addition to $400,000 in cash paid by the Company to Jeremy Stout and Josh Field, the shareholders of The Big Tomato, the Company issued an aggregate of 8,100,000 shares of common stock of the Company to the Shareholders. The Company also issued a secured promissory note in the principal amount of $1,000,000 (collectively, the “Notes”) to each of Messrs. Stout and Field. The Notes are payable in eight equal installments of $125,000 commencing April 1, 2015, accrue interest at the rate of 8% per annum and are secured by a first priority lien on all the assets of The Big Tomato. As additional security for the Notes, the Company pledged all of the shares of The Big Tomato to each of Messrs. Stout and Field. The security interest in such assets and the pledged stock is the exclusive remedy in the event of a default under the Notes. The Notes also provide that the Company shall be entitled to offset any damages incurred by it or its affiliates against the principal amount of the Notes arising from an inaccuracy or breach of any representation or warranty of Messrs. Stout and Field or failure to perform or comply with the Notes or other agreements or documents delivered in connection with the Merger.

Messrs. Stout and Field will each be granted 1,562,500 shares of common stock and have been paid $25,000 in consideration for the postponement of the $125,000 payment which was due July 1, 2015.

Accounting Survivor

The financial results presented below are presented under predecessor entity reporting. The Monarch segment is a segment of the successor, for which there are no comparable periods since predecessor accounting was adopted as a result of Monarch’s Merger with The Big Tomato. The results of operations referred to below for the three and six months ended June 30, 2015 represent the results of operations for the successor entity (Monarch) and the standalone comparative financial results of the predecessor (The Big Tomato) for the six months ended June 30, 2014 and June 30, 2015.

Our Operating Segments

We have two distinct operating segments:

Monarch – The management and consulting segment is positioned to provide services for building out indoor grow and cultivation facilities. This segment also has branded indoor gardening products, along with exclusive distribution arrangements with outside parties for specialized gardening supplies like soil additives and growing mediums.

The Big Tomato–The retail operations segment consists of supplying hydroponics and indoor gardening supplies through a retail storefront and supply warehouse.

Results of Operations – Monarch (Successor)

For the three and six months ended June 30, 2015

There are no comparable periods for 2014, due to the adoption of predecessor accounting.

Revenues

Monarch generated $56,054 in net revenues for the six months ended June 30, 2015, and $4,200 for the quarter ended June 30, 2015 as a result of retail sales of its branded hydroponic and cultivation supplies, such as lights and ballasts. This was a 92% decrease in retail revenue compared to prior quarter’s retail sales of $51,854 as Monarch has refocused itself to provide only consulting and management services and any Monarch-branded retail supplies will be sold exclusively through the Tomato.

Total operating expenses

Monarch’s total operating expenses were $1,175,021 for the six months ended June 30, 2015, and $470,970 for the quarter ended June 30, 2015. These year-to-date costs are related to salaries and wages of $272,652, consulting and professional fees of $604,459, occupancy costs of $89,969, and travel and other of $207,941. The quarter-to-date costs of $470,970 are related to salaries and wages of $164,063, consulting and professional fees of $108,301, occupancy costs of $29,969, and travel and other of $168,637. The 33% decrease of $233,081 from last quarter’s operating expense of $704,051 was largely attributable to stock granted to our SEC advisor and consultant in Q1, which was a non-recurring transaction. The 329% increase over prior quarter’s travel and other expenses were largely attributable to travel costs incurred in the negotiation of consulting and management agreements in Washington, Oregon, and South Dakota.

Net operating loss

During the quarter ended June 30, 2015, Monarch had a net operating loss of $469,414, compared to first quarter 2015’s net operating loss of $691,197, totaling a net operating loss for the six months ended June 30, 2015 of $1,160,611. Monarch has not yet received consulting or management revenues to offset its costs.

Results of Operations – The Big Tomato (Successor period – 2015; Predecessor period – 2014)

For the three and six months ended June 30, 2015 and June 30, 2014

Revenues

The Tomato generated $1,130,779 and $2,236,313 for the three and six months ended June 30, 2015, respectively, compared to sales of $923,284 and $1,610,179 for the three and six months ended June 30, 2014, respectively, an increase of 39% year-over-year for the six months. This continued growth in sales has been due in part to the Tomato refocusing its sales strategy to target and fulfill larger orders as well as fulfilling new large orders across the country. These types of arrangements have a larger profit margin, as when the Tomato places larger orders from its vendors, it obtains more favorable pricing per unit. This is demonstrated by the trend in cost in sales of $787,946 and $1,492,965 for the three and six months ended June 30, 2015, respectively, when compared to the cost of sales of $680,963 and $1,134,187 during the three and six months ended June 30, 2014, respectively, an increase of 32% year-over-year for the six months (compared to the 39% growth in revenue YTD). These trends have equated to a larger gross margin, as the Tomato earned a gross margin of $342,833 and $743,348 for the three and six months ended June 30, 2015, respectively, compared to the gross margins of $242,321 and $475,992 during the three and six months ended June 30, 2014, respectively, an increase of 56% year-over-year for the six months.

Total operating expenses

Total operating expenses for the three months ended June 30, 2015 were $146,940 consisting of $3,331 of advertising, $1,281 of depreciation, $14,669 of insurance, $3,750 of professional fees, $30,193 of rent, $40,058 of wages, and $53,658 of other general expenses. Total operating expenses for the three months ended June 30, 2014 were $154,842 consisting of $3,086 of advertising, $5,195 of depreciation, $9,313 of insurance, $5,545 of professional fees, $28,655 of rent, $65,986 of wages, and $37,062 of other general expenses. Year-over-year for quarter two, there was a decrease of 7,902, or 5%.

Total operating expenses for the six months ended June 30, 2015 were $301,780 consisting of $6,682 of advertising, $2,761 of depreciation, $30,647 of insurance, $8,420 of professional fees, $62,633 of rent, $105,350 of wages, and $85,287 of other general expenses. Total operating expenses for the six months ended June 30, 2014 were $290,257 consisting of $6,747 of advertising, $10,350 of depreciation, $19,596 of insurance, $12,878 of professional fees, $58,097 of rent, $118,463 of wages, and $64,126 of other general expenses. Year-over-year, there was an increase of 11,523, or 4%. When compared to net revenue, 2015 YTD operating expenses are 13% of net revenue, while 2014 YTD operating expenses were 18% of net revenue, demonstrating the Tomato’s focus on controlling fixed costs and overhead despite the growth of sales.

Net operating income

During the three and six months ended June 30, 2015, the Tomato had a net operating income of $195,893 and $441,568, respectively, as compared with a net operating income of $87,479 and $185,735 for the three and six months ended June 30, 2014, respectively, an increase in bottom line results for the six months year-over-year of $255,833 or 138%. With the legalization of marijuana in Colorado, the Tomato has been able to meet growing demands for indoor hydroponic and cultivation supplies. Larger grow facilities and operations are coming online, and the Tomato has an established reputation for being able to fill large orders at competitive costs, while giving expert advice. The Tomato has also been reaping the benefits of the synergies created by the Tomato-Monarch acquisition, as Monarch connects the Tomato to large customers across the country and fulfills large supply orders through the Tomato—connections and customers that the Tomato did not previously have.

Liquidity and Capital Resources

As of June 30, 2015, the Company had $177,146 of cash and total liabilities of $4,246,885.

Monarch has closed its line of credit with Steve Brandt, a related party to Monarch, and on August 4, 2015, Mr. Brandt, settled his note early by repaying in full principal outstanding plus accrued interest for a total of $28,243.

Beginning January 1, 2015, the Company entered into a management contract with Green Sky, Inc., a company wholly-owned by Steve Brandt, to build-out a warehouse located in Denver, Colorado for cultivation purposes. Green Sky entered into a lease agreement with the lessor of the warehouse, through which, Monarch agreed to assume responsibility of the rent from January 2015 through August 2015, during the build-out phase of the agreement. However, the Custer warehouse lessor had performance obligations to deliver a cultivation license to Green Sky which have not been met, so neither Green Sky nor Monarch America have paid rent from June 2015 on, unless and until the issue is remediated or an alternative solution is found. Monarch and Green Sky are working with other parties to seek out other opportunities for the space. Although the management contract that Monarch has entered into with Green Sky has provided for Green Sky to make payments to Monarch, currently, it is unlikely that Monarch will be able to collect any management fees from Green Sky. Monarch has determined subsequent to June 30, 2015 that its Leasehold Improvements at the Custer warehouse qualify as held for sale.

The Tomato has continued its profitable trend of 2014 by showing a continued surplus into 2015. However, in order to maintain its operations and its ability to manage its supply chain and distribution channels, the Tomato must have adequate working capital so as to have the financial flexibility to fulfill inventory orders by its customers. The profitability of the Tomato may not be sufficient to support the capital burn or operations of Monarch in the future.

Management estimates that Monarch will need approximately $2,540,000 for the next 12 months of operations, which includes $1,000,000 to pay the sellers for the sale of The Big Tomato. Quarterly interest payments are due to Glamis Capital commencing August 15, 2015 with the outstanding principal of about $1,150,000 and all accrued interest due no later than January 30, 2016. The Company also owes the former owners of the Tomato $1,700,000 in cash consideration, due quarterly, as of the date of this filing. The Company does not have sufficient cash to fund its expenses over the next twelve months. There can be no assurance that additional capital will be available to the Company. If the Company fails to raise adequate capital, its inability to raise funds for the above purposes will have a severe negative impact on its ability to remain a viable company.

To date, the Company has received cash proceeds from Redwood Management LLC funding the Debenture (described above in Corporate History- Monarch America, Inc.), resulting in $450,000 of principal outstanding, which will have to be repaid and is due in full on April 29, 2016. There is no assurance that the Company will receive any further funding from Redwood outside of the terms of the agreement.

Effective August 1, 2015, Monarch executed a management and consulting agreement with Mary JaneCo, LLC, in which Monarch will provide advisory and consulting services related to the cultivation, CO2 extraction and cultivation facility design, and construction management for Mary JaneCo’s facility in Auburn, Washington. The terms of this agreement require Mary JaneCo to pay Monarch an hourly fee for services rendered by Monarch personnel along with a surcharge on the cost of the build-out of the facility.

On June 24, 2015, Monarch entered into a five-year consulting agreement with FSST Pharms, LLC of the Flandreau Santee Sioux Tribe for the management of the build-out of a 10,000 square foot warehouse in South Dakota and the oversight of the growth of marijuana for the five years. In conjunction with this agreement, Monarch will receive a percentage of net monthly proceeds resulting from the cannabis cultivation at the Flandreau facility. However, there is uncertainty as to what this amount may be.

The Mary JaneCo and FSST Pharms contracts are models for the types of relationships Monarch would like to build with other cannabis-growing entities. The closing of these two deals will help provide Monarch with liquidity it needs to meet the capital requirements of its short-term and operational capital needs. There is uncertainty as to the extent of the profits that these arrangements will yield, so Monarch is continuing to pursue other consulting and management agreements with other parties across the nation.

Monarch also has issued and outstanding promissory notes in the aggregate principal amount of $1,400,000 due and payable in full on January 30, 2016. Monarch’s ability to continue as a going concern is dependent on management’s ability to raise additional capital, or renegotiate terms of repayment, despite the profits shown by The Big Tomato.

The financial statements included in this Report do not include any adjustments that may be necessary if we are unable to continue as a going concern.

Going Concern

As of June 30, 2015, the Company has a working capital deficit of $2,843,246, and has an accumulated deficit of $2,267,943. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

The repositioning of Lingas Resources into what is now Monarch America has required substantial capital throughout fiscal year 2014 and into 2015 in order to ramp up operations and change the Company’s industry from rare earth mining and discovery to marijuana cultivation. The transition has been made further difficult by governmental red tape and bureaucracy, demonstrated by Monarch’s consulting client at the Custer warehouse, Green Sky, being unable to obtain a license to grow cannabis at the facility, which has led to Monarch not being able to collect management and consulting fees from Green Sky, as no cannabis has been cultivated.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Revenue Recognition

Goodwill and Intangible Assets

Stock-based Compensation

Derivative Financial Instruments

Financial Instruments

Fair Value Hierarchy

Level 1

Level 2

Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance:

Level 3

June 30, 2015
	Amount		Level 1		Level 2		Level 3

Embedded conversion derivative liabilities	$	457,829	$	–	$	–	$	457,829

Total	$	457,829	$	–	$	–	$	457,829

Recently Adopted Accounting Policy

Inventories

Depreciation

Equipment is stated at cost and is depreciated on a straight-line basis over its estimated useful life, as follows:

Furniture and equipment	5 years
Leasehold improvements	3 years
Software and website	3 years
Vehicles	7 years

Property and equipment is presented net of accumulated depreciation.

Use of Estimates

Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on its financial statements unless otherwise disclosed, and the Company does not believe that there are new accounting pronouncements that have been issued that may have a material impact on its financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, who is also our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of June 30, 2015. Based upon such evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective, as of June 30, 2015, to provide assurance that information that is required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive, principal operating and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Our internal controls were not effective as of June 30, 2015 for the following reasons: Given the limited number of personnel responsible for accounting for and managing transaction and funds in the company, there is an inherent limitation to the Company’s ability to establish segregation of duties. Moreover, the Company has a limited number of qualified accounting personnel involved in the maintenance of accounting records and the Company has been unable to maintain adequate control activities or monitoring processes.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

Item 1A. Risk Factors

As a “smaller reporting company”, we are not required to provide the information required by this item.

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

Recent sales of unregistered securities

On July 27, 2015, the Company issued 50,000 shares of common stock with a fair value of $3,500 for products to sell at the Big Tomato, and 600,000 shares of common stock with a fair value of $42,000 to employees at the Tomato as a retention bonus. This issuance was conducted in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.

Purchases of equity securities by the issuer and affiliated purchasers.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description

31		Rule 13a-14(a)/15d-14(a) Certifications*

32		Section 1350 Certifications*

__________

*Filed 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.

	MONARCH AMERICA, INC.

Date: August 17, 2015	By:	/s/ Eric Hagen
		Eric Hagen President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Jonathan Hunt
		Jonathan Hunt Vice-President, Treasurer and Secretary (Principal Financial and Account Officer)

Attached files

Stock widget

Investing forum

Monarch America, Inc. Reports