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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended July 31, 2018

 

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

 

For the transition period from ________________ to _______________

 

Commission File Number 333-214643

 

SUNSET ISLAND GROUP, INC.

(Exact name of registrant as specified in its charter)

  

Colorado

 

47-3278534

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

20420 Spence Road, Salinas, CA

 

93908

(Address of principal executive offices)

(Zip Code)

   

(424) 239-6230

(Registrant’s telephone number, including area code)

 

N/A

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

 

Securities registered pursuant to Section 12(b) of the Act:

  

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

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   x NO

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x YES     ¨ NO

 

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

  

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

x

Smaller reporting company

x

Emerging growth company

x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

5,386,771 shares of common stock as of April 20, 2020

 

 

 
 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

Item 1A.

Risk Factors

 

28

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

Item 3.

Defaults Upon Senior Securities

 

28

 

Item 4.

Mine Safety Disclosure

 

28

 

Item 5.

Other Information

 

28

 

Item 6.

Exhibits

 

29

 

SIGNATURES

 

30

 

 

 
2

 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

     

 

Page

 

Condensed Consolidated Balance Sheets as of July 31, 2018 and October 31, 2017 (Unaudited)

 

4

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended July 31, 2018 and 2017 (Unaudited)

 

5

Condensed Consolidated Statements of Changes in Stockholders' Deficit for the Nine Months Ended July 31, 2018 and 2017 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 2018 and 2017 (Unaudited)

 

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9

  

 
 
3

 

Table of Contents

 

 

Sunset Island Group, Inc.

Condensed Consolidated Balance Sheets

 (Unaudited)

 

 

 

 

 

 

 

 

 

July 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$ 52,236

 

 

$ 24,656

 

Total Current Assets

 

 

52,236

 

 

 

24,656

 

 

 

 

 

 

 

 

 

 

Deposit

 

 

14,000

 

 

 

14,000

 

Total Assets

 

$ 66,236

 

 

$ 38,656

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$ 28,325

 

 

$ 25,817

 

Accrued interest

 

 

55,503

 

 

 

-

 

Accrued interest - related party

 

 

6,984

 

 

 

-

 

Dividend payable

 

 

90,572

 

 

 

46,029

 

Due to related party

 

 

-

 

 

 

2,885

 

Convertible notes, net of unamortized discount of $604,145

 

 

620,856

 

 

 

-

 

Current portion of notes payable - related party

 

 

157,200

 

 

 

-

 

Derivative liabilities

 

 

1,250,360

 

 

 

-

 

Total Current Liabilities

 

 

2,209,800

 

 

 

74,731

 

 

 

 

 

 

 

 

 

 

Notes payable - related party

 

 

290,200

 

 

 

330,200

 

Total Liabilities

 

 

2,500,000

 

 

 

404,931

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (note 9)

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 15,000,000 shares authorized;

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, 4,600,000 shares designated, 4,600,000 shares issued and outstanding

 

 

460

 

 

 

460

 

Series B Preferred Stock, 8,000,000 shares designated, no shares issued and outstanding

 

 

-

 

 

 

-

 

Series C Convertible Preferred Stock, 500,000 shares designated, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common Stock, par value $0.0001, 27,000,000 shares authorized, 5,386,771 and 4,871,771 shares issued and outstanding, respectively

 

 

539

 

 

 

487

 

Additional paid in capital

 

 

494,684

 

 

 

334,168

 

Subscriptions received - shares to be issued

 

 

-

 

 

 

50,000

 

Accumulated deficit

 

 

(2,929,447 )

 

 

(751,390 )

Total Stockholders’ Deficit

 

 

(2,433,764 )

 

 

(366,275 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

 

$ 66,236

 

 

$ 38,656

 

 

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

 

 
4

 

Table of Contents

 

Sunset Island Group, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

July 31,

 

 

July 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Labor

 

 

87,424

 

 

 

101,038

 

 

 

461,382

 

 

 

131,519

 

Supplies

 

 

47,270

 

 

 

29,489

 

 

 

139,353

 

 

 

80,748

 

General and administrative expenses

 

 

146,861

 

 

 

5,170

 

 

 

293,707

 

 

 

22,332

 

Lease

 

 

34,658

 

 

 

32,739

 

 

 

143,030

 

 

 

44,239

 

Lab testing

 

 

-

 

 

 

-

 

 

 

1,310

 

 

 

-

 

Utilities

 

 

27,318

 

 

 

6,126

 

 

 

66,139

 

 

 

6,126

 

Professional fees

 

 

6,783

 

 

 

-

 

 

 

25,115

 

 

 

4,000

 

Total Operating Expenses

 

 

350,314

 

 

 

174,562

 

 

 

1,130,036

 

 

 

288,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(350,314 )

 

 

(174,562 )

 

 

(1,130,036 )

 

 

(288,964 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(353,305 )

 

 

-

 

 

 

(971,068 )

 

 

-

 

Interest expense - related party

 

 

(3,875 )

 

 

-

 

 

 

(6,984 )

 

 

-

 

Net change in fair value of derivative liabilities including day one losses

 

 

(241,960 )

 

 

-

 

 

 

(18,582 )

 

 

-

 

 

 

 

(599,140 )

 

 

-

 

 

 

(996,634 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (949,454 )

 

$ (174,562 )

 

$ (2,126,670 )

 

$ (288,964 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$ (0.18 )

 

$ (0.00 )

 

$ (0.40 )

 

$ (0.01 )

Weighted average number of common shares outstanding

 

 

5,386,771

 

 

 

50,031,771

 

 

 

5,380,672

 

 

 

50,031,771

 

 

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

 

 
5

 

Table of Contents

 
Sunset Island Group, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
For the Nine Months Ended July 31, 2018
(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Subscription

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Received

 

 

Deficit

 

 

Total

 

Balance - October 31, 2017

 

 

4,600,000

 

 

$ 460

 

 

 

4,871,771

 

 

$ 487

 

 

$ 334,168

 

 

$ 50,000

 

 

$ (751,390 )

 

$ (366,275 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for cash

 

 

-

 

 

 

-

 

 

 

500,000

 

 

 

50

 

 

 

49,950

 

 

 

(50,000 )

 

 

-

 

 

 

-

 

Beneficial conversion feature

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,444

 

 

 

-

 

 

 

-

 

 

 

9,444

 

Contribution

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

69,841

 

 

 

-

 

 

 

-

 

 

 

69,841

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(330,198 )

 

 

(330,198 )

Balance - January 31, 2018

 

 

4,600,000

 

 

$ 460

 

 

 

5,371,771

 

 

$ 537

 

 

$ 463,403

 

 

$ -

 

 

$ (1,081,588 )

 

$ (617,188 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for note repayment

 

 

-

 

 

 

-

 

 

 

15,000

 

 

 

2

 

 

 

31,498

 

 

 

-

 

 

 

-

 

 

 

31,500

 

Reclassification of beneficial conversion feature to derivative liability from additional paid in capital

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,444 )

 

 

-

 

 

 

-

 

 

 

(9,444 )

Contribution

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,652

 

 

 

-

 

 

 

-

 

 

 

8,652

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(847,018 )

 

 

(847,018 )

Declaration of cash dividend

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(51,387 )

 

 

(51,387 )

Balance - April 30, 2018

 

 

4,600,000

 

 

$ 460

 

 

 

5,386,771

 

 

$ 539

 

 

$ 494,109

 

 

$ -

 

 

$ (1,979,993 )

 

$ (1,484,885 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

575

 

 

 

-

 

 

 

-

 

 

 

575

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(949,454 )

 

 

(949,454 )

Balance - July 31, 2018

 

 

4,600,000

 

 

$ 460

 

 

 

5,386,771

 

 

$ 539

 

 

$ 494,684

 

 

$ -

 

 

$ (2,929,447 )

 

$ (2,433,764 )

 

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

 

 
6

 

Table of Contents

 

Sunset Island Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

For the Nine Months Ended July 31, 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance - October 31, 2016

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ (10,030 )

 

$ 970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(980 )

 

 

(980 )

Balance - January 31, 2017

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ (11,010 )

 

$ (10 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(113,422 )

 

 

(113,422 )

Balance - April 30, 2017

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ (124,432 )

 

$ (113,432 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(174,562 )

 

 

(174,562 )

Balance – July 31, 2017

 

 

-

 

 

$ -

 

 

 

50,031,771

 

 

$ 5,003

 

 

$ 5,997

 

 

$ (298,994 )

 

$ (287,994 )

 

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

 

 
7

 

Table of Contents

 

Sunset Island Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

July 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

Net loss

 

$ (2,126,670 )

 

$ (288,964 )

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

827,883

 

 

 

-

 

Change in fair value of derivative liabilities

 

 

18,582

 

 

 

-

 

Prepayment interest penalty by share issuance

 

 

31,500

 

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Deposit

 

 

-

 

 

 

(14,000 )

Accounts payable and accrued liabilities

 

 

2,508

 

 

 

16,227

 

Accrued interest

 

 

55,504

 

 

 

-

 

Accrued interest - related party

 

 

6,984

 

 

 

-

 

Net Cash Used in Operating Activities

 

 

(1,183,709 )

 

 

(286,737 )

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from promissory notes - related party

 

 

117,200

 

 

 

281,700

 

Contribution

 

 

79,068

 

 

 

-

 

Advancement from related party

 

 

11,637

 

 

 

4,983

 

Repayment to related party

 

 

(14,522 )

 

 

(1,650 )

Dividend paid

 

 

(6,844 )

 

 

-

 

Proceeds from convertible note

 

 

1,244,750

 

 

 

-

 

Repayment of convertible note

 

 

(220,000 )

 

 

-

 

Net Cash Provided by Financing Activities

 

 

1,211,289

 

 

 

285,767

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

27,580

 

 

 

(970 )

Cash and cash equivalents, beginning of period

 

 

24,656

 

 

 

970

 

Cash and cash equivalents, end of period

 

$ 52,236

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 2,567

 

 

$ -

 

Cash paid for taxes

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Non-cash financing transactions:

 

 

 

 

 

 

 

 

Declaration of cash dividend

 

$ 51,387

 

 

$ -

 

Derivative liabilities recognized as debt discount

 

$ 787,197

 

 

$ -

 

Warrants issued in conjunction with convertible notes recognized as debt discount

 

$ 444,581

 

 

$ -

 

Common stock issued for partial repayment of convertible note

 

$ 31,500

 

 

$ -

 

Common stock issued

 

$ 50,000

 

 

$ -

 

 

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

 

 
8

 

Table of Contents

 

Sunset Island Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Sunset Island Group, Inc. (“SIGO” or the “Company”) was originally incorporated in the State of Colorado on September 29, 2005 as Gulf West Property, Inc. On October 25, 2005 the Company changed its name to Titan Global Entertainment, Inc. On May 7, 2008, the Company changed its name to Sunset Island Group, Inc.

 

Our business and corporate address is 20420 Spence Road, Salinas CA 93908, our phone number is (424) 239-6230. Our corporate website is www.sunsetislandgroup.com.

 

We have one subsidiary, VBF Brands, Inc. (“VBF Brands”), a California, corporation.

 

Our Business

 

The Company operates its cannabis growing, cultivation, manufacturing and distribution business through its wholly owned subsidiary VBF Brands. VBF Brands operated as a Nonprofit Mutual Benefit entity until December 21, 2017 when it was converted to a For Profit entity. Prior to December 21, 2017, VBF Brands operated as a collective under the Compassionate Use Act. Since VBF Brands was operating as a Nonprofit until December 21, 2017, the Company determined that it cannot book any revenue from the activities associated while it operated as collective under the Compassionate Use Act and as a non-profit.

 

The Company previously operated its cultivation business through its former wholly owned subsidiary Battle Mountain Genetics, Inc. (“BMG”); however, upon the conversion of VBF Brands to a for profit entity the Company transitioned the operation of all of its cannabis actives through VBF Brands and BMG ceased active operations.

  

Divestiture of Battle Mountain Genetics, Inc.

 

During December 2017, the Company divested itself of BMG by transferring all of the issued and outstanding shares of BMG, to T.J. Magallanes a former officer and director of the Company, in exchange for 3,036,000 of Mr. Magallanes’ SIGO Series A Preferred shares.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation of Interim Financial Statements

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended July 31, 2018 are not necessarily indicative of the results that may be expected for the year ending October 31, 2018. Notes to the unaudited interim condensed consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements for fiscal year 2017 have been omitted. This report should be read in conjunction with the audited consolidated financial statements and the footnotes thereto for the fiscal year ended October 31, 2017 included in the Company’s 10-K as filed with the Securities and Exchange Commission on March 25, 2019.

 

 
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Consolidation Policy

 

The unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, VBF Brands, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates and Assumptions

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and cash equivalents

 

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less, at the date acquired. As of July 31, 2018 and October 31, 2017, cash primarily consists of cash in bank. As of July 31, 2018 and October 31, 2017, cash was $52,236 and $24,656, respectively.

 

Basic and Diluted Net Loss Per Share of Common Stock

 

The Company has adopted ASC Topic 260, ”Earnings per Share,”(“EPS”) which requires presentation of basic EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation. In the accompanying financial statements, basic earnings (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.

 

As at July 31, 2018 and October 31, 2017, the Company has the following potentially dilutive securities, which were excluded from the computation of diluted net loss per common share as the result of the computation was anti-dilutive.

 

 

 

July 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Series A convertible preferred stock

 

 

46,000,000

 

 

 

46,000,000

 

Convertible Notes

 

 

2,899,408

 

 

 

-

 

Warrants

 

 

1,210,762

 

 

 

-

 

 

 

 

50,110,170

 

 

 

46,000,000

 

 

Concentrations of Credit Risk

 

The Company’s financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents and related party payables that it will likely incur in the near future. The Company places its cash and cash equivalents with financial institutions of high credit worthiness. At times, its cash and cash equivalents with a particular financial institution may exceed any applicable government insurance limits. The Company’s management plans to assess the financial strength and credit worthiness of any parties to which it extends funds, and as such, it believes that any associated credit risk exposures are limited.

 

 
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Financial Instruments

 

The Company follows ASC 820, “ Fair Value Measurements and Disclosures,” which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

Level 1

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

 

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

 

Level 3

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of July 31, 2018. The carrying values of our financial instruments, including, cash and cash equivalents, accounts payable and accrued expenses; and dividend payable and due to related party approximate their fair values due to the short-term maturities of these financial instruments.

 

The following table summarizes fair value measurements by level at July 31, 2018 and October 31, 2017, measured at fair value on a recurring basis:

 

July 31, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

$ -

 

 

$ -

 

 

$ 1,250,360

 

 

$ 1,250,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2017

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

  

Related Parties

 

The Company follows ASC 850, ”Related Party Disclosures,” for the identification of related parties and disclosure of related party transactions. See notes 4.

 

Income Taxes

 

We account for income taxes under ASC 740 “ Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

 
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Revenue Recognition

 

The Company recognizes revenue in accordance with “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 requires that the criteria must be met before revenue can be recognized:

 

1.

The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.

 

2.

The Company can identify each party’s rights regarding the goods or services to be transferred.

 

3.

The Company can identify the payment terms for the goods or services to be transferred.

 

4.

The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).

 

5.

It is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession.

 

Research and Development Expenses

 

We follow ASC 730, ”Research and Development,”and expense research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development.

 

Leasehold improvements

 

The company subleases land shared with other larger farms. In addition to fixed monthly lease payments, the Company is required to pay a proportionate share of costs incurred for upgrades benefiting all lots. Expenditures for repairs and maintenance and betterments for improvements shared with neighboring properties, are charged to rent expense as incurred.

 

For the nine months ended July 31, 2018 and 2017, additional leasehold costs included in rent expense were $57,475 and $15,239, respectively.

 

Recently Issued Accounting Standards

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The effective date for the standard is for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the effect ASU 2018-07 will have on the consolidated financial statements.

 

 
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In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the effect, if any, that the ASU will have on its consolidated financial statements.

 

In September 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-13, ”Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.”The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. The Company may still adopt using the public company adoption guidance in the related ASUs, as amended. The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.

 

In May 2014, the FASB issued some accounting standards update which modifies the requirements for identifying, allocating, and recognizing revenue related to the achievement of performance conditions under contracts with customers. This update also requires additional disclosure related to the nature, amount, timing, and uncertainty of revenue that is recognized under contracts with customers. This guidance is effective for fiscal and interim periods beginning after December 15, 2017 and is required to be applied retrospectively to all revenue arrangements. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In February 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-05, ”Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. Effective at the same time as the amendments in Update 2014-09, Revenue from Contracts with Customers (Topic 606). Therefore, public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the amendments in this Update to annual reporting periods beginning after December 15, 2017, including interim 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. All other entities should apply the amendments in this Update to annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

 

In January 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-04, ”Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”These amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Effective for public business entities that are SEC filers for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.

 

 
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In January 2017, the FASB issued ASU No. 2017-01, ”Business Combinations (Topic 805): Clarifying the Definition of a Business.”This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018, however, early adoption is permitted with prospective application to any business development transaction.

 

Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

 

NOTE 3 – GOING CONCERN

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not established any source of revenue to cover its operating costs, and it does not have sufficient cash flow to maintain its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company expects to develop its business and thereby increase its revenue. However, the Company would require sufficient capital to be invested into the Company to acquire the properties to begin generating sufficient revenue to cover the monthly expenses of the Company. Until the Company is able to generate revenue, the Company would be required to raise capital through the sale of its stock or through debt financing. Management may raise additional capital through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

 

To this date the Company has relied on the sale of securities to finance its operations and growth. The Company expects to continue to fund the Company through debt and securities sales and issuances until the Company generates enough revenues through the operations. These transactions will initially be through related parties, such as the Company’s officers and directors.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Notes Payable

 

During the nine months ended July 31, 2018, the Company issued multiple 5% notes to a related party, for gross proceeds of $99,200. The notes are due on December 31, 2019. The notes accrue interest at 0% for the initial nine months and then 5% on annual rate thereafter.

 

During the year ended October 31, 2017, the Company issued a total of twenty-six (26) 5% notes to Novus Group, a related party, for gross proceeds of $363,200 and during the nine months ended July 31, 2018, the Company issued one note of $18,000 (together the “Novus Notes”). The Novus Notes contained maturity dates of December 31, 2018 and December 31, 2019. The Novus Notes accrue interest at 0% for the initial nine months and 5% on annual rate thereafter.

 

As of July 31, 2018 and October 31, 2017, the long-term portion of notes payable were $290,200 and $330,200, respectively, and the current portion of notes payable were $157,200 and $0, respectively. During the nine months ended July 31, 2018 and 2017, the notes payable incurred interest expense of $6,984 and $0, respectively.

 

 
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Due to Related Party

 

During the period beginning January, 2017 and ending in October, 2017, Valerie Baugher, an officer of the Company lent to the Company, pursuant to seven (7) total advancements, an aggregate of $7,173 for use as working capital, and during the nine months ended July 31, 2018, the Company received advances from an officer of the Company at the amount of $11,637 and repaid to her $14,522 (collectively the “Officer Loans”). The Officer Loans are due on demand and non-interest bearing. As of July 31, 2018 and October 31, 2017, the total remaining due to the officer was $0 and $2,885, respectively.

 

NOTE 5 – CONVERTIBLE NOTES

 

The Company had the following principal balance under its convertible notes outstanding as of July 31, 2018:

 

 

 

July 31,

 

 

 

2018

 

Convertible Notes - originated in December 2017

 

$ 170,000

 

Convertible Notes - originated in February 2018

 

 

1,055,000

 

 

 

 

1,225,000

 

Less debt discount and debt issuance cost

 

 

(604,144 )

 

 

 

620,856

 

Less current portion of convertible notes payable

 

 

(620,856 )

Long-term convertible notes payable

 

$ -

 

 

The Company recognized amortization expense related to the debt discount and deferred financing fees of $827,883 for the nine months ended July 31, 2018, which is included in interest expense in the statements of operations.

 

For the nine months ended July 31, 2018, the interest expense on convertible notes was $58,069, with repayment on accrued interest of $2,567 from a note settlement during the period. As of July 31, 2018, the accrued interest payable was $55,503.

 

During the nine months ended July 31, 2018, the Company repaid a convertible note of $220,000 and accrued interest of $2,567 for a total repayment of $276,356 and issuance of 15,000 shares of common stock valued at $31,500, resulting in repayment interest penalty of $85,289.

 

Note in Default

 

On July 8, 2018, the $170,000 convertible promissory note issued on December 8, 2017 went into default and is accruing interest at a rate of 22%. The note is now convertible at a price which is the lower of $0.90 per share and the market price on any applicable date of conversion. Certain other reset provisions and potential true up policies are in effect which may materially increase the number of Common shares to be delivered upon conversion.

 

Convertible Notes – Issued during the nine months ended July 31, 2018

 

During the nine months ended July 31, 2018, the Company issued convertible notes in the total principal amount of $1,445,000 in exchange for cash proceeds of $1,244,750, after deducting original issuance discounts of $130,750 and financing fees of $69,500. The convertible notes were also provided with warrants to purchase up to 211,883 shares of common stock at exercise price of $1.90 per share. The terms of convertible notes are summarized as follows:

 

 

·

Term ranging from six months to one year. Notes expire on July 8, 2018 and February 13, 2019;

 

·

Annual interest rates ranging from 10% to 12%;

 

·

Convertible at the option of the holders at issuance; and

 

·

Conversion prices are typically based on a fixed price ranging from $0.90 to $1.70. However, in the event the market capitalization falls below the minimum market capitalization at any time, the conversion price is the lower of the note fixed conversion price or the market price as of the applicable date of conversion.

 

 
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NOTE 6 – DERIVATIVE LIABILITIES

 

The Company analyzed the conversion option for derivative accounting consideration under ASC 815, “ Derivatives and Hedging,” and determined that the convertible notes should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company accounts for warrants and Series A Convertible Preferred Stock as a derivative liability due to there being no explicit limit to the number of shares to be delivered upon settlement of all conversion options.

 

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of July 31, 2018. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used during the nine months ended July 31, 2018:

 

 

 

Nine months ended

 

 

 

July 31,

 

 

 

2018

 

Expected term

 

0.19 - 1 years 

 

Expected average volatility

 

180%-268

%

Expected dividend yield

 

 

-

 

Risk-free interest rate

 

1.64%-2.44

%

 

The following table summarizes the derivative liabilities included in the balance sheet at July 31, 2018:

 

Fair Value Measurements Using Significant Observable Inputs (Level 3)

 

Balance - October 31, 2017

 

$ -

 

Addition of new derivative liabilities recognized upon issuance of convertible notes and warrants as debt discount

 

 

1,231,778

 

Addition of new derivative liabilities recognized as day one loss on derivatives

 

 

1,043,494

 

Gain on change in fair value of the derivative liabilities

 

 

(1,024,912 )

Balance - July 31, 2018

 

$ 1,250,360

 

 

The following table summarizes the loss on derivative liability included in the income statement for the nine months ended July 31, 2018.

 

 

 

Nine months ended

 

 

 

July 31,

 

 

 

2018

 

Addition of new derivative liabilities recognized as day one loss on derivatives

 

$ 1,043,494

 

Gain on change in fair value of the derivative liabilities

 

 

(1,024,912 )

 

 

$ 18,582

 

 

 
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NOTE 7 – DIVIDEND PAYABLE

 

On August 22, 2017, the Company declared a dividend, in the aggregate amount of $50,672, payable to the Common shareholders. On August 30, 2017, the Company filed with FINRA its corporate notice for a cash dividend. Of the total amount of the declared dividend, the amount of $4,463 was paid out to the Common shareholders.

 

On February 26, 2018, the Company’s Board of Directors approved a cash dividend payable to the Common shareholders and Series A Preferred shareholders. The record date for the dividend of $51,387 was March 31, 2018 at a rate of $0.001 per share.

 

During the nine months ended July 31, 2018, the amount of $6,843 was paid out to the shareholders.

 

As of July 31, 2018 and October 31, 2017, the aggregate dividend payable to Common and Series A Preferred shareholders was $90,572 and $46,029.

 

NOTE 8 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company has authorized 15,000,000 shares of Preferred Stock with a par value of $0.0001 per share. The Board of Directors is authorized to divide the authorized shares of Preferred Stock into one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series and classes.

 

Series A Preferred Stock

 

The Company has designated 4,600,000 shares of Series A Convertible Preferred Stock. The Series A Preferred Stock may convert into Common Stock at a rate equal to 10 shares of Common Stock for each share of Series A Preferred stock. Each Series A Preferred shareholder is entitled to vote, on par with the Common shareholders, one (1) vote for each share of Common Stock into which a Series A Preferred share may be converted. In the event that any cash dividend on the Common Stock is declared by the Board, the Board shall simultaneously declare a dividend for each share of Series A Preferred Stock in an amount equal to the product of (i) the per share dividend declared and to be paid in respect of each share of Common Stock and (ii) the amount of common stock the Series A Preferred Stock is convertible into under the designation.

 

As at July 31, 2018 and October 31, 2017, the Company had 4,600,000 shares of Series A Preferred Stock issued and outstanding.

 

Series B Preferred Stock

 

The Company has designated 8,000,000 shares of Series B Preferred Stock, with a face value of $1.00 per share. The Series B Preferred Stock has no conversion rights or no voting rights. The shareholders of the Series B Preferred will be entitled to a payment of $200 per pound that the Company harvests from its cultivation operations, which is divided by the outstanding shares of the Series B preferred shares.

 

As at July 31, 2018 and October 31, 2017, the Company had no shares of Series B Preferred Stock issued and outstanding.

 

Series C Preferred Stock

 

The Company has designated 500,000 shares of Series C Convertible Preferred Stock. The Series C Preferred Stock has no voting rights. The Series C Preferred Stock may convert into Common Stock at a rate equal to 10 shares of common stock for each share of Series C Preferred stock. Each Series C Preferred shareholder is entitled to vote, on par with the Common shareholders, one (1) vote for each share of Common Stock into which a Series C Preferred share may be converted. In the event that any cash dividend on the Common Stock is declared by the Board, the Board shall simultaneously declare a dividend for each share of Series C Preferred Stock in an amount equal to the product of (i) the per share dividend declared and to be paid in respect of each share of Common Stock and (ii) the amount of common stock the Series C Preferred Stock is convertible into under the designation.

 

As at July 31, 2018 and October 31, 2017, the Company had no shares of Series C Preferred Stock issued and outstanding.

 

 
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Common Stock

 

As a result of an amendment to the Company’s Articles of Incorporation filed with the Colorado Secretary of State’s office on March 14, 2018, SIGO has authorized 27,000,000 shares of Common Stock with a par value of $0.0001 per share. Each Common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the corporation is sought.

 

During the nine months ended July 31, 2018, the Company issued 500,000 shares of Common Stock for $50,000 recorded as subscription received at October 31, 2017.

 

On February 20, 2018, the Company issued 15,000 shares of Common Stock valued at $31,500 to Auctus Funds, LLC as partial repayment for the convertible note issued on February 1, 2018.

 

As at July 31, 2018 and October 31, 2017, the Company had 5,386,771 and 4,871,771 shares of Common Stock issued and outstanding, respectively.

 

Warrants Exercisable to Common Shares

 

The below table summarizes the activity of warrants exercisable for common shares during the nine months ended July 31, 2018:

 

 

 

Number

of Shares

 

 

Weighted- Average

Exercise Price

 

Balances as of October 31, 2017

 

 

-

 

 

$ -

 

Granted

 

 

1,210,762

 

 

 

1.90

 

Exercised

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Balances as of July 31, 2018

 

 

1,210,762

 

 

$ 1.90

 

 

The fair value of each warrant on the date of grant is estimated using the Black-Scholes option valuation model. The following weighted-average assumptions were used for options granted during the period ended July 31, 2018:

 

 

 

Nine months ended

 

 

 

July 31,

 

 

 

2018

 

Exercise price

 

$ 1.90

 

Remaining contractual term

 

4.54–5 years

Expected average volatility

 

262% - 293

%

Expected dividend yield

 

 

-

 

Risk-free interest rate

 

2.60% - 2.79

%

 

The following table summarizes information relating to outstanding and exercisable warrants as of July 31, 2018:

 

Warrants Outstanding

 

 

Warrants Exercisable

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

 

 

 

Number

 

 

Remaining Contractual

 

 

Weighted Average

 

 

Number

 

 

Weighted Average

 

of Shares

 

 

life (in years)

 

 

Exercise Price

 

 

of Shares

 

 

Exercise Price

 

 

1,210,762

 

 

 

4.54

 

 

$ 1.90

 

 

 

1,210,762

 

 

 

1.90

 

 

 
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Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s Common Stock exceeded the exercise price of the warrants at July 31, 2018 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). As of July 31, 2018, the aggregate intrinsic value of warrants outstanding was approximately $0 based on the closing market price of $0.4225 on July 31, 2018.

 

The Company determined that the warrants qualify for derivative accounting as a result of the related issuances of convertible notes, which led to no explicit limit to the number of shares to be delivered upon future settlement of the conversion options (see Note 6).

 

Additional Paid in Capital

 

During the nine months ended July 31, 2018, the Company’s officer contributed additional paid in capital in the amount of $79,068.

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

On March 1, 2017, the Company executed a lease for 12,000 square feet green house space and 1,000 square of warehouse space expiring March 31, 2020. The base lease amount is $9,576 per month. On May 1, 2017, the Company executed a lease for 10,000 square feet of open land expiring June 30, 2020. The base lease amount is $2,576 per month. Any amounts expended by the Landlord for maintenance, repairs or improvements deemed to be our responsibility are added to our monthly lease amount as additional rent. During the nine months ended July 31, 2018 and 2017, we incurred total lease expenses of $75,564 and $29,000, respectively.

 

The Company has aggregate future minimum lease commitments as of July 31, 2018, as follows:

 

Year ending October 31,

 

 

 

2018

 

$ 28,728

 

2019

 

 

114,912

 

2020

 

 

55,608

 

Total

 

$ 199,248

 

 

NOTE 10 – SUBSEQUENT EVENTS

 

On March 2, 2018. the Company agreed to terms with REI Extracts regarding an extraction and distribution joint venture conducted under the Company’s licenses. To carry out the purposes of the joint venture, REI delivered equipment to SIGO’s facilities to conduct extraction tests. Additionally, REI Extracts also provided consulting services related to cultivation and provided a master grower. The new master grower originally began working with the Company in January 2018. The Company agreed to pay the grower based on the yield of sellable flower per warehouse bay, as follows:

 

Harvested pounds per bay of sellable flower

 

Incentive Bonus

 

0-40

 

$ 0

 

40-60

 

$

40 per pound in excess of 40 pounds

 

60-80

 

$

70 per pound in excess of 40 pounds

 

80-100

 

$

100 per pound in excess of 40 pounds

 

100+

 

$

120 per pound in excess of 40 pounds

 

 

In December, 2018, SIGO and REI Extracts mutually agreed to terminate their joint venture. All equipment delivered by REI Extracts was removed by REI Extracts and the Company ceased utilizing the master grower provided by REI Extracts.

 

On November 30, 2018, pursuant to a purchase agreement entered into by and between SIGO and Job Growing, Inc. (“Job Growing”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Job Growing, in exchange for the rights to 50% of the net profits of Job Growing. In the event that Job Growing either: (i) files a registration statement, with the Securities and Exchange Commission (the “SEC”), to become a reporting company under the Securities Exchange Act of 1934; or (ii) is acquired by an unrelated third party, then SIGO has the right to buy a fifty percent (50%) equity interest in Job Growing for the additional consideration of one and no/100 dollar ($1.00).

 

 
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On September 17, 2019 Job Growing notified the Company of its intent to terminate the agreement between Job Growing and the Company effective immediately.

 

On August 15, 2019, the Company received a true up notice from Job Growing to issue 576,091 shares of Series C Preferred Stock to Job Growing valued at $633,700, pursuant to the terms of the purchase agreement signed on November 30, 2018.

 

On January 15, 2019, BMG was fined approximately $35,000 for not having Worker’s Compensation insurance for the months of January 2018 - April 2018. The Company believes this is a fine owed by BMG and is not a liability due to the Company, as we transferred ownership of BMG during December 2017, to T.J. Magallanes, the Company’s former CEO (see Note 1). VBF Brands, the Company’s operating entity, has worker’s compensation and was not subject to the fine. The Company ceased operating BMG in December 2017.

 

On February 11, 2019, pursuant to a purchase agreement entered into by and between SIGO and Cicero Travel Group, Inc. (“Cicero Travel”) the Company issued 333,000 shares of Series C Preferred Stock, valued at $1,000,000, to Cicero Travel, in exchange for the rights to receive 33% of the net profits of Cicero Travel, 19% of the issued and outstanding shares of the common stock of Cicero Travel and the right to purchase an additional 14% of the issued and outstanding shares of the common stock of Cicero Travel.

 

On August 19, 2019, the Company received a true up notice from Cicero Travel to issue 486,672 shares of Series C Preferred Stock to Cicero Travel valued at $593,740, pursuant to the terms of the purchase agreement signed on February 11, 2019. The Company believes the true up notice is without merit, that Cicero Travel has not met its obligations under the purchase agreement and SIGO intends to cancel the previously issued shares of Series C Preferred Stock and will not be issuing any additional shares of Series C Preferred Stock to Cicero Travel.

 

Subsequent to July 31, 2018 and through the date that these financials were issued, the Company received net proceeds of $934,400, net of total OID of $93,440, from St. George investments in regard to the purchase agreement and convertible note of $4,245,000 executed on February 13, 2018.

 

On January 21, 2019 Valerie Baugher transferred 4,600,000 shares of Series A Preferred Stock held by her, and which constituted Ms. Baugher’s entire holdings in the Company and resigned as the Company’s President/CEO and sole Director.  Ms. Baugher transferred her Series A Preferred Stock to Mr. Ray Chacon who, at that time, became the Company’s President/CEO and sole Director.

 

The Company’s wholly-owned subsidiary, VBF Brands, has had its business license suspended by the California Franchise Tax Board (the “ FTB”). The Company and VBF are currently in the process of working with the FTB to return VBF to good standing and the Company expects VBF to return to good standing with the FTB in the near future.

 

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

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our unaudited financial statements are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

 

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.

 

As used in this quarterly report, the terms “we”, “us”, “our” and “our Company” mean Sunset Island Group, Inc. and our wholly owned subsidiary, VBF Brands, Inc., a California corporation, unless otherwise indicated.

 

General Overview

 

Sunset Island Group, Inc. (“SIGO” or the “Company”) was originally incorporated in the State of Colorado on September 29, 2005 as Gulf West Property, Inc. On October 25, 2005 the Company changed its name to Titan Global Entertainment, Inc. On May 7, 2008, the Company changed its name to Sunset Island Group, Inc.

 

Our business and corporate address is 20420 Spence Rd., Salinas, CA 93908, our phone number is (424) 239-6230. Our corporate website is www.sunsetislandgroup.com.

 

Until December 31, 2017, we operated our business through our then wholly owned subsidiary, Battle Mountain Genetics, Inc., a California corporation (“BMG”). The Company currently conducts its business operations through its wholly owned subsidiary VBF Brands, Inc. (“VBF Brands” or “VBF”). VBF Brands operated as a nonprofit mutual benefit entity until December 21, 2017 when it was converted to a for profit entity. Prior to December 21, 2017, VBF Brands operated as a collective pursuant to California’s Compassionate Use Act. Upon the conversion of VBF Brands to a for profit entity the Company began operating all of its cannabis related business through VBF Brands and BMG ceased active operations. One hundred percent of the issued and outstanding shares of BMG’s capital stock was transferred, in December, 2017 to T.J. Magallanes, a former officer and director of SIGO.

 

We have one subsidiary, VBF Brands, Inc., a California, corporation.

 

We have never declared bankruptcy, been in receivership.

 

Our Current Business

 

Our principal line of business is the growing, cultivation, production and distribution of adult and medicinal cannabis.

 

The Company currently leases the following real property in Northern California: greenhouse space of approximately 12,000 square feet; vacant land of approximately 10,000 square feet that can developed for additional greenhouse use; and 2,400 square feet for drying, curing, manufacturing, trimming and distribution activities.

 

 
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Federal Regulation

 

The Company, by and through VBF (a wholly-owned subsidiary) engages in the direct growth, cultivation, harvesting and distribution of cannabis containing psychoactive amounts of the THC molecule, for use in the medicinal cannabis industry

 

Cannabis is illegal under federal law and is a “Schedule 1” drug under the Controlled Substances Act (21 U.S.C. § 811) (the “CSA”). As a Schedule 1 drug, cannabis is viewed as being highly addictive and having no medical value. The United States Drug Enforcement Agency (“DEA”) enforces the CSA, and persons violating it are subject to federal criminal prosecution. The criminal penalty structure in the CSA is determined based on the specific predicate violations, including but not limited to: simple possession, drug trafficking, attempt and conspiracy, distribution to minors, trafficking in drug paraphernalia, money laundering, racketeering, environmental damage from illegal manufacturing, continuing criminal enterprise, and smuggling. A first conviction under the CSA can generally result in possible fines from $250,000 to $50 million dollars, and incarceration for periods generally from five and up to forty years. For a second conviction, fines increase generally from $500,000 to $75 million dollars, and incarceration for periods generally from ten years to twenty years to life.

 

The federal government recently issued guidance to federal prosecutors concerning marijuana enforcement under the CSA. On January 4, 2018, Attorney General Jeff Sessions issued a memorandum for all United States Attorneys concerning federal cannabis enforcement generally. The Department of Justice (the “DOJ”) rescinded all previous prosecutorial guidance issued by it regarding cannabis, including the August 29, 2013 memorandum by James Cole, then Deputy Attorney General (the “Cole Memorandum”).

 

The Cole Memorandum previously set out the DOJ’s prosecutorial priorities in light of various states legalizing cannabis for medicinal and/or recreational use. The Cole Memorandum provided that when states have implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities. A strong and effective regulatory system, according to the Cole Memorandum, would affirmatively address federal priorities by, for example, implementing effective measures to prevent diversion of cannabis outside of the regulated system and to other states, prohibiting access to cannabis by minors, and replacing an illicit cannabis trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for. In such circumstances, consistent with the traditional allocation of federal-state efforts in this area, the Cole Memorandum provided that enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing cannabis-related activity. If state enforcement efforts did not protect against the harms set forth above, the federal government could seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on those harms.

 

The rescission of the Cole Memorandum created material uncertainty as it relates to how the DOJ will evaluate cannabis cases for prosecution and introduced risk into the Company’s business as it relates to the research, growth, cultivation, development, manufacturing, marketing and sale of its cannabis products.

 

Current guidance requires U.S. Attorneys to decide whether or not to pursue prosecution of cannabis activity based upon factors including: the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. The guidance reiterates that the cultivation, distribution and possession of cannabis continues to be a crime under the CSA.

 

On March 23, 2018, President Donald J. Trump signed into law a $1.3 trillion-dollar spending bill that included an amendment known as “Rohrabacher-Blumenauer,” which prohibits the DOJ from using federal funds to prevent certain states “from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.”

 

The United States Food & Drug Administration (the “FDA”) is generally responsible for protecting the public health by ensuring the safety, efficacy, and security of (1) prescription and over the counter drugs; (2) biologics including vaccines, blood & blood products, and cellular and gene therapies; (3) foodstuffs including dietary supplements, bottled water, and baby formula; and, (4) medical devices including heart pacemakers, surgical implants, prosthetics, and dental devices.

  

 
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Regarding its regulation of drugs, the FDA process requires a review that begins with the filing of an “Investigational New Drug” (IND) application, with follow on clinical studies and clinical trials that the FDA uses to determine whether a drug is safe and effective, and therefore subject to approval for human use by the FDA.

 

Aside from the FDA’s mandate to regulate drugs, the FDA also regulates dietary supplement products and dietary ingredients under the Dietary Supplement Health and Education Act of 1994. This law prohibits manufacturers and distributors of dietary supplements and dietary ingredients from marketing products that are adulterated or misbranded. This means that these firms are responsible for evaluating the safety and labeling of their products before marketing to ensure that they meet all the requirements of the law and FDA regulations, including, but not limited to the following labeling requirements: (1) identifying the supplement; (2) nutrition labeling; (3) ingredient labeling; (4) claims; and, (5) daily use information.

 

The FDA has not approved cannabis as a safe and effective drug for any indication. As of the date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our cannabis products.

 

The FDA has concluded that cannabis is excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. The FDA’s position is that because cannabis is a Schedule 1 drug under the CSA, and therefore are illegal drugs that are under the purview of the DEA and DOJ who are charged with enforcing CSA. However, at some indeterminate future time, the FDA may choose to change its position concerning cannabis and may choose to enact regulations that are applicable to cannabis products as either drugs or supplements. In this event, our cannabis products may be subject to regulation.

 

In addition to strict compliance with all applicable California cannabis related laws and regulations, the Company’s activities intend to comply with the parameters of a recent 9th Cir. Federal Appellate Court decision, United States v. McIntosh, 2016 DJDAR 8484 (Aug. 16, 2016), which held: “the U.S. Department of Justice cannot spend money to prosecute federal marijuana cases if the defendants comply with state guidelines that permit the drug’s sale for medical purposes”. The Court reasoned that “if the DOJ punishes individuals for engaging in activities permitted under state law (such as the use, cultivation, distribution and possession of medical marijuana), then the DOJ is preventing state law from being implemented as a practical matter.” “By officially permitting certain conduct, state law provides for non-prosecution of individuals who engage in such conduct. If the federal government prosecutes such individuals, it has prevented the state from giving practical effect to its law providing for non-prosecution of individuals who engage in the permitted conduct.” This ruling is consistent with Congress’s “Rohrabacher-Blumenauer” amendment, discussed above, which prohibits the DOJ from using federal funds to prevent certain states “from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.”

 

State Regulation

 

The State of California requires companies engaged in the cannabis operations to be licensed by the State of California. The Company is regulated by multiple agencies in California:

 

 

·

The Bureau of Cannabis Control (Bureau) is the lead agency in regulating commercial cannabis licenses for medical and adult-use cannabis in California. The Bureau is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events.

   

 

·

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture (CDFA), ensures public safety and environmental protection by licensing and regulating commercial cannabis cultivators in California.

   

 

·

Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, (CDPH). MCSB is responsible for regulation of all commercial cannabis manufacturing in California. MCSB strives to protect public health and safety by ensuring commercial cannabis manufacturers operate safe, sanitary workplaces and follow good manufacturing practices to produce products that are free of contaminants, meet product guidelines and are properly packaged and labeled.

 

 
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These 3 divisions require the Company (via VBF) to maintain its licensing packages and be compliant with all local, state and environmental regulations. The Company estimates that the cost of licensing each year will be approximately $50,000 - $100,000 per year. The amount may vary year to year depending on what changes, if any, are made to applicable regulations and if any upgrades are required to be made on the property.

 

The Company (via VBF) currently is licensed by the State of California for the following activities:

 

Adult Use and Medicinal Distributor License Provisional

Valid 5-17-19 to 5-16-20

Lic# C11-0000102-LIC

 

Provisional Cannabis Cultivation License (Nursery)

Valid 8-7-19 to 8-7-20

Lic # PAL18-0003152

 

Provisional Cannabis Cultivation License (Adult Use Small Mixed Light Tier2)

Valid 3/15/19- to 3/15/20

Lic# PAL18-0000119

 

Annual Manufacturing License

Adult and Medicinal Cannabis Products-Provisional

Type 6 Non Volatile Solvent Extraction

Valid 4-11-29 to 4-11-20

Lic# CDPH-10002395

 

The Company (via VBF) grows its own cannabis plants through its Cannabis Cultivation License. The material grown and harvested from its cultivation operations are either packaged and sold through the Company’s Distribution license (via VBF) or processed through its Manufacturing license (via VBF) which is later sold through its Distribution license (via VBF). This allows the Company (by and through VBF) to sell products it manufactures (at reduced cost since the raw materials are self-grown), as well as products manufactured by third parties.

 

On January 29, 2018, the Company (via VBF) received its Distributor licenses from the State of California for Adult Use and Medicinal Use.

 

On April 11, 2019, VBF received its Annual Manufacturing License from the State of California. VBF also received its Provisional Cannabis Cultivation License.

 

Results of Operations

 

We have not earned any operational revenues from our inception on September 29, 2016 through July 31, 2018.

 

Three Months Ended July 31, 2018 Compared to Three Months Ended July 31, 2017

 

 

 

Three Months Ended

 

 

 

 

 

July 31,

 

 

 

Statement of Operations Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

$ -

 

Operating expenses

 

 

350,314

 

 

 

174,562

 

 

 

175,752

 

Other expenses

 

 

599,140

 

 

 

-

 

 

 

599,140

 

Net loss

 

$ 949,454

 

 

$ 174,562

 

 

$ 774,892

 

 

Our interim condensed consolidated financial statements report a net loss of $949,454 for the three months ended July 31, 2018 compared to a net loss of $174,562 for the three months ended July 31, 2017. Our losses have increased by $777,109, primarily as a result of an increase in general and administration expenses, such as travel expense, county tax, and management fees and an increase in other expenses related to amortization of debt discount and interest expense from convertible notes.

 

 
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Nine Months Ended July 31, 2018 Compared to Nine Months Ended July 31, 2017

 

 

 

Nine Months Ended

 

 

 

 

 

July 31,

 

 

 

Statement of Operations Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

$ -

 

Operating expenses

 

 

1,130,036

 

 

 

288,964

 

 

 

841,072

 

Other expenses

 

 

996,634

 

 

 

-

 

 

 

996,634

 

Net loss

 

$ 2,126,670

 

 

$ 288,964

 

 

$ 1,837,706

 

 

Our interim condensed consolidated financial statements report a net loss of $2,128,887 for the nine months ended July 31, 2018 compared to a net loss of $288,964 for the nine months ended July 31, 2017. Our losses have increased by $1,837,706, primarily as a result of an increase in labor, supplies and greenhouse lease related to the cultivation of medical cannabis with the operations commenced in March 2017, an increase in general and administration expenses and an increase in other expenses related to amortization of debt discount and interest expense from convertible notes.

 

Liquidity and Capital Resources

 

Working Capital

 

 

 

As of

 

 

As of

 

 

 

 

 

July 31,

 

 

October 31,

 

 

 

Balance Sheet Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$ 52,236

 

 

$ 24,656

 

 

$ 27,580

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

$ 52,236

 

 

$ 24,656

 

 

$ 27,580

 

Total current liabilities

 

 

2,209,800

 

 

 

74,731

 

 

 

2,135,069

 

Working capital (deficiency)

 

$ (2,157,564 )

 

$ (50,075 )

 

$ (2,107,489 )

 

Cash Flows

 

 

 

Nine Months Ended

 

 

 

 

 

July 31,

 

 

 

Cash Flow Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash Flows used in Operating Activities

 

$ (1,183,709 )

 

$ (286,737 )

 

$ (896,972 )

Cash Flows provided by Financing Activities

 

 

1,211,289

 

 

 

285,767

 

 

 

925,522

 

Net Change in Cash During Period

 

$ 27,580

 

 

$ (970 )

 

$ 28,550

 

 

Our total current assets as of July 31, 2018 were $52,236 as compared to current assets of $24,656 as of October 31, 2017. The increase was primarily due to an increase cash, from the issuance of convertible notes during the nine months ended July 31, 2018.

 

Our total current liabilities as of July 31, 2018 were $2,209,800 as compared to total current liabilities of $74,731 as of October 31, 2017. The increase was primarily due to an increase in convertible notes, related party notes payable, derivative liabilities, note accrued interest and dividend payable.

 

 
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The report of our auditors on our audited consolidated financial statements for the fiscal year ended October 31, 2017, contains a going concern qualification as we have suffered losses since our inception. We have minimal assets and have achieved no operating revenues since our inception. We have been dependent on sales of equity securities to conduct operations. Unless and until we commence material operations and achieve material revenues, we will remain dependent on financings to continue our operations.

 

Operating Activities

 

Net cash used in operating activities during the nine months ended July 31, 2018 was $1,183,709, compared to $286,737 net cash used in operating activities during the nine months ended July 31, 2017. The increase in cash used in operating activities was mainly due to an increase in net loss.

 

Investing Activities

 

During the nine months ended July 31, 2018 and 2017, our Company did not have any investing activities.

 

Financing Activities

 

Cash provided by financing activities during the nine months ended July 31, 2018 was $1,213,289. During the nine months ended July 31, 2018, our Company received $1,244,750 from convertible notes offset by the use of the proceeds from a convertible note to repay another convertible note of $220,000, $117,200 from related party notes payable and $79,068 from capital contribution. During the nine months ended July 31, 2017, the Company received $281,700 from related party notes payable.

 

Cash Requirements

 

We will require additional capital as we expand our business operations. Initially, to carry out our business plan, we will need to raise additional capital through operations, or the issuance of our equity and/or debt securities. There can be no assurance that we will be able to raise additional capital or, if we are able to raise additional capital, the terms we be favorable to us. Currently we do not have any inventory and therefore we have no product to sell to generate operating revenues.

 

These conditions indicate a material uncertainty that casts significant doubt about our ability to continue as a going concern. We require additional debt or equity financing to have the necessary funding to continue operations and meet our obligations. We have continued to adopt the going concern basis of accounting in preparing our financial statements.

 

Future Financings

 

We anticipate continuing to rely on sales of our equity and/or debt securities in order to continue to fund our business operations. Issuances of additional shares of our capital stock will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.

 

Off-Balance Sheet Arrangements

 

As of July 31, 2018, we do not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

 
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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange 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 Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2018. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms as a result of the following material weaknesses:

 

The specific material weakness identified by our management was ineffective controls over certain aspects of the financial reporting process because of a lack of a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with our financial reporting requirements and inadequate segregation of duties. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements would not be prevented or detected on a timely basis.

 

We expect to be materially dependent upon a third party to provide us with accounting consulting services for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our disclosure controls and procedures and internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements.

 

Changes in Internal Controls

 

There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rule 13a-15 or Rule 15d-15 that occurred in the quarter ended July 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company’s wholly-owned subsidiary, VBF Brands, has had its business license suspended by the California Franchise Tax Board (the “ FTB”). The Company and VBF are currently in the process of working with the FTB to return VBF to good standing and the Company expects VBF to return to good standing with the FTB in the near future.

 

Item 1A. Risk Factors

 

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

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

On January 20, 2019, the Company issued 537,869 shares of common stock to St. George Investments pursuant to that certain Secured Convertible Promissory Note made on December 8, 2017. St. George Investments supplied the Company with the following conversion request:

 

 

1. Conversion Amount: $21,000.00

 

2. Lender Conversion Price: $0.039043

 

3. Lender Conversion Shares: 537,869

 

4.

Remaining Outstanding Balance of Note: $381,082.01

 

On January 21, 2019 Valerie Baugher transferred 4,600,000 shares of Series A Preferred Stock held by her, and which constituted Ms. Baugher’s entire holdings in the Company and resigned as the Company’s President/CEO and sole Director.  Ms. Bagher transferred her Series A Preferred Stock to Mr. Ray Chacon who, at that time, became the Company’s President/CEO and sole Director.

 

 
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Item 6. Exhibits

 

Exhibit Number

 

Description

(31)

 

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

31.1*

 

Section 302 Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer

(32)

 

Section 1350 Certifications

32.1**

 

Section 906 Certification by the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer

101**

 

Interactive Data File

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

______

* Filed herewith.

**Furnished herewith.

   

 
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Table of Contents

 

SIGNATURES



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

 

 

SUNSET ISLAND GROUP, INC.

 

 

(Registrant)

 

 

 

 

 

Dated: April 20, 2020

 

/s/ Ray Chacon

 

 

Ray Chacon

 

 

President, Chief Executive Officer, Chief Financial Officer and Director

 

 

(Principal Executive Officer, Principal Financial Officer and

Principal Accounting Officer)