UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission file number 333-169802
ARISTA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
| Nevada | 27-1497347 | |
| State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization | Identification No.) | |
51 JFK Parkway, First Floor West Short Hills, NJ |
07078 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (973) 218-2428
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ | ||
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 Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $605,426
As of April 15, 2019, the registrant had 3,498,577 shares of its common stock outstanding.
TABLE OF CONTENTS
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FORWARD LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. Such statements may include, but are not limited to, information related to: anticipated operating results; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of revenues; selling, general and administrative expenses; interest expense; growth and expansion; anticipated income or benefits to be realized from our investments in unconsolidated entities; the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities; legal proceedings and claims.
From time to time, forward-looking statements also are included in other periodic reports on Forms 10-Q and 8-K, in press releases, in presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made by us, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.
Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
In this report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common stock” refer to shares of our common stock.
As used in this current report and unless otherwise indicated, the terms “we”, “us”, “our”, the “Company”, and “ARST” refer to Arista Financial Corp. (formerly Praco Corporation) and “Arista” to its consolidated subsidiary Arista Capital Ltd.
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| Item 1. Business |
Corporate History
Arista Financial Corp. (the “Company”), a Nevada corporation, was incorporated on December 15, 2009 as Hunt for Travel, Inc. to design and market travel excursions featuring entertainment, adventure, intellectual stimulation and access to experts on topics related to the destinations they visit. Subsequently, the Company ceased to operate in the travel industry sector and became a “shell company” as defined in Rule 12b-2 promulgated under the Exchange Act, as amended, as it had no operations. On February 16, 2012, the Company changed its name to Praco Corporation and announced its intention to sell the Company to another operational entity.
On April 19, 2017, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Arista Capital Ltd. (“Arista”) and the shareholders of Arista (“Arista Shareholders”) pursuant to which the Company agreed, subject to the terms and conditions contained therein, to exchange newly issued shares of the Company for shares of Arista held by the Arista Shareholders, with Arista becoming a wholly-owned subsidiary of the Company (the “Transaction”). The closing of the Transaction (the “Closing”) occurred as of December 14, 2017 and the Company ceased to be a “shell company” as defined in Rule 12b-2. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation – Share Exchange”.
Current Business
Substantially all of the Company’s current business operations are conducted through Arista. Arista was formed on June 10, 2014 as a Nevada corporation. Arista is a finance company that provides financing to other small finance companies that do not have significant access to the capital markets. Typically, Arista does this by acquiring lease portfolios from such lenders at a purchase price that yields Arista an annual return and these lenders continue to service the portfolios purchased by us. We are currently focused on leases for trucks and construction equipment.
Arista was founded by a team of experienced finance professionals who saw significant opportunity to participate in this market after the financial crisis of 2009, as traditional funding sources for this segment of the financial market have disappeared or have severely limited their financing activities in this area. Arista intends to participate in this market through a variety of funding arrangements including debt financings, equity infusions and direct loan participations. Management believes that although small asset-based lenders (“Lenders”) have limited access to capital necessary to enable growth, these lenders have well-managed and maintained origination, underwriting and administrative infrastructure as well as expertise and experience in their specific area of lending. Arista has accessed this experience and infrastructure by participating with these lenders in their lending opportunities.
Currently, Arista relies on one Lender to acquire financing leases and to service such leases, however, Arista believes that other Lenders are available if Arista is unable to acquire leases from its current Lender. Lenders primarily finance tractor trailers or other transportation equipment and construction equipment to companies that ordinarily would not be able to obtain dealer or commercial bank financing. These Lenders offer both finance leases and operating leases, with terms up to 60 months and transaction sizes from $10,000 to $150,000 and target advance rates that are not more than 80% loan-to-value. Generally the leases have effective interest rates of around 30%. These Lenders have developed their own credit approval processes based upon their experience with entering into leases with small transportation and construction companies. The Lenders generally require significant down payments to be made in cash by the borrower. Accordingly, since the collateral usually has significant value relative to the value of the loans made by them, Arista believes that the risk of loss of principal is not significant. Arista’s current arrangements provide that it will purchase portfolios of leases from a Lender and such Lender will service the portfolios. Arista believes that its lending activities can achieve attractive net returns of capital. Arista has raised approximately $960,000 as of December 31, 2018, and has purchased approximately $368,000 of leases in the aggregate since inception. At December 31, 2018, Arista’s leasing portfolio consisted of seven leases valued at $96,505.
Arista reviews each lease portfolio in depth to determine which loans to purchase. Arista also performs a collateral valuation to determine if the purchase price of the loan will be covered if the collateral is repossessed. To this end, Arista utilizes a third-party service provider with experience in the transportation and construction equipment industries to assist in the valuation of the underlying collateral. All leases purchased to date have gone through this collateral valuation process.
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Our strategy is to identify specialty Lenders who have operated successfully for a significant period of time and are in need of capital to grow their loan portfolio. We believe our management team has the experience necessary to identify these Lenders and our investment approach involves, among other things:
| ● | an assessment of the markets and overall macroeconomic environment; |
| ● | substantial Lender-specific research and analysis; and |
| ● | with respect to each individual Lender, an emphasis on capital preservation, low volatility and management of downside risk. |
We seek to identify those Lenders exhibiting superior fundamental risk-reward profiles and a strong business history, while focusing on the absolute and relative value of each individual lending investment. Arista intends to diversify its list of Lenders and make purchases of their portfolios of leases on a regular basis when such risk-reward profile is attractive.
Employees
We employ 3 people and utilize independent contractors as needed.
Competition
We compete for investments with a number of other lenders and investment funds (including private equity funds and venture capital funds), special purpose acquisition company sponsors, investment banks with underwriting activities, hedge funds that invest in private investments in public equities, traditional financial services companies such as commercial banks, and other sources of financing. Many of these entities have significantly greater financial and managerial resources than we do.
Regulatory Matters
Although most states do not directly regulate the commercial equipment lease financing business, certain states require lenders and finance companies to be licensed, impose limitations on certain contract terms and on interest rates and other charges, mandate disclosure of certain contract terms and constrain collection practices and remedies. Arista does not operate in any states that would require Arista to be licensed. Pursuant to agreements under which we purchase leases and other loan obligations, we are typically indemnified against losses resulting from the failure of the originator to have complied with applicable laws relating to obligations prior to our purchase of such obligations.
The Registrant is not providing any information pursuant to this item since the Registrant is a smaller reporting company.
Item 1B. Unresolved Staff Comments
None.
Our principal executive office consists of approximately 100 square feet of space located at 51 JFK Parkway, First Floor West, Short Hills New Jersey, which we lease from a third party pursuant to a lease with a remaining term of 6 months at a monthly rent of $445. Our telephone number at that facility is (973) 218-2428. Arista subleases 1,000 square feet of office space for $750 on a month to month basis from Cambridge Capital, a company owned by Mr. Mathews, one of our directors. It is our belief that the space is adequate for our immediate needs. We do not presently own any real property.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending, or, to the knowledge of the executive officers of the Registrant, threatened against or affecting our company, our common stock, or our officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our stock is listed on the OTC Pink Current Information marketplace under the symbol “ARST”. There is currently no active trading market for shares of our common stock.
Holders
As of April 15, 2019, there were approximately 30 holders of record of our common stock. This figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominees.
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board will have the discretion to declare and pay dividends in the future.
Sales of Unregistered Securities
On October 15, 2018 the company issued 10,000 shares to a consultant for services rendered.
Securities Authorized for Issuance under Equity Compensation Plans
We presently do not have any equity based or other long-term incentive programs. In the future, we may adopt and establish an equity-based or other long-term incentive plan if we deem it in the best interest of the Company and our stockholders to do so. However, effective January 1, 2018, the Company granted options to purchase 300,000 shares of our common stock to Paul Patrizio, our chief executive officer, at an exercise price of $1.00 per share. The options vest annually on a pro rata basis over a three year period beginning January 1, 2019.
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Transfer Agent
Our transfer agent is VStock Transfer LLC, 18 Lafayette Place Woodmere, NY 11598.
Repurchases of Equity Securities
During the year ended December 31, 2018, there were no repurchases of the Company’s common stock by the Company.
Item 6. Selected Financial Data
We are a smaller reporting company (as defined by Rule 12b-2 under the Securities Exchange Act of 1934) and are not required to provide the information under this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following summarizes the factors affecting our operating results and financial condition. This discussion should be read together with the financial statements of Arista Financial Corp. and the notes to financial statements included elsewhere in this annual report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed elsewhere in this report. We encourage you to review the section titled “Forward-Looking Statements” at the front of this report.
Overview
We are a finance company that provides financing to other small finance companies that do not have significant access to the capital markets. Typically, we do this by acquiring lease portfolios from such lenders at a purchase price that yields us an annual return and these lenders continue to service the portfolios purchased by us. We are currently focused on leases for trucks and construction equipment.
Share Exchange
On April 19, 2017, the Company entered into the Share Exchange Agreement with Arista Capital Ltd. (“Arista Capital”) and the Arista Capital Shareholders (the “Share Exchange Agreement”) pursuant to which the Company agreed, subject to the terms and conditions in the Share Exchange Agreement, to exchange newly issued shares of the Company for shares of Arista Capital held by the Arista Capital Shareholders, with Arista Capital becoming a wholly-owned subsidiary of the Company (the “Transaction”). The closing of the Transaction (the “Closing”) was to take place sixty days after the execution of this Agreement. On July 18, 2017, the parties entered into the First Addendum to the Share Exchange Agreement, pursuant to which the closing date for the Transaction was scheduled for September 15, 2017. In connection with this First Addendum, Arista Capital paid the Company a $15,000 non-refundable deposit, and had the right to extend the closing date in intervals of thirty days upon payment of an additional non-refundable deposit of $10,000 for each requested extension interval. In November 2017, Arista Capital paid the Company an additional $10,000 non-refundable deposit. The Closing occurred on December 14, 2017. At Closing, Arista Capital paid the Company $72,500 which was used to pay all remaining outstanding liabilities of Praco.
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Prior to Closing, the Company restructured its equity ownership via a reverse stock split at a ratio of 13.2 to 1 which reduced the number of shares of common stock outstanding to 522,558 shares followed by the issuance of an additional 95,109 shares to certain Praco shareholders so that there were 617,667 shares outstanding immediately prior to the Closing. On the date of the Share Exchange Agreement, the fair value of the 617,667 shares retained by Praco shareholders was approximately $401,000, or $0.65 per common share, based on the quoted closing price of the Company common shares. Therefore, the Praco shareholders received aggregate consideration for the acquisition of $498,500. At Closing, the Company exchanged two shares of its common stock for each outstanding share of Arista common stock. This resulted in the issuance at Closing of an additional 2,470,666 shares of common stock which consisted of 2,084,000 common shares issued to Arista Shareholders and 386,666 common shares issued to certain Arista Capital noteholders upon the conversion of convertible notes payable. Accordingly, Arista Capital Shareholders owned in the aggregate approximately 80% of the outstanding common stock of the Company, with the Praco Shareholders owning the remaining approximately 20% of the Company and Arista Capital became a wholly-owned subsidiary of the Company. At the time of the closing, under the Share Exchange Agreement, the Company, then known as Praco Corporation, was not engaged in any business activity and was considered a shell.
Also, at Closing, the Praco shareholders were issued warrants for 283,749 common shares on a pro-rata basis exercisable at $2.00 per share and subject to the same terms and conditions as the warrants currently held by the Arista warrant holders except without a cashless exercise option. On the date of the Share Exchange Agreement, the Company calculated the fair value of the 283,749 warrants using the Black-Sholes option pricing method. The fair value of the warrants was approximately $108,000. In addition, immediately following the Closing, the Company exchanged each outstanding Arista warrant for new warrants issued by the Company entitling the holder to purchase an equal number of shares of the Company’s common stock as the number of Arista shares they were entitled to purchase upon exercise, subject to the same terms and conditions as the Arista Capital warrants except without a cashless exercise option. Also, at Closing, the Company exchanged each outstanding Arista Capital convertible note into a convertible note issued by the Company convertible into an equal amount of shares of the Company’s common stock as the number of Arista Capital shares into which such notes were convertible, subject to the same terms and conditions as the convertible notes currently held by Arista Capital convertible noteholders. As a result of such exchange offers, at Closing, the Company issued warrants to purchase 935,000 shares of Common Stock and convertible notes convertible into 199,999 shares of Common Stock.
As of December 31, 2017, the Company has recapitalized the Company to give effect to the Share Exchange Agreement discussed above. Under generally accepted accounting principles, the acquisition by the Company of Arista is considered to be capital transactions in substance, rather than a business combination. That is, the acquisition is equivalent to the acquisition by Arista of the Company, then known as Praco Corporation, with the issuance of stock by Arista for the net assets of the Company. This transaction is reflected as a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse takeover accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Arista Capital. Accordingly, the Company’s financial statements prior to the closing of the reverse acquisition, reflect only business of the Arista Capital.
The accompanying consolidated financial statements reflect the recapitalization of the stockholders’ deficit as if the transactions occurred as of the beginning of the first period presented. Thus, the shares of common stock issued to the former Arista Capital stockholders are deemed to be outstanding from December 31, 2015.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations are based upon our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continually evaluates such estimates, including those related to allowances for uncollectible finance receivables, income taxes, and the valuation of equity transactions. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.
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Going Concern
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, for the year ended December 31, 2018, we had a net loss of $1,164,692 and used cash in operating activities of $315,371, respectively. Additionally, we had an accumulated deficit of $2,099,185 and had a stockholders’ deficit of $890,522 at December 31, 2018, respectively, and had minimal revenues for the year ended December 31, 2018. Management believes that these matters raise substantial doubt about our ability to continue as a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that its capital resources are not currently adequate to continue operating and maintaining its business strategy for a period of twelve months from the issuance date of this report. Although we have historically raised capital from the issuance of promissory notes, there is no assurance that it will be able to continue to do so. Management believes that its ability to attract debt and equity financing in the capital markets is enhanced by becoming a public reporting company. If we are unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Financing leases receivable
Financing leases receivable are recorded at the aggregate future minimum lease payments, estimated unguaranteed residual value of the leased equipment less unearned income. Residual values, which are reviewed periodically, represent the estimated amount we expect to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from these estimates. The unearned income is recognized in revenues in the statements of operations over the lease term, in a manner that produces a constant rate of return on the lease. Financing leases receivable due after twelve months from the balance sheet date are reflected as a long-term asset. Financing leases receivables are periodically evaluated based on individual creditworthiness of customers. Based on this evaluation, we record an allowance for estimated losses on these receivables.
Revenue recognition
Income from direct financing lease transactions is reported using the financing method of accounting, in which our investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. Allowances for losses on direct financing leases are typically established based on historical charge-off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible. Direct financing leases are generally placed in a nonaccrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on nonaccrual status. Leases placed on nonaccrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
Income taxes
We account for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
We follow the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. We recognize interest and penalties related to uncertain income tax positions in other expense.
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Recent Accounting Pronouncements
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”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this update apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Results of Operations - Comparison of Results of Operations for the Years Ended December 31, 2018 and 2017
Revenues
Revenues consist of interest earned on lease financings and other fee income. For the year ended December 31, 2018, total revenues amounted to $13,948 as compared to $28,806 for the year ended December 31, 2017, a decrease of $14,858, or 52%. The decrease in revenues for the periods discussed were attributable to a decrease in the revenue generated by our leasing portfolio during the 2018 periods as compared to the 2017 periods.
Operating Expenses
For the year ended December 31, 2018, operating expenses amounted to $1,004,991 as compared to $437,710 for the year ended December 31, 2017, an increase of 567,281, or 130%.
For the years ended December 31, 2018 and 2017, operating expenses consisted of the following:
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Compensation and benefits | $ | 519,487 | $ | 224,041 | ||||
| Professional fees | 443,576 | 134,139 | ||||||
| Provision for lease losses | (14,084 | ) | 53,975 | |||||
| General and administrative expenses | 56,012 | 25,015 | ||||||
| Total | $ | 1,004,991 | $ | 437,170 | ||||
| ● | For the year ended December 31, 2018, compensation and benefit expense increased by $295,446, or 132% as compared to the year ended December 31, 2017. This increase was attributable to an increase in compensation paid to Arista’s chief executive officer which includes stock-based compensation of $268,096 for the year ended December 31, 2018 for stock options granted on January 1, 2018. |
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| ● | For the year ended December 31, 2018, professional fees increased by $309,437, or 231%, as compared to the year ended December 31, 2017. This increase was primarily attributable to an increase in legal fees of $76,297, an increase in accounting fees of $61,585 and an increase in consulting fees of $181,029. |
| ● | For the year ended December 31, 2018, provision for lease losses decreased by $68,059 as compared to the year ended December 31, 2017. Management periodically evaluates financing leases receivables based on the individual creditworthiness of customers. Based on this evaluation, Arista records an allowance for estimated losses on these receivables. | |
| ● | For the year ended December 31, 2018, general and administrative expenses increased by $30,997 as compared to the year ended December 31, 2017. The increase was due an increase in investor relations expenses and office rent. |
Loss from Operations
As a result of the factors described above, for the year ended December 31, 2018, loss from operations amounted to $991,043, as compared to $408,364 for the year ended December 31, 2017, an increase of $582,679, or 143%
Other Expenses
Other expenses consist of interest expense incurred on debt owed to third parties and related parties as well as gain on sales of equipment. For the year ended December 31, 2018, interest expense amounted to $173,649, as compared to $151,042 for the year ended December 31, 2017, an increase of $22,607, or 15%. These increases were attributable to an increase in borrowing pursuant to convertible note instruments and the amortization of debt discount.
Net Loss
As a result of the foregoing, for the years ended December 31, 2018 and 2017, net loss amounted to $1,164,692, or $0.33 per common share (basic and diluted), and $559,406, or $0.26 per common share (basic and diluted), respectively.
Due to lack of operating cash flows, from December 31, 2017 to December 31, 2018, accounts payable and accrued expenses increased by $123,324 and $160,907, respectively.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. Arista had cash of $10,357 and $728 on hand as of December 31, 2018 and December 31, 2017, respectively.
Arista’s primary uses of cash have been for salaries, fees paid to third parties for professional services, general and administrative expenses, and the acquisition lease portfolios. All funds received have been expended in the furtherance of growing the business. Arista has received funds from the collection of lease payments, and from various financing activities such as from debt financings. The following trends are reasonably likely to result in changes in Arista’s liquidity over the near to long term:
We may need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on current plans and assumptions, our available cash will not be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this annual report. Other than revenue received from our lease portfolio, and funds received from debt financings, we presently have no other significant alternative source of working capital. We have used these funds to fund our operating expenses, pay our obligations, acquire lease portfolios, and grow our company. We need to raise significant additional capital or debt financing to acquire new properties, to acquire additional lease portfolios, and to assure we have sufficient working capital for our ongoing operations and debt obligations.
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Cash Flows
Net cash flow used in operating activities was $315,371 for the year ended December 31, 2018, as compared to net cash used in operating activities of $261,159 for the year ended December 31, 2017, an increase of $54,212. Net cash used in operating activities consisted of cash used for working capital purposes for salaries, professional fees and general and administrative expenses.
For the year ended December 31, 2018, net cash flow provided by investing activities amounted to $15,000 and consisted of proceeds from the sale of assets held for sale of $15,000. For the year ended December 31, 2017, net cash flow used in investing activities amounted to $94,800 and consisted of cash used in the recapitalization of $97,500 offset by proceeds from the sale of assets held for sale of $2,700.
Net cash provided by financing activities was $310,000 for the year ended December 31, 2018 as compared to $265,000 for the year ended December 31, 2017. During the year ended December 31, 2018, we received proceeds from a note payable subscription receivable of $50,000, proceeds from a related party line of credit – related party of $55,000 and proceeds from convertible notes of $205,000. During the year ended December 31, 2017, we received cash from convertible notes of $200,000, proceeds from notes payable – related parties of $50,000, and received related party advances of $15,000.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
We are a smaller reporting company (as defined by Rule 12b-2 under the Securities Exchange Act of 1934) and are not required to provide the information under this item.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company (as defined by Rule 12b-2 under the Securities Exchange Act of 1934) and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary Data
The financial statements and notes thereto appear on pages F-1 to F-22 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We did not have any change in or disagreements with accountants on accounting and financial disclosures.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s President, Chief Financial Officer, Secretary, and Treasurer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as required under applicable United States securities regulatory requirements. Internal control over financial reporting is defined in Rule 13a–15(f) or 15d–15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s chief executive and chief financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; | |
|
● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. A system of internal controls can provide only reasonable, not absolute, assurance that the objectives of the control system are met, no matter how well the system is conceived or operated. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, our management, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 in Internal Control Integrated Framework. Based on that evaluation under this framework, our management concluded that our internal control over financial reporting was not effective because of the following material weaknesses in our internal control over financial reporting:
| ● | We did not maintain effective controls to identify and maintain segregation of duties between the ability to create and post manual journal entries to the general ledger system for a key accounting individual impacting the accuracy and completeness of all key accounts and disclosures. Specifically, the individual is assigned to both prepare and post journal entries, while holding responsibility for review of certain monthly reconciliations, without his entries being subject to an independent review; |
| ● | We did not maintain effective controls to identify accounting policies and procedures specifying the correct treatment for estimating the allowance for lease losses and the related provision for lease losses. Specifically, supporting analysis is not prepared for estimating the allowance for lease losses and the related provision for lease losses, documenting compliance with relevant GAAP and the Company’s accounting policies; |
| ● | We did not maintain effective controls to identify and prepare a supporting analysis for each financial statement disclosure, documenting its relevance with GAAP and the Company’s accounting and disclosure policies. Specifically, an independent review of financial statements and all related disclosures is not performed by management and/or other suitably qualified personnel for completeness, consistency, and compliance with GAAP and the Company’s accounting and disclosure policies; |
| ● | Sufficient information is not provided to our Board of Directors on a timely basis to allow monitoring of management’s objectives and strategies, the entity’s financial position and operating results, and terms of significant agreements. Specifically, the Board of Directors does not receive key information such as financial statements, analysis of significant accounts or transactions, and other financial information on a timely basis to monitor our financial position and operating results. |
This annual report does not include an attestation report by our independent registered public accounting firm regarding internal control over financial reporting. As we are neither a large accelerated filer nor an accelerated filer, our management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names and ages of our current directors and executive officers. Our Board of Directors appoints our executive officers. Our directors serve until the earlier occurrence of the election of his or her successor at the next meeting of stockholders, death, resignation or removal by the Board of Directors.
| Name | Age | Position | ||
| Paul Patrizio | 62 | Chairman and Chief Executive Officer; Director | ||
| Kenneth Mathews | 76 | Vice Chairman and Treasurer; Director | ||
| Scott Williams | 67 | Director | ||
| Jonathan Tegge | 29 | Interim Chief Financial Officer |
Paul Patrizio Mr. Patrizio has been the Chairman and CEO of the Company since its inception. Mr. Patrizio is also Chairman of MPMI Solutions, Inc., a technology solutions provider. He is also Of Counsel to the law firm Wollmuth Maher & Deutsch LLP. Previously, he was the Managing Partner of Apogee Energy Partners LLC (“AEP”) since its inception in 2009. AEP was an energy project development company and financing firm specializing in the solar energy industry. AEP was involved (through its affiliated partnerships) in the development and financing of over $200 million of solar projects in the last five years. During that period, Mr. Patrizio also had been General Counsel to Green States Energy, Inc., a developer and owner of solar energy projects and prior to Green States Energy was General Counsel to Gehrlicher Solar America Corp., the US subsidiary of Gehrlicher Solar AG (Germany), one of the largest solar companies in the world. From 1996-2008, Mr. Patrizio was a Managing Director and General Counsel at several investment banking firms which specialized in private equity and debt transactions. From 1984-1996, Mr. Patrizio worked at New York City law firms where he specialized in corporate, securities, and general business matters which included being an associate at Cahill Gordon and Shea & Gould and a partner at Campbell & Fleming (which became the NYC office of Epstein Becker & Green). Mr. Patrizio holds a BA, MBA, JD and LLM and is admitted to practice law in New Jersey, New York and Pennsylvania.
Kenneth Mathews Mr. Mathews brings more than 50 years’ experience in corporate finance with specialties in commercial lending, capital sourcing, leasing, and financial consulting for marketing and profit improvement. He is the founder and managing director of Cambridge Capital Corp., a boutique financial consulting firm specializing in raising capital for mid-sized companies, early-stage companies, and troubled businesses. Prior to forming Cambridge Capital Corp. in 1992, Ken Mathews served for 20 years with First Fidelity Bancorporation, then a New Jersey based $30 billion dollar commercial banking organization serving the Northeast. Through a series of mergers First Fidelity was acquired by Wachovia Bank, which was acquired by Wells Fargo Bank. Mr. Mathews was an Executive Vice President responsible for several departments including National Corporate and Equipment Leasing. In the Commercial Banking Division, Mr. Mathews managed a regional network with a portfolio of secured and unsecured loans for middle market companies. In addition, Mr. Mathews was a co-founder of and served on the Board of Directors for Hilltop Community Bank, a publicly-traded community bank until its recent sale. Mr. Mathews holds a BS degree from St. Peter’s College with a major in economics, and studied for a MBA in finance and marketing at NYU’s Graduate School of Business Administration.
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Scott Williams Mr. Williams began his career in the investment industry in 1978 with A. G. Edwards and Sons, Inc. He has been with firms as diverse as Drexel Burnham Lambert, Prudential Securities, and Pennsylvania Merchant Group a boutique investment-banking firm. Over a 35-year period he has been involved in the management of various areas in the industry, such as high net worth accounts, a high yield trading desk and banking group, and retail and institutional sales forces. Beginning in 2004, Mr. Williams partnered with David Callan to form Hawk Management. Hawk Management was created to be the investment advisor to Hawk Opportunity Fund. The Hawk Opportunity Fund, launched in 2005, was designed to allow Callan and Williams to use their expertise in distressed and bankrupt securities to take major positions in those situations they deemed investment worthy. The Hawk Opportunity Fund has over $30,000,000 in assets under management. Mr. Williams holds a BA in Political Science with a minor in Economics from the University of Oklahoma.
Jonathan Tegge Mr. Tegge has been a Senior Associate of Financial Reporting for Brio Financial Group (“Brio”) since late 2015. In that capacity, he consults with various private and public companies with respect to financial reporting, analysis of complex financial instruments and the valuation of such instruments. Prior to joining Brio, Mr. Tegge was an accounting consultant at Robert Half Finance & Accounting from 2014 to 2015, where he was involved in their accounting practice with industry focuses in healthcare and professional service firms. Mr. Tegge has a Bachelor of Science in Accounting from New Jersey Institute of Technology.
On October 1, 2018, Mr. Tegge was appointed Interim Chief Financial Officer of the Company pursuant to an agreement dated September 1, 2018 between the Company and Brio. Under the agreement, Brio agreed to assist the Company in the preparation of its quarterly and annual financial statements and related matters at a fixed monthly rate of $5,000 plus expenses. As part of this fixed monthly rate, Brio agreed to provide the Company with an Interim Chief Financial Officer upon request by the Company until the Company identifies a full time Chief Financial Officer. In addition, Brio may provide additional services if requested by the Company at Brio’s standard hourly rates.
There are no family relationships among Arista’s officers and directors.
Each director serves until our next annual meeting of the stockholders or unless they resign earlier. The Board of Directors elects officers and their terms of office are at the discretion of the Board of Directors. Each of our directors serves until his or her successor is elected and qualified. Each of our officers is elected by the board of directors to a term of one (1) year and serves until his or her successor is duly elected and qualified, or until he or she is removed from office. At the present time, members of the board of directors are not compensated for their services to the board.
Arista does not presently have any board committees, including any separately designated standing audit committee, compensation committee or nominating committee.
Board of Advisors
Gordon Sweely Mr. Sweely is the sole member of Arista’s Board of Advisors. Mr. Sweely is a Managing Director and Head of Structured Finance, Americas for Nomura Securities International, Asia’s global investment bank. Mr. Sweely joined Nomura in 2011 and is responsible for all structured lending and Non-Agency origination activity for Securitized Products in the Americas. Additionally, he also oversees all Collateralized Loan Obligation activity and structured lending activity for Structured Credit in the Americas. Prior to joining Nomura, Mr. Sweely spent 18 years at Lehman Brothers as Head of ABS Trading, Principal Finance and Co-Head of ABS CDOs with an expanded focus on distressed and non-investment grade assets on a whole loan and securitized basis. Mr. Sweely holds a B.S. from Hobart College and has an MBA from New York University Stern School of Business. Mr. Sweely has received 27,000 shares of our common stock as compensation for serving on Arista’s Board of Advisors.
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Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers to file reports of holdings and transactions in our equity securities with the SEC. Based on our records and other information, we believe that in 2018 our directors and officers who were subject to Section 16(a) met all applicable filing requirements.
Code of Ethics
We have not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions, because of the small number of persons involved in the management of the Company.
Item 11. Executive Compensation
The objective of our compensation program is to provide compensation for services rendered by our executive officers in the form of a salary. We utilize this form of compensation because we believe that it is adequate to both retain and motivate our executive officers. The amount we deem appropriate to compensate our executive officers is determined in accordance with other like corporations; we have no specific formula to determine compensatory amount at this time. We have deemed that our current compensatory program and the decisions regarding compensation are easy to administer and are appropriately suited for our objectives. We may expand our compensation program to additional future employees and to include other compensatory elements.
Summary Compensation Table
The following table provides summary information concerning cash and non-cash compensation paid or accrued by the Company or on behalf of our executive officers.
| Name and Principal Position | Title | Year | Salary ($) | Bonus ($) | Stock
Awards ($) | Option
Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All
other compensation ($) | Total ($) | ||||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||||
| 2018 | $ | 150,000 | $ | -0- | -0- | -0- | -0- | -0- | 30,000- | $ | 180,000 | |||||||||||||||||||||||||||
| Paul Patrizio | President, | 2017 | $ | 150,000 | $ | -0- | $ | -0- | -0- | -0- | -0- | 30,000- | $ | 180,000 | ||||||||||||||||||||||||
| CEO, Secretary | 2016 | $ | 28,337- | $ | -0- | $ | -0- | -0- | -0- | -0- | 12,000- | $ | 40,337- | |||||||||||||||||||||||||
| and Director | ||||||||||||||||||||||||||||||||||||||
| 2018 | $ | 32,500 | $ | -0- | $ | -0- | -0- | -0- | -0- | -0- | $ | 32,500 | ||||||||||||||||||||||||||
| Walter A. | CFO | 2017 | $ | 32,500 | $ | -0- | $ | -0- | -0- | -0- | -0- | -0- | $ | 32,500 | ||||||||||||||||||||||||
| Wojcik, Jr. | 2016 | $ | 7,500- | $ | -0- | $ | 6,000- | -0- | -0- | -0- | -0- | $ | 13,500- | |||||||||||||||||||||||||
Mr. Patrizio entered into an employment agreement with the Company immediately following the Closing, effective January 1, 2018, which provides for a five-year term, subject to renewal. Mr. Patrizio’s base salary is $150,000 and such annual salary is subject to a minimum 5% annual increase as well as increases based upon receipt by the Company of additional funding. Mr. Patrizio is entitled to an annual bonus based upon the EBITDA performance of the Company. In addition to reimbursement of business expenses, the agreement provides payment for monthly expenses for car, home office and telecommunications and other miscellaneous expenses incurred by Mr. Patrizio of $3,000 and provides reimbursement of his health care premium of $2,000 respectively. Also, consistent with the previous agreement between Mr. Patrizio and Arista, the agreement for Mr. Patrizio provides for termination in the event of a change in control, and for severance in the event of termination without cause, or for termination due to the Company’s breach. See Note 9 of Notes to Financial Statements.
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Arista had an oral understanding with Mr. Wojcik to pay him an annual salary of $42,000. The Company has entered into a new written understanding with Mr. Wojcik to pay him an annual salary of $48,000 which became effective upon the closing of the Transaction. On October 1, 2018, Mr. Wojcik resigned from his position as the Chief Financial Officer of the Company. On October 1, 2018, Mr. Wojcik also entered into an agreement to provide certain advisory services to the Company and Brio at a rate of $60 per hour.
On October 1, 2018, Jonathan R. Tegge was appointed Interim Chief Financial Officer of the Company pursuant to an agreement dated September 1, 2018 between the Company and Brio. Under the agreement, Brio agreed to assist the Company in the preparation of its quarterly and annual financial statements and related matters at a fixed monthly rate of $5,000 plus expenses. As part of this fixed monthly rate, Brio agreed to provide the Company with an Interim Chief Financial Officer upon request by the Company until the Company identifies a full time Chief Financial Officer. In addition, Brio may provide additional services if requested by the Company at Brio’s standard hourly rates.
The Company has no option or stock award plan or long-term incentive plan. However, effective January 1, 2018, Mr. Patrizio was granted options to purchase 300,000 shares of our common stock at an exercise price of $1.00 per share. These options will vest annually on a pro rata basis over a three-year period commencing January 1, 2019 and will expire on January 1, 2013.
The Company has no plans that provides for the payment of retirement benefits, or benefits that will be paid primarily following retirement.
Other than Mr. Patrizio, the Company has no agreement that provides for payment to our executive officers at, following, or in connection with the resignation, retirement or other termination, or a change in control of Company or a change in our executive officers’ responsibilities following a change in control.
Director Compensation
At the present time, members of the board of directors are not compensated for their services to the board.
Outstanding Equity Awards at Fiscal Year-End
At December 31, 2018, other than the grant of options to purchase 300,000 shares to Mr. Patrizio described above, there were no outstanding equity awards to our executive officers.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information, as of April 15, 2019, with respect to the beneficial ownership of our outstanding common stock by: (i) any holder of more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. There were 3,498,577 shares of common stock issued and outstanding as of April 15, 2019.
Name and Address of Beneficial Owner, Directors and Officers: | Number of Shares and Nature of Beneficial Ownership |
Percentage | ||||||
| Paul Patrizio | 1,850,000 | (2) | 51.6 | % | ||||
| Kenneth Mathews | 197,750 | (3) | 5.6 | % | ||||
| Jonathan R. Tegge | 0 | (4) | 0 | % | ||||
| Scott Williams | 655,369 | (5) | 17.7 | % | ||||
| Rory Deutsch and Judith Meehan | 755,000 | (6) | 18.6 | % | ||||
| David H. Wollmuth | 233,333 | (7) | 6.4 | % | ||||
| David Callan | 323,688 | (8) | 9.0 | % | ||||
| All executive officers and directors as a group (4 persons) | 2,703,119 | 70.7 | % | |||||
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| (1) | Applicable percentage of ownership is based on 3,498,577 shares of common stock outstanding on April 15, 2019. Percentage ownership is determined based on shares owned together with securities exercisable or convertible into shares of common stock within 60 days of April 15, 2019 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of April 15, 2019 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
In addition to our common stock, we have issued 51 shares of our Series A Super Voting Preferred Stock (the “Series A Preferred”). The Series A Preferred is not entitled to receive any dividends or liquidation preference and is not convertible into shares of our common stock. The holders of the Series A Preferred shall in the aggregate have a voting power equal to 51% of the total votes of all of the outstanding common and preferred stock of the Company entitled to vote. Accordingly, each share of Series A Preferred shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of common stock and preferred stock eligible to vote on a matter (the “Numerator”) divided by (y) 0.49, minus (z) the Numerator. For example, if the total issued and outstanding shares of common stock and preferred stock equal 3,498,628 shares, then the voting rights of one share of the Series A Preferred shall be equal to 71,398 ((3,498,628 x 0.019607) / 0.49) – (3,498,628 x 0.019607). |
| (2) | Includes 100,000 shares issuable upon exercise of options granted to Mr. Patrizio that have vested or will vest within 60 days. In addition, Mr. Patrizio has voting power over 1,750,000 shares of common stock held by AEP Holdings LLC, an entity solely owned by Mr. Patrizio’s spouse, but otherwise disclaims beneficial ownership thereof. AEP Holdings LLC also owns all of the outstanding shares of Series A Preferred. Accordingly, the shares of common stock and Series A Preferred over which Mr. Patrizio has voting power represent approximately 75.8% of the total voting power. |
| (3) | Includes 28,750 shares issuable upon exercise of warrants owned by Mr. Mathews. |
| (4) | Mr. Tegge is an employee of Brio Financial Group ("Brio") and was designated to act as Arista Financial Corp.'s Interim Chief Financial Officer pursuant to a consulting agreement between Brio and Arista dated as of September 1, 2018. As partial consideration for entering into the consulting agreement, Brio received 144,000 shares of Arista's common stock, of which 48,000 vested immediately upon signing of the agreement and 4,000 shares will vest monthly over the following 24 months. Mr. Tegge disclaims beneficial ownership over any shares held by Brio. |
| (5) | Includes 140,152 shares owned by Hawk Opportunity Fund L.P. Scott Williams is only a 3.42% limited partner of Hawk Opportunity Fund LP, but based on his overall control and management of Hawk, the Hawk shares are combined for this presentation. Also includes 141,914 shares and 64,384 shares issuable upon exercise of warrants owned by Mr. Williams and Hawk Opportunity Fund L.P., respectively. The business address of Mr. Williams and Hawk Opportunity Fund LP is 159 North State Street, Newtown, Pennsylvania 18940. |
| (6) | Includes 405,000 shares issuable upon exercise of warrants and 50,000 shares issuable upon conversion of convertible notes owned by Mr. Deutsch and his spouse Ms. Meehan. The business address of Mr. Deutsch and Ms. Meehan is c/o Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York, New York 10110. Also includes 150,000 shares issuable upon the exercise of warrants and 16,667 shares issuable upon conversion of convertible notes owned by Wollmuth & Co. II LLC, a Delaware limited liability company whose managers are Mr. Deutsch and Mr. Wollmuth. Messrs. Deutsch and Wollmuth disclaim any economic interest in the securities owned by Wollmuth & Co. II LLC. |
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| (7) | Includes 150,000 shares issuable upon exercise of warrants and 16,667 shares issuable upon conversion of convertible notes owned by Wollmuth & Co. II LLC, a Delaware limited liability company whose managers are Mr. Deutsch and Mr. Wollmuth. Messrs. Deutsch and Wollmuth disclaim any economic interest in the securities owned by Wollmuth & Co. II LLC. The business address of Mr. Wollmuth and Wollmuth & Co. II LLC is c/o Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York 10110. |
| (8) | Includes 140,152 shares owned by Hawk Opportunity Fund L.P. David Callan is only a 14.06% limited partner of Hawk Opportunity Fund LP, but based on his overall control and management of Hawk, the Hawk shares are combined for this presentation. Also includes 37,507 shares and 64,384 shares issuable upon exercise of warrants owned by Mr. Williams and Hawk Opportunity Fund L.P., respectively. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as set forth below, none of the following persons has any direct or indirect material interest in any transaction to which we were or are a party since the beginning of our last fiscal year, or in any proposed transaction to which we propose to be a party:
| (A) | any of our directors or executive officers; |
| (B) | any nominee for election as one of our directors; |
| (C) | any person who is known by us to beneficially own, directly or indirectly, shares carrying more than 5% of the voting rights attached to our common stock; or |
| (D) | any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons named in paragraph (A), (B) or (C) above |
Arista subleases 1,000 square feet of office space for $750 on a month to month basis from Cambridge Capital, a company owned by Mr. Mathews.
Mr. Patrizio is Of Counsel to the law firm of Wollmuth Maher & Deutsch LLP, which has acted as counsel to Arista prior to the Closing and now acts as counsel to the Company. In addition, David H. Wollmuth and Rory M. Deutsch, partners in Wollmuth Maher & Deutsch LLP, beneficially own approximately 6.4% and 18.6%, respectively, of the Company. At December 31, 2018, billed and unbilled legal fees owed to Wollmuth Maher & Deutsch LLP by the Company were approximately $177,271.
Review, Approval or Ratification of Transactions with Related Persons
We are a smaller reporting company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934) and are not required to provide the information under this item.
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Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The NASDAQ definition of “Independent Director” means a person other than an executive officer or employee or any other individual having a relationship, which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to this definition, Mr. Mathews and Mr. Williams are independent directors.
Item 14. Principal Accounting Fees and Services
Audit Fees
For the years ended December 31, 2018 and 2017, the Company was billed $49,085 and $31,722, respectively, for professional services rendered for the audit and reviews of our financial statements by Ciro E. Adams, CPA, LLC.
Audit Related Fees
The Company did not incur any audit related fees for the years ended December 31, 2018 or 2017.
Tax Fees
For the years ended December 31, 2018 and 2017, the Company was not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees, other than the fees discussed above, for services related to our audit for the years ended December 31, 2018 or 2017.
Pre-Approval of Services
We do not have an audit committee. As a result, our Board of Directors performs the duties of an audit committee. Our Board of Directors evaluates and approves in advance the scope and cost of the engagement of an auditor before the auditor renders the audit and non-audit services. We do not rely on pre-approval policies and procedures.
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Item 15. Exhibits, Financial Statement Schedules
Exhibits:
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
| (b) | The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included. |
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| 32.1 | Certifications of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Schema | |
| 101.CAL* | XBRL Taxonomy Calculation Linkbase | |
| 101.DEF* | XBRL Taxonomy Definition Linkbase | |
| 101.LAB* | XBRL Taxonomy Label Linkbase | |
| 101.PRE* | XBRL Taxonomy Presentation Linkbase |
| (1) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2017. |
| (2) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on August 24, 2017. |
| (3) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2018. |
| (4) | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on April 17, 2018. |
| (5) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 13, 2018. |
| (6) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2018. |
| (7) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 1, 2019. |
| (8) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 14, 2019. |
| (9) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 2, 2019. |
| (10) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 20, 2017. |
| (11) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 25, 2018. |
| * | Filed herewith. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2019
| ARISTA FINANCIAL CORP. | ||
| /s/ Paul Patrizio | ||
Name: Paul Patrizio Chief Executive Officer (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Paul Patrizio | Chairman, Chief Executive Officer and Director | April 15, 2019 | ||
| Paul Patrizio | (Principal Executive Officer) | |||
| /s/ Kenneth Mathews | Vice Chairman, Secretary and Treasurer, Director | April 15, 2019 | ||
| Kenneth Mathews | ||||
| /s/ R. Scott Williams | Director | April 15, 2019 | ||
| R. Scott Williams | ||||
| /s/ Jonathan R. Tegge | Interim Chief Financial Officer | April 15, 2019 | ||
| Jonathan R. Tegge | (Principal Financial and Accounting Officer) |
20
ARISTA FINANCIAL CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
CONTENTS
F-1
56 Rockford Rd. IWilmington, DE 1 9806 - 1004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Arista Financial Corp.
Short Hills, NJ 07078
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Arista Financial Corp. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has recurring net losses from operations and a stockholders' deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ciro E. Adams, CPA, LLC
Ciro E. Adams, CPA, LLC
Wilmington, DE 19806-1004
April 15, 2019
We have served as the Company's auditor since 2017.
F-2
ARISTA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | 10,357 | 728 | ||||||
| Financing leases receivable, net | 61,655 | 33,125 | ||||||
| Due from lease service provider | 6,306 | 6,755 | ||||||
| Accrued interest receivable | - | 1,026 | ||||||
| Prepaid expenses | 1,721 | 780 | ||||||
| Subscription receivable | - | 50,000 | ||||||
| Equipment held for sale | - | 15,000 | ||||||
| Total Current Assets | 80,039 | 107,414 | ||||||
| LONG-TERM ASSETS: | ||||||||
| Financing leases receivable, net | 16,431 | 19,760 | ||||||
| Total Long-term Assets | 16,431 | 19,760 | ||||||
| Total Assets | 96,470 | 127,174 | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable - related parties, net | 12,500 | 35,284 | ||||||
| Note payable - net | - | 34,109 | ||||||
| Accounts payable | 204,590 | 81,266 | ||||||
| Line of credit - related party | 70,000 | - | ||||||
| Accrued interest payable | 13,167 | 11,102 | ||||||
| Accrued interest payable - related parties | 3,113 | 186 | ||||||
| Due to related party | - | 15,000 | ||||||
| Convertible notes payable, net | - | - | ||||||
| Accrued expenses | 153,448 | 43,542 | ||||||
| Total Current Liabilities | 456,818 | 220,489 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Convertible notes payable, net | 479,174 | 306,516 | ||||||
| Total Long-term Liabilities | 479,174 | 306,516 | ||||||
| Total Liabilities | 935,992 | 527,005 | ||||||
| Redeemable Series A Preferred stock, $0.0001 par value; 51 shares authorized 51 and 0 shares issued and outstanding as of December 31, 2018 and 2017, respectively | 51,000 | - | ||||||
| Commitments and Contingencies (See Note 8) | ||||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $0.0001 par value, 10,000,000 shares authorized; | ||||||||
| Common stock: $0.0001 par value, 200,000,000 shares authorized; 3,433,083 and 3,088,333 shares issued and outstanding at December 31, 2018 and 2017 | 343 | 309 | ||||||
| Additional paid-in capital | 1,208,320 | 534,353 | ||||||
| Accumulated deficit | (2,099,185 | ) | (934,493 | ) | ||||
| Total Stockholders’ Deficit | (890,522 | ) | (399,831 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | 96,470 | 127,174 | ||||||
See accompanying notes to consolidated financial statements.
F-3
ARISTA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| REVENUES: | ||||||||
| Interest on lease financings | $ | 13,948 | $ | 28,806 | ||||
| Total revenues | 13,948 | 28,806 | ||||||
| OPERATING EXPENSES: | ||||||||
| Compensation and benefits | 519,487 | 224,041 | ||||||
| Professional fees | 443,576 | 134,139 | ||||||
| Provision for lease losses | (14,084 | ) | 53,975 | |||||
| General and administrative expenses | 56,012 | 25,015 | ||||||
| Total operating expenses | 1,004,991 | 437,170 | ||||||
| LOSS FROM OPERATIONS | (991,043 | ) | (408,364 | ) | ||||
| OTHER (INCOME) EXPENSES: | ||||||||
| Interest expense | 151,551 | 146,283 | ||||||
| Interest expense - related parties | 23,703 | 4,759 | ||||||
| Gain on sale of equipment | (1,605 | ) | - | |||||
| Total other expenses | 173,649 | 151,042 | ||||||
| LOSS BEFORE INCOME TAXES | (1,164,692 | ) | (559,406 | ) | ||||
| PROVISION FOR INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (1,164,692 | ) | $ | (559,406 | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic and Diluted | $ | (0.33 | ) | $ | (0.26 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic and Diluted | 3,510,645 | 2,130,777 | ||||||
See accompanying notes to consolidated financial statements.
F-4
ARISTA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, December 31, 2016 | - | $ | - | 2,084,000 | $ | 208 | $ | 275,445 | $ | (375,087 | ) | $ | (99,434 | ) | ||||||||||||||
| Shares issued in recapitalization | - | - | 617,667 | 62 | (97,562 | ) | - | (97,500 | ) | |||||||||||||||||||
| Shares issued upon conversion of debt | - | - | 386,666 | 39 | 259,961 | - | 260,000 | |||||||||||||||||||||
| Warrants issued in connection with convertible notes and related party notes | - | - | - | - | 96,509 | - | 96,509 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (559,406 | ) | (559,406 | ) | |||||||||||||||||||
| Balance, December 31, 2017 | - | - | 3,088,333 | 309 | 534,353 | (934,493 | ) | (399,831 | ) | |||||||||||||||||||
| Shares issued for services | - | - | 211,000 | 21 | 453,826 | - | 453,847 | |||||||||||||||||||||
| Shares issued upon conversion of debt | - | - | 113,750 | 11 | 90,534 | - | 90,545 | |||||||||||||||||||||
| Warrants issued in connection with convertible note | - | - | - | - | 74,609 | - | 74,609 | |||||||||||||||||||||
| Common stock issued in connection with convertible note | - | - | 20,000 | 2 | 27,998 | - | 28,000 | |||||||||||||||||||||
| Beneficial conversion feature on convertible notes | - | - | - | - | 27,000 | - | 27,000 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,164,692 | ) | (1,164,692 | ) | |||||||||||||||||||
| Balance, December 31, 2018 | - | $ | - | 3,433,083 | $ | 343 | $ | 1,208,320 | $ | (2,099,185 | ) | $ | (890,522 | ) | ||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
ARISTA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,164,692 | ) | $ | (559,406 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | - | 200 | ||||||
| Stock-based compensation | 448,840 | - | ||||||
| Amortization of debt discount to interest expense | 131,981 | 106,872 | ||||||
| Bad debt recovery | (4,176 | ) | 53,975 | |||||
| Change in operating assets and liabilities: | ||||||||
| Financing leases receivable | (21,025 | ) | 54,635 | |||||
| Due from lease service provider | 449 | (6,755 | ) | |||||
| Accrued interest receivable | 1,026 | 3,175 | ||||||
| Prepaid expenses | (43 | ) | (231 | ) | ||||
| Accounts payable | 123,324 | 80,281 | ||||||
| Accrued interest payable | 2,065 | 1,524 | ||||||
| Accrued interest payable - related parties | 5,973 | (570 | ) | |||||
| Accrued expenses | 160,907 | 5,141 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (315,371 | ) | (261,159 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of equipment held for sale | 15,000 | 2,700 | ||||||
| Cash paid for recapitalization | - | (97,500 | ) | |||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 15,000 | (94,800 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from line of credit - related party | 55,000 | 15,000 | ||||||
| Proceeds from note payable subscription receivable | 50,000 | - | ||||||
| Proceeds from notes payable - related parties | - | 50,000 | ||||||
| Proceeds from convertible notes | 205,000 | 200,000 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 310,000 | 265,000 | ||||||
| NET INCREASE (DECREASE) IN CASH | 9,629 | (90,959 | ) | |||||
| CASH, beginning of period | 728 | 91,687 | ||||||
| CASH, end of period | $ | 10,357 | $ | 728 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Interest paid | $ | 38,281 | $ | 33,145 | ||||
| Income taxes paid | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of common stock for services | $ | 77,000 | $ | - | ||||
| Reclassification of due to related party to line of credit - related party | $ | 15,000 | $ | - | ||||
| Issuance of Series A Preferred to settele Accrued Compensation | $ | 51,000 | $ | - | ||||
| Beneficial conversion feature on convertible notes | $ | 27,000 | $ | - | ||||
| Acquisition for financing leases receivable for accrued expense | $ | - | $ | 32,921 | ||||
| Increase in debt discount for warrants | $ | - | $ | 96,494 | ||||
| Conversion of debt in connection with recapitalization | $ | - | $ | 260,000 | ||||
| Financing lease receivable reclassified to equipment held for sale | $ | - | $ | 15,000 | ||||
| Increase in subscription receivable and note payable | $ | - | $ | 50,000 | ||||
| Shares issued for recapitalization | $ | - | $ | 401,484 | ||||
See accompanying notes to consolidated financial statements.
F-6
ARISTA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Organization
Arista Financial Corp. (the “Company”) was incorporated in Nevada on December 15, 2009. Effective February 21, 2012, the Company filed with the State of Nevada a Certificate of Amendment to the Articles of Incorporation changing the Company’s name from Hunt for Travel, Inc. to Praco Corporation (“Praco”) and on January 2, 2018, the Company changed its name to Arista Financial Corp.
On April 19, 2017, the Company entered into the Share Exchange Agreement with Arista Capital Ltd. (“Arista Capital”), a Nevada corporation formed on June 10, 2014, and the Arista Capital Shareholders (the “Share Exchange Agreement”). Under generally accepted accounting principles, the acquisition by the Company of Arista Capital is considered to be a capital transaction in substance, rather than a business combination. That is, the acquisition is equivalent to the acquisition by Arista Capital of the Company with the issuance of stock by Arista Capital for the net assets of the Company. This transaction is reflected as a recapitalization and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition. Under reverse merger accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, Arista Capital. Accordingly, the Company’s financial statements prior to the closing of the reverse acquisition, reflect only the business of Arista Capital.
The Company is a finance company that provides financing to other small finance companies that do not have significant access to the capital markets. Typically, the Company does this by acquiring lease portfolios from such lenders at a purchase price that yields the Company an annual return and these lenders continue to service the portfolios purchased by the Company. The Company is currently focused on leases for trucks and construction equipment.
NOTE 2 – GOING CONCERN ANALYSIS AND MANAGEMENT PLANS
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, for the year ended December 31, 2018, the Company had a net loss of $1,164,692 and used cash in operating activities of $315,371. Additionally, the Company had an accumulated deficit of $2,099,185, a stockholders’ deficit of $890,522, and a working capital deficit of $376,779 at December 31, 2018, and minimal revenues for the year ended December 31, 2018. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. Management believes that its capital resources are not currently adequate to continue operating and maintaining its business strategy for a period of twelve months from the issuance date of this report. Although the Company has historically raised capital from the issuance of promissory notes, there is no assurance that it will be able to continue to do so. Management believes that its ability to attract debt and equity financing in the capital markets is enhanced as a public reporting company. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
F-7
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The management of the Company is responsible for the selection and use of appropriate accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of presentation
The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated upon consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2017 and 2016 include estimates of allowances for uncollectible finance leases receivable, the useful life of property and equipment, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of equipment held for sale, and the fair value of non-cash equity transactions.
Credit risk and concentrations
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. At December 31, 2018 and 2017, cash in bank did not exceed federally insured limits. The Company has not experienced any losses in such accounts through December 31, 2018.
Financing leases receivable represent amounts due from lessees in various industries, related to equipment on direct financing leases. Currently, the Company relies on one source to acquire financing leases and to service such leases. The Company believes that other lenders are available to acquire lease portfolios if the Company cannot acquire additional financing lease receivable portfolios from its single source. Additionally, as of December 31, 2018, the Company’s portfolio of financing leases consists of seven leases. A default on or loss of any of these leases would have a material adverse effect on the Company’s results of operations and financial condition.
Cash and cash equivalent
For purposes of the statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At December 31, 2018 and 2017, the Company did not have any cash equivalents.
Financing leases receivable
Financing leases receivable are recorded at the aggregate future minimum lease payments, estimated unguaranteed residual value of the leased equipment less unearned income. Residual values, which are reviewed periodically, represent the estimated amount the Company expects to receive at lease termination from the disposition of the leased equipment. Actual residual values realized could differ from these estimates. The unearned income is recognized in revenues in the statements of operations over the lease term, in a manner that produces a constant rate of return on the lease. Financing leases receivable due after twelve months from the balance sheet date are reflected as a long-term asset. Financing leases receivables are periodically evaluated based on individual creditworthiness of customers. Based on this evaluation, the Company records allowance for estimated losses on these receivables.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
F-8
Fair value of financial instruments and fair value measurements
The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:
| Level 1 | Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. | |
| Level 2 | Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. | |
| Level 3 | Pricing inputs that are generally unobservable inputs and not corroborated by market data. |
Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts reported in the consolidated balance sheets for cash, financing lease receivables, due from lease service provider, accrued interest receivables, prepaid expenses, notes payable, accounts payable, accrued expenses, accrued interest payable and amounts due to related party approximate their fair market value based on the short-term maturity of these instruments. The Company does not account for any instruments at fair value using level 3 valuation.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Revenue recognition
Income from direct financing lease transactions is reported using the financing method of accounting, in which the Company’s investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The interest income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. Allowances for losses on direct financing leases are typically established based on historical charge-off and collection experience and the collectability of specifically identified lessees and billed and unbilled receivables. Direct financing leases are charged off to the allowance as they are deemed uncollectible. Direct financing leases are generally placed in a nonaccrual status (i.e., no revenue is recognized) and deemed impaired when payments are more than 90 days past due. Additionally, management periodically reviews the creditworthiness of all direct finance lessees with payments outstanding less than 90 days. Based upon management’s judgment, the related direct financing leases may be placed on nonaccrual status. Leases placed on nonaccrual status are only returned to an accrual status when the account has been brought current and management believes recovery of the remaining unpaid lease payments is probable. Until such time, all payments received are applied only against outstanding principal balances.
F-9
Income taxes
Income Tax Provision
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes, requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The Company’s gross deferred tax assets were revalued based on the reduction in the federal statutory tax rate from 35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential other taxes arising due to the Tax Act will result in reductions to the Company’s net operating loss carryforward and valuation allowance. The Company will continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for the Company’s fiscal year ending December 31, 2018, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated financial statements.
Uncertain Tax Positions
The Company evaluates uncertain tax positions to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained.
Interpretation of taxation rules relating to net operating loss utilization in real estate transactions give rise to uncertain positions. In connection with the uncertain tax position, there were no interest or penalties recorded as the position is expected but the tax returns are not yet due.
The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company will adjust tax expense to reflect the Company’s ongoing assessments of such matters, which require judgment and can materially increase or decrease its effective rate as well as impact operating results.
The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include the United States (including applicable states).
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Through March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, were recognized in the condensed consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusted the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have any impact on its consolidated financial statements.
F-10
Basic and diluted loss per share
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method) and common shares issuable upon the conversion of convertible notes payable (using the as-if converted method). These common stock equivalents may be dilutive in the future.
All potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Stock warrants | 1,080,250 | 1,268,749 | ||||||
| Stock options | 300,000 | - | ||||||
| Convertible debt | 444,124 | 200,000 | ||||||
| 1,824,374 | 1,468,749 | |||||||
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Recent accounting pronouncements
In May 2014, FASB issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company will adopt this standard in 2018 using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09 will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 will not have a material impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts with lessees.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and notes to its consolidated financial statements.
F-11
In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted the standard and the adoption did not have a material effect on its consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company adopted the standard during the year ended December 31, 2017 and the adoption did not have a material effect on its consolidated financial statements and disclosures.
In June 2018, the FASB issued Accounting Standards Update 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”)”. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company will adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The adoption of ASU 2018-07 is not expected to have a material impact on the Company’s financial statement presentation or disclosures.
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”, which changes the fair value measurement disclosure requirements of ASC 820. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
F-12
NOTE 3 – FINANCING LEASES RECEIVABLE
In December 2017, the Company repossessed one truck from one lessee that defaulted on their lease in 2017. At December 31, 2017, the truck held for sale had an estimated residual value of $15,000. On June 13, 2018, the Company sold the truck to a third party for $17,100. Accordingly, the Company recorded a gain on sale of equipment of $2,100 less servicing fees of $495 for a net gain on sale of equipment of $1,605 for the year ended December 31, 2018.
On September 28, 2018, the Company entered into a Purchase and Service Agreement with a third-party lease financing company (the “Seller”) to acquire a portfolio consisting of three leases for a cash purchase price of $67,207, an amount that is estimated a yield a return on investment of approximately 18%.
The Seller is responsible for administrating the leases, collecting all payments, and distributing funds to the Company. On a monthly basis, the Company shall pay the seller an administrative fee equal to 2% of the scheduled payment amount of each lease, 50% of all penalties or late fee charges collected, and 50% of all default interest collected. The seller shall remit the remaining amount received from the lessees to the Company. The finance leases require 36 monthly/weekly or bi-weekly payments through February 2020. Each lease is secured by ownership of the related transportation equipment. As of December 31, 2018 and 2017, financing leases receivable consists of leases for transportation equipment. At December 31, 2018 and 2017, financing leases receivable consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Total minimum financing leases receivable | $ | 96,505 | $ | 89,370 | ||||
| Unearned income | (8,124 | ) | (11,080 | ) | ||||
| Total financing leases receivable | 88,381 | 78,290 | ||||||
| Less: allowance for uncollectible financing leases receivable | (10,295 | ) | (25,405 | ) | ||||
| Financing leases receivable, net | 78,086 | 52,885 | ||||||
| Less: current portion of financing leases receivable, net | (61,655 | ) | (33,125 | ) | ||||
| Financing leases receivable, net – long-term | $ | 16,431 | $ | 19,760 | ||||
For the years ended December 31, 2018 and 2017, activities in the Company’s allowance for uncollectible financing leases receivable were are follows:
| For the Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Allowance for uncollectible financing leases receivable at beginning of period | $ | 25,405 | $ | 79,000 | ||||
| Provisions for credit losses | - | 53,975 | ||||||
| Bad debt recovery | (15,110 | ) | (107,570 | ) | ||||
| Allowance for uncollectible financing leases receivable at end of period | $ | 10,295 | $ | 25,405 | ||||
At December 31, 2018, the aggregate amounts of future minimum gross lease payments receivable are as follows:
| Amount | ||||
| Year 1 | $ | 90,286 | ||
| Year 2 | 6,219 | |||
| Future minimum gross financing leases receivable | $ | 96,505 | ||
F-13
NOTE 4 – CONVERTIBLE DEBT
During the year ended December 31, 2015, the Company entered into 10% convertible promissory notes (the “10% Convertible Notes”) with three third party individuals in the aggregate amount of $30,000. The unpaid principal and interest were payable three years from the date of the respective 10% Convertible Note through September 2018 and bear interest computed at a rate of interest which is equal to 10.0% per annum. The Noteholders were entitled, at their option, at any time after the issuance of the 10% Convertible Notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price of $1.00 per common shares. In connection with the 10% Convertible Notes, the Company issued to noteholders 30,000 five-year warrants to acquire common shares at $2.00 per share. On December 14, 2017, in connection with the Share Exchange Agreement, the Company issued 60,000 shares upon conversion of the full principal amount of $30,000.
During the year ended December 31, 2016, the Company entered into 10% convertible promissory notes (the “2016 10% Convertible Notes”) with seven third party individuals in the aggregate amount of $400,000. The unpaid principal and interest are payable three years from the date of the respective 2016 10% Convertible Note through December 2019 and bear interest computed at a rate of interest which is equal to 10.0% per annum. The Company may prepay any amount outstanding under the 2016 10% Convertible Note by making a payment to note holder of an amount in cash equal to the principal amount multiplied by a prepayment penalty percentage of 5.0%. The Noteholders are entitled, at their option, at any time after the issuance of the 2016 10% Convertible Notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price of $1.50 per common shares. The noteholders have the option to extend the due date of the notes for three additional one-year periods. In connection with the 2016 10% Convertible Notes, the Company issued to noteholders 575,000 five-year warrants to acquire common shares at $2.00 per share. On December 14, 2017, in connection with the Share Exchange Agreement, the Company issued 266,666 shares to certain noteholders upon conversion of principal amount of $200,000.
During the period from July 1, 2017 to September 30, 2017, the Company issued 12% convertible promissory notes to three individuals in the aggregate amount of $200,000. The unpaid principal and interest is payable three years from the date of the respective 12% Convertible Note through August 1, 2020. The Company may prepay any amount outstanding under the 12% Convertible Note by making a payment to note holder of an amount in cash equal to the principal amount multiplied by a prepayment penalty percentage of 5.0%. The Noteholders are entitled, at their option, at any time after the issuance of the 12% Convertible Notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price of $3.00 per share. In connection with the 12% Convertible Notes, the Company issued to noteholders five-year warrants to acquire up to 300,000 shares of common stock at $4.00 per share.
On May 31, 2018 one of the three noteholders of the 12% Convertible Notes purchased one of the others’ 12% Convertible note which has an unpaid principal balance of $50,000 and had accrued interest of $1,132, for an aggregate purchase price of $51,132. Accordingly, this note had warrants to acquire 75,000 shares of the Company’s common stock at a price of $4.00 per share that was transferred to the new noteholder. As an incentive for purchasing the note, the Company issued to the noteholder 5,000 shares of the Company’s common stock which was recorded as professional fees during the year ended December 31, 2018. The shares were valued at a price of $0.80 per share, or $4,000 (see Note 8).
In May 2018, the Company issued an 8% promissory note to an individual in the amount of $50,000. The unpaid principal and interest are payable in November 2018. In connection with these 8% notes, in May 2018, the Company issued to this individual noteholder five-year warrants to acquire up to 25,000 shares of common stock at $0.01 per share. The warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. On June 15, 2018, the Company and noteholder restructured the 8% promissory note to an 11% convertible promissory note for the aggregate amount of $50,000. The unpaid principal and interest is now payable on June 15, 2021. The Company may prepay any amount outstanding under the 11% Convertible Note by making a payment to note holder of an amount in cash equal to the principal amount, plus accrued but unpaid interest through the date of such redemption date, multiplied by a prepayment penalty percentage of 5.0%. The Noteholder is entitled, at their option, at any time after the issuance of the 11% Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price of $2.00 per share. In connection with the 11% Convertible Note, the Company issued to the noteholder five-year warrants to acquire up to 25,000 shares of common stock at $3.00 per share in replacement of the previous warrants associated with the 8% note valued at $16,939, using the below assumptions with the Black-Scholes option-pricing model. The warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock.
F-14
On September 7, 2018, the Company issued a convertible note to a third-party lender totaling $137,500. The convertible note accrues interest at 8% per annum and matures with interest and principal both due on June 7, 2019. In addition, the Company issued a warrant to purchase 50,000 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $1.25 per share for a period of three years from the issue date. The Company recorded a $45,565 debt discount relating to the warrants issued to the investor based on the fair value on the dates of issuance, $28,000 for the issuance of 20,000 shares of the Company’s common stock and an original issue discount of $10,000. The debt discount is being accreted over the life of the note. The convertible note and accrued interest are convertible at a conversion price of $1.00 per share, subject to adjustment.
On December 3, 2018, the Company issued a convertible note to a third-party lender totaling $40,500. The convertible note accrues interest at 5% per annum and matures with interest and principal both due on December 3, 2019. In addition, the Company issued a warrant to purchase 20,250 shares of Company common stock. The warrant entitles the holder to purchase the Company’s common stock at a purchase price of $1.15 per share for a period of three years from the issue date. The Company recorded a $12,106 debt discount relating to the warrants issued to the investor based on the fair value on the dates of issuance, $27,000 for the beneficial conversion feature and an original issue discount of $5,500. The debt discount is being accreted over the life of the note.
These Convertible Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions.
The Warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. The warrants are also exercisable on a cashless basis.
The Company evaluated whether or not the convertible notes and warrants above contained embedded conversion options, which meet the definition of derivatives under ASC Topic 815. The Company concluded that since the above convertible notes had a fixed conversion price, the convertible notes were not derivative instruments.
The convertible notes were analyzed to determine if the convertible notes have an embedded beneficial conversion feature (BCF). Based on this analysis, the Company concluded that for the December 2018 note, the conversion feature contained an exercise price that was lower than the fair value of the Company’s common stock and therefore a BCF was recorded. For the remaining notes discussed above, the effective conversion price was greater than the fair value of the Company’s common stock on the note dates and therefore no BCF was recorded.
As discussed above, in connection with convertible notes payable, the Company granted an aggregate of 95,250 warrants to note holders (See Note 8). During the years ended December 31, 2018 and 2017, on the issuance date of the respective warrants, the fair value of the warrants of $74,609 and $64,095 was recorded as a debt discount and an increase to paid-in capital, respectively. The fair market value of each stock warrant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
| 2018 | 2017 | |||||||
| Dividend rate | 0 | 0 | ||||||
| Term (in years) | 3-5 years | 5 Years | ||||||
| Volatility | 100.0 | % | 100.0 | % | ||||
| Risk-free interest rate | 1.71-2.82 | % | 1.80-1.89 | % | ||||
For the years ended December 31, 2018 and 2017, amortization of debt discount related to these convertible notes amounted to $148,826 and $104,089, respectively, which has been included in interest expense on the accompanying condensed consolidated statements of operations.
F-15
As of December 31, 2018 and 2017, accrued interest payable amounted to $13,167 and $11,102, respectively. The weighted average interest rate for the year ended December 31, 2018 and 2017 was approximately 10% and 10.6%, respectively.
At December 31, 2018 and 2017, the convertible debt consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Principal amount | $ | 628,000 | $ | 400,000 | ||||
| Less: unamortized debt discount | (148,826 | ) | (93,484 | ) | ||||
| Convertible note payable, net – long-term | $ | 479,174 | $ | 306,517 | ||||
At December 31, 2018, debt maturities are $378,000 in 2019 and $250,000 in 2020.
NOTE 5 – NOTE PAYABLE
On December 31, 2017, the Company issued an 8% promissory note to a third party in the amount of $50,000. In connection with this promissory note, at December 31, 2017, the Company recorded a subscription receivable of $50,000. The funds were received in January 2018. The unpaid principal and interest was payable on June 8, 2018. In connection with this 8% note, on December 31, 2017, the Company issued to this noteholder five-year warrants to acquire up to 25,000 shares of common stock at $0.01 per share. The warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price. The exercise price of the warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. On the issuance date of the warrants, the fair value of the warrants of $16,345 was recorded as a debt discount and an increase to paid-in capital, respectively.
As discussed above, in connection with the note payable, the Company granted an aggregate of 25,000 warrants to noteholder. In December 2017, on the issuance date of the respective warrants, the fair values of the warrants of $16,345 was recorded as a debt discount and an increase to paid-in capital, respectively.
The fair market value of each stock warrant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
| Dividend rate | 0 | |||
| Term (in years) | 5 years | |||
| Volatility | 100.0 | % | ||
| Risk-free interest rate | 2.20 | % |
On May 31, 2018, the noteholder elected to convert the unpaid principal of $50,000 and accrued interest of $1,665, into 65,000 shares of the Company’s common stock at a price of $0.80 per share.
Upon conversion of the note and related interest on May 31, 2018, the Company expensed the remaining debt discount relating to the above warrants of $7,718 to interest expense on the accompanying condensed consolidated statements of operations.
At December 31, 2018 and 2017, note payable consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Principal amount | $ | - | $ | 50,000 | ||||
| Less: unamortized debt discount | - | (15,891 | ) | |||||
| Notes payable, net | $ | - | $ | 34,109 | ||||
For the years ended December 31, 2018 and 2017, amortization of debt discount related to this note amounted to $15,891 and $454, respectively which has been included in interest expense on the accompanying statements of operations.
F-16
NOTE 6 – RELATED PARTY TRANSACTIONS
Convertible notes payable – related parties
During the year ended December 31, 2015, the Company entered into 10% convertible promissory notes with certain officers and directors of the Company in the aggregate amount of $30,000. The unpaid principal and interest was payable three years from the date of the respective convertible note through May 1, 2018 and bear interest computed at a rate of interest which is equal to 10.0% per annum. These noteholders were entitled, at their option, at any time after the issuance of these 10% convertible notes, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price of $1.00 per common shares. On December 14, 2017, in connection with the Share Exchange Agreement, the Company issued 60,000 shares upon conversion of the full principal amount of $30,000.
In connection with these 10% convertible notes, in 2015, the Company issued to these related party noteholders 30,000 five-year warrants to acquire common shares at $2.00 per share These warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock.
Notes payable – related parties
In December 2017, the Company issued 8% promissory notes to certain officers and directors of the Company in the aggregate amount of $50,000. The unpaid principal and interest were payable on June 8, 2018. In connection with these 8% notes, in December 2017, the Company issued to these related party noteholders five-year warrants to acquire up to 25,000 shares of common stock at $0.01 per share These warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock.
As discussed above, in connection with the notes payable, the Company granted warrants to acquire an aggregate of 25,000 shares of common stock to note holders. In December 2017, on the issuance date of the respective warrants, the fair value of the warrants of $16,053 was recorded as a debt discount and an increase to paid-in capital, respectively.
The fair market value of each stock warrant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
| 2017 | ||||
| Dividend rate | 0 | |||
| Term (in years) | 5 years | |||
| Volatility | 100.0 | % | ||
| Risk-free interest rate | 2.14 | % | ||
On May 31, 2018 the noteholders elected to convert unpaid principal of $37,500 and accrued interest of $1,381, into 48,750 shares of the Company’s common stock at a price of $0.80 per share.
F-17
At December 31, 2018 and 2017, notes payable – related parties consisted of the following:
| December 31, 2018 | December 31, 2017 | |||||||
| Principal amount | $ | 12,500 | $ | 50,000 | ||||
| Less: unamortized debt discount | - | (14,716 | ) | |||||
| Notes payable – related parties, net | $ | 12,500 | $ | 35,284 | ||||
On June 1, 2018, the Company and noteholder restructured the remaining 8% promissory note of $12,500 into a 10% promissory note with all unpaid principal and interest due on December 31, 2018.
In connection with related party convertible note and notes payable, the weighted average interest rate for the years ended December 31, 2017 was approximately 8.0% and 9.9%, respectively.
Upon conversion on May 31, 2018, the Company expensed the remaining debt discount relating to the above warrants of $5,017 to interest expense on the accompanying consolidated statements of operations.
For the years ended December 31, 2018 and 2017, amortization of debt discount related to these related party convertible notes and notes payable amounted to $25,590 and $2,329, respectively, which has been included in interest expense – related parties on the accompanying consolidated statements of operations.
As of December 31, 2018 and 2017, accrued interest payable - related parties amounted to $5,973 and $570, respectively. For the years ended December 31, 2017 and 2016, interest expense - related parties amounted to $23,703 and $4,759, respectively.
Due to related party
In December 2017, a director of the Company advanced $15,000 to the Company for working capital purposes. The advance is non-interest bearing and is payable on demand, On January 1, 2018, the advance was converted into a line of credit promissory note.
Line of credit – related party
On January 1, 2018, the Company entered into a line of credit promissory note with a company owned by a director of the Company in the principal amount of $50,000 or such lesser amount as may be borrowed by the Company. This line of credit promissory note shall bear interest at the rate of 12% per annum and such interest shall be paid each month. The entire outstanding principal amount of this Note shall be due and payable on December 31, 2018. On the Maturity Date, if this Note has not been paid in full, it shall bear interest from inception at the rate of 18% per annum until paid in full. On January 1, 2018, the Company reclassified $15,000 of advances received by this related party entity into this promissory note. On August 1, 2018 the Company amended the terms of the line of credit agreement dated January 1, 2018 with the related party lender to increase the principal amount from $50,000 to $60,000. On October 1, 2018 the Company amended the terms of the line of credit agreement dated January 1, 2018 with the related party lender to increase the principal amount from $60,000 to $80,000. All other terms under the line of credit remain the same. Additionally, during the year ended December 31, 2018, the Company borrowed an additional $45,000 pursuant to the line of credit agreement. At December 31, 2018, amounts due under the line of credit amounted to $60,000.
Office rent - related party
The Company rents its office space from a Director of the Company on a month-to-month basis for $750 per month. For the years ended December 31, 2018 and 2017, rent expense – related party amounted to $9,723 and $7,500, respectively, and is included in general and administrative expenses on the accompanying statements of operations.
F-18
NOTE 7 – REDEEMABLE SERIES A PREFERRED
Preferred Stock
The Company has 10,000,000 shares of preferred stock authorized. Preferred stock may be issued in one or more series. The Company’s board of directors is authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.
On September 4, 2018, the Company filed a Certificate of Designation with the Secretary of State of Nevada (the “Certificate of Designation”) designating 51 shares of its authorized preferred stock as Series A Super Voting Preferred Stock (“Series A Preferred”). The shares of Series A Preferred have a par value of $0.0001 per share. The Series A Preferred is not entitled to receive any dividends or liquidation preference and are not convertible into shares of the Company’s common stock.
The holders of the Series A Preferred shall in the aggregate have a voting power equal to 51% of the total votes of all of the outstanding common and preferred stock of the Company entitled to vote. Accordingly, each share of Series A Preferred shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of common stock and preferred stock eligible to vote on a matter (the “Numerator”) divided by (y) 0.49, minus (z) the Numerator. For example, if the total issued and outstanding shares of common stock and preferred stock equal 5,000,000 shares, then the voting rights of one share of the Series A Preferred shall be equal to 102,036 ((5,000,000 x 0.019607) / 0.49) – (5,000,000 x 0.019607). With respect to all matters upon which stockholders are entitled to vote or give consent, the holders of the outstanding shares of Series A Preferred shall vote with the holders of the common stock and any outstanding preferred stock without regard to class, except as to those matters on which separate class voting is required by applicable law or the Company’s Articles of Incorporation or Bylaws.
The holders of a majority of the outstanding Series A Preferred may require the Company to redeem all of the outstanding shares of Series A Preferred at any time at a redemption price of $1,000 per share. In addition, the Series A Preferred shall be automatically, and without required action by the Company or the holders thereof, be redeemed by the Company at $1,000 per share on the date that Paul Patrizio ceases, for any reason, to serve as an officer, director or consultant of the Company, it being understand that if Mr. Patrizio continues without interruption to serve in at least one such capacity, this shall not be considered a cessation of service.
During the year ended December 31,2018, the Company issued 51 shares of Series A Preferred, valued at $51,000, for officer compensation.
NOTE 8 – STOCKHOLDERS’ DEFICIT
Common stock issued for services
On March 1, 2018 and effective on March 15, 2018, the Company entered into a six-month consulting agreement for business development services. In connection with the consulting agreement, the Company issued 60,000 shares of its common stock. The shares were valued at their fair value of $69,000 or $1.15 per common share which was the fair value on the date of grant based on the closing quoted share price on the date of grant. In connection with these shares, the Company recorded stock-based consulting fees of $69,000.
Effective on September 15, 2018, the Company entered into a six-month consulting agreement for business development services. In connection with the consulting agreement, the Company issued 75,000 shares of its common stock. The shares were valued at their fair value of $108,750 or $1.45 per common share which was the fair value on the date of grant based on the closing quoted share price on the date of grant. In connection with these shares, the During the year ended December 31, 2008, the Company recorded stock-based consulting fees of $107,851 related to this agreement. As of December 31, 2018, the unamortized amount of $899 in included in prepaid expenses on the consolidated balance sheets which will be amortized over the remaining agreement term.
On June 13, 2018, the Company issued 5,000 shares of its common stock at a price of $0.80 per share or $4,000 based on the value of services rendered for investor relations services.
F-19
Common stock issued for note conversion
On May 31, 2018 the Company issued 65,000 shares at a price of $0.80 per share for a conversion of note payable and accrued interest for an aggregate value of $51,665 (see Note 6).
On May 31, 2018 the Company issued 48,750 shares at a price of $0.80 per share for conversions of notes payable – related parties and accrued interest – related parties for an aggregate value of $38,881 (see Note 6).
On May 31, 2018, the Company issued 5,000 shares of its common stock to a noteholder as an incentive for purchasing another noteholders loan with the Company (see Note 5). The fair value was determined at a price of $0.80 per share, or $4,000, using the value of services rendered to third parties.
Stock options
Effective January 1, 2018, in connection with an employment agreement (see Note 8), the Company granted to its CEO options to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The grant date of the options was January 1, 2018 and the options expire on January 1, 2023. The options vest as to (i) 100,000 of such shares on January 1, 2019, and (ii) as to 100,000 of such shares on January 1, 2020 and 100,000 of such shares on January 1, 2021. The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 100%; risk-free interest rate of 2.20%; and, an estimated holding period of 5 years. In connection with these options, the Company valued these options at a fair value of $225,193 and will record stock-based compensation expense over the vesting period. For the years ended December 31, 2018 and 2017, the Company recorded stock-based compensation expense of $137,618 and $0, respectively.
At December 31, 2018, there were 300,000 options outstanding and no options vested and exercisable. As of December 31, 2018, there was $87,575 of unvested stock-based compensation expense to be recognized through January 2021. The aggregate intrinsic value at December 31, 2018 was approximately $27,000 and was calculated based on the difference between the quoted share price on December 31, 2018 and the exercise price of the underlying options.
Warrants
At Closing of the Share Exchange Agreement, the Praco Shareholders were issued warrants for 283,749 common shares on a pro-rata basis exercisable at $2.00 per share and subject to the same terms and conditions as the warrants currently held by the Arista warrant holders except without a cashless exercise option. In addition, immediately following the Closing, the Company exchanged each outstanding Arista warrant for new warrants issued by the Company entitling the holder to purchase an equal number of shares of the Company’s common stock as the number of Arista shares they were entitled to purchase upon exercise, subject to the same terms and conditions as the Arista Capital warrants except without a cashless exercise option. Also, at Closing, the Company exchanged each outstanding Arista Capital convertible note into a convertible note issued by the Company convertible into an equal amount of shares of the Company’s common stock as the number of Arista Capital shares into which such notes were convertible, subject to the same terms and conditions as the convertible notes currently held by Arista Capital convertible noteholders. As a result of such exchange offers, at Closing, the Company issued warrants to purchase 935,000 shares of Common Stock.
In December 2018, the Company issued to related party noteholders 20,250 five-year warrants to acquire common shares at $0.01 per share (See Note 6). Additionally, in December 2018, the Company issued to a third-party noteholder 25,000 five-year warrants to acquire common shares at $0.01 per share (See Note 5).
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Warrant activities for the years ended December 31, 2018 and 2017 are summarized as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Average Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2016 | 635,000 | 2.00 | ||||||||||||||
| Granted in connection with Share Exchange | 283,749 | 2.00 | ||||||||||||||
| Granted in connection with debt | 350,000 | 3.43 | ||||||||||||||
| Balance Outstanding December 31, 2017 | 1,268,749 | 2.39 | 5.16 | |||||||||||||
| Granted in connection with debt | 95,250 | 1.87 | ||||||||||||||
| Balance Outstanding December 31, 2018 | 1,363,999 | 2.36 | 4.10 | $ | 54,000 | |||||||||||
| Exercisable, December 31, 2018 | 1,363,999 | 2.36 | 4.10 | $ | 54,000 | |||||||||||
NOTE 9 – COMMITMENTS AND CONTINCENGIES
Employment agreement
On December 14, 2017 and effective on January 1, 2018 (the “Effective Date”), the Company entered into a new employment agreement with its CEO. For all services rendered by CEO pursuant to this Agreement, during the term of this Agreement the Company shall pay the CEO a salary at the following annual rates based upon the financial statements of the Company:
| (i) | Upon the Effective Date, the CEO’s base compensation shall be at the annual rate of $150,000; | |
| (ii) | Thereafter; upon the first $500,000 of gross proceeds in a financing raised by the Company during the term of the Agreement the CEO’s base salary compensation shall be raised to $200,000; | |
| (iii) | Thereafter; upon the next $500,000 of gross proceeds in financings raised by the Company during the term of the Agreement the CEO’s base salary compensation shall be raised to $250,000; | |
| (iv) | Thereafter; for each additional $1,000,000 of gross proceeds in financings raised by the Company during the term of the Agreement the CEO’s base salary compensation shall be increased by $12,000. |
The CEO’s base salary shall be increased on each January 1st during the term of this Agreement by not less than five percent (5%) of the then annual compensation amount.
The Company will provide the CEO with an allowance equal to $2,000 per month for health insurance with such allowance increased on each anniversary date of this Agreement at the same rate as the CEO’s base compensation in addition to any amounts provided to employees generally.
The CEO will earn an annual bonus as follows: nine percent (9%) of the Company’s annual EBITDA (Earnings before interest expense, taxes, depreciation, and amortization and all other non-cash charges) up to the first $5,000,000 of EBITDA, then 5% on amounts thereafter, based on the audited consolidated results of the Company. This bonus shall be payable in cash within thirty days after the audit has been completed. In addition, the CEO was entitled to a transaction bonus in the amount of $20,000 payable in cash at the closing of the Share Exchange in addition to any amounts outstanding to him from Arista at that time.
In addition, effective January 1, 2018, the CEO was granted options to purchase 300,000 shares of the Corporation’s common stock at an exercise price of $1.00 per share which shall vest annually on a pro rata basis over the 3-year period commencing January 1, 2019.
Unless earlier terminated in accordance with the terms hereof, the term of the Agreement shall be for the period commencing as of the Effective Date and ending December 31, 2022; provided, however, that on each anniversary date of the Agreement, this Agreement shall automatically be extended for successive one-year periods unless the Company or the CEO shall have given the other written notice of its or his intention to terminate this Agreement at least six months prior to the anniversary date in any such year.
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In the event of termination of employment by the Company pursuant to the Agreement, without cause, the Company shall continue for a period equal to the greater of (A) the balance of the term of the Agreement, or (B) two (2) years, the following: (i) the CEO’s base salary at its then annual rate, and (ii) provide to the Executive the benefits.
In the event of termination of the CEO’s employment by the Company in the first year of the Agreement for any reason whatsoever excluding a termination with cause, the Company shall pay as severance to CEO, no later than thirty days following the date of termination, the greater of (i) 300% of the maximum allowable bonus payable to the Executive pursuant to Section 4(b); or (ii) the sum of $300,000.
Future minimum commitment payments under an employment agreement at December 31, 2018 are as follows:
| Years ending December 31, | Amount | |||
| 2019 | $ | 220,500 | ||
| 2020 | 231,525 | |||
| 2021 | 243,101 | |||
| 2022 | 255,256 | |||
| Total minimum commitment employment agreement payments | $ | 950,383 | ||
Consulting agreements
On March 1, 2018, the Company entered into a one-year consulting agreement with a third-party entity for assistance with corporate strategy, investor relations, and financial advisory and business development services. In connection with this consulting agreement, the Company paid the consultant $5,000. Upon fulfillment of the term of the agreement, the agreement shall convert to either an “at will” agreement or shall extend for an additional period of time as mutually determined by the Company and consultant.
On August 6, 2018 the Company entered into a consulting agreement with a third party to perform services relating to investor relations and due diligence. The term of this agreement is for a period of two years unless terminated earlier with a thirty-day prior written notice. This consultant will introduce investors to the company and will be paid 8% of the capital raised by the investor introduced. During the year ended December 31, 2018 the parties agreed to terminate this agreement.
Investment agreement
On July 19, 2018, the Company entered into an investment agreement with a third-party entity to invest up to $5,000,000 over a commitment period of three years by purchasing the Company’s common stock under Section 4(a)(2) of the Securities Act of 1933. The third-party entity’s obligation to purchase the Company’s common stock is subject to the filing and effectiveness of an S-1 registration statement by the Company.
NOTE 10 – INCOME TAXES
On December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. Beginning January 1, 2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during 2018.
The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets at December 31, 2018 and 2017 consist of net operating loss carryforwards and allowances for uncollectible financing receivables. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realizability. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. The valuation allowance increased by approximately $82,000 and $92,000 for the years ended December 31, 2018 and 2017, respectively.
F-22
The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2018 and 2017 were as follows:
| Years Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Income tax benefit at U.S. statutory rate of 34% | $ | (244,585 | ) | $ | (117,475 | ) | ||
| State income tax benefit | (75,705 | ) | (36,361 | ) | ||||
| Non-deductible expenses | 25,988 | 29,390 | ||||||
| Change in effective U.S statutory rate to 21% | - | 58,829 | ||||||
| Change in valuation allowance | 294,302 | 65,617 | ||||||
| Total provision for income tax | $ | — | $ | — | ||||
The Company’s approximate net deferred tax assets as of December 31, 2018 and 2017 were as follows:
| December 31, 2018 | December 31, 2017 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforward | $ | 483,358 | $ | 185,943 | ||||
| Allowance for uncollectible financing receivables | 3,873 | 6,986 | ||||||
| Total deferred tax assets | 487,231 | 192,929 | ||||||
| Valuation allowance | (487,231 | ) | (192,929 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
The estimated net operating loss carryforward was approximately $1,757,665 at December 31, 2018. The Company’s net operating loss carryforward may be limited on the usage of such net operating loss carryforwards due to a change in ownership in accordance with Section 382 of the Internal Revenue Code. The Company provided a valuation allowance equal to the net deferred income tax asset for the year ended December 31, 2018 and 2017 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the valuation allowance was approximately $294,000 from the year ended December 31, 2018. The potential tax benefit arising from tax loss carryforwards will expire in 2036.
If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other expenses – Interest expense” in the statement of operations. Penalties would be recognized as a component of “General and administrative.”
No material interest or penalties on unpaid tax were recorded during the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2016, 2017 and 2018 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to December 31, 2018 the Company entered into three convertible note agreements with investors. The Company received proceeds of $128,300. As additional consideration for entering in the convertible note agreements, the investors were granted a total of 31,910 warrants to purchase the Company’s common stock.
Subsequent to December 31, 2018 the Company issued 60,000 shares to a vendor for services rendered.
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