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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C . 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED March 31, 2015
333-173537
Commission File Number
MONTALVO SPIRITS, INC.
(Name of Business Issuer in Its Charter)
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NEVADA
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27-4004890
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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5301 N. COMMERCE AVE, SUITE F, MOORPARK, CA 93021
(Address of principal executive offices)
818-266-9286
(Issuer's telephone number, including area code)
| Securities Registered Pursuant To Section 12(B) of the Act: | None. |
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Securities Registered Pursuant To Section 12(G) of the Act:
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Common Stock, par value $0.001 per share
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(Title of Class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No o
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o No o
Indicate by checkmark 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 (§229.405 of this chapter) during the preceding 12 months ( or for such shorter period that the registrant was required to submit and post such files.
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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”, or “smaller reporting company in Rule 12b-2 of the Exchange Act (check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting Company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).
Yes o No o
The aggregate market value of the voting stock held on September 30, 2014 by non-affiliates of the registrant was $3,895,554 based on the closing price of $0.10 per share as reported on the OTCQB on September 30, 2014 the last business day of the registrant's most recently completed fiscal second quarter (calculated by excluding all shares held by executive officers, directors and holders known to the registrant of five percent or more of the voting power of the registrant's common stock, without conceding that such persons are "affiliates" of the registrant for purposes of the federal securities laws).
As of April 8, 2016, there were 75,466,969 shares of common stock of the Registrant issued and outstanding.
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PART II
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PART III
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| Item 10. | Directors, Executive Officers, Promoters and Corporate Governance. | 30 | |
| Item 11. | Executive Compensation | 32 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 33 | |
| Item 13. | Certain Relationships and Related Transactions and Director Independence | 34 | |
| Item 14. | Principal Accountant Fees and Services | 34 | |
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| PART IV | |||
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” “anticipates,” “projects,” “expects,” “may,” “will,” or “should,” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
Although these forward-looking statements reflect the good faith judgment of our management, such statements can only be based upon facts and factors currently known to us. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption “Risk Factors.” For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should not unduly rely on these forward-looking statements, which speak only as of the date on which they were made. They give our expectations regarding the future but are not guarantees. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
References in this Annual Report on Form 10-K (the “Annual Report”) to “we”, “us,” “our,” “Registrant,” “the Company,” “Montalvo” mean Montalvo Spirits, Inc. and our subsidiaries, unless the context otherwise requires.
Corporate History
Montalvo Spirits, Inc. (Formerly Advanced Cloud Storage, Inc.)
Montalvo Spirits, Inc. (the “Company”) was incorporated on November 18, 2010 under the laws of the State of Nevada under the name of Advanced Cloud Storage, Inc. The Company originally intended to market and sell its planned secure online data storage through its intended website.
Amendment to the Articles of Incorporation
On December 21, 2012, holders of a majority of the Company’s outstanding shares of common stock, par value $0.001 per share (the “Common Stock”) voted to amend the Company’s Articles of Incorporation to: (i) change its name to “Montalvo Spirits, Inc.” (the “Company”), (ii) increase the number of its authorized shares of capital stock from 75,000,000 shares to 310,000,000 consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock and (iii) effectuate a forward split on a 1:32.4552 basis (“the Amendment”).
CASA Montalvo Holdings, Inc.
CASA Montalvo Holdings, Inc. (“Casa Montalvo”) was incorporated under the laws of the State of California on April 4, 2011. Casa Montalvo develops, markets and/or distributes alcoholic beverages, primarily in the United States.
Formation of Montalvo Imports LLC
On August 9, 2012, the Company formed Montalvo Imports LLC (“LLC” or “Imports”) under the laws of the State of Delaware. The LLC, of which the Company is the sole member, was formed to provide the same services as that of the Company.
Formation of Cannabis Beverage Group, Inc.
On March 27, 2014, the Company formed Cannabis Beverage Group, Inc. (“CBG”) under the laws of the State of Colorado. CBG, of which the Company is the shareholder, was formed to explore entry into the cannabis based beverage industry.
Acquisition of CASA Montalvo Treated as a Reverse Acquisition
On December 21, 2012, the Company, entered into and consummated the Agreement and Plan of Share Exchange (the “Exchange Agreement”) with Casa Montalvo and the shareholders of Casa Montalvo (the “Exchange”). Upon consummation of the transactions set forth in the Exchange Agreement (the “Closing”), the Registrant adopted the business plan of Casa Montalvo.
Pursuant to the Exchange Agreement, the Company agreed to acquire all of the issued and outstanding capital stock of Casa Montalvo in exchange for the issuance of an aggregate for 59,000,016 post-split (pre-split 1,817,891) shares of the Registrant’s Common Stock (the “Exchange Shares”). As a result of the Exchange, Casa Montalvo became a wholly-owned subsidiary of the Registrant. The shareholders of Casa Montalvo beneficially owned approximately eighty-eight and one half percent (88.5%) of the issued and outstanding Common Stock of the Registrant immediately after the consummation of the Exchange. Pursuant to the terms of the Exchange Agreement, the Registrant’s principal shareholder agreed to retire 10,000,000 shares of the Registrant’s Common Stock.
As a result of the controlling financial interest of the former stockholder of Casa Montalvo, for financial statement reporting purposes, the merger between the Company and Casa Montalvo has been treated as a reverse acquisition with Casa Montalvo deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of Casa Montalvo (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Casa Montalvo which are recorded at their historical cost. The equity of the Company is the historical equity of Casa Montalvo retroactively restated to reflect the number of shares issued by the Company in the transaction.
Company Overview
We develop, market and/or distribute alcoholic beverages, primarily in the United States. We sell our products through a network of established spirits distributors, who are licensed to distribute alcoholic beverages throughout the United States. We are federally licensed, maintaining the right to sell to distributors in all markets in the U.S. and globally.
We intend to focus on growing the market share of its initial products, the ultra-premium Montalvo line of tequilas, whose expressions include Plata, Reposado, Anejo and Extra-Anejo. We own the Montalvo brand trademark and have exclusive worldwide master distribution rights to the brands.
We intend to grow our business by expanding our portfolio of premium alcoholic beverage brands, including additional spirits categories, as well as beer and wine, through additional importation and distribution contracts of existing brands. In addition, we may choose to develop new brands or acquire existing companies with their own brand portfolios.
Target Markets and Marketing Strategy
While our primary route to market is by selling directly to distributors, who maintain extensive resources to sell to both on and off premise retail accounts, including liquor stores, grocery stores, convenience stores, bars and restaurants, to build our brands, we must effectively communicate with three distinct audiences: the distributors; the retail trade; and the end consumer. We believe advertising, marketing and promotional activities help to establish and reinforce the image and perception of our brand as we strive in building substantial brand value.
In control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. We would sell on consignment to any control state in which we do business, we would provide inventory to state regulated stores and would be paid upon sale of the product. Should the inventory we provide not sell in a timely manner or at all, this could negatively impact our working capital and tie up our inventory for an unknown period of time. We currently do business in two control states, Oregon and Wyoming.
Marketing, sales and customer service functions are provided by our executive officers and independent contractors who work together with third party design and advertising firms to maintain a high degree of focus on each of our products. We attempt to build brand awareness through innovative marketing activities including social media, brand tastings, as well as competitive spirits competitions. We use a variety of marketing strategies and tactics to build brand equity and increase sales, including consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and on-premise promotions and public relations, as well as a variety of other traditional and non-traditional marketing techniques. Our significant public relations campaign has helped gain editorial coverage for our brands, which increases brand awareness. We define editorial coverage as an article in a publication expressing the opinion of its editors or publishers. Montalvo Tequila has been featured in various industry publications, including Tasting Panel Magazine, Beverage Industry and M. Shanken’s Market Watch. Past and future event sponsorship is an economical way for us to have influential consumers taste our brands.
Products
We have an Exclusive Worldwide Distribution Agreement with Destilidora Huerta Real, S.A. de C.V., the producers of Montalvo Tequila. Montalvo, an award winning, ultra-premium tequila brand is a handcrafted, meticulously formulated tequila produced from only the highest quality blue agave plants from the Lowlands of Jalisco, Mexico. Montalvo ensures the brand’s premium quality by handcrafting in small batches, using hand-selected Blue Weber agave plants picked at the peak of maturity and employing a third distillation. Fourth-generation tequila producers Sergio and Carlos Gonzalez Rivera have combined their family’s ancient traditions with modern techniques, resulting in a clean, smooth and memorable tequila. Montalvo is available in four expressions: Plata, Reposado, Añejo and Extra-Añejo.
Inventory
We maintain a relatively large inventory based on historical revenues in order to meet unknown customer delivery requirements of new independent distributors we are in the process of securing. We feel that the current production capacity of our primary supplier is sufficient to meet demand for the foreseeable future. In case of an unexpected surge in demand, our primary supplier maintains contract manufacturing arrangements with third-party suppliers capable of producing large-scale volumes of our products. Based on the relatively short turnaround time from placing an order with our supplier to receiving the product, we believe it will be able to effectively manage our inventory in the face of unknown demand.
Patents and Trademarks
Pursuant to the Exclusive Distribution Agreement with Destilidora Huerta Real, S.A. de C.V., we own the trademark “Montalvo”. The trademark is registered in the United States, Mexico, Colombia, Brazil and Argentina, and is currently pending in the European Union. We consider the trademark to be valuable and important to our business.
Customers
The U.S. alcoholic beverage industry is a regulated, three-tier system of suppliers, distributors and retailers. We currently distribute the Montalvo Tequila brand through a network of independent distributors. We also maintain an arrangement with MHW, Ltd., a third-party leading service provider to alcoholic beverage companies, to import the Montalvo brand into the U.S. as well as to sell Montalvo directly to retailers in New York, New Jersey and California. We hope to expand the number of independent distributors in certain existing markets and new markets, when we have sufficient funds to maintain a larger marketing campaign.
Competition
The alcohol beverage industry is highly competitive. We compete with other alcohol beverage companies, most of which have significantly more sales and resources than us, and have been in business for much longer than we have. We compete with national and regional beverage producers and "private label" suppliers. Some of our largest competitors are Diageo PLC, Pernod Ricard S.A., Bacardi Limited, Brown-Forman Corporation, Beam Inc., Remy Cointreau S.A. and Constellation Brands, Inc.
Over the last decade, the wine and spirits industry in the United States has undergone dramatic consolidation and realignment of brands and brand ownership. The number of major importers, suppliers and distributors in the U.S. has declined significantly due to this consolidation. As a result, we believe there is a great opportunity for smaller companies to develop high-quality, high-margin brands, which can grow to be very attractive acquisition candidates for the larger companies.
We believe that we compete on the basis of quality, price, brand recognition and distribution strength. By focusing on the premium and super-premium segments of the market, which typically have higher margins, we believe we are able to gain relatively significant attention from our distributors for a company of our size. Our U.S. sales force have built, and should continue to build sound, long standing relationships with distributors both locally and nationally as well as with their customers. Finally, with the continued consolidation among the major companies that we have seen and expect to continue to see, we feel there is an opportunity for small to mid-size spirits companies such as ours, as the major companies contract their portfolios to focus on fewer brands.
There can be no assurance that we will compete successfully with existing or new competitors, or that the competition will not have a material adverse effect on our business, operating results or financial condition (See ITEM 1A “RISK FACTORS”).
Management and Employees
We currently have no full time employees other than our executive officers. Our sales and marketing team consists of six (6) independent contractors, which are all at-will contractors. We are not a party to any collective bargaining agreements.
Liquidity and Capital Resources
Our auditors have issued a “going concern” opinion, meaning that there is substantial doubt if we can continue as an on-going business for the next twelve months unless we obtain additional capital. We must raise cash to implement our strategy and stay in business.
As of March 31, 2015, we had $50,757 in cash, $20,985 in accounts receivable and $104,800 in inventories, totaling $176,000 in assets as compared to $279,581 in total assets for March 31, 2014. The funds available to us will not be sufficient to fund our planned operations. If we do not substantially increase our sales, we will require funding to continue our operations of which there can be no assurance that we will be able to raise funds or that if we do so that they will be on grounds that are favorable to us.
Potential Future Projects and Conflicts Of Interest
Members of management may serve in the future as an officer, director or investor in other entities. Neither the Company nor any shareholder would have any interest in these projects. Management believes that they have sufficient resources to fully discharge their responsibilities to all projects they have organized or will organize in the future, if any.
Government Regulation
The production and marketing of our alcoholic beverages are subject to the rules and regulations of various Federal, provincial, state and local health agencies, including in particular the U.S. Alcohol and Tobacco Tax and Trade Bureau (“TTB”) as well as the Alcoholic Beverage Control Laws of all states in which our products are sold. The TTB also regulates labeling of our products.
We believe that we are in material compliance with applicable federal, state, and other regulations and that we have a compliance program in place to ensure compliance with production, marketing and labeling regulations on a going-forward basis. There are no regulatory notifications or actions currently outstanding.
We currently do not incur any material costs in connection with our compliance with applicable environmental laws. Furthermore, the cost of maintaining compliance with applicable environmental laws has not, and we believe, in the future, will not, have a material adverse effect on our business, results of operations and financial condition.
Website
Our website address is www.montalvospirits.com.
We intend to make available through our website, all of our filings with the Commission and all amendments to these reports as soon as reasonably practicable after filing, by providing a hyperlink to the EDGAR website containing our reports.
Available Information
The Company is required to file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Investors may read and copy any document that the Company files, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 450 F Street, N.W., Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, from which investors can electronically access the Company’s SEC filings.
Our Information
Our principal executive offices are currently located at 5301 N. Commerce Ave., Suite F, Moorpark, CA and our telephone number is (818) 266-9286. We can be contacted by email at info@MontalvoSpirits.com.
Our business, financial condition, operating results and prospects are subject to the following risks. Additional risks and uncertainties not presently foreseeable to us may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our Common Stock could decline, and our stockholders may lose all or part of their investment in the shares of our Common Stock.
This Form 10-K contains forward-looking statements that involve risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” or “anticipation” or the negative thereof or other variations thereon or comparable terminology. Actual results could differ materially from those discussed in the forward- looking statements as a result of certain factors, including those set forth below and elsewhere in this Form 10-K.
We have inadequate capital and need additional financing to accomplish our business and strategic plans.
We have very limited funds, and such funds are not adequate to develop our current business plan. We believe that for our company to be successful, we will be required to spend significant sums to market our products. If the sales of our products do not enable us to meet this need, our ultimate success may depend on our ability to raise additional capital. In the absence of additional financing or significant revenues and profits, the we will have to approach our business plan from a much different and much more restricted direction, attempting to secure additional funding sources to fund our growth, borrowing money from lenders or elsewhere or to take other actions to attempt to provide funding. We cannot guarantee that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us.
Our limited operating history does not afford investors a sufficient history on which to base an investment decision.
We are currently in the early stages of developing our business. There can be no assurance that at this time that we will operate profitably or will have adequate working capital to meet our obligations as they become due.
Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving and changing markets. Such risks include the following:
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the nature of our competition and our ability to effectively market our products;
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ability to anticipate and adapt to the highly competitive alcoholic beverage and spirits market;
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ability to effectively manage expanding operations; amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure; and
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dependence upon key personnel to market and sell our services and the loss of one of our key managers may adversely affect the marketing of our services.
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We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected and we may not have the resources to continue or expand our business operations.
Recent worldwide and domestic economic trends and financial market conditions could adversely impact our financial performance.
The worldwide and domestic economies have experienced adverse conditions and may be subject to further deterioration for the foreseeable future. We are subject to risks associated with these adverse conditions, including economic slowdown and the disruption, volatility and tightening of credit and capital markets. This global economic situation could adversely impact our major suppliers, distributors and retailers. In addition, unfavorable global or domestic economic situations could adversely impact our major suppliers, distributors and retailers. Financial difficulties experienced by our suppliers or customers could result in product delays, possible accounts receivable defaults and inventory challenges. The inability of suppliers, distributors or retailers to conduct business or to access liquidity could impact our ability to distribute our products.
There can be no assurance that market conditions will improve in the near future. A prolonged downturn, further worsening or broadening of the adverse conditions in the worldwide and domestic economies could affect consumer spending patterns and purchases of our products, and create or exacerbate credit issues, cash flow issues and other financial hardships for us and for our suppliers, distributors, retailers and consumers. Depending upon their severity and duration, these conditions could have a material adverse impact on our business, liquidity, financial condition and results of operations. We are unable to predict the likely duration and severity of the current disruption in the financial markets and the adverse economic conditions in the U.S. and other markets.
We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace. We also have annual purchase obligations with certain suppliers.
We depend on a limited number of third-party suppliers for the sourcing of all of our products, including both our own proprietary brands and those we distribute for others. These suppliers consist of third-party distillers, bottlers and producers in Mexico. For our proprietary products, we may rely on a single supplier to fulfill one or all of the manufacturing functions for a brand. For instance, Destilidora Huerta Real, S.A. de C.V. is the sole producer for Montalvo Tequila. The termination of our written or oral agreements or an adverse change in the terms of these agreements could have a negative impact on our business. If our suppliers increase their prices, we may not have alternative sources of supply and may not be able to raise the prices of our products to cover all or even a portion of the increased costs. Also, our suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products from international suppliers or the loss of our existing suppliers, especially our key suppliers, could cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage our relationships with distributors, ultimately leading to a decline in our business and results of operations. If we are not able to renegotiate these contracts on acceptable terms or find suitable alternatives, our business could be negatively impacted.
The sales of our products could decrease significantly if we cannot secure and maintain listings in the control states.
In the control states, the state liquor commissions act in place of distributors and decide which products are to be purchased and offered for sale in their respective states. Products selected for listing must generally reach certain volumes and/or profit levels to maintain their listings. Products are selected for purchase and sale through listing procedures which are generally made available to new products only at periodically scheduled listing interviews. Products not selected for listings can only be purchased by consumers in the applicable control state through special orders, if at all. If, in the future, we are unable to maintain our current listings in the control states, or secure and maintain listings in those states for any additional products we may acquire, sales of our products could decrease significantly.
Currency exchange rate fluctuations and devaluations may have a significant adverse effect on our revenues, sales, costs of goods and overall financial results.
For fiscal 2015, non-U.S. operations accounted for none of our revenues but we are dependent upon resources in Mexico for the products we intend to market, distribute and sell. Therefore, gains and losses on the conversion of foreign payments into U.S. dollars could cause fluctuations in our results of operations, and fluctuating exchange rates could cause reduced revenues and/or gross margins from non-U.S. dollar-denominated international sales and inventory purchases. Our ability to acquire spirits and wine and produce and sell our products at favorable prices will also depend in part on the relative strength of the U.S. dollar. We may not be able to hedge against these risks.
If our inventory is lost due to theft, fire or other damage or becomes spoiled, our results of operations would be negatively impacted.
We expect our inventory levels to fluctuate to meet customer delivery requirements for our products. We are always at risk of loss of that inventory due to theft, fire or other damage, and any such loss, whether insured against or not, could cause us to fail to meet our orders and harm our sales and operating results. Also, our inventory may become obsolete as we introduce new products, cease to produce old products or modify the design of our products’ packaging, which would increase our operating losses and negatively impact our results of operations.
Weather conditions may have a material adverse effect on our sales or on the price of raw materials used to produce spirits.
We operate in an industry where performance is affected by the weather. Extreme changes in weather conditions may result in lower consumption of tequila and other alcoholic beverages. In particular, unusually cold spells in winter or high temperatures in the summer can result in temporary shifts in customer preferences and impact demand for the alcoholic beverages we produce and distribute. Similar weather conditions in the future may have a material adverse effect on our sales which could affect our business, financial condition and results of operations. In addition, inclement weather may affect the availability of grain used to produce raw spirit, which could result in a rise in raw spirit pricing that could negatively affect margins and sales.
Climate change, or legal, regulatory or market measures to address climate change, may negatively affect our business, operations or financial performance, and water scarcity or poor quality could negatively impact our production costs and capacity.
Our business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Severe weather events and climate change may negatively affect agricultural productivity in the regions from which we presently source our agricultural raw materials such as agave. Decreased availability of our raw materials may increase the cost of our products. Severe weather events or changes in the frequency or intensity of weather events can also disrupt our supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of our products to wholesalers, retailers and consumers.
Water is essential in the production of our products. The quality and quantity of water available for use is important to the supply of agave and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality which may affect our production costs or impose capacity constraints. Such events could adversely affect our results of operations and financial condition.
The Company has limited protection of the Exclusive Master Distribution Agreement (“Distribution Agreement”).
The Company currently has an exclusive right to distribute all Casa Montalvo products throughout the world for a three-year term. The term will be extended indefinitely provided the Company hits minimal sales requirements. Any breach of the Distribution Agreement, or an act of terminating cause, could lead to the loss of the Company’s exclusive distribution rights, for the respective jurisdictions which the Company operates, which would have a material adverse effect on the business, results of operations and financial condition.
Either our strategic partners’ failure to protect our respective trademarks and trade secrets could compromise our competitive position and decrease the value of our brand portfolio.
Since we frequently enter into exclusive arrangements to market our products with unaffiliated agents, our business and prospects depend in part on our, and with respect to our agency or joint venture brands, our strategic partners’ ability to develop favorable consumer recognition of our brands and trademarks. Although both we and our strategic partners actively apply for registration of our brands and trademarks, they could be imitated in ways that we cannot prevent. Also, we rely on trade secrets and proprietary know-how, concepts and formulas. Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future and result in a judgment or monetary damages being levied against us. We do not maintain non-competition agreements with all of our key personnel or with some of our key suppliers. If competitors independently develop or otherwise obtain access to our or our strategic partners’ trade secrets, proprietary know-how or recipes, the appeal, and thus the value, of our brand portfolio could be reduced, negatively impacting our sales and growth potential.
We operate in highly competitive industries, and competitive pressures could have a material adverse effect on our business.
The alcoholic beverages production and distribution industries in our region are intensely competitive. The principal competitive factors in these industries include product range, pricing, distribution capabilities and responsiveness to consumer preferences, with varying emphasis on these factors depending on the market and the product. The alcoholic beverage industry competes with respect to brand recognition, product quality, brand loyalty, customer service and price. Failure to maintain and enhance our competitive position could materially and adversely affect our business and prospects for business. Wholesaler, retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of our products, including their quality or pricing, compared to competitor’s products. Unit volume and dollar sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers, state and provincial agencies, and retailers which could affect their supply of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase the number of our personnel or our advertising or marketing expenditures to maintain our competitive position or for other reasons.
Our business could be adversely affected by a decline in the consumption of alcohol and spirits we sell.
While over the past several years there have been modest increases in consumption of beverage alcohol in most of our product categories and geographic markets, there have been periods in the past in which there were substantial declines in the overall per capita consumption of beverage alcohol products in the U.S. and other markets in which we participate. A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:
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A general decline in economic or geopolitical conditions;
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Concern about the health consequences of consuming beverage alcohol products and about drinking and driving;
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A general decline in the consumption of beverage alcohol products in on-premise establishments, such as may result from smoking bans and stricter laws related to driving while under the influence of alcohol;
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Consumer dietary preferences favoring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products;
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The increased activity of anti-alcohol groups;
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Increased federal, state, provincial or foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing; and
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Increased regulation placing restrictions on the purchase or consumption of beverage alcohol products.
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We are subject to extensive government regulation and are required to obtain and renew various permits and licenses; changes in or violations of laws or regulations or failure to obtain or renew permits and licenses could materially adversely affect our business and profitability.
Our business of marketing and distributing alcoholic beverages in the United States is subject to regulation by national and local governmental agencies. These regulations and laws address such matters as licensing and permit requirements, regarding the production, storage and import of alcoholic products; competition and anti-trust matters; trade and pricing practices; taxes; distribution methods and relationships; required labeling and packaging; advertising; sales promotion; and relations with wholesalers and retailers. Loss of production capacity due to regulatory issues can negatively affect our sales and increase our operating costs as we attempt to increase production at other facilities during that time to offset the lost production. It is possible that we could have similar issues in the future that will adversely impact our sales and operating costs. Additionally, new or revised regulations or requirements or increases in excise taxes, customs duties, income taxes, or sales taxes could materially adversely affect our business, financial condition and results of operations.
In addition, we are subject to numerous environmental and occupational, health and safety laws and regulations in the countries in which we plan to operate. We may incur significant costs to maintain compliance with evolving environmental and occupational, health and safety requirements, to comply with more stringent enforcement of existing applicable requirements or to defend against challenges or investigations, even those without merit. Future legal or regulatory challenges to the industry in which we operate or our business practices and arrangements could give rise to liability and fines, or cause us to change our practices or arrangements, which could have a material adverse effect on us, our revenues and our profitability.
Governmental regulation and supervision as well as future changes in laws, regulations or government policy (or in the interpretation of existing laws or regulations) that affect us, our competitors or our industry generally, strongly influence our viability and how we operate our business. Complying with existing laws, regulations and government policy is burdensome, and future changes may increase our operational and administrative expenses and limit our revenues.
Additionally, governmental regulatory and tax authorities have a high degree of discretion and may at times exercise this discretion in a manner contrary to law or established practice. Such conduct can be more prevalent in jurisdictions with less developed or evolving regulatory systems like Mexico. Our business would be materially and adversely affected if there were any adverse changes in relevant laws or regulations or in their interpretation or enforcement. Our ability to introduce new products may also be affected if we cannot predict how existing or future laws, regulations or policies would apply to such products or services.
If we fail to manage growth effectively or prepare for product scalability, it could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations.
Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. As of March 31, 2015, we had no full time employees outside of our management team. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the marketing of the products we sell, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
Our management team may not be able to successfully implement our business strategies.
If our management team is unable to execute on its business strategies, then our development, including the establishment of revenues and our sales and marketing activities would be materially and adversely affected. In addition, we may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by any future growth. We may seek to augment or replace members of our management team or we may lose key members of our management team, and we may not be able to attract new management talent with sufficient skill and experience.
If we are unable to retain key executives and other key affiliates, our growth could be significantly inhibited and our business harmed with a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel. The loss of such individuals could have a material adverse effect upon our business, financial condition, and results of operations. We do not maintain key-person insurance for members of our management team because it is cost prohibitive at this point. If we lose the services of any member of senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
Due to the regulated nature of the alcoholic beverage industry, we will be required to establish strategic relationships with third parties. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our product and marketing plan relative to our competitors. We may not be able to establish other strategic relationships in the future. In addition, any strategic alliances that we establish may subject us to a number of risks, including risks associated with sharing proprietary information, loss of control of operations that are material to developed business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control.
Our financial results may not meet the expectations of investors and may fluctuate because of many factors and, as a result, investors should not rely on our revenue and/or financial projections as indicative of future results.
Fluctuations in operating results or the failure of operating results to meet the expectations of investors may negatively impact the value of our securities. Operating results may fluctuate due to a variety of factors that could affect revenues or expenses in any particular quarter. Fluctuations in operating results could cause the value of our securities to decline. Investors should not rely on revenue or financial projections or comparisons of results of operations as an indication of future performance. As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of investors. This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
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delays in sales resulting from potential customer sales cycles;
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variations or inconsistencies in return on investment models and results;
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delays in demonstrating product performance or installations;
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changes in competition; and
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changes or threats of significant changes in legislation or rules or standards that would change the drivers for product adoption.
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Because our auditors have issued a going concern opinion, there is substantial doubt about our ability to continue as a going concern.
Our report from our independent registered public accounting firm for the year ended March 31, 2015 includes an explanatory paragraph stating that our recurring losses from operations and negative cash flows raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment.
Our strategy may include acquiring companies which may result in unsuitable acquisitions or failure to successfully integrate acquired companies, which could lead to reduced profitability.
We may embark on a growth strategy through acquisitions of companies or operations that complement existing product lines, customers or other capabilities. We may be unsuccessful in identifying suitable acquisition candidates, or may be unable to consummate desired acquisitions. To the extent any future acquisitions are completed, we may be unsuccessful in integrating acquired companies or their operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse impact on future profitability. Some of the risks that may affect our ability to integrate, or realize any anticipated benefits from, acquisitions include:
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unexpected losses of key employees or customer of the acquired company;
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difficulties integrating the acquired company’s standards, processes, procedures and controls;
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difficulties coordinating new product and process development;
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difficulties hiring additional management and other critical personnel;
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difficulties increasing the scope, geographic diversity and complexity of our operations;
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difficulties consolidating facilities, transferring processes and know-how;
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difficulties reducing costs of the acquired company’s business;
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diversion of management’s attention from our management; and
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adverse impacts on retaining existing business relationships with customers.
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RISKS RELATED TO OUR INDUSTRY
Demand for our products may be adversely affected by many factors, including changes in consumer preferences and trends.
Consumer preferences may shift due to a variety of factors including changes in demographic and social trends, public health initiatives, product innovations, changes in vacation or leisure activity patterns and a downturn in economic conditions, which may reduce consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences toward beer, wine or non-alcoholic beverages. Our success depends in part on fulfilling available opportunities to meet consumer needs and anticipating changes in consumer preferences with successful new products and product innovations.
We face substantial competition in our industry and many factors may prevent us from competing successfully.
We compete on the basis of product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences. The global spirits industry is highly competitive and is dominated by several large, well-funded international companies which trend toward consolidation. It is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability. The dollar amount and unit volume of our sales could be negatively affected by our inability to maintain or increase prices, changes in geographic or product mix, a general decline in beverage alcohol consumption or the decision of wholesalers, retailers or consumers to purchase competitor’s products instead of our products. Wholesaler, retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of our products, including their quality or pricing, compared to competitor’s products. Unit volume and dollar sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers, state and provincial agencies, and retailers which could affect their supply of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase the number of our personnel or our advertising or marketing expenditures to maintain our competitive position or for other reasons.
Adverse public opinion about alcohol could reduce demand for our products.
Anti-alcohol groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations designed to discourage alcohol consumption. More restrictive regulations, negative publicity regarding alcohol consumption and/or changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue growth, causing a decline in our results of operations.
Class action or other litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.
The alcoholic beverage industry faces the possibility of class action or similar litigation alleging that the continued excessive use or abuse of beverage alcohol has caused death or serious health problems. It is also possible that governments could assert that the use of alcohol has significantly increased government funded health care costs. Litigation or assertions of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers, could be named in litigation of this type.
Also, lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend against, depleting our cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our business could be harmed significantly.
Regulatory decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our margins.
The production, distribution, marketing, advertising and labeling of alcohol beverage products is subject to extensive regulation in all of the countries in which we operate. We are required to comply with these regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we could find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our sales and profit potential.
Further, the distribution of beverage alcohol products is subject to extensive taxation both in the U.S. and internationally (and, in the U.S., at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
We could face product liability or other related liabilities that increase our costs of operations and harm our reputation.
Although we maintain liability insurance and will attempt to limit contractually our liability for damages arising from our products, these measures may not be sufficient for us to successfully avoid or limit liability. Our product liability insurance coverage is limited to $1 million per occurrence and $2 million in the aggregate and our general liability umbrella policy is capped at $1 million. Further, any contractual indemnification and insurance coverage we have from parties supplying our products is limited, as a practical matter, to the creditworthiness of the indemnifying party and the insured limits of any insurance provided by these suppliers. In any event, extensive product liability claims could be costly to defend and/or costly to resolve and could harm our reputation.
If we become subject to product liability claims, personal injury claims or defective products, our business may be harmed.
The marketing and sale of our products entails risk of product liability and there can be no assurance that product liability claims will not be asserted against us. While we intend to obtain some business liability insurance, insurance designed to cover product liability is expensive, difficult to obtain in some cases and may not be available now or in the future on acceptable terms, if at all. Furthermore, there can be no assurance that such insurance coverage will be adequate, or that a product liability claim, even one without merit, would not have a material adverse effect on our business or financial condition. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any such business interruption insurance, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
Contamination of our products and/or counterfeit or confusingly similar products could harm the image and integrity of, or decrease customer support for, our brands and decrease our sales.
The success of our brands depends upon the positive image that consumers have of them. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could affect the demand for our products. Contaminants in raw materials purchased from third parties and used in the production of our products or defects in the distillation and fermentation processes could lead to low beverage quality as well as illness among, or injury to, consumers of our products and could result in reduced sales of the affected brand or all of our brands. Also, to the extent that third parties sell products that are either counterfeit versions of our brands or brands that look like our brands, consumers of our brands could confuse our products with products that they consider inferior. This could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our sales and operations.
RISKS RELATED TO THE SECURITIES MARKETS AND INVESTMENTS IN OUR COMMON STOCK
There is a substantial lack of liquidity of our Common Stock and volatility risks.
Our Common Stock is quoted on the OTCQB under the symbol “TQLA.” The liquidity of our Common Stock may be very limited and affected by our limited trading market. The OTCQB market is an inter-dealer market much less regulated than the major exchanges, and is subject to abuses, volatilities and shorting. There is currently no broadly followed and established trading market for our Common Stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded.
The trading volume of our Common Stock is limited and sporadic. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained. As a result of such trading activity, the quoted price for our Common Stock on the OTCQB may not necessarily be a reliable indicator of our fair market value. In addition, if our shares of Common Stock cease to be quoted, holders would find it more difficult to dispose of or to obtain accurate quotation as to the market value of, our Common Stock and as a result, the market value of our Common Stock likely would decline.
The market price for our stock may be volatile and subject to fluctuations in response to factors, including the following:
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The increased concentration of the ownership of our shares by a limited number of affiliated stockholders following the Exchange may limit interest in our securities;
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variations in quarterly operating results from the expectations of securities analysts or investors;
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revisions in securities analysts’ estimates or reductions in security analysts’ coverage;
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announcements of new attractions or services by us or our competitors;
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reductions in the market share of our services;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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general technological, market or economic trends;
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investor perception of our industry or prospects;
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insider selling or buying;
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investors entering into short sale contracts;
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regulatory developments affecting our industry; and
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additions or departures of key personnel.
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Many of these factors are beyond our control and may decrease the market price of our Common Stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our Common Stock will be at any time, including as to whether our Common Stock will sustain current market prices, or as to what effect that the sale of shares or the availability of Common Stock for sale at any time will have on the prevailing market price.
Our Common Stock may never be listed on a major stock exchange.
We currently do not satisfy the initial listing standards of a national or other securities exchange and cannot ensure that we will ever satisfy such listing standards or that our Common Stock will be accepted for listing on any such exchange. Should we fail to satisfy the initial listing standards of such exchanges, or our Common Stock is otherwise rejected for listing, the trading price of our common stock could suffer, the trading market for our Common Stock may continue to be less liquid and the price may be subject to increased volatility.
A decline in the price of our Common Stock could affect our ability to raise working capital and adversely impact our ability to continue operations.
A prolonged decline in the price of our Common Stock could result in a reduction in the liquidity of our Common Stock and a reduction in our ability to raise capital. A decline in the price of our Common Stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new services and continue our current operations. If our Common Stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
Concentrated ownership of our Common Stock creates a risk of sudden changes in our Common Stock price.
The sale by any shareholder of a significant portion of their holdings could have a material adverse effect on the market price of our Common Stock.
Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our Common Stock.
A majority of the outstanding shares of Common Stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 144”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of Common Stock. Under Rule 144, affiliates who have held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of Common Stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four calendar week rule does not apply to companies quoted on the OTCQB). A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of Common Stock, may have a depressive effect upon the price of our shares of Common Stock in any active market that may develop.
If we issue additional shares or derivative securities in the future, it will result in the dilution of our existing stockholders.
Our Articles of Incorporation authorizes the issuance of up to 300,000,000 shares of Common Stock, $0.001 par value per share. Our board of directors may choose to issue some or all of such shares, or derivative securities to purchase some or all of such shares, to provide additional financing in the future.
We do not plan to declare or pay any dividends to our stockholders in the near future.
We have not declared any dividends in the past, and we do not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
The requirements of being a public company may strain our resources and distract management.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
We have incurred and may continue to incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate governance requirements. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately. Any inability to report and file our financial results accurately and timely could harm our business and adversely affect the trading price of our common stock.
We are required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the SEC. Our management will need to include a report on our internal control over financial reporting and its assessment on whether such internal controls were effective for the prior fiscal year with our annual reports that we file under the Exchange Act with the SEC. Under current federal securities laws, our management may conclude that our internal control over financial reporting is not effective.
Our management has limited or no experience operating as a public reporting company under the Exchange Act or establishing the level of internal control over financial reporting required by the Sarbanes-Oxley Act. Our management currently relies in many instances on the professional experience and advice of third parties including our attorneys and accountants. At present, we have started reviewing and instituting internal controls, but it may take time to implement them fully as a newly public reporting company under the Exchange Act.
Our management cannot guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. 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. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Because we did not file our quarterly or annual reports with the SEC, we were de-listed from the OTCQB.
OTCQB is the middle tier of the OTC market. OTCQB companies report to the SEC or a U.S. banking regulator, making it easy for investors to identify companies that are current in their reporting obligations. There are no financial or qualitative standards to be in this tier. OTCQB securities may also be quoted on the FINRA BB. The OTCQB allows investors to easily identify reporting companies traded in the OTC market regardless of where they are quoted.
Under OTCQB rules relating to the timely filing of periodic reports with the SEC, any OTCQB issuer who fails to file a periodic report (Forms 10-Q or 10-K) by the due date of such report may be removed from the OTCQB. Since we have not filed our quarterly or annual reports with the SEC since March 25, 2015, we were de-listed from the OTCQB and our Common Stock may only be able to be traded on the OTC Pink and is designated with a “STOP” sign for failure to file information. The OTC Pink is the bottom tier of the OTC market – a speculative trading marketplace that helps broker-dealers get the best prices for investors. Accordingly, our securities may become worthless and we may be forced to curtail or abandon our business plan.
Persons associated with securities offerings, including consultants, may be deemed to be broker dealers.
In the event that any of our securities are offered without engaging a registered broker-dealer, we may face claims for rescission and other remedies. If any claims or actions were to be brought against us relating to our lack of compliance with the broker-dealer requirements, we could be subject to penalties, required to pay fines, make damages payments or settlement payments, or repurchase such securities. In addition, any claims or actions could force us to expend significant financial resources to defend our company, could divert the attention of our management from our core business and could harm our reputation.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
“Penny Stock” rules may make buying or selling our Common Stock difficult.
Trading in our Common Stock is subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our Common Stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our Common Stock, which could severely limit the market price and liquidity of our Common Stock.
None.
Description of Property
We rent our executive office on a month to month basis for $625 per month. We currently have no policy with respect to investments or interests in real estate, real estate mortgages or securities of, or interests in, persons primarily engaged in real estate activities.
None.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Common Stock was initially traded on the Over The Counter Bulletin Board under the symbol ACSR and was first quoted on October 18, 2011. From February 28, 2013, our Common Stock has been quoted on the Over The Counter Bulletin Board under the symbol TQLA. The table below sets forth the high and low prices for our Common Stock for the quarters included within the past two fiscal years. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions. Since our Common Stock trades sporadically, there is not an established active public market for its Common Stock. No assurance can be given that an active market will exist for our Common Stock and we do not expect to declare dividends in the foreseeable future since we intend to utilize our earnings, if any, to finance our future growth, including possible acquisitions.
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Quarter ended
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High
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Low
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March 31, 2015
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$
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0.08
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$
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0.275
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December 31, 2014
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$
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0.925
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$
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0.25
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September 30, 2014
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$
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0.98
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$
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0.62
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June 30, 2014
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$
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0.238
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$
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0.11
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March 31, 2014
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$
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0.20
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$
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0.12
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December 31, 2013
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$
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0.37
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$
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0.12
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September 30, 2013
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$
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0.86
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$
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0.25
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June 30, 2013
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$
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1.07
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Common Stock
Holders of our Common Stock are entitled to one vote per share on each matter submitted to vote at a meeting of Company’s stockholders. Holders of Common Stock do not have cumulative voting rights. Stockholders do not have any preemptive rights or other similar rights to acquire additional shares of Common Stock or other securities. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of Common Stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, subject to preferences that may be applicable to any then-outstanding preferred stock, each outstanding share of Common Stock entitles its holder to participate ratably in all remaining assets of the Company that are available for distribution to stockholders after providing for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is issued.
Preferred Stock
Our Amended Articles of Incorporation authorizes the issuance of 10,000,000 shares of “Blank Check” Preferred Stock, par value $0.001 per share, subject to any limitations prescribed by law, without further vote or action by the stockholders. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
Number of Shareholders.
As of March 31, 2015, a total of 75,466,969 shares of our Common Stock were outstanding and held by approximately ____ shareholders of record of our Common Stock. This figure does not reflect the persons or entities that hold their stock in nominee or street name through various brokerage firms. Of this amount, 23,839,286 shares are unrestricted. Approximately 15,116,257 shares are restricted securities held by non-affiliates, and 36,511,426 shares are restricted securities held by affiliates. These shares may only be sold in accordance with Rule 144. As of March 31, 2015, there were no warrants and no stock options to purchase our Common Stock outstanding.
Dividends.
We have not paid any cash dividends since its inception. We currently intend to retain any earnings for use in our business, and therefore we do not anticipate paying dividends in the foreseeable future.
Long-Term Incentive Plans Awards in Last Fiscal Year
None.
Recent Sales of Unregistered Securities.
During the fiscal years ended March 31, 2015, March 30, 2014 and March 31, 2013, we issued the following securities exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. No underwriting or other compensation was paid in connection with these transactions:
Upon consummation of the Exchange Agreement on December 21, 2012, the then majority stockholders of the Company surrendered 324,552,000 shares of our Common Stock which was cancelled upon receipt and we issued 59,000,016 shares of our Common Stock pursuant to the terms and conditions of the Exchange Agreement.
Sale of Common Stock
On December 21, 2012 we issued 200,000 shares of our Common Stock at $0.50 per share for a total of $100,000. $83,500 was received while the remaining $16,500 was recorded as stock subscription receivable, which we received on April 30, 2013.
On February 12, 2013 we sold 12,500 shares of our Common Stock to one investor at $0.40 per share or $5,000.
On March 29, 2013 we issued 200,000 shares to a newly appointed member of our Board of Advisors. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share or $100,000 on the date of grant and were expensed upon issuance.
On June 15, 2013 we sold 10,000 shares of our Common Stock to one investor at $0.05 per share or $5,000. We received payment by on July 2, 2013.
From July 1, 2013 to August 1, 2013 we issued 46,000 shares of our Common Stock at $0.50 per share, or $23,000, to five (5) individuals.
On July 15, 2013, we entered into a Conversion and Release Agreement, whereby we issued 32,500 shares of our Common Stock in exchange for the cancellation of $16,250 in notes payable, including $15,000 in principal plus accrued interest of $1,250, at $0.50 per share.
On July 15, 2013 we entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year for from the date of signing in exchange for 111,000 shares of our Common Stock. These shares are fully vested and non-forfeitable.
On August 29, 2013 we sold 100,000 shares of our Common Stock to an institutional investor at $0.50 per share or $50,000.
On August 29, 2013 we issued 603,000 shares of our Common Stock to an institutional investor in exchange for the investor committing to purchase up to $10,050,000 of our Common Stock over the next 24 months, subject to certain terms and conditions. These shares are fully vested and non-forfeitable.
On September 3, 2013 we issued 10,000 shares of our Common Stock to one investor at $0.20, or $2,000.
On November 13, 2013 we issued 20,000 shares of our Common Stock to one investor at $0.20, or $5,000.
On November 13, 2013 we sold 100,000 shares of our Common Stock to an institutional investor at $0.242 per share or $24,200.
On November 15, 2013 we sold 100,000 shares of our Common Stock to an institutional investor at $0.234 per share or $23,400
On December 3, 2013 we sold 100,000 shares of our Common Stock to an institutional investor at $0.180 per share or $18,000.
On February 27, 2014 we issued 166,667 shares of our Common Stock to two investors at $0.15, or $25,000.
On February 27, 2014 we entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year for from the date of signing in exchange for 145,833 shares of our Common Stock. These shares are fully vested and non-forfeitable.
On March 28, 2014 we entered into a Contribution Agreement with five individuals to provide marketing services for a period of one (1) year for from the date of signing in exchange for an aggregate of 500,000 shares of our Common Stock. These shares are fully vested and non-forfeitable.
On March 28, 2014 we issued 250,000 shares to each of its four board members in exchange for their services on the Board of Directors. These shares are fully vested and non-forfeitable.
On September 15, 2014 we effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $5,000 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. The first Debenture in the principal amount of $150,000 (the "Debenture") was issued on September 15, 2014.
On February 19, 2015, we amended the Agreement. Pursuant to the amended Agreement, the Company issued a second debenture in the face amount of $17,000 to the Investor (the “Second Debenture”). The Second Debenture does not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion.
On March 30, 2015, we consummated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company sold to the Investor a convertible note in the principal amount of $84,000.00, bearing interest at the rate of 8% per annum (the “Convertible Note”). The Convertible Note contains customary default provisions, including provisions for potential acceleration of the Convertible Note, a default premium and a default interest rate. The Convertible Note is payable, along with any and all accrued interest, on December 23, 2015. The principal balance of the Convertible Note is convertible into shares of the Company’s common stock, par value $0.001 per share, at the election of the holder, beginning 180 days after the issuance of the Convertible Note. The conversion price is equal to the Market Price (as such term is defined in the Convertible Note) multiplied by 61%.
On April 15, 2015 and May 15, 2015, the Company issued 145,161 and 191,489 shares of the Company’s common stock, respectively, to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.031 and $0.0235 per share, the closing price of the Company’s common stock on the dates of issuance, and were expensed upon issuance.
On April 1, 2015 and May 1, 2015, the Company issued 137,931 and 163,265 shares of the Company’s common stock, respectively, to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.029 and $0.0245 per share, the closing price of the Company’s common stock on the dates of issuance, and were expensed upon issuance.
On April 1, 2015, the Company entered into a Contribution Agreement with a company to provide marketing services for a period of six (6) months for from the date of signing in exchange for 1,500,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.029 per share, the closing price of the Company’s common stock on the date of issuance, or $43,500 on the date of grant and were expensed upon issuance.
On July 23, 2015, the Company issued 2,330,097 shares to each of its five officers in exchange for their services as executives of the Company. These shares are fully vested and non-forfeitable. These shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance, or $70,000 on the date of grant and were expensed upon issuance.
On April 21, 2015, $25,000 of principal of from the September 15, 2014 Debenture was converted into 1,532,332 shares of the Company’s common stock at $0.016315 per share.
On May 20, 2015, $25,000 of principal of the Debenture was converted into 2,236,135 shares of the Company’s common stock at $0.01118 per share.
On April 23, 2015, the Company sold 925,926 shares of its common stock to one investor at $0.027 per share or $25,000.
On May 26, 2015, the Company sold 11,363,630 shares of its common stock to one investor at $0.022 per share or $250,000.
On June 15, 2015, we consummated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company sold to the Investor 11,363,367 shares of the Company’s common stock, par value $0.001 per share, (the “Common Stock”), at $.022 per share and warrants to purchase an additional 5,681,684 shares of Common Stock at the exercise price of $.022 per share (the “Warrants”). The Warrants are exercisable immediately and expire within three (3) years. The Company used a portion of the proceeds from the investment to repay a Convertible Promissory Note in the principal amount of Eighty-Four Thousand Dollars ($84,000) issued by the Company on March 30, 2015.
On June 29, 2015, $25,000 of principal of the Debenture was converted into 2,727,768 shares of the Company’s common stock at $0.009165 per share.
On July 15, 2015, the Company sold 966,183 shares of its common stock to one investor at $0.0207 per share or $20,000.
On August 28, 2015, the Company sold 454,545 shares of its common stock to one investor at $0.022 per share or $10,000.
On October 30, 2015, Montalvo Spirits, Inc. (the “Registrant”) effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $540,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty percent (60%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $2,900 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. The shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance.
Unless noted above, the sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, we believe that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and rules promulgated there under. Each of the above-referenced investors in our stock represented to us in connection with their investment that they were “accredited investors” (as defined by Rule 501 under the Securities Act) and were acquiring the shares for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The investors received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
ITEM 6: SELECTED FINANCIAL DATA
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our selected financial data and our financial statements and the accompanying notes included in this Annual Report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and under the headings “Risk Factors” and “Forward-Looking Statements.”
Overview
Montalvo Spirits, Inc. (Formerly Advanced Cloud Storage, Inc.)
Montalvo Spirits, Inc. (the “Company”) was incorporated on November 18, 2010 under the laws of the State of Nevada under the name of Advanced Cloud Storage, Inc. The Company originally intended to market and sell its planned secure online data storage through its intended website.
Amendment to the Articles of Incorporation
On December 21, 2012, holders of a majority of the Company’s outstanding Common Stock voted to amend the Company’s Articles of Incorporation to: (i) change its name to “Montalvo Spirits, Inc.” (the “Company”), (ii) increase the number of its authorized shares of capital stock from 75,000,000 shares to 310,000,000 consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock and (iii) effectuate a forward split on a 1:32.4552 basis (“the Amendment”).
CASA Montalvo Holdings, Inc.
CASA Montalvo Holdings, Inc. (“Casa Montalvo”) was incorporated under the laws of the State of California on April 4, 2011. Casa Montalvo develops markets and/or distributes alcoholic beverages, primarily in the United States.
Formation of Montalvo Imports LLC
On August 9, 2012, the Company formed Montalvo Imports LLC (“LLC” or “Imports”) under the laws of the State of Delaware. The LLC, of which the Company is the sole member, was formed to provide the same services as that of the Company.
Formation of Cannabis Beverage Group, Inc.
On March 27, 2014, the Company formed Cannabis Beverage Group, Inc. (“CBG”) under the laws of the State of Colorado. CBG, of which the Company is the shareholder, was formed to explore entry into the cannabis based beverage industry.
Acquisition of CASA Montalvo Treated as a Reverse Acquisition
On December 21, 2012, the Company, entered into and consummated the Agreement and Plan of Share Exchange (the “Exchange Agreement”) with Casa Montalvo and the shareholders of Casa Montalvo (the “Exchange”). Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of Casa Montalvo.
Pursuant to the Exchange Agreement, the Company agreed to acquire all of the issued and outstanding capital stock of Casa Montalvo in exchange for the issuance of an aggregate for 59,000,016 post-split (pre-split 1,817,891) shares of the Registrant’s Common Stock, par value $0.001 per share (the “Exchange Shares”). As a result of the Exchange, Casa Montalvo became a wholly-owned subsidiary of the Registrant. The shareholders of Casa Montalvo beneficially owned approximately eighty-eight and one half percent (88.5%) of the issued and outstanding Common Stock of the Registrant immediately after the consummation of the Exchange. Pursuant to the terms of the Exchange Agreement, the Registrant’s principal shareholder agreed to retire 10,000,000 shares of the Registrant’s Common Stock.
As a result of the controlling financial interest of the former stockholder of Casa Montalvo, for financial statement reporting purposes, the merger between the Company and Casa Montalvo has been treated as a reverse acquisition with Casa Montalvo deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of Casa Montalvo (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Casa Montalvo which are recorded at their historical cost. The equity of the Company is the historical equity of Casa Montalvo retroactively restated to reflect the number of shares issued by the Company in the transaction.
TARGET MARKETS AND MARKETING STRATEGY
While our primary route to market is by selling directly to distributors, who maintain extensive resources to sell to both on and off premise retail accounts, including liquor stores, grocery stores, convenience stores, bars and restaurants, to build our brands, we must effectively communicate with three distinct audiences: the distributors; the retail trade; and the end consumer. We believe advertising, marketing and promotional activities help to establish and reinforce the image and perception of our brand as we strive in building substantial brand value.
We employ, in-house marketing, sales and customer service personnel who work together with third party design and advertising firms to maintain a high degree of focus on each of our products. We attempt to build brand awareness through innovative marketing activities including social media, brand tastings, as well as competitive spirits competitions. We use a variety of marketing strategies and tactics to build brand equity and increase sales, including consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, in-store and on-premise promotions and public relations, as well as a variety of other traditional and non-traditional marketing techniques. Our significant public relations campaign has helped gain editorial coverage for our brands, which increases brand awareness. Past and future event sponsorship is an economical way for us to have influential consumers taste our brands.
PLAN OF OPERATIONS
We develop, market and/or distribute alcoholic beverages, primarily in the United States. We sell our products through a network of established spirits distributors, who are licensed to distribute alcoholic beverages throughout the United States. The We are federally licensed, maintaining the right to sell to distributors in all markets in the U.S. and globally.
We intend to focus on growing the market share of our initial products, the ultra-premium Montalvo line of tequilas, whose expressions include Plata, Reposado, Anejo and Extra-Anejo. We own the Montalvo brand trademark and have exclusive worldwide master distribution rights to the brands.
We intend to grow our business by expanding our portfolio of premium alcoholic beverage brands, including additional spirits categories, as well as beer and wine, through additional importation and distribution contracts of existing brands. In addition, we may choose to develop new brands or acquire existing companies with their own brand portfolios.
To achieve our goal of building a distinctive portfolio of premium craft spirits, we seek to:
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grow revenues by securing additional independent distributors for Montalvo Tequila in multiple states in the U.S. and potentially in additional countries internationally and by targeted marketing activities. We anticipate such marketing activities will require us to expend approximately $750,000. As the independent distributors are generally large, well-recognized companies, we feel that accounts receivable financing should be available, though it may not be on favorable terms. We anticipate that increased sales revenues from Montalvo Tequila will contribute to improving our cash flow and provide additional liquidity from operations. We may require additional financing through private placements or issuance of notes payable, and there is no assurance that such financing will be available. In the event we are not able to increase our working capital, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected.
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explore the potential of developing or acquiring new or existing brands by identifying attractive acquisition candidates, entering into negotiations and reaching agreements with these candidates and obtaining financing to acquire such brands. We estimate we will expend $15,000 to identify brands that are potential acquisition targets and $25,000 discussing and negotiating acquisition terms and drafting preliminary agreements; the funding required to acquire a potential target is too speculative to estimate. We intend to finance our brand acquisitions through a combination of third party financing and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position, and could cause substantial fluctuations in our quarterly and yearly operating results. Also, the pursuit of acquisitions and other new business relationships may require significant management attention. We may not be able to successfully identify attractive acquisition candidates, obtain financing on favorable terms or complete these types of transactions in a timely manner and on terms acceptable to us, if at all.
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GOING CONCERN
Based on the our cash balance at March 31, 2015 and projected cash needs for the remainder of 2015, management estimates that it will need to raise additional capital to cover operating and capital requirements for the 2015 year. Management plans on raising the additional needed funds through increased sales volume, issuing additional shares of common stock or other equity securities, or obtaining debt financing. Although we have been successful to date in raising necessary funding, there can be no assurance that required future financing can be successfully completed on a timely basis, or on terms acceptable to us.
PRODUCTS
We have an Exclusive Worldwide Distribution Agreement with Destilidora Huerta Real, S.A. de C.V., the producers of Montalvo Tequila. Montalvo, an award winning, ultra-premium tequila brand is a handcrafted, meticulously formulated tequila produced from only the highest quality blue agave plants from the Lowlands of Jalisco, Mexico. Montalvo ensures the brand’s premium quality by handcrafting in small batches, using hand-selected Blue Weber agave plants picked at the peak of maturity and employing a third distillation. Fourth-generation tequila producers Sergio and Carlos Gonzalez Rivera have combined their family’s ancient traditions with modern techniques, resulting in a clean, smooth and memorable tequila. Montalvo is available in four expressions: Plata, Reposado, Añejo and Extra-Añejo.
CUSTOMERS
The U.S. alcoholic beverage industry is a regulated, three-tier system of suppliers, distributors and retailers. We currently distribute the Montalvo Tequila brand through a network of independent distributors. We also maintain an arrangement with MHW, Ltd., a third-party leading service provider to alcoholic beverage companies, to import the Montalvo brand into the U.S. as well as to sell Montalvo directly to retailers in New York, New Jersey and California. We hope to expand the number of independent distributors in certain existing markets and new markets, when we have sufficient funds to maintain a larger marketing campaign.
RESULTS OF OPERATIONS
Year ended March 31, 2015 compared to year ended March 31, 2014
Net Sales: For the year ended March 31, 2015, net sales were approximately $112,690 compared to $119,900 in net sales for the year ended March 31, 2014, decrease of approximately 6%. The (decrease) was a result of our inability to pay our supplier for product to be sold.
Gross Margin: Gross margin for the year ended March 31, 2015 was $(194,590), compared to $80,971 gross margin, or approximately 67.5% of net sales for the year ended March 31, 2014, which represents a decrease of approximately $275,560. This decrease in gross margin is attributable to inventory obsolescence and markdowns increased. We were also able to maintain margins due to the implementation of our premium product selling strategy implemented that targets premium price points, targeted non-price discounting promotion for our products and low overhead.
Selling, General and Administrative Expenses: Selling, general and administrative expenses for the year ended March 31, 2015 amounted to approximately $368,273 compared to approximately $819,606 for the same period of the prior year, a decrease of approximately $451,333. The (decrease) was primarily attributable to our reduced activity, the reduction of executive officers and our inability to prepare our reports with the SEC.
Interest expense: Interest expense for the year ended March 31, 2015 was approximately $90,131 compared to $4,680 for the same period last year, a net increase of $85,451 or 2000%. This increase is predominantly due to the issuance of additional promissory notes as compared to prior year.
Net income (loss): The above resulted in a net loss before income tax of $(826,756) for the year ended March 31, 2015 compared to a net loss before income tax of $(1,044,815) for the year ended March 31, 2014.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Our accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of March 31, 2015, we had a shareholders' equity deficit of approximately $1,190,203 compared with a deficit of approximately $622,982 at March 31, 2014, and have incurred significant operating losses and negative cash flows since inception. For the year ended March 31, 2015, we sustained a net loss before income tax of $826,756 compared to a net loss before income tax of $1,044,815 for the year ended March 31, 2014 and used cash of approximately $250,837 in operating activities for the year ended March 31, 2015 compared with approximately $215,738 for the year ended March 31, 2014. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.
We will need to continue to manage carefully our working capital and our business decisions will continue to be influenced by our working capital requirements.
Net Cash used in Operating Activities: Net cash used in operating activities for the year ended March 31, 2015 was approximately $250,837, primarily from our loss of approximately $826,756 net with non cash activities of $525,919 including an increase in accrued liabilities of $52,227 and $206,073 in stock based compensation. Changes in operating assets, liabilities and sundry and other non cash activities were $165,372.
Net Cash provided by Financing Activities: Net cash provided by financing activities for the year ended March 31, 2015 was approximately $281,451 primarily from sale of common stock of $250,000 (and a net issuance of notes payable of $251,000).
GOING CONCERN
We had an accumulated deficit at March 31, 2015 and have had limited revenues from operations through the period ended March 31, 2015. Further, the Company has inadequate working capital to maintain or develop its operations, and is dependent upon funds from private investors and the support of certain stockholders.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management is planning to raise necessary additional funds through loans and additional sales of its Common Stock. There is no assurance that the Company will be successful in raising additional capital or in further developing its operations
OFF BALANCE SHEET ARRANGEMENTS
As of March 31, 2015, there were no off balance sheet arrangements.
BASIS OF PRESENTATION
The financial statements of the Company are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States.
CRITICAL ACCOUNTING POLICIES
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and (iii) the reported amount of net sales and expenses recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, actual results could differ from these estimates. These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Topic 360 “ Revenue Recognition in Financial Statements ,” which is when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably assured.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At March 31, 2014, cash and cash equivalents include cash on hand and cash in the bank.
Property and Equipment
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When items are retired or otherwise disposed of, income is charged or credited for the difference between net book value and proceeds realized. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.
The range of estimated useful lives used to calculated depreciation for principal items of property and equipment are as follow:
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Asset Category
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Depreciation/ Amortization Period
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Furniture and Fixture
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3 Years
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Office equipment
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3 Years
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At March 31, 2014, property and equipment consisted of office equipment purchased during the period.
Impairment of Long-Lived Assets
Long-Lived Assets, such as property, plant, and equipment and purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any goodwill or other intangible assets are tested at least annually for impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated an impairment of long lived assets as of March 31, 2015.
Income Taxes
Deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At March 31, 2015, the Company did not record any liabilities for uncertain tax positions.
Concentration of Credit Risk
The Company maintains its operating cash balances in banks located in California. The Federal Depository Insurance Corporation (“FDIC”) insures accounts at each institution up to $100,000. At March 31, 2015, the Company’s cash accounts were below the insured limit.
Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options, warrants, and other commitments to issue Common Stock were exercised or equity awards vest resulting in the issuance of Common Stock that could share in the earnings of the Company. The Company does not have any options, warrants or other Common Stock equivalents outstanding as of March 31, 2015.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable, accrued liabilities, and advances from affiliates. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
ASC Topic 820, “ Fair Value Measurements ” (“ASC Topic 820”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value that focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
|
Level 1 –
|
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
|
Level 2 –
|
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, or inputs that are observable for the assets or liabilities other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; | |
|
Level 3 –
|
inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Off Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements during the year ended March 31, 2014.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.
Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.
The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.
The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.
In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.
The amendments in this Update remove the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations.
Finally, the amendments remove paragraph 810-10-15-16. Paragraph 810-10-15-16 states that a development stage entity does not meet the condition in paragraph 810-10-15-14(a) to be a variable interest entity if (1) the entity can demonstrate that the equity invested in the legal entity is sufficient to permit it to finance the activities that it is currently engaged in and (2) the entity’s governing documents and contractual arrangements allow additional equity investments.
The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage.
The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein.
Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (other entities). Upon adoption, entities will no longer present or disclose any information required by Topic 915.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
The Company is not exposed to market risk related to interest rates on foreign currencies.
The information required by Item 8 appears after the signature page to this report.
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act). Disclosure controls and procedures are defined as those controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon an evaluation of the effectiveness of disclosure controls and procedures, our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10K our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) are not effective because of the material weaknesses in our disclosure controls and procedures which are identified below. 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.
The material weaknesses in our disclosure control procedures are as follows:
|
1.
|
Lack of formal policies and procedures necessary to adequately review significant accounting transactions. The Company utilizes a third party independent contractor for the preparation of its financial statements. Although the financial statements and footnotes are reviewed by our management, we do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions. The third party independent contractor is not involved in the day to day operations of the Company and may not be provided information from management on a timely basis to allow for adequate reporting/consideration of certain transactions.
|
|
2.
|
Audit Committee and Financial Expert. The Company does not have a formal audit committee with a financial expert, and thus the Company lacks the board oversight role within the financial reporting process.
|
We intend to initiate measures to remediate the identified material weaknesses including, but not necessarily limited to, the following:
|
●
|
Establishing a formal review process of significant accounting transactions that includes participation of the Chief Executive Officer, the Chief Financial Officer and the Company’s corporate legal counsel.
|
|
|
●
|
Forming an Audit Committee that will establish policies and procedures that will provide the Board of Directors a formal review process that will among other things, assure that management controls and procedures are in place and being maintained consistently.
|
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintain records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition , use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected.
As of March 31, 2015, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in SEC guidance on conducting such assessments. Based on this evaluation under the COSO Framework, our management concluded that our internal control over financial reporting are not effective as of March 31, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on that evaluation, they concluded that, as of March 31, 2015, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee and lack of a majority of outside directors on the Company's board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes. The aforementioned material weaknesses were identified by the Company's Chief Financial Officer in connection with the review of our financial statements as of March 31, 2015 and communicated to our management.
Management believes that the material weaknesses set forth in items (2), (3) and (4) above did not have an affect on the Company's financial results. However, management believes that the lack of a functioning audit committee and lack of a majority of outside directors on the Company's board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures can result in the Company's determination to its financial statements for the future years.
We are committed to improving our financial organization. As part of this commitment, 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 the Company: i) Appointing one or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; and ii) Preparing and implementing sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.
Management believes that the appointment of more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on the Company's Board. In addition, management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes. Further, management believes that the hiring of additional personnel who have the technical expertise and knowledge will result proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support the Company if personnel turn over issues within the department occur. This coupled with the appointment of additional outside directors will greatly decrease any control and procedure issues the company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide management report in the Annual Report.
ITEM 9B. Other Information
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE GOVERNANCE
The following table sets forth the names and ages of our current directors and executive officers, their principal offices and positions and the date each such person became a director or executive officer. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board or his successor is elected and qualified. Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
The following persons are the directors and executive officers of our company:
|
Name
|
Age
|
Title
|
||||
|
Alex Viecco
|
50
|
Chief Executive Officer
|
||||
|
Carlos Gonzalez Rivera
|
43
|
Chief Operating Officer; Chief Financial Officer;
|
||||
|
Sergio Gonzalez Rivera
|
44
|
President, Director
|
||||
|
Daniel Cahill
|
40
|
Director of Sales, Director
|
The Company’s executive officers and directors are elected annually and serve until the next annual meeting of stockholders.
Alex Viecco, Chief Executive Officer and Director, has served as the Chief Executive Officer of Casa Montalvo Holdings, Inc. since 2011, prior thereto and from 2000 to 2011, Mr. Viecco served as the Co-Founder and Vice President of New Era Debt Solutions, in Camarillo, California. Under Mr. Viecco’s leadership, New Era Debt Solutions has become an industry leader, providing debt resolution for thousands of clients throughout the United States. With his expertise in the debt resolution field, Mr. Viecco has been featured in numerous industry publications. Mr. Viecco also worked as a Financial Consultant with a division of Citigroup, and consistently led sales throughout his five-year tenure. While serving in this capacity, Mr. Viecco managed, supervised, and trained dozens of representatives into successful positions, and received multiple awards. The Company believed Mr. Viecco’s extensive business and finance expertise made him an ideal candidate to serve in these capacities.
Sergio Gonzalez Rivera, Chief Financial Officer, has served as the President of Casa Montalvo Holdings, Inc. since 2011, prior thereto and from 2005 to the present, Mr. Gonzalez Rivera has served as a Director of Destilidora Huerta Real, S.A. de C.V., a distillery located in Jalisco, Mexico. From a young age, Mr. Gonzalez Rivera began learning from his father and uncles all of the intricacies of the art of producing tequila, from picking the perfect Blue Agave Weber plants, to identifying the best time to harvest the plants to give the best yield. Sergio learned the secret of producing high quality Tequila is combining ancient techniques with modern world trends. His family’s experience in tequila business dates back to his great grandfather and Sergio has worked in a variety of positions in the industry from sales, engineering, product development, customer service and management. Mr. Gonzalez Rivera earned a degree in Business Management, Project Management, Marketing, Innovation and Strategies, Real Estate Business, and Sales from the University of Guadalajara. Mr. Rivera also continued his studies in Systems Engineering in Germany, with a specialization in business and entrepreneurism. The Company believes Mr. Gonzalez Rivera’s distinguished career in the tequila industry and the region, made him ideal for these positions. Mr. Gonzalez Rivera also serves as Councilman of the Municipality of Tequila, Mexico.
Carlos Gonzalez Rivera, President and Director, has served as the Chief Operating of Casa Montalvo Holdings, Inc. since 2011, prior thereto and from 2005 to the present, served as President of Destilidora Huerta Real, S.A. de C.V., a distillery located in Jalisco, Mexico. Mr. Gonzalez Rivera spent many years with his family learning the art of producing tequila. His particular interest was in harvesting the plants and learning their regional attributes and has been recognized by the local farmers as an instrumental representative to ensure fair trade in the region. Mr. Gonzalez Rivera graduated from the University of Guadalajara, Mexico with a degree in Dentistry Medicine in 1994. After further studies and specializing as a dental surgeon, he travelled to the United States to continue his studies in modern dental techniques, where he worked with well-respected dentists in Oxnard, California and Thousand Oaks, California. The Company believes Mr. Rivera’s previous experience operating tequilerias make him an asset to the Company.
Daniel Cahill, Director of Sales and Director, has served as the Director of Sales of Casa Montalvo Holdings, Inc. since 2011, prior thereto and from 2011 to 2012 Mr. Cahill served as the Managing Director of Point Loma Capital, Inc. Prior thereto and from 2001 to 2011, Mr. Cahill served in various positions at Meyers Associates, Aegis Capital and Maxim Group. Throughout his career, he has executed a wide variety of financing transactions as an investment banker to numerous private and publicly traded companies, as well as spending significant time and resources mentoring and developing new advisors on how to build and maintain client relationships. The Company believes Mr. Cahill’s experience in the finance industry would be an asset to the Company.
Significant Employees
We do not, at present, have any employees other than the current directors and officers.
Family Relations
Sergio Gonzalez Rivera and Carlos Gonzalez Rivera are brothers.
Involvement in Legal Proceedings
During the past ten years, none of our current directors or executive officers has been:
|
●
|
the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
●
|
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
●
|
subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
|
|
●
|
found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated;
|
|
●
|
subject of, or a party to, any order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of a federal or state securities or commodities law or regulation, law or regulation respecting financial institutions or insurance companies, law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
|
●
|
subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
|
None of our directors, officers or affiliates, or any beneficial owner of 5% or more of our common stock, or any associate of such persons, is an adverse party in any material proceeding to, or has a material interest adverse to, us or any of our subsidiaries.
Audit Committee
Our Board of Directors has not established a separate audit committee within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Instead the board of directors acts as the audit committee within the meaning of Section 3(a)(58)(B) of the Exchange Act. We intend on establishing an Audit Committee composed of independent directors of the Company. The audit committee's duties would be to recommend to the Company's board of directors the engagement of independent auditors to audit the Company's financial statements and to review its accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company's board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Compensation Committee
Our Board of Directors does not have a separate compensation committee responsible for determining executive and director compensation. Instead, the board of directors fulfills this function, and each member of the Board participates in the determination. Given the small size of the Company and its Board, plus the Company's limited resources, locating, obtaining and retaining additional independent directors is extremely difficult. In the absence of independent directors, the Board does not believe that creating a separate compensation committee would result in any improvement in the compensation determination process. Accordingly, the board of directors has concluded that the Company and its stockholders would be best served by having the entire board of director’s act in place of a compensation committee. When acting in this capacity, the Board does not have a charter.
Code Of Ethics
We have adopted a code of ethics meeting the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of violations; and provide accountability for adherence to the provisions of the code of ethic. A copy of our code of ethics is available without charge, upon written request to: Montalvo Spirits, Inc., Attn: C.E.O., 5301 N. Commerce Ave., Suite F, California 93021.
The following table sets forth all of the compensation awarded to, earned by or paid to (i) each individual serving as the Company’s principal executive officer during the last three completed fiscal years ending March 31, 2015, 2014 and 2013; (ii) each other individual that served as an executive officer of the Company at the conclusion of the fiscal year ended March 31, 2014 and who received in excess of $100,000 in the form of salary and bonus during such fiscal year.
|
Name and Principal Position
|
Year
|
Salary (1)
|
Bonus
|
Equity
Awards
|
Option
Awards
|
All Other
Compensation
|
Total
|
||||||||||
|
George Frederick Meyer, President, Secretary, Treasurer and Chief Executive Officer
|
2012
|
$ |
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||
|
Alex Viecco**
|
2015
|
$ | 72,000 |
-
|
- |
-
|
-
|
72,000 | |||||||||
|
Chief Executive Officer
|
2014
|
$ |
54,000
|
-
|
30,000
|
-
|
-
|
84,000
|
|||||||||
|
|
2013
|
$ |
72,000
|
-
|
187,612
|
-
|
-
|
259,612
|
|||||||||
|
Carlos Gonzalez Rivera **
|
2015
|
$ | 72,000 |
-
|
- |
-
|
-
|
72,000 | |||||||||
|
Chief Operating Officer, Chief
|
2014
|
$ |
54,000
|
-
|
30,000
|
-
|
-
|
84,000
|
|||||||||
|
Financial Officer
|
2013
|
$ |
72,000
|
-
|
187,612
|
-
|
-
|
259,612
|
|||||||||
|
Sergio Gonzalez Rivera **
|
2015
|
$ | 72,000 |
-
|
- |
-
|
-
|
72,000 | |||||||||
|
President
|
2014
|
$ |
54,000
|
-
|
30,000
|
-
|
-
|
84,000
|
|||||||||
|
|
2013
|
$ |
72,000
|
-
|
187,612
|
-
|
-
|
259,612
|
|||||||||
|
Daniel P. Cahill *
|
2015
|
$ | 72,000 | - | 72,000 | ||||||||||||
|
Director of Sales
|
2014
|
$ |
9,500
|
-
|
30,000
|
-
|
-
|
39,500
|
|||||||||
|
2013
|
$ |
-
|
-
|
120,649
|
-
|
-
|
120,649
|
||||||||||
*Mr. Myer resigned effective December 21, 2012
**Appointed December 21, 2012
None.
Compensation of Directors
As of March 31, 2015, none of our directors has received any compensation from us for serving as our director, nor do we have any plans to compensate our directors until we have adequate funds to do so
EMPLOYMENT AGREEMENTS
On November 13, 2014, the Company entered into employment agreements (the “Employment Agreements”) with each of Sergio Gonzalez as the Company’s President, Carlos Gonzalez as then - Chief Operating Officer, and Daniel Cahill as the Company’s Director of Sales. All of the Employment Agreements provide an initial term of employment from November 13, 2014 (the “Effective Date”) until November 12, 2016, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. All of the Employment Agreements provide the employee with a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2016.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT, AND RELATED STOCKHOLDERS MATTERS.
The following table sets forth certain information, as of March 31, 2015 (except as otherwise indicated), regarding beneficial ownership of our Common Stock by (i) each person who is known by us to own beneficially more than 5% of the Common Stock, (ii) each of our directors and nominees for director, (iii) each of the Named Executive Officers (as defined below) and (iv) all our directors and executive officers as a group. As used in the table below, the term beneficial ownership with respect to a security consists of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire such power(s) during the 60 days immediately following March 31, 2015. As of March 31, 2015, we had 75,466,969 shares of Common Stock outstanding.
Additionally, unless otherwise noted, the address of each person is: Care of Montalvo Spirits, Inc., 5301 N. Commerce Ave., Suite F, Moorpark, CA 93021.
|
Shareholder
|
Beneficial Ownership (a)
|
Percent of Class (b)
|
||||||
|
Sergio Gonzalez Rivera
|
8,787,596 | 11.64 | % | |||||
|
Daniel Cahill
|
3,911,343 | 5.18 | % | |||||
|
Carlos Gonzalez Rivera
|
8,787,596 | 11.64 | % | |||||
|
Alex Viecco
|
8,787,596 | 11.64 | % | |||||
|
All Directors and Executive Officers as a group
|
30,274,131 | 40.12 | % | |||||
|
Other 5% Shareholders
|
||||||||
|
Ronald Shoemaker
|
6,237,295 | 8.26 | % | |||||
(a) Security ownership is direct unless indicated otherwise. Security ownership information for beneficial owners is taken from statements filed with the Securities and Exchange Commission pursuant to Sections 13(d), 13(g) and 16(a) and/or information made known to the Company.
(b) Based on 75,466,969 shares of our Common Stock outstanding as of March 31, 2015.
Our Chief Financial Officer and our President control Destiladora Huerta Real, S.A. de C.V. (“Huerta Real”), the producers of Montalvo Tequila. We have an outstanding note payable to Huerta Real in the principal amount of $320,000 that accrues interest at a rate of 5% per annum. We have not made any payment of principal or interest on this note to date. As such, the largest aggregate principal amount on the note during 2015 and 2014, and to date, is $320,000.
Our Chief Executive Officer loaned the Company $2,000 on April 1, 2012 for which we issued a note payable in the amount of $2,000, with interest at 8% per annum, with principal and interest due on March 31, 2013, The note is currently past due
Currently, there are no contemplated transactions that the Company may enter into with our officers, directors or affiliates. If any such transactions are contemplated we will file such disclosure in a timely manner with the Commission on the proper form making such transaction available for the public to view.
Audit Fees
The aggregate fees for each of the last two years for professional services rendered by the principal accountant for our audits of our annual financial statements and interim reviews of our financial statements included in our fillings with Securities and Exchange Commission on Form 10-K and 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those years were approximately:
|
March, 2015
|
$ | 25,000 | ||
|
March, 2014
|
$ | 10,000 |
Audit Related Fees
The aggregate fees in each of the last two years for the assurance and related services provided by the principal accountant that are not reasonably related to the performance of the audit or review of the Company's financial statements and are not reported in paragraph (1) were approximately:
|
March, 2015
|
$
|
0
|
||
|
March, 2014
|
$
|
0
|
We incurred these fees in connection with registration statements and financing transactions.
Tax Fees
The aggregate fees in each of the last two years for the professional services rendered by the principal accountant for tax compliance, tax advice and tax planning were approximately:
|
March, 2015
|
$
|
0
|
||
|
March, 2014
|
$
|
0
|
All Other Fees
The aggregate fees in each of the last two years for the products and services provided by the principal accountant, other than the services reported in paragraph (1) were approximately:
|
March 31, 2015
|
$
|
0
|
||
|
March 31, 2014
|
$
|
0
|
Our Board of Directors pre-approves all services provided by our independent accountants. Our Board of Directors reviewed and approved all of the above services and fees.
ITEM 15 . EXHIBITS
|
Exhibit
|
Description
|
||
|
2.1
|
Agreement and Plan of Share exchange by and among Advanced Cloud Storage, Inc., Casa Montalvo Holdings, Inc. and the shareholders of Casa Montalvo Holdings, Inc., dated December 21, 2012*
|
||
|
3.1
|
Amended and Restated Articles of Incorporation of the Registrant.*
|
||
|
10.1
|
Exclusive Master Distribution Agreement*
|
||
|
10.2
|
Form of Employment Agreement*
|
||
|
10.3
|
Form of Director Agreement
|
||
|
21
|
List of Subsidiaries#
|
||
|
31.1
|
Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002#
|
||
|
31.2
|
Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002#
|
||
|
32.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002#
|
||
|
32.2
|
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002#
|
||
| 101.INS | XBRL Instance Document# | ||
| 101.SCH | XBRL Schema Document# | ||
| 101.CAL | XBRL Calculation Linkbase Document# | ||
| 101.DEF | XBRL Definition Linkbase Document# | ||
| 101.LAB | XBRL Label Linkbase Document# | ||
| 101.PRE | XBRL Presentation Linkbase Document# | ||
|
*
|
Incorporated by reference to the Company’s Current Form on 8-K, filed with the Securities Commission on December 24, 2012, as amended.
|
||
Pursuant to the requirements of Section 13 or 15(d) 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.
|
Dated: April __, 2016
|
MONTALVO SPIRITS, INC.
|
|
/s/ Alex Viecco
|
|
|
Name: Alex Viecco
|
|
|
Title: Chief Executive Officer, Chairman
|
|
|
(Principal Executive Officer)
|
|
|
/s/ Carlos Gonzalez Rivera
|
|
|
Name: Carlos Gonzalez Rivera
|
|
|
Title: Chief Financial Officer,
(Principal Financial Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated
|
Signature
|
Title
|
Date
|
||
|
/s/ Alex Viecco
|
Chief Executive Officer, Charman |
April 8, 2016
|
||
| Alex Viecco |
(Principal Executive Officer)
|
|||
|
/s/ Carlos Gonzalez Rivera
|
Chief Financial Officer, and Director
|
April 8, 2016
|
||
|
Carlos Gonzalez Rivera
|
(Principal Financial Officer)
|
|||
|
/s/Sergio Gonzalez Rivera
|
President, Director
|
April 8, 2016
|
||
|
Sergio Gonzalez Rivera
|
||||
|
/s/Daniel Cahill
|
Director of Sales, Director
|
April 8, 2016
|
||
|
Daniel Cahill
|
EXHIBIT INDEX
|
Exhibit
|
Description
|
||
|
2.1
|
Agreement and Plan of Share exchange by and among Advanced Cloud Storage, Inc., Casa Montalvo Holdings, Inc. and the shareholders of Casa Montalvo Holdings, Inc., dated December 21, 2012*
|
||
|
3.1
|
Amended and Restated Articles of Incorporation of the Registrant.*
|
||
|
10.1
|
Exclusive Master Distribution Agreement*
|
||
|
10.2
|
Form of Employment Agreement*
|
||
|
10.3
|
Form of Director Agreement*
|
||
|
21
|
List of Subsidiaries#
|
||
|
31.1
|
Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002#
|
||
|
31.2
|
Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002# | ||
|
32.1
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002# | ||
| 32.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002# | ||
|
*
|
Incorporated by reference to the Company’s Current Form on 8-K, filed with the Securities Commission on December 24, 2012, as amended.
|
||
#Filed Herewith
-37-
Montalvo Spirits, Inc.
March 31, 2015 and 2014
Index to the Consolidated Financial Statements
| Contents | Page(s) | |||
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|||
|
Consolidated Balance Sheets at March 31, 2015 and 2014
|
F-3
|
|||
|
Consolidated Statements of Operations for the Fiscal Year ended March 31, 2015 and 2014
|
F-4
|
|||
|
Consolidated Statement of Stockholders’ Equity (Deficit) for the Fiscal Year ended March 31, 2015 and 2014
|
F-5
|
|||
|
Consolidated Statements of Cash Flows for the Fiscal Year ended March 31, 2015 and 2014
|
F-6
|
|||
|
Notes to the Consolidated Financial Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Montalvo Spirits, Inc.
We have audited the accompanying consolidated balance sheets of Montalvo Spirits, Inc. (the “Company”) as of March 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company had an accumulated deficit at March 31, 2015, a net loss and net cash used in operating activities for the year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Li and Company, PC
Li and Company, PC
Skillman, New Jersey
F-2
|
Montalvo Spirits, Inc.
Consolidated Balance Sheets |
||||||||
| March 31, 2015 | March 31, 2014 | |||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
|
$ | 50,757 | $ | 20,143 | ||||
|
Accounts receivable
|
20,985 | 35,171 | ||||||
|
Inventories
|
104,800 | 308,213 | ||||||
|
Total Current Assets
|
176,542 | 363,527 | ||||||
|
TOTAL ASSETS
|
$ | 176,542 | $ | 363,527 | ||||
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable and accrued liabilites
|
$ | 597,822 | $ | 619,909 | ||||
|
Advance from stockholder
|
8,700 | 8,700 | ||||||
|
Notes payable
|
27,351 | 11,900 | ||||||
|
Convertible notes payable, net of discount
|
1,556 | - | ||||||
|
Derivative liability
|
137,691 | - | ||||||
|
Current maturities of notes payable - related parties
|
346,000 | 26,000 | ||||||
|
Total Current Liabilities
|
1,119,120 | 666,509 | ||||||
|
LONG-TERM LIABILITIES
|
||||||||
|
Convertible notes payable, net of discount
|
29,156 | - | ||||||
|
Derivative liability
|
218,469 | - | ||||||
|
Notes payable - related parties, net of current maturities
|
- | 320,000 | ||||||
|
Total Long-Term Liabilities
|
247,625 | 320,000 | ||||||
|
Total Liabilities
|
1,366,745 | 986,509 | ||||||
|
STOCKHOLDERS' DEFICIT
|
||||||||
|
Preferred stock par value $0.001: 10,000,000 shares authirozied;
none issued or outstanding
|
- | - | ||||||
|
Common stock par value $0.001: 300,000,000 shares authorized;
75,466,969 and 70,157,512 shares issued and outstanding, respectively
|
75,467 | 70,158 | ||||||
|
Additional paid-in capital
|
2,360,298 | 2,106,072 | ||||||
|
Accumulated deficit
|
(3,625,968 | ) | (2,799,212 | ) | ||||
|
Total Stockholders' Deficit
|
(1,190,203 | ) | (622,982 | ) | ||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 176,542 | $ | 363,527 | ||||
See accompanying notes to the consolidated financials statements.
F-3
|
Montalvo Spirits, Inc.
Consolidated Statements of Operations
|
||||||||
|
For the Fiscal Year Ended
|
||||||||
|
March 31, 2015
|
March 31, 2014
|
|||||||
|
SALES
|
$ | 112,697 | $ | 119,916 | ||||
|
COST OF GOODS SOLD
|
||||||||
|
Cost of goods sold
|
33,105 | 38,945 | ||||||
|
Inventory obsolescence and markdowns
|
274,182 | - | ||||||
|
COST OF GOODS SOLD
|
307,287 | 38,945 | ||||||
|
GROSS MARGIN
|
(194,590 | ) | 80,971 | |||||
|
OPERATING EXPENSES
|
||||||||
|
Selling expense
|
99,702 | 199,641 | ||||||
|
Salaries and wages
|
112,538 | 289,000 | ||||||
|
Consulting fees
|
32,262 | 142,828 | ||||||
|
General and administrative
|
123,771 | 188,137 | ||||||
|
Total Operating Expenses
|
368,273 | 819,606 | ||||||
|
LOSS FROM OPERATIONS
|
(562,863 | ) | (738,635 | ) | ||||
|
OTHER (INCOME) EXPENSE
|
||||||||
|
Financing expense
|
- | 301,500 | ||||||
|
Derivative expense
|
158,368 | - | ||||||
|
Change in fair value of derivative liabilities
|
15,394 | - | ||||||
|
Interest expense
|
90,131 | 4,680 | ||||||
|
Total Other (Income) Expense
|
263,893 | 306,180 | ||||||
| - | ||||||||
|
LOSS BEFORE INCOME TAX PROVISION
|
(826,756 | ) | (1,044,815 | ) | ||||
|
Income tax provision
|
- | - | ||||||
|
NET LOSS
|
$ | (826,756 | ) | $ | (1,044,815 | ) | ||
|
Net Loss per Common Share
|
||||||||
|
- Basic and diluted
|
$ | (0.01 | ) | $ | (0.02 | ) | ||
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
||||||||
|
- Basic and diluted
|
71,703,883 | 67,818,145 | ||||||
See accompanying notes to the consolidated financials statements.
F-4
|
Montalvo Spirits, Inc.
Consolidated Statement of Stockholders' Deficit
For the Period from March 31, 2013 through March 31, 2015
|
||||||||||||||||||||
|
Common stock par value $0.001
|
Additional
Paid-In Capital
|
|
||||||||||||||||||
|
Number of Shares
|
Amount
|
Accumulated
Deficit |
Total
Stockholders' |
|||||||||||||||||
|
Balance, March 31, 2013
|
67,112,512 | $ | 67,113 | $ | 1,358,352 | $ | (1,754,397 | ) | $ | (328,932 | ) | |||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.50 per share on June 15, 2013
|
10,000 | 10 | 4,990 | 5,000 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.50 per share from July 5, 2013 to August 29, 2013
|
146,000 | 146 | 72,854 | 73,000 | ||||||||||||||||
|
Common stock issued for services on July 15, 2013,
|
||||||||||||||||||||
|
valued at $0.50 per share
|
111,000 | 111 | 55,389 | 55,500 | ||||||||||||||||
|
Common stock issued for notes payable and
|
||||||||||||||||||||
|
accrued interest on July 15, 2013, valued at $0.50 per share
|
32,500 | 32 | 16,218 | 16,250 | ||||||||||||||||
|
Common stock issued for commitment shares
|
||||||||||||||||||||
|
on August 29, 2013, valued at $0.50 per share
|
603,000 | 603 | 300,897 | 301,500 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.20 per share on September 3, 2013
|
10,000 | 10 | 1,990 | 2,000 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.20 per share on Novmber 13, 2013
|
20,000 | 20 | 4,980 | 5,000 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.242 per share on Novmber 13, 2013
|
100,000 | 100 | 24,140 | 24,240 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.234 per share on Novmber 15, 2013
|
100,000 | 100 | 23,300 | 23,400 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.20 per share on December 3, 2013
|
100,000 | 100 | 17,900 | 18,000 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.15 per share of February 28, 2014
|
166,667 | 167 | 24,833 | 25,000 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
vauled at $0.15 per share on February 28, 2014
|
145,833 | 146 | 21,729 | 21,875 | ||||||||||||||||
|
Common stock issued for services,
|
||||||||||||||||||||
|
valued at $0.12 per share on March 28, 2014
|
1,500,000 | 1,500 | 178,500 | 180,000 | ||||||||||||||||
|
Net loss
|
(1,044,815 | ) | (1,128,761 | ) | ||||||||||||||||
|
Balance, March 31, 2014
|
70,157,512 | 70,158 | 2,106,072 | (2,799,212 | ) | (622,982 | ) | |||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.10 per share on June 16, 2014
|
11,111 | 11 | 1,100 | 1,111 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.10 per share on June 23, 2014
|
11,111 | 11 | 1,100 | 1,111 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.10 per share on June 30, 2014
|
11,111 | 11 | 1,100 | 1,111 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.10 per share from July 7, 2014 to August 15, 2014
|
144,443 | 144 | 14,300 | 14,444 | ||||||||||||||||
|
Common stock issued for cash
|
||||||||||||||||||||
|
at $0.075 per share of August 20, 2014
|
200,000 | 200 | 14,800 | 15,000 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.075 per share from August 25, 2014 to September 15, 2014
|
112,500 | 112 | 8,326 | 8,438 | ||||||||||||||||
|
Common stock issued for commitment shares
|
||||||||||||||||||||
|
on September 12, 2014, valued at $0.0711 per share
|
400,000 | 400 | 28,040 | 28,440 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.077 per share on October 6, 2014
|
11,111 | 11 | 844 | 855 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.077 per share on October 13, 2014
|
11,111 | 11 | 689 | 700 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.066 per share on October 15, 2014
|
37,500 | 37 | 2,438 | 2,475 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.05 per share on October 13, 2014
|
2,000,000 | 2,000 | 98,000 | 100,000 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.055 per share on November 17, 2014
|
377,500 | 378 | 20,385 | 20,763 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.03 per share on December 15, 2014
|
170,833 | 171 | 4,954 | 5,125 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.04 per share on January 15, 2015
|
137,500 | 138 | 5,362 | 5,500 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.08 per share on February 17, 2015
|
100,000 | 100 | 7,900 | 8,000 | ||||||||||||||||
|
Common stock issued for services
|
||||||||||||||||||||
|
at $0.03 per share on March 15, 2015
|
200,000 | 200 | 7,800 | 8,000 | ||||||||||||||||
|
Conversion of convertible note into common stock
|
||||||||||||||||||||
|
at $0.0182 per share on March 27, 2015
|
1,373,626 | 1,374 | 23,626 | 25,000 | ||||||||||||||||
|
Beneficial conversion of derivative liability
|
13,462 | 13,462 | ||||||||||||||||||
|
Net loss
|
(826,756 | ) | (826,756 | ) | ||||||||||||||||
|
Balance, March 31, 2015
|
75,466,969 | $ | 75,467 | $ | 2,360,298 | $ | (3,625,968 | ) | $ | (1,190,203 | ) | |||||||||
See accompanying notes to the consolidated financials statements.
F-5
|
Montalvo Spirits, Inc.
Consolidated Statements of Cash Flows
|
||||||||
| For the Fiscal Year Ended | ||||||||
| March 31, 2015 |
March 31, 2014
|
|||||||
|
OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (826,756 | ) | $ | (1,044,815 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Common stock issued for financing expenses
|
- | 301,500 | ||||||
|
Amortization of debt issuance and discount fee
|
30,712 | - | ||||||
|
Derivative expense
|
158,368 | - | ||||||
|
Change in fair value of derivative liability
|
15,394 | |||||||
|
Stock based compensation
|
206,073 | 257,375 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Accounts receivable
|
14,186 | (35,171 | ) | |||||
|
Inventories
|
203,413 | 37,984 | ||||||
|
Accounts payable and accrued liabilites
|
(52,227 | ) | 267,389 | |||||
|
|
||||||||
|
Net Cash Used in Operating Activities
|
(250,837 | ) | (215,738 | ) | ||||
|
FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from subscription receivable
|
- | 16,500 | ||||||
|
Advances from stockholder
|
- | 8,550 | ||||||
|
Proceeds from notes payable
|
89,100 | 15,000 | ||||||
|
Repayment of notes payable
|
(73,649 | ) | (3,100 | ) | ||||
|
Proceeds from convertible notes payable
|
251,000 | - | ||||||
|
Proceeds from sale of common stock
|
15,000 | 175,640 | ||||||
|
Net Cash Provided by Financing Activities
|
281,451 | 212,590 | ||||||
|
NET CHANGE IN CASH
|
30,614 | (3,148 | ) | |||||
|
CASH AT BEGINNING OF PERIOD
|
20,143 | 23,291 | ||||||
|
CASH AT END OF PERIOD
|
$ | 50,757 | $ | 20,143 | ||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
|
Interest paid
|
$ | 3,185 | $ | 4,680 | ||||
|
Income tax paid
|
$ | - | $ | - | ||||
|
NON CASH FINANCING AND INVESTING ACTIVITIES:
|
||||||||
|
Common stock issued for a stock subscription receivable
|
$ | - | $ | 16,500 | ||||
|
Note payable issued for inventory
|
$ | - | $ | 320,000 | ||||
|
Common stock issued for debt conversion
|
$ | 25,000 | $ | 16,250 | ||||
See accompanying notes to the consolidated financials statements.
F-6
Montalvo Spirits, Inc.
March 31, 2015 and 2014
Notes to the Consolidated Financial Statements
Note 1 – Organization and Operations
Montalvo Spirits, Inc. (Formerly Advanced Cloud Storage, Inc.)
Montalvo Spirits, Inc. (the “Company”) was incorporated on November 18, 2010 under the laws of the State of Nevada under the name of Advanced Cloud Storage, Inc. The Company originally intended to market and sell its planned secure online data storage through its intended website.
Amendment to the Certificate of Incorporation
On December 21, 2012, holders of a majority of the Company’s outstanding Common Stock voted to amend the Company’s Articles of Incorporation to: (i) change its name to “Montalvo Spirits, Inc.” (the “Company”), (ii) increase the number of its authorized shares of capital stock from 75,000,000 shares to 310,000,000 consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock and (iii) effectuate a forward split on a 1:32.4552 basis (“the Amendment”).
CASA Montalvo Holdings, Inc.
CASA Montalvo Holdings, Inc. (“Casa Montalvo”) was incorporated under the laws of the State of California on April 4, 2011. Casa Montalvo develops markets and/or distributes alcoholic beverages, primarily in the United States.
Formation of Montalvo Imports LLC
On August 9, 2012, the Company formed Montalvo Imports LLC (“LLC” or “Imports”) under the laws of the State of Delaware. The LLC, of which the Company is the sole member, was formed to provide the same services as that of the Company.
Acquisition of CASA Montalvo Treated as a Reverse Acquisition
On December 21, 2012, the Company, entered into and consummated the Agreement and Plan of Share Exchange (the “Exchange Agreement”) with Casa Montalvo and the shareholders of Casa Montalvo (the “Exchange”). Upon consummation of the transactions set forth in the Agreement (the “Closing”), the Registrant adopted the business plan of Casa Montalvo.
Pursuant to the Exchange Agreement, the Company agreed to acquire all of the issued and outstanding capital stock of Casa Montalvo in exchange for the issuance of an aggregate for 59,000,016 shares of the Registrant’s common stock, par value $0.001 per share (the “Exchange Shares”). As a result of the Exchange, Casa Montalvo became a wholly-owned subsidiary of the Registrant. The shareholders of Casa Montalvo beneficially owned approximately eighty-eight and one half percent (88.5%) of the issued and outstanding Common Stock of the Registrant immediately after the consummation of the Exchange. Pursuant to the terms of the Exchange Agreement, the Registrant’s principal shareholder agreed to retire 10,000,000 shares of the Registrant’s Common Stock.
As a result of the controlling financial interest of the former stockholder of Casa Montalvo, for financial statement reporting purposes, the merger between the Company and Casa Montalvo has been treated as a reverse acquisition with Casa Montalvo deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of Casa Montalvo (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of Casa Montalvo which are recorded at their historical cost. The equity of the Company is the historical equity of Casa Montalvo retroactively restated to reflect the number of shares issued by the Company in the transaction.
Formation of Cannabis Beverage Group, Inc.
On March 27, 2014, the Company formed Cannabis Beverage Group, Inc. (“CBG”) under the laws of the State of Colorado. CBG, of which the Company is the shareholder, was formed to explore entry into the cannabis based beverage industry. CBG is currently inactive.
F-7
Note 2 – Summary of Significant Accounting Policies
The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Fiscal Year-End
The Company elected March 31st as its fiscal year ending date.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, in which the parent’s power to control exists.
The Company's consolidated subsidiary and/or entity is as follows:
|
Name of consolidated subsidiary or entity
|
State or other jurisdiction of incorporation or organization
|
Date of incorporation or formation
(date of acquisition, if applicable)
|
Attributable interest
|
|
CASA Montalvo Holdings, Inc.
|
The State of California
|
April 4, 2011
|
100%
|
|
Montalvo Imports LLC
|
The State of Delaware
|
August 9, 2012
|
100%
|
|
Cannabis Beverage Group, Inc.
|
The State of Colorado
|
March 27, 2014
|
100%
|
The consolidated financial statements include all accounts of the Company as of December 31, 2015 and 2014.
All inter-company balances and transactions have been eliminated.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
F-8
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reporting period.
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimate(s) and assumption(s) affecting the financial statements were:
|
(i)
|
Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
|
|
(ii)
|
Allowance for doubtful accounts: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole.
|
|
(iii)
|
Inventory Obsolescence and Markdowns: The Company’s estimate of potentially excess and slow-moving inventories is based on evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts.
|
|
(iv)
|
Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
|
|
(v)
|
Estimates and assumptions used in valuation of derivative liability and equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liability, share options and similar instruments.
|
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, paragraph 820-10-35-37 of the FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by paragraph 820-10-35-37 of the FASB Accounting Standards Codification are described below:
|
Level 1
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level 2
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
Level 3
|
Pricing inputs that are generally observable inputs and not corroborated by market data.
|
F-9
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, approximate their fair values because of the short maturity of these instruments.
The Company’s notes payable approximates the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at December 31, 2015 and 2014.
The Company’s Level 3 financial liabilities consist of the derivative financial instruments for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a Monte Carlo model, with the assistance of a valuation specialist, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis
The Company’s non-financial assets include inventories. The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.
Level 3 Financial Liabilities – Derivative conversion features and warrant liabilities
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of March 31, 2015:
|
Fair Value Measurement Using Level 3 Inputs
|
||||||||||||||||||||
|
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
Derivative conversion features and warrant liabilities
|
$
|
356,160
|
$
|
-
|
$
|
-
|
$
|
356,160
|
$
|
356,160
|
||||||||||
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheets as of March 31, 2014:
|
Fair Value Measurement Using Level 3 Inputs
|
||||||||||||||||||||
|
Carrying Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
Derivative conversion features and warrant liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the fiscal year ended March 31, 2015:
|
Fair Value Measurement Using Level 3 Inputs
|
||||||||
|
Derivative Liabilities
|
Total
|
|||||||
|
Balance, March 31, 2014
|
$
|
-
|
$
|
-
|
||||
|
Total (gains) or losses (realized/unrealized) included in consolidated statements of operations
|
173,762
|
173,762
|
||||||
|
Purchases, issuances and settlements
|
195,860
|
195,860
|
||||||
|
Transfers in and/or out of Level 3
|
(13,462
|
) |
(13,462
|
) | ||||
|
Balance, March 31, 2015
|
$
|
356,160
|
$
|
356,160
|
||||
F-10
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and economic conditions.
Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.
Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.
The Company had no bad debt expense for the reporting period ended March 31, 2015 or 2014.
The Company does not have any off-balance-sheet credit exposure to its customers.
Inventories
The Company follows the guidance of ASC Topic 330 regarding the presentation and disclosure of inventory on the face of the financial statements as well as in the notes to financial statements.
Pursuant to paragraphs 330-10-50-1 and 50-2 the basis of stating inventories shall be consistently applied and shall be disclosed in the financial statements; whenever a significant change is made therein, there shall be disclosure of the nature of the change and, if material, the effect on income. A change of such basis may have an important effect upon the interpretation of the financial statements both before and after that change, and hence, in the event of a change, a full disclosure of its nature and of its effect, if material, upon income shall be made. See paragraph 210-10-50-1. When substantial and unusual losses result from the application of the rule of lower of cost or market it will frequently be desirable to disclose the amount of the loss in the income statement as a charge separately identified from the consumed inventory costs described as cost of goods sold.
Inventory Valuation
We record inventory on the first-in, first-out (“FIFO”) method. In accordance with generally recognized trade practice, maturing spirits inventories are classified as current assets, although the majority of these inventories ordinarily will not be sold within one year, due to the duration of aging processes. Maturing spirits inventory includes costs of production such as warehousing and insurance. Inventory provisions are recorded to reduce inventory to the lower of cost or market value for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions, inventory turns, product spoilage and specific identification of items, such as product discontinuance, material changes, or regulatory-related changes.
Inventory Obsolescence and Markdowns
The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
There was no inventory obsolescence for the reporting period ended March 31, 2015 or 2014.
There was no lower of cost or market adjustments for the reporting period ended March 31, 2015 or 2014.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
F-11
Pursuant to section 850-10-20 the related parties include a) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company and members of their immediate families; e) management of the Company and members of their immediate families; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Pursuant to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Discount on Debt
The Company allocates the proceeds received from convertible debt instruments between the liability component and equity component, and records the conversion feature as a liability in accordance with subtopic 470-20 of the FASB Accounting Standards Codification (“Subtopic 470-20”). The conversion feature and certain other features that are considered embedded derivative instruments, such as a conversion reset provision, a penalty provision and redemption option, have been recorded at their fair value as its fair value can be separated from the convertible note and its conversion is independent of the underlying note value. The conversion liability is marked to market each reporting period with the resulting gains or losses shown in the Statement of Operations. The Company has also recorded the resulting discount on debt related to the conversion features and amortizes the discount using the effective interest rate method over the life of the debt instruments.
Derivative Liabilities
The Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of Section 815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.
The Company marks to market the fair value of the embedded derivative warrants at each balance sheet date and records the change in the fair value of the embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).
F-12
The Company utilizes the Binomial Lattice Model that values the liability of the derivative conversion feature based on a probability weighted discounted cash flow model with the assistance of a third party valuation firm. Black-Scholes valuation does not consider all of the terms of the instrument which may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Binomial Lattice Model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the conversion features. The Binomial Lattice Model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the conversion features.
Commitments and Contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Revenue Recognition
The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
|
|
Shipping and Handling Costs
|
The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.
Stock-Based Compensation for Obtaining Employee Services
The Company accounts for share-based payment transactions issued to employees under the guidance of the Topic 718 Compensation—Stock Compensation of the FASB Accounting Standards Codification (“ASC Topic 718”).
Pursuant to ASC Section 718-10-20 an employee is an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (“IRS”) Revenue Ruling 87-41. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to nonemployee directors for other services shall be accounted for as awards to non-employees.
Pursuant to ASC Paragraphs 718-10-30-2 and 718-10-30-3 a share-based payment transaction with employees shall be measured based on the fair value of the equity instruments issued and an entity shall account for the compensation cost from share-based payment transactions with employees in accordance with the fair value-based method, i.e., the cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued or the fair value of the liabilities incurred/settled.
F-13
Pursuant to ASC Paragraphs 718-10-30-6 and 718-10-30-9 the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date. As such, the fair value of an equity share option or similar instrument shall be estimated using a valuation technique such as an option pricing model. For this purpose, a similar instrument is one whose fair value differs from its intrinsic value, that is, an instrument that has time value.
If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in its most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
|
a.
|
The exercise price of the option.
|
|
b.
|
The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding. Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
|
|
c.
|
The current price of the underlying share.
|
|
d.
|
The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
|
|
e.
|
The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
|
|
f.
|
The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
|
Pursuant to ASC Paragraphs 718-10-30-11 and 718-10-30-17 a restriction that stems from the forfeitability of instruments to which employees have not yet earned the right, such as the inability either to exercise a non-vested equity share option or to sell non-vested shares, is not reflected in estimating the fair value of the related instruments at the grant date. Instead, those restrictions are taken into account by recognizing compensation cost only for awards for which employees render the requisite service and a non-vested equity share or non-vested equity share unit awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date.
F-14
Pursuant to ASC Paragraphs 718-10-35-2 and 718-10-35-3 the compensation cost for an award of share-based employee compensation classified as equity shall be recognized over the requisite service period, with a corresponding credit to equity (generally, paid-in capital). The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the vesting period. The total amount of compensation cost recognized at the end of the requisite service period for an award of share-based compensation shall be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed). An entity shall base initial accruals of compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change. Previously recognized compensation cost shall not be reversed if an employee share option (or share unit) for which the requisite service has been rendered expires unexercised (or unconverted).
Under the requirement of ASC Paragraph 718-10-35-8 the Company made a policy decision to recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under the guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant to ASC paragraphs 505-50-25-6 and 505-50-25-7, a grantor shall recognize the goods acquired or services received in a share-based payment transaction when it obtains the goods or as services are received. A grantor may need to recognize an asset before it actually receives goods or services if it first exchanges share-based payment for an enforceable right to receive those goods or services. Nevertheless, the goods or services themselves are not recognized before they are received. If fully vested, nonforfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, nonforfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services.
Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.
Pursuant to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which the counterparty's performance is complete. If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
F-15
Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
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a.
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The exercise price of the option.
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b.
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The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.
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c.
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The current price of the underlying share.
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d.
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The expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
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e.
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The expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.
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f.
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The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
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Pursuant to ASC paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.
Deferred Tax Assets and Income Taxes Provision
The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13.addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.
The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
F-16
Earnings Per Share
Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
Pursuant to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method. Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid stock subscriptions. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period. c. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted EPS computation. Pursuant to ASC Paragraphs 260-10-45-40 through 45-42 convertible securities shall be reflected in diluted EPS by application of the if converted method. The convertible preferred stock or convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance, if later). In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive.
The total amount of potentially outstanding dilutive common shares from the conversion of the convertible debt would be 14,462,940 and 0 for the reporting period ended March 31, 2015 and 2014, respectively.
Cash Flows Reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).
This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
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1.
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Identify the contract(s) with the customer
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2.
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Identify the performance obligations in the contract
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3.
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Determine the transaction price
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4.
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Allocate the transaction price to the performance obligations in the contract
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5.
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Recognize revenue when (or as) the entity satisfies a performance obligations
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F-17
The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:
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1.
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Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
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2.
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Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
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3.
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Assets recognized from the costs to obtain or fulfill a contract.
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ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.
In August 2015, the FASB issued the FASB Accounting Standards Update No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”).
The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.
When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):
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a.
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Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
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b.
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Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
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c.
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Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
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If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:
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a.
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Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
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b.
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Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
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c.
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Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
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The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
F-18
In November 2015, the FASB issued the FASB Accounting Standards Update No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). This update simplifies the presentation of deferred income taxes; the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position.
For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
In January 2016, the FASB issued the FASB Accounting Standards Update No. 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).
This Update makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. Some of the major changes as a result of the ASU 2016-01 are summarized below.
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·
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Requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
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·
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Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
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·
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Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
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·
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Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
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·
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Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
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·
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Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
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·
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Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
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For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.
The Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).
The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the consolidated financial statements, the Company had an accumulated deficit at March 31, 2015, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenue and in its ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
F-19
Note 4 – Notes Payable
Notes payable consisted of the following:
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March 31, 2015
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March 31, 2014
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|||||||
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Note payable, issued February 13, 2014, in the principal amount of $15,000 with six minimum monthly payments totaling $16,800 in aggregate. The Company fully repaid the note.
|
$ | - | $ | 11,900 | ||||
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Note payable, issued June 10, 2014, in the principal amount of $75,000 with eighteen weekly payments of $5,000. The Company repaid $45,000 in aggregate towards the principal of the note as of March 31, 2015. The note is currently past due.
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25,000 | - | ||||||
|
Note payable, issued July 22, 2014, in the principal amount of $6,000 with six minimum monthly payments of $6,720 in aggregate. The Company repaid $3,469 in aggregate towards the principal of the note.
|
2,531 | - | ||||||
|
Convertible notes payable, net
|
$ | 27,531 | $ | 11,900 | ||||
Note 5 – Convertible Notes Payable
On September 15, 2014, the Company effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $5,000 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. Pursuant to the Agreement and a Registration Rights Agreement, for the nine months following the date of the Agreement, if the Registrant offers Common Stock (or other equity securities convertible into or exchangeable for Common Stock) registered for sale under the Securities Act or proposes to file a registration statement (“Registration Statement”) with the Securities and Exchange Commission covering any of its securities other than (i) a registration on Form S-8 or S-4, or any successor or similar forms; and (ii) a shelf registration under Rule 415 for the sole purpose of registering shares to be issued in connection with the acquisition of assets, the Registrant will give the Investor the option to include the Commitment Shares and any shares of Common Stock into which the Debentures are convertible into in such Registration Statement.
The first Debenture was issued in the principal amount of $150,000 (the "Debenture"). On March 27, 2015, $25,000 of principal was converted into 1,373,626 shares of the Company’s common stock at $0.0182 per share. The Debenture was shown as a long-term liability net of discounts of $97,330 for a net value of $27,670 at March 31, 2015.
An additional Debenture in the principal amount of $100,000 may be issued by the Registrant to the Investor anytime sixty-one (61) days thereafter subject to the satisfaction of the terms and conditions set forth in the Agreement (the “Second Closing”). A third Debenture in the principal amount of $100,000 may be issued by the Registrant to the Investor anytime sixty-one (61) days following the Second Closing subject to the satisfaction of the terms and conditions set forth in the Agreement.
The second Debenture was issued in the principal amount of $17,000 (the "Debenture")and was shown as a long-term liability net of discounts of $15,514 for a net value of $1,466 at March 31, 2015.
On March 16, 2015, the Company effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of an 8% convertible note in the aggregate principal amount of $84,000. The note matures on December 18, 2015 and pays interest at a rate of 8%, per annum. The Debenture is convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty-one percent (61%) of the lowest thre trading prices, as defined, of the Common Stock for the ten (10) trading days immediately preceding the date of conversion.
The Debenture is shown as a current liability net of a discounts of $82,444 for a net value of $1,556 at March 31, 2015.
The note has subsequently been repaid.
F-20
Note 6 – Commitments and Contingencies
Employment with the President
On November 13, 2014, the Company and Sergio Gonzalez (“SG”), entered into an Employment Agreement (the “Employment Agreement”), to employ CG as the Company’s President. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, SG is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Chief Operating Officer
On November 13, 2014, the Company and Carlos Gonzalez (“CG”), entered into an Employment Agreement (the “Employment Agreement”), to employ CG as the Company’s Chief Operating Officer. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, CG is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Chief Executive Officer
On November 13, 2014, the Company and Alex Viecco (“AV”), entered into an Employment Agreement (the “Employment Agreement”), to employ AV as the Company’s Chief Executive Officer. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, AV is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
Employment with the Director of Sales
On November 13, 2014, the Company and Daniel Cahill (“DC”), entered into an Employment Agreement (the “Employment Agreement”), to employ DC as the Company’s Director of Sales. The initial term of employment under the agreement is from November 13, 2014 (the “Effective Date”) until November 12, 2015, unless sooner terminated in accordance with the terms and conditions of the Employment Agreement. Pursuant to the Employment Agreement, DC is entitled to a salary of $72,000 per annum for the period beginning on the Effective Date through November 12, 2015.
F-21
Note 7 – Related Party Transactions
Related Parties
Related parties with whom the Company had transactions are:
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Related Parties
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|
Relationship
|
|
Alex Viecco
|
Chief Executive Officer and significant stockholder of the Company
|
|
|
Point Loma Capital, Inc.
|
An entity owned and controlled by a significant stockholder of the Company
|
|
|
CMFD Group LLC
|
An entity owned and controlled by a significant stockholder of the Company
|
Notes Payable - Related Parties
Notes payable – related parties consisted of the following:
|
March 31, 2015
|
March 31, 2014
|
|||||||
|
Note payable to Chief Executive Officer, issued on June 6, 2011, with interest at 8% per annum, with principal and interest due on June 6, 2013, The note is currently past due.
|
$ | 1,000 | $ | 1,000 | ||||
|
Note payable to stockholder, issued on June 21, 2011, with interest at 8% per annum, with principal and interest due on June 21, 2013, The note is currently past due.
|
10,000 | 10,000 | ||||||
|
Note payable to stockholder, issued on January 3, 2012, with interest at 8% per annum, with principal and interest due on January 20, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
|
Note payable to stockholder, issued on January 20, 2012, with interest at 8% per annum, with principal and interest due on January 20, 2014, The note is currently past due
|
2,000 | 2,000 | ||||||
|
Note payable to stockholder, issued on March 1, 2012, with interest at 8% per annum, with principal and interest due on March 31, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
|
Note payable to stockholder, issued on April 1, 2012, with interest at 8% per annum, with principal and interest due on March 31, 2013, The note is currently past due
|
2,000 | 2,000 | ||||||
|
Note payable to stockholder, issued on March 23, 2012, with interest at 8% per annum, with principal and interest due on March 23, 2014, The note is currently past due
|
6,000 | 6,000 | ||||||
|
Note payable to a relative of the Chief Executive Officer, issued November 20, 2012, with interest at 8% per annum, with principal and interest due on November 20, 2013, The note is currently past due
|
1,000 | 1,000 | ||||||
|
Note payable to Destiladora Huerta Real, S.A. de C.V., an entity controlled by the President and Chief Operating Officer, with interest at 5% per annum, with principal and interest due on August 23, 2015, The note is currently past due
|
320,000 | 320,000 | ||||||
| 346,000 | 346,000 | |||||||
|
Current maturities of notes payable – related parties
|
(346,000 | ) | (26,000 | ) | ||||
|
Notes payable – related parties, net of current maturities
|
$ | - | $ | 320,000 | ||||
Advances from Stockholder
From time to time, stockholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest bearing and due on demand.
F-22
Note 8 – Stockholders’ Deficit
Shares Authorized
Upon formation the total number of shares of common stock which the Company is authorized to issue is Seventy Five Million (75,000,000) shares, par value $0.001 per share. In December 2012, an increase of the authorized shares of the Company’s common stock from 75,000,000 shares to 310,000,000, $0.001 par value, consisting of (a) 300,000,000 shares designated as Common Stock and (b) 10,000,000 shares designated as blank check preferred stock was ratified, effective upon the filing of an amendment to the Company’s Certificate of Incorporation.
Common Stock
Immediately prior to the consummation of the Exchange Agreement on December 21, 2012, the Company had 332,251,996 common shares issued and outstanding.
Upon consummation of the Exchange Agreement on December 21, 2012, the then majority stockholders of the Company surrendered 324,552,000 shares of the Company's common stock which was cancelled upon receipt and the Company issued 59,000,016 shares of its common stock pursuant to the terms and conditions of the Exchange Agreement.
Sale of Common Stock
On June 15, 2013 the Company sold 10,000 shares of its common stock to one investor at $0.05 per share or $5,000. Payment was received by the Company on July 2, 2013.
From July 1, 2013 to August 1, 2013 the Company issued 46,000 shares of its common stock at $0.50 per share, or $23,000, to five (5) individuals.
On July 15, the Company entered into a Conversion and Release Agreement, whereby the Company issued 32,500 shares of its Common Stock in exchange for the cancellation of $16,250 in notes payable, including $15,000 in principal plus accrued interest of $1,250, at $0.50 per share.
On August 29, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.50 per share or $50,000.
On September 3, 2013 the Company issued 10,000 shares of its common stock to one investor at $0.20, or $2,000.
On November 13, 2013 the Company issued 20,000 shares of its common stock to one investor at $0.20, or $5,000.
On November 13, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.242 per share or $24,200.
On November 15, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.234 per share or $23,400
On December 3, 2013 the Company sold 100,000 shares of its common stock to an institutional investor at $0.180 per share or $18,000.
On February 27, 2014 the Company issued 166,667 shares of its common stock to two investors at $0.15, or $25,000.
On August 20, 2014, the Company issued 200,000 shares of its common stock to one investor at $0.075 per share, or $15,000.
Common Shares Issued for Obtaining Employee Services
On March 29, 2013 the Company issued 200,000 shares to a newly appointed member of the Company’s Board of Advisors. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent volume PPM price of the Company’s common stock, or $100,000 on the date of grant and were expensed upon issuance.
On March 28, 2014 the Company issued 250,000 shares to each of its four board members in exchange for their services on the Board of Directors. These shares are fully vested and non-forfeitable. These shares were valued at $0.12 per share, the closing price of the Company’s common stock on the date of issuance, or $120,000 on the date of grant and were expensed upon issuance.
On November 13, 2014 the Company issued 500,000 shares to each of its four board members in exchange for their services on the Board of Directors. These shares are fully vested and non-forfeitable. These shares were valued at $0.05 per share, the closing price of the Company’s common stock on the date of issuance, or $100,000 on the date of grant and were expensed upon issuance.
F-23
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
On July 15, 2013 the Company entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year from the date of signing in exchange for 111,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent PPM price of the Company’s common stock or $55,000 on the date of grant and were expensed upon issuance.
On February 27, 2014 the Company entered into a Contribution Agreement with an individual to provide marketing services for a period of one (1) year for from the date of signing in exchange for 145,833 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.15 per share, the closing price of the Company’s common stock on the date of issuance, or $21,875 on the date of grant and were expensed upon issuance.
On March 28, 2014 the Company entered into a Contribution Agreement with five individuals to provide marketing services for a period of one (1) year from the date of signing in exchange for an aggregate of 500,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.12 per share, the close price of the Company’s common stock on the date of issuance, or $60,000 on the date of grant and were expensed upon issuance.
On each of June 16, 2014, June 23, 2014 and June 30, 2014, the Company issued 11,111 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.10 per share, the closing price of the Company’s common stock on the date of issuance, or $1,111 on the date of grant and were expensed upon issuance.
On each of July 7, 2014, July 14, 2014, July 21, 2014, July 28, 2014, August 4, 2014, August 11, 2014, August 18, 2014, August 25, 2014, September 1, 2014, September 8, 2014, September 15, 2014, September 22, 2014, September 29, 2014, October 6, 2014, and October 13, 2014, the Company issued 11,111 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued from $0.063 to $0.10 per share, the closing price of the Company’s common stock on the date of issuance.
On each of July 15, 2014, August 15, 2014, September 15, 2014, October 15, 2014, November 15, 2014, and December 15, 2014, the Company issued 37,500 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued from $0.03 to $0.075 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On September 15, 2014, Montalvo Spirits, Inc. (the “Registrant”) effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $350,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $5,000 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. The shares were valued at $0.0711 per share, the closing price of the Company’s common stock on the date of issuance.
On November 17, 2014 the Company entered into a Contribution Agreement with three individuals to provide marketing services for a period of one (1) year from the date of signing in exchange for an aggregate of 377,500 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.055 per share, the close price of the Company’s common stock on the date of issuance, or $20,763 on the date of grant and were expensed upon issuance.
On December 15, 2014, the Company issued 133,333 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On January 15, 2015, the Company issued 137,500 shares of the Company’s common stock to consultants in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.04 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On February 17, 2015 the Company issued 50,000 shares of the Company’s common stock to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.08 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
On March 15, 2015, the Company issued 200,000 shares of the Company’s common stock to consultants in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.04 per share, the closing price of the Company’s common stock on the date of issuance, and were expensed upon issuance.
F-24
Note 9 – Lincoln Park Purchase Agreement
On August 29, 2013, the Company entered into a purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park or LPC”), (the “Purchase Agreement”) pursuant to which Lincoln Park agreed to purchase up to $10,050,000 of Company common stock (subject to certain limitations) from time to time over a twenty-four (24) month period. Also on August 29, 2013, Montalvo entered into a Registration Rights Agreement, (the “Registration Rights Agreement”), with Lincoln Park, in which Montalvo filed with the SEC the registration statement to register for resale under the Securities Act of 1933, as amended, or the Securities Act, the shares that have been or may be issued to Lincoln Park under the Purchase Agreement.
Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and LPC is obligated to purchase up to $10,050,000 in shares of the Company’s Common Stock, subject to certain limitations, from time to time, over the 24 month period commencing on November 7, 2013, the date that the registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Lincoln Park Registration Rights Agreement, was declared effective by the SEC. The Company may, from time to time and at its’ sole discretion, direct Lincoln Park to purchase shares of Company common stock in amounts up to 100,000 shares on any single business day so long as at least one business day has passed since the most recent purchase or up to $500,000 per purchase plus an additional “accelerated amount” under certain circumstances. There are no trading volume requirements or restrictions under the Purchase Agreement, and Montalvo will control the timing and amount of any sales of common stock to Lincoln Park. The purchase price of the shares that may be sold to Lincoln Park under the Purchase Agreement will be based on the market price of our common stock immediately preceding the time of sale as computed under the Purchase Agreement without any fixed discount; provided that in no event will such shares be sold to Lincoln Park when the closing sale price is less than $0.25 per share, subject to adjustment as provided in the Purchase Agreement. The purchase price per share will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute such price. The Company may at any time in its’ sole discretion terminate the Purchase Agreement without fee, penalty or cost upon one business day notice. Lincoln Park may not assign or transfer its rights and obligations under the Purchase Agreement.
In connection with the entry into the Purchase Agreement the Company issued 603,000 shares of its common stock to an institutional investor in exchange for the investor committing to purchase up to $10,050,000 of the Company’s common stock over the next 24 months, subject to certain terms and conditions. These shares are fully vested and non-forfeitable. These shares were valued at $0.50 per share, the most recent PPM price of the Company’s common stock or $301,500 on the date of grant and were expensed as financing expense upon issuance.
Note 10 – Concentrations and Credit Risk
Customers and Credit Concentrations
Customer concentrations and credit concentrations are as follows:
|
Net Sales
|
||||||||
|
For the Fiscal Year Ended March 31, 2015
|
For the Fiscal Year Ended March 31, 2014
|
|||||||
|
Customer A
|
53
|
%
|
56
|
%
|
||||
|
Customer B
|
10
|
%
|
30
|
%
|
||||
|
63
|
%
|
86
|
%
|
|||||
No customer in accounts receivable were over 10% at March 31, 2015 or 2014.
reduction in sales from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial condition.
Deferred Tax Assets
At March 31, 2015, the Company had net operating loss (“NOL”) carry–forwards for Federal income tax purposes of $3,625,968 that may be offset against future taxable income through 2035. No tax benefit has been reported with respect to these net operating loss carry-forwards because the Company believes that the realization of the Company’s net deferred tax assets of approximately $1,232,829 was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance.
Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realization. The valuation allowance increased approximately $281,097 and $355,257 for the Fiscal Year ended March 31, 2015 and 2014, respectively.
F-25
Components of deferred tax assets are as follows:
|
March 31, 2014
|
March 31, 2013
|
|||||||
|
Net deferred tax assets – non-current:
|
||||||||
|
Expected income tax benefit from NOL carry-forwards
|
$
|
1,232,829
|
$
|
951,732
|
||||
|
Less valuation allowance
|
(1,232.829
|
)
|
(951,732
|
)
|
||||
|
Deferred tax assets, net of valuation allowance
|
$
|
-
|
$
|
-
|
||||
Income Tax Provision in the Statement of Operations
A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
|
For the Fiscal Year Ended
March 31,
2015
|
For the Fiscal Year Ended
March 31, 2014
|
|||||||
|
Federal statutory income tax rate
|
34.0
|
%
|
34.0
|
%
|
||||
|
Change in valuation allowance on net operating loss carry-forwards
|
(34.0
|
)
|
(34.0
|
)
|
||||
|
Effective income tax rate
|
0.0
|
%
|
0.0
|
%
|
||||
F-26
Note 11 – Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The Management of the Company determined that there were reportable subsequent event(s) to be disclosed as follows:
On April 15, 2015 and May 15, 2015, the Company issued 145,161 and 191,489 shares of the Company’s common stock, respectively, to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.031 and $0.0235 per share, the closing price of the Company’s common stock on the dates of issuance, and were expensed upon issuance.
On April 1, 2015 and May 1, 2015, the Company issued 137,931 and 163,265 shares of the Company’s common stock, respectively, to a consultant in exchange for services to be provided. These shares are fully vested and non-forfeitable. These shares were valued at $0.029 and $0.0245 per share, the closing price of the Company’s common stock on the dates of issuance, and were expensed upon issuance.
On April 1, 2015, the Company entered into a Contribution Agreement with a company to provide marketing services for a period of six (6) months for from the date of signing in exchange for 1,500,000 shares of the Company’s common stock. These shares are fully vested and non-forfeitable. These shares were valued at $0.029 per share, the closing price of the Company’s common stock on the date of issuance, or $43,500 on the date of grant and were expensed upon issuance.
On July 23, 2015, the Company issued 2,330,097 shares to each of its five officers in exchange for their services as executives of the Company. These shares are fully vested and non-forfeitable. These shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance, or $70,000 on the date of grant and were expensed upon issuance.
On April 21, 2015, $25,000 of principal of issued on September 15, 2014 (the “Debenture”) was converted into 1,532,332 shares of the Company’s common stock at $0.016315 per share.
On May 20, 2015, $25,000 of principal of the Debenture was converted into 2,236,135 shares of the Company’s common stock at $0.01118 per share.
On April 23, 2015, the Company sold 925,926 shares of its common stock to one investor at $0.027 per share or $25,000.
On May 26, 2015, the Company sold 11,363,630 shares of its common stock to one investor at $0.022 per share or $250,000.
On June 29, 2015, $25,000 of principal of the Debenture was converted into 2,727,768 shares of the Company’s common stock at $0.009165 per share.
On July 15, 2015, the Company sold 966,183 shares of its common stock to one investor at $0.0207 per share or $20,000.
On August 28, 2015, the Company sold 454,545 shares of its common stock to one investor at $0.022 per share or $10,000.
On October 30, 2015, Montalvo Spirits, Inc. (the “Registrant”) effectuated a Securities Purchase Agreement (the “Agreement”) with an accredited investor (the “Investor”) for the purchase and sale of up to $540,000 of the Registrant’s original issue discount convertible debentures (collectively, the “Debentures”). The Debentures do not bear interest and are convertible into shares of the Registrant’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price equal to sixty percent (60%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Registrant paid the Investor a fee consisting of $2,900 and 400,000 shares of restricted Common Stock (the “Commitment Shares”) in connection with the Investor’s due diligence review of the Registrant and reimbursed the Investor for $5,000 in legal fees incurred by the Investor. The shares were valued at $0.03 per share, the closing price of the Company’s common stock on the date of issuance.
F-27