HEALTHY EXTRACTS INC. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2018

For the transition period from _______________ to _______________.

Commission file number 333-202542

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the previous 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ 

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

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

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 25, 2019, there were 121,610,085 shares of common stock, $0.001 par value, issued and outstanding.

GREY CLOAK TECH INC.

TABLE OF CONTENTS 

PART I – FINANCIAL INFORMATION

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”). These statements are based on management’s beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading: “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.

ITEM 1 Financial Statements

GREY CLOAK TECH INC

CONSOLIDATED BALANCE SHEETS

(unaudited)

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

GREY CLOAK TECH INC

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

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

GREY CLOAK TECH INC

CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

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

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Grey Cloak Tech Inc. (the “Company”) was incorporated in the State of Nevada on December 19, 2014. The Company was formed to provide cloud based software to detect advertising fraud on the internet. The Company has acquired Eqova Life Sciences and is transitioning its business towards marketing and selling CBD oil products.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2018 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-K for the year ended December 31, 2017 filed with the SEC on June 8, 2018.

Use of Estimates

The preparation of financial statements in conformity with 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 reported amount of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash

Cash includes cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

The Company will record revenue when it is realizable and earned and the computer programming services or marketing services have been rendered to the customers. Additionally, the Company will record revenue from the sale of its software when the software is delivered to the customer or it will be recognized ratably throughout the term of the contract.

The Company records revenue upon shipment of the products to the customers.

Concentration

There is no concentration of revenue for the nine months ended September 30, 2018 because the revenue was earned from multiple customers. One customer accounted for 100% of total revenue earned during the nine months ended September 30, 2017.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of September 30, 2018, the Company did not have any amounts recorded pertaining to uncertain tax positions.

Fair Value Measurements

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which  defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

ASC 820 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, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is the only financial liability measure at fair value on a recurring basis.

The change in Level 3 financial instrument is as follows:

Convertible Instruments

The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities. During the nine months ending September 30, 2018, the Company recognized a loss on extinguishment of $526,481 from the conversion of convertible debt with a bifurcated conversion option.

Common Stock Purchase Warrants

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). The Company classifies as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification is required.

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has generated minimal revenues from operations. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and incurring start up costs and expenses. As a result, the Company incurred accumulated net losses from Inception (December 19, 2014) through the period ended September 30, 2018 of $8,904,527. In addition, the Company’s development activities since inception have been financially sustained through equity financing. Management plans to seek funding through debt and equity financing and has recently acquired a new company as a wholly owned subsidiary.

NOTE 4 – RELATED PARTY

For the nine months ended September 30, 2018 and 2017, the Company had expenses totaling $105,000 and $72,000, respectively, to an officer and director for salaries, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of September 30, 2018, there was no accounts payable – related party. As of September 30, 2018, there was accrued interest payable of $0 due to an officer and director.

For the nine months ended September 30, 2018 and 2017, the Company had expenses totaling $42,000 and $85,500 to a company owned by an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of September 30, 2018, there was $15,000 in accounts payable – related party. As of September 30, 2018, there was convertible debt of $30,000 and accrued interest payable of $1,372 due to an officer and director.

For the nine months ended September 30, 2018 and 2017, the Company had expenses totaling $65,496 and $0, respectively, to an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. During the nine months ended September 30, 2018, the Company recorded forgiveness of debt totaling $18,420. As of September 30, 2018, there was $0 in accounts payable – related party.

For the nine months ended September 30, 2018 and 2017, the Company had expenses totaling $22,000 and $0, respectively, to the wife of an officer and director for consulting fees, which is included in general and administrative expenses – related party on the accompanying statement of operations. As of September 30, 2018, there was $0 in accounts payable – related party.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 5 – CONVERTIBLE DEBT – RELATED PARTY

As of September 30, 2018, the Company had the following:

NOTE 6 – NOTES PAYABLE

As of September 30, 2018, the Company had the following:

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 7 – CONVERTIBLE DEBT

As of September 30, 2018, the Company had the following:

Some of the convertible promissory notes are in default but will be in compliance upon filing of the 10-Q.

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 8 – STOCKHOLDERS’ EQUITY

Authorized Stock 

The Company had initially authorized 75,000,000 common shares with a par value of $0.001 per share.  Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought. During February 2017, the Company increased the authorized number of shares to 500,000,000. Also, the Company increased the authorized preferred stock to 75,000,000 shares and designated 25,000,000 shares of preferred stock as Series A Convertible Preferred Stock. During January 2018, the Company increased its authorized number of common shares to 1,000,000,000. During April 2018, the Company increased its authorized number of common shares to 2,500,000,000.

The shareholders of the Company approved a reverse stock split at a ratio of between 1-for-100 and 1-for 250. The Board approved and the Company received approval from FINRA for a reverse stock split of 1-for-250, which was effective as of July 23, 2018.

On October 16, 2017, the Company filed an Amended and Restated Certificate of Designation of the Rights, Preferences, Privileges and Restrictions of the Series A Convertible Preferred Stock (the “Amended Certificate”) with the Secretary of State of the State of Nevada. The Amended Certificate reduces the number of preferred shares designated as Series A Preferred Stock from 25,000,000 shares to 1,333,334 shares. The Amended Certificate also changes the conversion and voting rights of the Series A Preferred Stock. The Series A Preferred Stock is now convertible into the number of shares of our common stock equal to 0.00006% of our outstanding common stock upon conversion. The voting rights of the Series A Preferred Stock are now equal to the number of shares of common stock into which the Series A Preferred Stock may convert.

As of September 30, 2018, the preferred stock is convertible into 2,422,425 shares of common stock.

Common Share Issuances

During the nine months ended September 30, 2018, the Company issued a total of 2,129,588 shares of common stock for the conversion of debt totaling $190,940 including interest of $7,952 and fees of $18,915 and loss on settlement of debt of $526,481.

Warrant Issuances

As of September 30, 2018, there were 43,585 warrants outstanding, of which 11,585 warrants are fully vested.

NOTE 9 – ACQUISITIONS

On October 17, 2017, the Company entered into a Share Exchange Agreement with Eqova Life Sciences (“Eqova”) and issued 1,100,000 shares of Series A Convertible Preferred Stock in exchange for 100% of Eqova. The shares are convertible into approximately 66% of the total outstanding common stock as of the date of the closing. Of the total shares issued to Eqova only 550,000 shares are vested and the remaining 550,000 shares will vest upon sales of $100,000 for three consecutive months or $300,000 gross sales in any calendar quarter. Any unvested shares as of October 17, 2019, will be repurchased by the Company at a price of $0.01 per share. The Company wanted to position itself to take advantage of the growing hemp based marketplace as it is one of the fastest growing segments in the United States.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 9 – ACQUISITIONS (continued)

In accordance with the acquisition method of accounting, the Company allocated the consideration to the net tangible and identifiable intangible assets based on their estimated fair values.

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets.

The following table presents the consideration of net assets purchased:

The assets acquired and liabilities assumed as part of our acquisition were recognized at their fair values as of the effective acquisition date, October 17, 2017. The following table summarizes the fair values assigned to the assets acquired and liabilities assumed.

The following table provides unaudited pro forma results of operations for the fiscal years ended December 31, 2017 and 2016 as if the acquisitions had been consummated as of the beginning of each period presented. The pro forma results include the effect of certain purchase accounting adjustments, such as the estimated changes in depreciation and amortization expense on the acquired intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of the companies. Accordingly, such amounts are not necessarily indicative of the results if the acquisition has occurred on the dates indicated, or which may occur in the future.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 10 – BUSINESS SEGMENT INFORMATION

As of October 17, 2017, the Company operated in two reportable segments (Advertising and CBD) supported by a corporate group which conducts activities that are non-segment specific. The following table presents selected financial information about the Company’s reportable segments for the nine months ended September 30, 2018.

The following table presents selected financial information about the Company’s reportable segments for the three months ended September 30, 2018.

NOTE 11 – SALE OF ASSET

On June 8, 2018, the Company sold its website, CBD.co, to a third party for $50,000. The Company recorded a gain on the sale of $6,951.

GREY CLOAK TECH INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 12 – SUBSEQUENT EVENT

New Convertible Debt

On October 26, 2018, the Company entered into a convertible promissory note with an individual that is also a shareholder of the Company for a total of $10,000. The note is due on April 26, 2019 and bears interest at 10% per annum. The note is convertible into shares of common stock at a rate of the lower of 30% of the average trading price for the 3 latest trading days or $0.05^[1]

Stock Issued for Conversion of Convertible Debt

During the period from October 1, 2018 through February 14, 2019, the Company issued a total of 4,423,376 shares of common stock for the conversion of debt totaling $21,829 including interest of $1,166

Stock Issued for Services

On January 28, 2019, the Company entered into a marketing and sales consulting agreement with an individual for a period of six months. The Company issued 350,000 shares of common stock as the compensation for this agreement.

Acquisition of BergaMet and the Share Exchange Agreement

On February 4, 2019, the Company entered into a Share Exchange Agreement with BergaMet NA, LLC, a Delaware limited liability company (“BergaMet”), and the members of BergaMet, whereby the Company issued and exchanged 97,409,678 shares of its common stock for all of the outstanding equity securities of BergaMet (the “Exchange”). Through the Exchange, BergaMet became a wholly-owned subsidiary of the Company. The shares of common stock issued in the Exchange were equal to 80.1% of the Company’s outstanding common stock (post-exchange).

In connection with the Exchange, Kevin Pitts resigned as the Company’s President and Chief Executive Officer, and the Company appointed Mr. Pitts as its Chief Operating Officer. The Company appointed Sanjeev Javia to serve as its President and Chief Executive Officer and as a Director on its Board of Directors.

Note Satisfaction Agreements

Prior to the Exchange, the Company entered into a Note Satisfaction Agreement with each of Auctus Fund, Crown Bridge Partners, LLC, Power Up Lending Group Ltd., GS Capital Partners LLC, Oakmore Opportunity Fund I LP, and Adar Bays, LLC. All of these entities were holders of the Company’s convertible debt, and these Note Satisfaction Agreements terminate their convertible notes unless the Company fails to perform its payment obligations. The Company agreed to pay these note holders an aggregate of $518,485.97, plus interest. The Company paid an aggregate of $353,907.97 on or before February 15, 2019, and it will pay another $164,578 plus interest in approximately one (1) year.

Various other holders of Convertible Promissory Notes agreed to convert their notes for an aggregate of 806,015 shares of common stock prior to the Exchange. As a result of these transactions, no convertible promissory notes remain outstanding, except for those convertible notes subject to revival if the Company fails to make payments pursuant to the Note Satisfaction Agreements. 

Share Conversion Agreements

All of the holders of the Company’s Series A Convertible Preferred Stock (the “Preferred Holders”) entered into a Preferred Stock Conversion Agreement. Pursuant to the Conversion Agreements, the Preferred Holders converted their shares of preferred stock into common stock, effective as of the Exchange. As a result, no shares of the Company’s Series A Convertible Preferred Stock are outstanding. An aggregate of 10,860,012 shares of common stock were issued to the Preferred Holders. The Preferred Holders agreed to convert each share of Series A Convertible Preferred Stock into eighteen (18) shares of common stock and agreed to retire a total of 467,057 shares of Series A Convertible Preferred Stock. The Company cancelled the retired shares.

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Summary Overview

We were formed in December 2014 and, therefore, have a relatively short operating history. We had revenues of approximately $128,105 in the year ended December 31, 2017, 94% of which was from a single customer. We had revenues of approximately $66,119 in the nine-month period ended September 30, 2018, but no revenue from the same customer. In December 2017, we ended our relationship with this customer and have shifted our focus from software services to medically-focused CBD hemp oil products.

Eqova Life Sciences

On October 17, 2017, we acquired Eqova Life Sciences, a Nevada corporation (“Eqova”), through an exchange of shares of our Series A Convertible Preferred Stock for all of the outstanding equity interest of Eqova.

Eqova is a medically-focused CBD company that develops clinical grade full spectrum hemp oil products, sold exclusively via partnerships with licensed medical practitioners to use with their patients. To date, we know of no other hemp oil company exclusively focused on the practitioner market, leaving it largely underserved. According to The Hemp Business Journal, CBD products marketplace are projected to grow by 700% by 2020 with annual sales reaching $2.1 billion. With a head start in a growing marketplace, we believe that Eqova provides us with a prime growth opportunity with an established business. Initial revenues of our hemp oil products from the acquisition of Eqova through December 31, 2017 and for the nine months ended September 30, 2018 were $7,605 and $66,119, respectively.

Acquisition of BergaMet NA, LLC

On February 4, 2019, we issued and exchanged 97,409,678 shares of our common stock for all of the outstanding equity securities of BergaMet, NA, LLC (“BergaMet”). Through this exchange of securities (the “Exchange”), BergaMet is now our wholly-owned subsidiary. The shares of common stock issued in the Exchange are equal to 80.1% of our outstanding common stock immediately following the Exchange.

Through the Exchange, we were able to secure funds in BergaMet to pay off some debt and provide capital for operations. We paid an aggregate of $353,908 and will pay another $164,578 in approximately one (1) year to retire convertible debt. Prior to the exchange, we also entered into agreements with other holders of convertible debt to convert their notes for an aggregate of 806,015 shares of common stock. We also entered into conversion agreements with the holders of our Series A Convertible Preferred Stock whereby all of the outstanding preferred stock was converted for an aggregate of 15,592,986 shares of common stock. The conversion and repayment of the preferred stock and convertible debt have greatly improved our capitalization structure.

The acquisition of BergaMet has been extremely beneficial to the Company. In addition to paying off our convertible debt, we are now able to better position ourselves in the market. BergaMet is an established company that was already generating revenues when we acquired it. BergaMet also has unique products that will fit nicely with our existing business. We will continue to operate our CBD line, but we now plan on expanding our product line to other nutraceuticals. We expect that the revenues from BergaMet will greatly improve our future financial position.

In addition, we expanded our management team by bringing in Sanjeev Javia as our new Chief Executive Officer and Director. He has over three decades of knowledge in the nutraceutical market and established relationships that we believe will prove valuable in growing the Company.

Going Concern

As a result of our financial condition, we have received a report from our independent registered public accounting firm for our financial statements for the years ended December 31, 2017 and 2016 that includes an explanatory paragraph describing the uncertainty as to our ability to continue as a going concern. From inception (December 19, 2014) through the period ended September 30, 2018, we have incurred accumulated net losses of $8,904,527. In order to continue as a going concern we must effectively balance many factors and begin to generate revenue so that we can fund our operations from our sales and revenues. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will last less than one month, and thus we must raise capital by issuing debt or through the sale of our stock. However, there is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.

Results of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

Introduction

We had revenues of $15,203 for the three months ended September 30, 2018, compared to $34,500 for the three months ended September 30, 2017. Our operating expenses were $112,053 for the three months ended September 30, 2018, compared to $96,425 for the three months ended September 30, 2017, an increase of $15,628, or approximately 16%.

We had revenues of $66,119 for the nine months ended September 30, 2018, compared to $114,000 for the nine months ended September 30, 2017. Our operating expenses were $504,931 for the nine months ended September 30, 2018, compared to $656,074 for the nine months ended September 30, 2017, a decrease of $151,143, or approximately 23%.

Our operating expenses consisted mostly of general and administrative expenses, including general and administrative expenses to a related party.

Revenues and Net Operating Loss

Our revenue, operating expenses, net operating loss, and net loss for the three and nine months ended September 30, 2018 and 2017 were as follows:

Revenues

Revenues were $15,203 for the three months ended September 30, 2018, compared to $34,500 for the three months ended September 30, 2017, a decrease of $19,297, or about 56%.

Revenues were $66,119 for the nine months ended September 30, 2018, compared to $114,000 for the nine months ended September 30, 2017, a decrease of $47,881, or about 42%. For the nine months ended September 30, 2017, nearly all of the total revenue came from a single customer. However, we received no revenue from this customer during the nine months ended September 30, 2018. The decrease reflects the loss of this customer and the transition to our new business selling CBD products.

Direct Cost of Revenue

Direct cost of revenue expenses was ($839) for the three months ended September 30, 2018, compared to $12,000 for the three months ended September 30, 2017.

Direct cost of revenue expenses was $24,748 for the nine months ended September 30, 2018, compared to $29,659 for the nine months ended September 30, 2017.

General and Administrative

General and administrative expenses were $62,053 for the three months ended September 30, 2018, compared to $47,925 for the three months ended September 30, 2017, an increase of $14,128, or about 30%. General and administrative expenses – related party were $50,000 for the three months ended September 30, 2018, compared to $48,500 for the three months ended September 30, 2017, an increase of $1,500, or about 3%.

General and administrative expenses were $270,435 for the nine months ended September 30, 2018, compared to $498,574 for the nine months ended September 30, 2017, a decrease of $228,139, or about 46%. General and administrative expenses – related party were $234,496 for the nine months ended September 30, 2018, compared to $157,500 for the nine months ended September 30, 2017, an increase of $76,996, or about 49%.

Operating Loss

Net operating loss was $96,011 for the three months ended September 30, 2018, compared to $73,925 for the three months ended September 30, 2017, an increase of $22,086. Net operating loss increased, as set forth above, primarily due to a decrease in revenues and an increase in general and administrative expenses. The Company had a decline in revenue during the three months ended due to natural fluctuations in the business, as this is still a relatively new business. The increase in general and administrative expenses is mainly for the costs associated with being a public company.

Net operating loss was $463,560 for the nine months ended September 30, 2018, compared to $571,733 for the nine months ended September 30, 2017, a decrease of $108,173. Net operating loss increased, as set forth above, primarily due to a decrease in general and administrative expenses, offset by a decline in revenues.

Other Income (Expense)

Other expense was $(661,029) for the three months ended September 30, 2018, compared to other expense of ($1,445,555) for the three months ended September 30, 2017, an increase of $784,526.

Other expense was $(757,585) for the nine months ended September 30, 2018, compared to other expense of $(1,577,389) for the nine months ended September 30, 2017, a decrease of $819,804.

Other expense consisted of interest expense, net of interest income. Other income (expense) for both periods consisted primarily of a change in fair value on derivative and loss on extinguishment of debt offset by interest expense, net of interest income.

The increase in interest expense for the three months ended September 30, 2018, compared to the three months ended September 30, 2017, is attributable primarily to new debt issuances. The decrease in interest expense for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, is attributable to debt conversions and reduction in debt. The change in the fair value of the Company’s derivative liabilities from period to period is the primary factor in the changes of other income (expense) from period to period. Fair value of derivative liabilities changes from period to period primarily due to natural fluctuations in the assumptions used for the calculation.

Net Loss

Net loss was $(757,040) for the three months ended September 30, 2018, or $(0.40) per share, compared to $(1,519,480) for the three months ended September 30, 2017, or $(11.63) per share, a decrease of $762,440. Net loss decreased, as set forth above, primarily due to a decrease in the loss from changes in the fair value of derivative liabilities and a decrease in revenues, offset by an increase in interest expense and a slight increase in general and administrative expenses.

Net loss was $(1,221,145) for the nine months ended September 30, 2018, or $(0.73) per share, compared to $(2,149,122) for the nine months ended September 30, 2017, or $(21.28) per share, a decrease of $927,977. Net loss decreased, as set forth above, primarily due to a decrease in the loss from changes in the fair value of derivative liabilities, a decrease in operating expenses and a decrease interest expense, offset by a decrease in revenues.

Liquidity and Capital Resources

Introduction

During the three months ended September 30, 2018, we were unable to generate sufficient revenues and had negative operating cash flows. Our cash on hand as of September 30, 2018 was $4,995, which was derived from the sale of convertible promissory notes to investors. Our monthly cash flow burn rate for 2018 was approximately $63,000. Although we have moderate short term cash needs, as our operating expenses increase we will face strong medium to long term cash needs. We anticipate that these needs will be satisfied through the issuance of debt or the sale of our securities until such time as our cash flows from operations will satisfy our cash flow needs.

Our cash, current assets, total assets, current liabilities, and total liabilities as of September 30, 2018 and December 31, 2017, respectively, are as follows:

Our cash decreased because we had some debt or equity financing for the three months ended September 30, 2018. Our total current assets decreased primarily because of lower cash, inventory and accounts receivable as of September 30, 2018. Our total current liabilities increased during the nine months ended September 30, 2018 primarily because of additional convertible debt and notes payable at the end of the period, offset by a decrease in the value of our derivative liabilities as of September 30, 2018. Our accumulated deficit increased during the nine months ended September 30, 2018 by $1,221,145 to ($8,904,527) while our total stockholders’ deficit increased by $296,895 to $(1,476,022), primarily due to issuances of stock upon conversion of our convertible notes.

Following the Exchange, BergaMet had sufficient funds to pay off $353,908 of our convertible debt. With BergaMet, we have additional funds that will help us sustain operations for the next few months. Nevertheless, in order to maintain operations, we will be required to raise significant capital from other sources. There is no assurance, however, that we will be successful in these efforts.

Cash Requirements

Our cash on hand as of September 30, 2018 was $4,995. Based on our current level of revenues and monthly burn rate of approximately $63,000 per month, we will need to continue to fund operations by raising capital from the sale of our stock and debt financings.

Sources and Uses of Cash

Operating Activities

We had net cash used in operating activities of $(324,241) for the nine months ended September 30, 2018, compared to $(417,935) for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, the net cash used in operating activities consisted of $324,241.For the nine months ended September 30, 2017, the net cash used in operating activities consisted primarily of 417,935. For the nine months ended September 30, 2018, the Company had non-cash fees including penalties of $724,143 which was an increase of $626,679 from the same period in 2017. The loss on extinguishment of debt was $526,481 for the nine months ended September 30, 2018 as compared to $211,525 for the same period in 2017.

Investing Activities

We had $50,000 net cash provided by investing activities for the nine months ended September 30, 2018, and $(34,189) net cash used in investing activities for the nine months ended September 30, 2017. The $50,000 consisted of cash received upon the sale of the Company’s website, CBD.co.

Financing Activities

Our net cash provided by financing activities for the nine months ended September 30, 2018 was $197,583, which consisted primarily of proceeds from convertible notes payable of $194,583, compared to $491,500 for the nine months ended September 30, 2017, all of which was proceeds from convertible notes payable, offset by payments for repayment of convertible notes and notes payable.

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

(a)       Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all errors and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation 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 realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b)       Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report, the three month period ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

We are not a party to or otherwise involved in any legal proceedings.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

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

Except as set forth below or previously reported on a Current Report on Form 8-K, we had no unregistered sales of equity securities during the three month period ended September 30, 2018.

On June 27, 2018, the Company effected a 1-for-250 reverse stock split (the “Reverse Stock Split”). No fractional shares were issued, and no cash or other consideration was paid in connection with the Reverse Stock Split. Instead, the Company issued one whole share of the post-Reverse Stock Split common stock to any stockholder who otherwise would have received a fractional share as a result of the Reverse Stock Split. Accordingly, we issued 64 shares of common stock in the Reverse Stock Split to avoid the issuance of fractional shares.

Convertible Debt

We issued the following promissory notes which are convertible into shares of our common stock as described below:

On September 30, 2018, we received proceeds of $61,367 upon the issuance of a 10% interest bearing, unsecured convertible promissory note maturing on March 30, 2019. The note was issued to William Bossung and is convertible at 30% of the average of the trading price of our common stock in the three (3) trading days prior to the conversion date. On February 4, 2019, the note was replaced by a new, 4% interest bearing, unsecured promissory note maturing February 4, 2020 in the principal amount of $61,876. The new note is not convertible.

All of the issuances of securities above were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, the investors were sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

ITEM 3 Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

ITEM 6 Exhibits

(a)       Exhibits

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.