FRQN 10-Q
Frequency Holdings, Inc (FRQN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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 ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | 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 Exchange Act). Yes ☐
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. $756,108
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of as of November 15, 2024 there, were shares of common stock outstanding.
TABLE OF CONTENTS
i
Emerging Growth Company
We are and we will remain an “emerging growth company” as defined under The Jumpstart Our Business Startups Act (the “JOBS Act”), until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities, or (iv) the date on which we are deemed a “large accelerated filer” (with at least $700 million in public float) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).
As an “emerging growth company”, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
| ● | only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis” disclosure; |
| ● | reduced disclosure about our executive compensation arrangements; |
| ● | no requirement that we hold non-binding advisory votes on executive compensation or golden parachute arrangements; and |
| ● | exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We have taken advantage of some of these reduced burdens, and thus the information we provide stockholders may be different from what you might receive from other public companies in which you hold shares.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Notwithstanding the above, we are also currently a “smaller reporting company”, meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $250 million and annual revenues of less than $100 million during the most recently completed fiscal year. In the event that we are still considered a “smaller reporting company”, at such time as we cease being an “emerging growth company”, the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “emerging growth company” or a “smaller reporting company”. Specifically, similar to “emerging growth companies”, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act (“SOX”) requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports.
Employees
The Company currently has approximately twenty-five full-time and part time employees, including officers and directors. Our employees are not represented by any labor union.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this Item.
ii
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YUENGLING’S ICE CREAM CORPORATION
Index to Financial Statements
1
YUENGLING’S ICE CREAM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2024 |
December 31, 2023 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Loans to related parties | ||||||||
| Inventory | ||||||||
| Total Current Assets | ||||||||
| Other Assets: | ||||||||
| Deposits | ||||||||
| Furniture and fixed assets, net | ||||||||
| Goodwill | ||||||||
| Right of use asset | ||||||||
| Total non-current assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Deferred Revenues | ||||||||
| Due to officers | ||||||||
| Due to Affiliate | ||||||||
| Due to financial institutions | ||||||||
| Seller notes and loans payable, related parties current | ||||||||
| SBA loan payable | ||||||||
| Vehicle and equipment loans | ||||||||
| Term note payable, related parties | ||||||||
| Other loans and notes payable | ||||||||
| Officer life insurance liability, current portion | ||||||||
| Convertible notes payable, third parties, net of put premiums | ||||||||
| Derivative liability | ||||||||
| Lease liability, current portion | ||||||||
| Equipment lease, current | ||||||||
| Total Current Liabilities | ||||||||
| Non-Current Liabilities: | ||||||||
| Seller notes payable, non-current portion related parties | ||||||||
| CNP, third parties, net of discounts | ||||||||
| Officer life insurance premium, non-current portion | ||||||||
| Dividend payable, preferred stock Series C & D | ||||||||
| Equipment lease, non-current | ||||||||
| Lease liability, non-current portion | ||||||||
| Total Non-Current Liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
| Commitments and contingencies | ||||||||
| Temporary Equity - Preferred Series A stock to be issued | ||||||||
| Stockholders’ Deficit: | ||||||||
| To be issued | ||||||||
| Preferred stock, Series A; par value $; shares authorized, shares issued and outstanding at March 31, 2024 and December 31, 2023 | ||||||||
| Preferred stock, Series C and D, par value $, shares authorized, shares issued and outstanding at March 31, 2024 and December 31, 2023 | ||||||||
| Common stock: $ par value; shares authorized; shares issued and outstanding at March 31, 2024 and December 31, 2023 | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Deficit | ( |
) | ( |
) | ||||
| TOTAL LIABILITIES & STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
YUENGLING’S ICE CREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended March 31, |
||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating Expenses: | ||||||||
| Impairment loss | ||||||||
| General and administrative expenses | ||||||||
| Stock compensation | ||||||||
| Compensation | ||||||||
| Professional fees | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( |
) | ( |
) | ||||
| Other income (expense): | ||||||||
| Derivative: expense, gains and losses from issuances and conversion | ( |
) | ( |
) | ||||
| Changes in fair market value | ||||||||
| Gain on debt extinguishment | ||||||||
| Interest expense | ( |
) | ( |
) | ||||
| Total other expense | ( |
) | ( |
) | ||||
| Loss before provision for income tax | ( |
) | ( |
) | ||||
| Provision for income tax | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Preferred Dividends | ||||||||
| Net income (loss) available to common shareholders | ||||||||
| Basic and Diluted loss per share | $ | ( |
) | $ | ( |
) | ||
| Basic and Diluted weighted average shares | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
YUENGLING’S ICE CREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(Unaudited)
| Series A Preferred Stock |
Series C & D Preferred Stock |
Common Stock | To Be Issued Common Stock |
Additional Paid in |
Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Amount | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||
| Net loss for three months ending March 31, 2023 | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||
| Series A Preferred Stock |
Series C & D Preferred Stock |
Common Stock | To Be Issued Common Stock |
Additional Paid in |
Accumulated | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Amount | Capital | Deficit | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||
| Warrants issued to investors | - | - | - | |||||||||||||||||||||||||||||||||||||
| Preferred stock dividends Series C & D | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Net loss for three months ending March 31, 2024 | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
YUENGLING’S ICE CREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, |
||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| NET INCOME (LOSS) | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based expenses | ||||||||
| Amortization & depreciation | ||||||||
| Amortization of debt discounts | ||||||||
| Derivative expense | ( |
) | ||||||
| Changes in fair market value of derivatives | ( |
) | ||||||
| Gain on extinguishment | ( |
) | ||||||
| Fee notes issued | ||||||||
| Intangibles impairment | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ( |
) | ||||
| Prepaids and Other | ||||||||
| A/P and accrued | ||||||||
| Equipment lease | ( |
) | ||||||
| ROU Lease | ||||||||
| Customer deposits | ( |
) | ( |
) | ||||
| Other current liabilities | ( |
) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Fixed assets | ( |
) | ( |
) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from Fox loan | ||||||||
| Repayments Fox loan | ( |
) | ||||||
| Proceeds from Fora loan | ||||||||
| Repayment of Fora loan | ( |
) | ( |
) | ||||
| Repayments seller notes | ( |
) | ( |
) | ||||
| New vehicle loan | ||||||||
| Repayments vehicle loans | ( |
) | ||||||
| Affiliate advances | ||||||||
| Repayments of affiliate advances | ( |
) | ||||||
| Repayments - Related party advances | ( |
) | ||||||
| Proceeds – convertible notes payable | ||||||||
| ULI Insurance payment | ( |
) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ||||||||
| NET INCREASE (DECREASE) IN CASH | ||||||||
| CASH BEGINNING OF YEAR | ||||||||
| CASH END OF YEAR | $ | $ | ||||||
| Cash paid during the period for Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Supplemental Disclosure of Non-Cash Activity: | ||||||||
| Debt discounts | $ | $ | ||||||
| Preferred stock dividends | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
YUENGLING’S ICE CREAM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2024
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS
Yuengling’s Ice Cream Corporation, (f/k/a Aureus, Inc.) (“Yuengling’s,” “YCRM,” or the “Company”) was incorporated in Nevada on April 19, 2013, under the name “Aureus Incorporated.” The Company was initially organized to develop and explore mineral properties in the state of Nevada. Effective December 15, 2017, the name was changed to “Hohme, Inc.,” and, effective February 7, 2019, the Company changed its name to “Aureus, Inc. and on September 14, 2021, the Company changed their name to Yuengling’s Ice Cream Corporation”. The Company is currently active in the state of Nevada.
In November, 2023, YCRM completed its acquisition of ReachOut Technology Corp. (“ReachOut”). ReachOut is a Managed Service Provider (MSP) that provides cybersecurity and IT services to Small to Medium Sized Businesses (SMBs). Management is highly experienced with business operation as well as acquisition and integration. After the closing of the ReachOut transaction, the Company agreed to assign the ice cream assets to Mid Penn Bank in return for the cancellation of the bank debt. The Company also ceased its Aureus Micro Markets operations at the time the ReachOut agreement was signed.
Reverse Merger/Acquisition of ReachOut Technology Corp.
On November 9, 2023, the Yuengling’s Ice Cream Corporation closed the Share Exchange and Control Block Transfer Agreements with ReachOut Technology Corp. (“ReachOut”) whereby
The Share Exchange is intended to constitute a reorganization with the meaning of Section 368 of the Internal Revenue Code of 1986 (as amended).
As a result of the transaction, ReachOut became a subsidiary of the Company.
The Company evaluated the substance of the merger transaction and found it met the criteria for the accounting and reporting treatment of a reverse acquisition under ASC 805 (Business Combinations)-40-45 (Reverse Acquisition and Other Presentation Matters) and accordingly will consolidate the operations of ReachOut and the Company and the financial condition from the closing date of the transaction. The historic results of operations will reflect those of ReachOut. As such, ReachOut is treated as the acquirer while the Company is treated as the acquired entity for accounting and financial reporting purposes.
Under reverse merger accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, ReachOut, the Company’s financial statements prior to the closing of the reverse acquisition; reflect only the business of ReachOut and its subsidiaries.
For accounting purposes, ReachOut is considered the acquirer of YCRM. based upon the terms of the Merger as well as other factors including; (i) RO former shareholders own approximately 87.5% of the combined Company’s outstanding common shares (giving effect to the conversion of the preferred Series C shares ReachOut stockholders received in exchange for the ReachOut stock) immediately following the closing of the Merger, and (ii ReachOut management hold key management positions of the combined Company. The Merger has therefore recorded as a reverse acquisition. The figures described in the notes and financial statements are a continuation of the figures of the legal subsidiary or accounting acquirer (ReachOut). However, the equity reflects the legal acquirer, or accounting acquiree (YCRM) equity structure. The acquisition value is recorded to reflect the par value of the outstanding shares of the Company, including the number of shares issued in the reverse acquisition and has been recast to reflect the merger transactions as if it had occurred as of the earliest period presented. Any difference is recognized as an adjustment to the additional paid in capital to the extent available, and then as a retained earnings adjustment.
6
Under the terms of the Control Block Transfer Agreement, Everett Dickson (former CEO) sold all his remaining Series A Preferred Stock to Richard Jordan (new CEO) for $
Following the closing of the agreements, Robert Bohorad and Everett Dickson resigned their positions as CEO and Chairman of the Board of Directors, respectively and Richard Jordan was appointed to those positions.
The Company has authorized Series C Preferred Shares of Stock, effective December 13, 2023. The shares have a stated value of $ per share, earns a 2% dividend on the stated value, which is cumulative and payable solely upon redemption. The stock has voting rights equal to the number of common shares into which the preferred shares may be converted. At any time following 180 days from the date of issuance the preferred stock in aggregate can be converted into 87.5% of the outstanding common stock for a period of twenty-four months from the date of issuance of the Series C Preferred Stock.
Under the terms of the Share Exchange Agreement the Company issued shares of Series C Preferred Stock to the owners of ReachOut. in exchange for
ReachOut Technology Corp.
Reachout Technology, Corp. (“ReachOut”) is a corporation formed on February 13, 2020 under the laws of the State of Delaware. ReachOut provides cybersecurity and IT management solutions to businesses to protect their complete operating landscape and data secrets. ReachOut is headquartered in Chicago, Illinois.
From formation until the acquisition of Innovative Design Networks, LLC (“IND”) on September 2, 2022, ReachOut had no principal operations or revenue. ReachOut’s activities during this period primarily consisted of formation activities, acquisition research and preparations to raise capital.
ReachOut Corp. Acquisition - Innovative Network Designs LLC
IND is a New Jersey limited liability company and ReachOut acquired 100% of the member’s interest of IND in exchange for cash, notes payable, commitment to purchase universal life insurance policies for the principals and restricted shares of ReachOut’s common stock. The transactions were deemed to be a business combinations and applied acquisition accounting under ASC 805.
Innovative Network Designs LLC - New Jersey
IND Corporation (“IND”) provides information technology services. IND offers cybersecurity, risk assessment, network security, cloud performance, remote management, migration support, and monitoring solutions for businesses, as well as provides consulting and maintenance services. IND serves clients in the States of New York, New Jersey, and Pennsylvania. IND can either manage and support a client’s entire technology infrastructure, or complement to the existing internal IT personnel. IND’s unique service model is designed to reduce client costs, increase client profits and mitigate client’s business risks.
ReachOut Corp. Acquisition - Red Gear LLC
ReachOut entered into a Membership Interest Purchase Agreement on September 29, 2023 with RedGear, LLC, a Texas limited liability company and acquired
7
RedGear LLC - Texas
RedGear LLC (“RedGear”) provides professional technology services, structured cabling, equipment, and consulting in the Southwest US region. RedGear’s entire culture is built around supporting business infrastructures, while building relationships and delivering an exceptional customer service experience and always keeping customers’ best interest a top priority. RedGear has built its success by reputation, quality of work, professionalism, and always being there for clients every step of the way whenever needed. RedGear’s services, certifications, experience, and expertise cover the entire spectrum of Information Technology that no other regional technology service provider can match.
These are pre-acquisition descriptions. Post-acquisition, ReachOut Technology Corp. will re-brand its subsidiaries to ReachOut, add any unique revenue streams to ReachOut’s portfolio and standardize program offerings.
NOTE 2 – GOING CONCERN
The Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt and the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since inception, has sustained net losses of $
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying consolidated financial statements include the accounts of ReachOut Technology Corp. and its wholly-owned subsidiaries, ReachOut IND and RedGear. All significant intercompany accounts and transactions have been eliminated in consolidation. Since September 2, 2022, following the purchase of 100% of the membership interests in Innovative Network Designs LLC, (now ReachOut IND) and RedGear, LLC on October 2, 2023, the operations, assets, and liabilities have been consolidated into the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, YIC Acquisitions Corp., ReachOut (and its subsidiaries). All material intercompany transactions and balances have been eliminated on consolidation. ReachOut’s wholly-owned subsidiaries, ReachOut IND and RedGear were acquired on September 2, 2022 (purchase of
Under reverse merger accounting, the comparative historical financial statements of the Company, as the legal acquirer, are those of the accounting acquirer, ReachOut, the Company’s financial statements prior to the closing of the reverse acquisition; reflect only the business of ReachOut and its subsidiaries.
8
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, inventory, revenue recognition and the valuations of common and preferred stock, valuations of derivative liabilities and intangible assets. The Company bases its estimates on historical experience, known trends, analysis and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company generally maintains balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that may exceed federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. At March 31, 2024 and 2023, all of the Company’s cash and cash equivalents were held at accredited financial institutions. As of March 31, 2024, the Company had $
The Company’s subsidiary, Innovative Design Networks, has two clients with outstanding unpaid accounts representing a total of
Cash Equivalents
The Company considers all highly liquid investments with a maturity of year or less when purchased to be cash equivalents. There were
Reclassifications
Certain reclassifications have been made to the prior period financial information to conform to the presentation used in the financial statements for the three months ended March 31, 2024. These reclassifications did not have any effect on the results of operations.
Accounts Receivable
Trade receivables are recorded at net realizable value consisting of the carrying amount less the allowance for credit losses. Factors used to establish an allowance include the credit quality of the customer and other factors. The Company may also use the direct write-off method to account for uncollectible accounts that are not received. Using the direct write-off method, trade receivable balances are written off to bad debt expense when an account balance is deemed to be uncollectible. The Company maintains an allowance for credit losses primarily for estimated losses resulting from the inability or failure of individual customers to make required payments. The Company maintains an allowance under Accounting Standards Codification (“ASC”) 326 based on historical losses, changes in payment history, customer-specific information, current economic conditions, and reasonable and supportable forecasts of future economic conditions. The allowance under ASC 326 is updated as additional losses are incurred or information becomes available related to the customer or economic conditions. As of March 31, 2024, the calculated and recognized allowance for credit losses was $
9
Deferred Financing Costs
Any unamortized deferred financing costs related to the Company borrowings are presented in the consolidated balance sheets as a direct deduction from the related debt. As of March 31, 2024, there are unamortized deferred financing fees recognized. Amortization of such costs is reported as interest and financing costs included in the consolidated statement of operations.
Inventory
Inventory is stated at the lower of cost and net realizable value on a first-in, first-out basis. Cost is principally determined using the last-in, first-out (LIFO) method. The Company periodically assesses if any of the inventory has expired or if the value has fallen below cost. When this occurs, the Company recognizes an expense for inventory write down. Total inventories at March 31, 2024 and December 31, 2023 were $
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the lesser of the remaining term of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred.
Basic loss per share is calculated by dividing the loss attributable to stockholders by the weighted-average number of shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings (loss) of the Company. Diluted loss per share is computed by dividing the loss available to stockholders by the weighted average number of shares outstanding for the period and dilutive potential shares outstanding unless such dilutive potential shares would result in anti-dilution. The total potentially dilutive shares calculated is at March 31, 2024. As of March 31, 2024: there are obligations to issue Series A Preferred Stock which are convertible into shares of common stock; the Series A Preferred shares outstanding convertible into of common shares; the Series C Preferred shares outstanding may convert into common shares; the Series D Preferred shares outstanding may convert into common shares; the warrants outstanding my convert into common shares; and there are potentially dilutive shares arising from the conversion value of the convertible notes payable. Options outstanding may be exercised into common shares. It should be noted that contractually the limitations on obligation to convertible notes, the various preferred series and warrant holders that limit the number of shares converted to either 4.99% or 9.99% of the then outstanding shares. The Company’s Chairman of the Board of Directors holds a control block of Series A Preferred Stock which confers upon him a majority vote in all Company matters including authorization of additional common shares or to reverse split the stock. As of March 31, 2024, and 2023, potentially dilutive securities consisted of the following:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Series A Preferred Stock Payable | ||||||||
| Series A Preferred Stock outstanding | ||||||||
| Series C Preferred Stock outstanding | ||||||||
| Series D Preferred Stock outstanding | ||||||||
| Warrants | ||||||||
| Third party convertible debt | ||||||||
| Common shares to be issued | ||||||||
| Common stock options | ||||||||
| Total | ||||||||
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Stock-based Compensation
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. We adopted this ASU on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.
Convertible Notes with Fixed Rate Conversion Options
The Company may enter into convertible notes, some of which contain, predominantly, fixed rate conversion features, whereby the outstanding principal and accrued interest may be converted by the holder, into common shares at a fixed rate to the market price of the common stock at the time of conversion. This results in a fair value of the convertible note being equal to a fixed monetary amount. The Company records the convertible note liability at its fixed monetary amount by measuring and recording a premium, as applicable, on the Note date with a charge to interest expense in accordance with ASC 480 - “Distinguishing Liabilities from Equity”.
Derivative Financial Instruments
The Company evaluates its convertible notes to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date using a binomial model, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a weighted-average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Fair Value Measurements
The Company follows the FASB Fair Value Measurements standard, as they apply to its financial instruments. This standard defines fair value, outlines a framework for measuring fair value, and details the required disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The standard establishes a hierarchy in determining the fair value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. Level 1 inputs include quoted market prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date. Level 2 inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data. The standard requires the utilization of the lowest possible level of input to determine fair value and carrying amounts of current liabilities approximate fair value due to their short-term nature.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
The Company’s non-financial assets, such as property and equipment, are adjusted to fair value only when an impairment is recognized. Such fair value measurements are based predominantly on Level 3 inputs.
Level 1: Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly.
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Level 2 inputs include quoted prices for similar assets, quoted prices in markets that are not considered to be active, and observable inputs other than quoted prices such as interest rates.
Level 3: Level 3 inputs are unobservable inputs.
The following required disclosure of the estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows: Cash and Cash Equivalents, Accounts Receivable, and Accounts Payable. The items are generally short-term in nature, and accordingly, the carrying amounts reported on the consolidated balance sheets are reasonable approximations of their fair values.
The carrying amounts of notes payable approximate the fair value as the notes bear interest rates that are consistent with current market rates.
The table below classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of March 31, 2024 and December 31, 2023.
| At March 31, 2024 | At December 31, 2023 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Derivative Liability | $ | $ | ||||||||||||||||||||||
A roll-forward of the level 3 valuation financial instruments is as follows
| Derivative Liabilities |
||||
| Balance at December 31, 2023 | $ | |||
| Charged to derivative expense upon issuance of related note | ||||
| Classified as initial debt discount upon issuance of related note | ||||
| Fair Value adjustments - convertible notes | ( |
) | ||
| Balance at March 31, 2024 | $ | |||
A summary of quantitative information about significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative liability that are categorized within Level 3 of the fair value hierarchy for the year ended March 31, 2024 is as follows:
| Inputs | December 31, 2023 |
|||
| Stock price | $ | |||
| Conversion price | $ | |||
| Volatility (annual) | % | |||
| Risk-free rate | % | |||
| Dividend rate | ||||
| Years to maturity | ||||
An additional $
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Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to tax net operating loss carryforwards. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will either be taxable or deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the Company’s control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of March 31, 2024 and December 31, 2023, no liability for unrecognized tax benefits was required to be reported.
Revenue recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”), effective January 1, 2018. The Company determines revenue recognition through the following steps:
Identification of a contract with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the performance obligations are satisfied.
For the three months ended March 31, 2024 and the year ended December 31, 2023, the Company deferred revenue of $
The Company and its wholly owned subsidiaries (“Operating Companies”) are not selling or leasing software to customers. The operating companies provide managed IT services (managing customers networks including security, support user needs and network infrastructure), and installation (cabling and network hardware and third-party software set up). Agreements such as the Master Consulting Services Agreement are entered into by the operating companies and their clients. These agreements provide the general terms of service and the legal matters essential to the agreement. The agreements are supplemented by Statements of Work (SOW) which spell specific services and any hardware to be provided. Invoices are prepared based on the terms of the SOW either monthly for services to be rendered for the coming month or based on installation progress estimates, collectively the billings are based on performance obligations. Revenue from invoiced billings is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company’s customers in an amount that reflects the consideration expected to be received in exchange for transferring goods or services to customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance.
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It is management’s practice to only invoice for services and goods to be provided within the coming month. While services may not be fully transferred the client is in fact obligated to pay the invoiced amount unless the contract is terminated with prior notice.
The Company manages its operating income on a regional basis at the present time. Revenue recognized for the Northeast region was $
Advertising Costs
Advertising costs are expensed as incurred and are included in General and Administrative expenses. The Company expensed less than $
Deferred Offering Costs
The Company complies with the requirements of Accounting Standards Codification (“ASC”) 340, Other Assets and Deferred Costs, with regards to offering costs. Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged to additional paid-in capital or as a discount to debt, as applicable, upon the completion of an offering or to expense if the offering is not completed.
Stock-Based Compensation
The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation — Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as an expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services. In accordance with ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting share-based payment transactions for acquiring goods and services from nonemployees are included. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
Business Combinations
In accordance with ASC 805-10, “Business Combinations”, we account for all business combinations using the acquisition method of accounting. Under this method, assets and liabilities, including any remaining non-controlling interests, are recognized at fair value at the date of acquisition. The excess of the purchase price over the fair value of assets acquired, net of liabilities assumed, and non-controlling interests is recognized as goodwill. Certain adjustments to the assessed fair values of the assets, liabilities, or non-controlling interests made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Any cost or equity method interest that we hold in the acquired company prior to the acquisition is re-measured to fair value at acquisition with a resulting gain or loss recognized in income for the difference between fair value and the existing book value. Results of operations of the acquired entity are included in our results from the date of the acquisition onward and include amortization expense arising from acquired tangible and intangible assets.
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Related Party Transactions
The Company follows FASB ASC subtopic 850-10, “Related Party Transactions”, for the identification of related parties and disclosure of related party transactions.
Pursuant to ASC 850-10-20, related parties include: a) our affiliates; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit sharing trusts that are managed by or under the trusteeship of management; d) our principal owners; e) our management; f) other parties with which we may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Material related party transactions are required to be disclosed in the consolidated financial statements, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
Lease Accounting
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to report on their balance sheets a right-of-use asset and a lease liability in connection with most lease agreements classified as operating leases under the prior guidance (ASC Topic 840). Under the new guidance, codified as ASC Topic 842, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense generally is flat (straight-line) throughout the life of the lease. For finance leases, periodic expense declines over the life of the lease. The new standard, as amended, provides an option for entities to use the cumulative-effect transition method. As permitted, the Company adopted ASC Topic 842 effective June 1, 2020. The adoption of ASC Topic 842 did not have a material impact on the Company’s consolidated financial statements.
The Company’s subsidiaries have recognized the Right of Use assets and related liabilities for leases and sublease for the office facilities in New Jersey, Texas and Arizona during the years ended December 31, 2023 and 2022, and following the acquisitions are accounted for under ASC 842. The corporate office is an informal arrangement which provides for office space in a shared office environment with a company controlled by the CEO and has not been charged for the office space during the periods ended March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024 and year ended December 31, 2023, the Company recognized lease liabilities of $
Recently Adopted Accounting Pronouncements
The Company has reviewed the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. We have carefully considered the new pronouncements that alter previous generally accepted accounting principles and do not believe that any new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of the Company’s financial management.
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In November 2023, the FASB issued ASU 2023-07, “Segment Reporting: Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 modifies the reportable segment disclosure requirements, primarily by requiring enhanced disclosures about significant segment expenses. In addition, ASU 2023-07: (i) enhances interim disclosure requirements, (ii) clarifies the circumstances in which an entity can disclose multiple measures of a segment’s profit or loss, (iii) provides new segment disclosure requirements for public entities with a single reportable segment, and (iv) requires that a public entity disclose the title and position of the chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in ASU 2023-07 are to be applied retrospectively to all prior periods presented in the financial statements
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)”, which is intended to address issues identified during the post-implementation review of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendment, among other things, eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, “Receivables - Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The new guidance is effective for interim and annual periods beginning after December 15, 2022. This adoption did not have a material effect to the Company.
In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity, and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company adopted ASU 2020-06 on February 13, 2020 and the adoption did not have any impact on its financial statements.
Management does not believe that any other recently issued accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
NOTE 4 – PROPERTY & EQUIPMENT
Property and Equipment are first recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets as follows between three and five years.
Long lived assets, including property and equipment, to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows of the related assets are less than their carrying values. Measurement of an impairment loss is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Maintenance and repair expenses, as incurred, are charged to expense. Betterments and renewals are capitalized in plant and equipment accounts. Cost and accumulated depreciation applicable to items replaced or retired are eliminated from the related accounts with any gain or loss on the disposition included as income.
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Property and equipment stated at cost, less accumulated depreciation consisted of the following:
| March 31, 2024 |
December 31, 2023 |
|||||||
| Property and equipment | $ | $ | ||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Property and equipment, net | $ | $ | ||||||
Property and equipment consisted of vehicles, leasehold improvements and computers and other network technology equipment, primarily located in the RedGear office facilities. For the three months ended March 31, 2024, the Depreciation Expense was $
NOTE 5 – GOODWILL
The Company acquired the operations, assets and liabilities of Innovative Network Designs, LLC during the year ended December 31, 2022. The Company recognized goodwill of $
Membership Interest Purchase Agreement
Innovative Network Designs, LLC
The Company entered into a Membership Interest Purchase Agreement on August 1, 2022 with Innovative Network Designs, LLC, a New Jersey limited liability company and acquired
17
Assets Acquired and Liabilities Assumed
| Assets Acquired | Fair Value | |||
| Cash | $ | |||
| Accounts Receivable | ||||
| Prepaid Expenses | ||||
| Right of Use Asset | ||||
| Total Assets | $ | |||
| Liabilities Assumed | ||||
| Accounts Payable | $ | |||
| Accrued Expenses | ||||
| Sales Tax Payable | ||||
| Lease Liabilities | ||||
| Total Liabilities | $ | |||
| Consideration Value | ||||
| Cash | $ | |||
| Convertible Note | ||||
| Universal Life Insurance Commitment | ||||
| Promissory Note | ||||
| Common Stock | ||||
| Total Purchase Price | ||||
| Less, net asset value | ||||
| Less impairment charge - 2023 | ( |
) | ||
| Value of intangible assets | $ | |||
Acquisition - Red Gear LLC
The Company entered into a Membership Interest
Purchase Agreement on September 29, 2023 with RedGear, LLC, a Texas limited liability company and acquired
18
Assets Acquired and Liabilities Assumed
| Assets Acquired | Fair Value | |||
| Cash | $ | |||
| Accounts Receivable | ||||
| Receivable, Related Party | ||||
| Fixed Assets, | ||||
| Right of Use Asset | ||||
| Total Assets | $ | |||
| Liabilities Assumed | ||||
| Accounts payable | $ | |||
| Accrued Expenses | ||||
| Bank line of credit | ||||
| Vehicle and equipment loans payable | ||||
| SBA Loan | ||||
| Lease Liabilities | ||||
| Total Liabilities | $ | |||
| Consideration Value | ||||
| Cash | $ | |||
| Promissory Note | ||||
| Total Purchase Price | ||||
| Tangible Net Liabilities | ||||
| Impairment charge 2024 | ( |
) | ||
| Value of intangible assets | $ | |||
NOTE 6 – BANK NOTES AND LOANS
The Company has an SBA loan with monthly payments that matures on March 13, 2026. The balance due on this loan as of December 31, 2023, is $
The Company has a line of credit requiring monthly payments. On December 24, 2021, $
19
NOTE 7 – SELLERS’ TERM AND SECURED NOTES PAYABLE
On October 1, 2022 the Company’s subsidiary ReachOut issued a term promissory note to the sellers of the membership interest in Innovative Network Designs LLC. Under the option selected by the holder of the note, a ballon payment of principal is due on October 1, 2024. The note principal is $
On October 1, 2022 the Company issued a secured promissory note to the sellers of the membership interest in Innovative Network Designs LLC. The original (as adjusted for purchase contingencies) note principal was $
On September 29, 2023, the Company issued a promissory note to the former members of RedGear, LLC as partial payment for the RedGear acquisition. as of March 31, 2023 the note principal is $
| Year Ended: | Principal | |||
| March 31, 2025 | $ | |||
| March 31, 2026 | ||||
| March 31, 2027 | ||||
| March 31, 2028 | ||||
| January 15, through March 2, 2025 | ||||
| Totals | $ | |||
NOTE 8 – DUE TO OFFICERS
The amount due to officers of $
NOTE 9 – DUE TO AND FROM AFFILIATIATED COMPANYS
At March 31, 2024 and December 31, 2023, $
NOTE 10 – DUE TO FINANCIAL INSTITUTIONS
The Company has taken loans from financial institutions in the form of sales of future receivables, had outstanding balance of principal (net of unamortized debt discounts) of $
The Company, through its wholly owned subsidiary IND, engaged PIPE Technologies Inc. for financing. The financing arrangement was in the form of a sale of future revenues, whereby PIPE advanced a net amount of $
20
The Company arranged a similar financing transaction with Fora Financial for which it received cash of $
On January 30, 2024, the Company arranged another financing (Future Sale of Receivables) with Fox Funding Group LLC for which it received cash of $
Choice Financial Group is owed $
There was approximately $
NOTE 11 – THIRD PARTY NOTES PAYABLE
| March 31, 2024 |
December 31, 2023 |
|||||||
| Note principal | $ | $ | ||||||
The Company has issued various notes to investors to fund operations prior to the reverse merger on November 9, 2023. Below is basic information about each of these legacy financings.
During the year ended December 31, 2023, $
On
On
On
On
21
On
On
On
On
At March 31, 2024, the Company was also indebted to a third party for a total of $
NOTE 12 – CONVERTIBLE NOTES PAYABLE
Post Reverse Merger Issuances
On November 10, 2023, YCRM issued a convertible note payable, warrants to purchase to the Company’s common stock and Series D Preferred Shares to Trillium Partners, L.P. The convertible note has principal of $
On December 1, 2023, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On January 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On January 11, 2024, YCRM issued a convertible note payable and
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On February 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On March 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
NOTE 13 – SMALL BUSINESS LOANS PAYABLE
The Company’s subsidiary ReachOut Technology Corporation assumed two SBA notes payable originally issued by RedGear, as part of the acquisition. The first note was issued May 26, 2020 for $
NOTE 14 – OFFICER LIFE INSURANCE PREMIUMS PAYABLE
On October 1, 2022, the Company committed to paying life insurance with the sellers of the membership interest in Innovative Network Designs LLC. The total amount of the liability was $
| Year Ended December 31: | Insurance Premiums Due |
|||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 - 2029 | ||||
| Total | $ | |||
NOTE 15 – RELATED PARTY TRANSACTIONS
In February 2020, ReachOut recorded stock compensation expense of $ for the accrual of the founder’s stock issuances with a corresponding entry to loan payable, related party. The loan payable, related party balance was reduced to $
During the years ended December 31, 2022 and 2021, the Company’s CEO advanced the Company funds for operating expenses. At March 31, 2024 and December 31, 2023, the outstanding balances owed were $
23
During the years ended December 31, 2023 and 2022, an entity controlled by the CEO advanced (net of repayments) the Company $
During the year ended December 31, 2022, the Company issued notes to former owners of the membership interest in Innovative Network Designs, LLC (now ReachOut IND) and committed to purchase universal life insurance for officers of ReachOut IND. The notes issued were a term promissory note for $
During the year ended December 31, 2023, the Company issued notes totaling $
Compensation due to former officers of RedGear amounts to $
RedGear is obligated under office leases to a company controlled by the former owners of the RedGear membership interests. The office space is in two locations in the city of El Paso, Texas and covers approximately 10,000 square feet in total. The liability as calculated for the right to use asset (under ASC 842) was $
The
On May 3, 2024,
On January 14, 2023, the Company granted million restricted common shares to Robert C. Bohorad. The Company signed a letter of intent with Mr. Bohorad on October 26, 2022, where Mr. Bohorad will become Chief Operating Officer and Chief Financial Officer. The purpose of the issuance is to retain and incentivize the individual in their efforts to manage the Company and foster its success. The shares were valued at $, the closing stock price on the date of grant, for total non-cash compensation of $
During the year ended October 31, 2023 and 2022, the Company paid Robert C. Bohorad, President and CEO, $
On October 30, 2023, the Company awarded Mr. Bohorad
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NOTE 16 – TEMPORARY EQUITY
Commitment to Purchase Series A Convertible Preferred Stock
On January 18, 2019, The Company entered into a Series A Preferred Stock Purchase Agreement with Device Corp. (“the Agreement”), of up to $
As of March 31, 2024, the Company has preferred stock to be issued in the amount of $
On January 26, 2024, Everett Dickson (former CEO and Chairman of the Board of Directors) acquired the preferred series A shares formerly held by Device Corp.
Series B Preferred Stock
On August 25, 2023, the Company Amended its Articles of Incorporation, to designate of the Authorized preferred stock, par value $, as Series B Preferred Stock (“Series B”). The Series B is convertible into shares of common stock at the average price of the previous five trading days. The Series B shares are not entitled to dividends and have no voting rights.
Following the amendment above the Series B preferred stock is convertible into shares of common stock at the option of the holder at a 50% discount to the average price for the five trading days prior to conversion. As of the balance sheet date and the date of this report, these shares have not been issued to the Purchaser. S99-3A(2) ASR 268 requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the issuer. Given that there is an unknown number of preferred shares to be issued and the preferred shares are convertible at the option of the holder, the Company determined that the shares to be issued shall be treated as temporary equity.
On August 25, 2023, the Company and Device Corp amended the January 18, 2019, and the May 1, 2023 Series A Preferred Stock Purchase Agreements, so that any purchased Series A preferred stock is now Series B preferred stock.
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NOTE 17 – STOCKHOLDERS’ DEFICIT
Preferred Stock
Series A Preferred Stock
The Company has designated Ten Million () shares of Preferred Stock the Series A Convertible Preferred Stock with a par and stated value of $ per share. The holders of the Series A Convertible Preferred Stock are not entitled to receive any dividends.
Except as otherwise required by law or by the Articles of Incorporation and except as set forth below, the outstanding shares of Series A Convertible Preferred Stock shall vote together with the shares of Common Stock and other voting securities of the Corporation as a single class and, regardless of the number of shares of Series A Convertible Preferred Stock outstanding and as long as at least one of such shares of Series A Convertible Preferred Stock is outstanding shall represent Sixty Six and Two Thirds Percent (66 2/3%) of all votes entitled to be voted at any annual or special meeting of shareholders of the Corporation or action by written consent of shareholders. Each outstanding share of the Series A Convertible Preferred Stock shall represent its proportionate share of the 66 2/3% which is allocated to the outstanding shares of Series A Convertible Preferred Stock. The Certificate of Designation was amended on September 12, 2023, among other changes the Series A Convertible Preferred Stock must be held for one year following issuance or reissuance prior to conversion.
The entirety of the shares of Series A Convertible Preferred Stock outstanding as such time shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into two thirds of the after conversion outstanding fully paid and non-assessable shares of Common Stock. Each individual share of Series A Convertible Preferred Stock shall be convertible into Common Stock at a ratio determined by dividing the number of shares of Series A Convertible Stock to be converted by the number of shares of outstanding pre-conversion Series A Convertible Preferred Stock. Such initial Conversion Ratio, and the rate at which shares of Series A Convertible Preferred Stock may be converted into shares of Common Stock. On August 25, 2023, Everett Dickson, Chairman of the Board, agreed to return 4,525,000 shares of Series A preferred Stock to the Company. The shares will be retired by the Company. His remaining shares were sold to Mr. Richard Jordan for $, during the year ended December 31, 2023.
Series C Preferred Stock
The Company has authorized Series C Preferred Shares of Stock, effective December 13, 2023. The shares have a stated value of $3.00 per share, earns a 2% dividend on the stated value, which is cumulative and payable solely upon redemption. The stock has voting rights equal to the number of common shares into which the preferred shares may be converted. At any time following 180 days from the date of issuance the preferred stock in aggregate can be converted into 87.5% of the outstanding common stock for a period of twenty-four months from the date of issuance of the Series C Preferred Stock.
Under the terms of the Share Exchange Agreement the Company issued 8,750,000 shares of Series C Preferred Stock to the owners of ReachOut common stock in exchange for 100% of the shares of ReachOut.
Using a Black-Scholes model the preferred Series C stock was valued at $2,910,984 and $ was charged to stock compensation for service providers and $ was charged to investment in ReachOut. The accrued dividend of 2% of the stated value ($3.00 per share) was calculated to be $
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Series D Preferred Stock
The Company has authorized Series D Preferred Shares of Stock, effective December 13, 2023. The shares have a stated value of $ per share, earns a 2% dividend on the stated value, which is cumulative and payable solely upon redemption. The stock has voting rights equal to the number of common shares into which the preferred shares may be converted. At any time following 180 days from the date of issuance the preferred stock in aggregate can be converted into 12.5% of the outstanding common stock for a period of twenty-four months from the date of issuance of the Series D Preferred Stock.
Under the terms of the
Using a Black-Scholes model the preferred Series D stock was valued at $
Common Stock
On March 31, 2024 and December 31, 2023, the Company had and shares of common stock authorized respectively. There were common shares of stock outstanding on March 31, 2024 and December 31, 2023.
During the three months ended March 31, 2024, -
The Company charged dividends on Series C and D preferred stock to accumulated deficit ($
Warrants Issued
For the three months ended March 31, 2024 and year ended December 31, 2023, a summary of the Company’s warrant activity is as follows:
| Number of Warrants |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Weighted- Average Grant-Date Fair Value |
Aggregate Intrinsic Value |
||||||||||||||||
| Outstanding and exercisable at December 31, 2023 | $ | $ | $ | |||||||||||||||||
| Issued and exercisable during the three months ended March 31, 2024 | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
All warrants were issued as incentive to an investor for future investment.
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Stock Options Issued
For the three months ended March 31, 2024 and the year ended December 31, 2023, a summary of the Company’s stock options activity is as follows:
| Number of Options |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Weighted- Average Grant-Date Fair Value |
Aggregate Intrinsic Value |
||||||||||||||||
| Outstanding and exercisable at December 31, 2023 | $ | $ | $ | |||||||||||||||||
| Issued during the three months ended March 31, 2024 | - | |||||||||||||||||||
| Outstanding and exercisable at March 31, 2024 | $ | $ | $ | |||||||||||||||||
All options were issued as compensation to key employees.
During the year ended December 31, 2023, the Company’s subsidiary issued
The inputs for the Black-Scholes model calculation of the options model were:
Stock (YCRM) price - $ midmarket price on the grant date;
Annualized volatility of %;
Discount rate %.
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Legal Matters
RedGear LLC – Purchase Dispute
On April 26, 2024, ReachOut Technology Corp. (“ReachOut”), a wholly-owned subsidiary of the Company filed a lawsuit (Case No. 1:24-cv-03408) in the United States District Court for the Northern District of Illinois, against the former members of RedGear related to certain representations and warranties made by the Defendants, Luciano Aguayo and Armando Gonzalez, in the Membership Interest Purchase Agreement, dated September 29, 2023 and closing on October 2, 2023, under which ReachOut acquired 100% of RedGear. The lawsuit was served on the defendants on April 30, 2024, and the amend below were served in June 2024.
In June 2024, ReachOut amended its complaint in the above case including fraud, post-closing misappropriation of funds and opportunities, tortious interference, breach of fiduciary duty, and post-termination illegal activities in violation of the Computer Fraud and Abuse Act (CFAA) attempting to take control of RedGear systems.
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On July 2, 2024, the United States District Court for the Northern District of Illinois entered a Temporary Restraining Order against the Defendants in the above case, based on the federal Computer Fraud and Abuse Act, a statute designed to protect against computer hacking.
As of the filing date of this report no probable outcome has been determined in the above case.
While the Company is working with legal counsel to minimize the impact to the business, the exit of the Defendants has led to a material reduction in RedGear business customers and revenue.
Other Contingencies
Default on Loan - PIPE Technologies Inc.
The Company through its wholly owned subsidiary IND engaged PIPE Technologies Inc.(“PIPE”) for financing. The financing arrangement was in the form of a sale of future revenues, whereby PIPE advanced a net amount of $613,800 on February 7, 2023, recorded on the books of ReachOut Technology Corporation. The Company paid $583,578 which was applied to principal leaving a balance of $89,743.
On February 7, 2024 PIPE sent a notice of default and demand for payment to IND. The notice and demand letter confirmed the balance due was $89,743 as recorded by the Company. This amount is disputed by the company believing there were duplicate payments and/or payments not applied during the Silicon Valley Bank collapse, the primary financial backing for PIPE.
As of the filing date of this report no probable outcome has been determined.
Lease Obligations
Effective October 2020, the ReachOut’s subsidiary (RedGear, LLC) renewed the lease for the principal offices at 123 West Mills Avenue, El Paso, Texas. The lease extends through September 30, 2025, for $
Effective October 29, 2021, the ReachOut’s subsidiary (RedGear, LLC) entered into a lease for office facilities at 3636 North Central Avenue, Phoenix, Arizona. The lease extends through October 31, 2025, for $
Effective September 29, 2023, the ReachOut’s subsidiary (RedGear, LLC) entered into a lease for office facilities at 10033 Carnegie Avenue, El Paso, Texas. The lease extends through September 28, 2028, for $
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Effective September 29, 2023, the ReachOut’s subsidiary (RedGear, LLC) entered into a lease for office facilities at 6713 Viscount Blvd. El Paso, Texas. The lease extends through September 28, 2028, for $
On May 1, 2021 the ReachOut’s subsidiary IND entered into a sublease for its office in Whippany, NJ for a term commencing on June 1, 2021 extending through February 28, 2025 at an initial monthly rent of approximately $
The Company recognized a right-of-use assets of and a related lease liabilities of $
The offices for ReachOut are shared with a related party ReachOut IL (an S corporation), under an arrangement that is not formalized.
Right of use asset (ROU) is summarized below:
| March 31, 2024 |
December 31, 2023 |
|||||||
| Operating lease at inception | $ | $ | ||||||
| Less accumulated reduction | ( |
) | ( |
) | ||||
| Balance ROU asset | $ | $ | ||||||
Operating lease liability related to the ROU asset is summarized below:
| Operating lease liabilities at inception | $ | $ | ||||||
| Reduction of lease liabilities | ( |
) | ( |
) | ||||
| Total lease liabilities | $ | $ | ||||||
| Less: current portion | ( |
) | ( |
) | ||||
| Lease liabilities, non-current | $ | $ |
Non-cancellable operating lease total future payments are summarized below:
| Total minimum operating lease payments | $ | $ | ||||||
| Less discount to fair value | ( |
) | ( |
) | ||||
| Total lease liability | $ | $ |
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Future minimum lease payments under non-cancellable operating leases at March 31, 2024 are as follows:
| Years ending December 31, | Amount | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total minimum non-cancelable operating lease payments | $ | |||
For the three months ended March 31, 2024 rent expense was for was $
Other Commitments
On January 20, 2022, the Company entered into a Service Agreement with Desmond Partners, LLC for consulting services to be provided. The agreement is effective on February 1, 2022 for a term of year. Per the terms of the agreement the consultant will receive a fee of $
On January 23, 2024, Desmond Partners, LLC and the Company entered into a Settlement Agreement and Mutual Release relating to the Professional Services Agreement (‘initial agreement”) entered into by the parties on January 20, 2022. Under the terms of the settlement the Company will issue 500,000 common shares to Desmond Partners, LLC thereby settling all claims for service and fees related thereto and releasing both parties from the terms of the initial agreement.
An individual has asserted that the Company owes approximately $
On December 1, 2023, the Company entered into a service agreement with Frondeur Partners LLC (“Frondeur”). Frondeur will provide accounting, reporting and consulting services on a monthly basis. On December 1, 2023, the Company executed a corporate services agreement with Frondeur Partners LLC a Nevada limited liability company. Under the terms of the agreement the Company will receive accounting and reporting services. As compensation Frondeur will receive monthly payments of $10,000 in cash and a convertible promissory note for $15,000 The notes are convertible into the Company’s common stock at a 50% discount to the market price (defined in the notes). As of the date of issuance of this report the Company has issued three such notes (December 1, 2023, January 1, and February 1, 2024), which are to be accounted for as stock settled debt under ASC 480.
NOTE 19 – SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10) management has performed an evaluation of subsequent events through the date that the financial statements were available to be issued and has determined that it does not have any material subsequent events to disclose in these financial statements other than the following.
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Securities Issued
On April 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On April 3, 2024, YCRM issued a convertible note payable and warrants to purchase to the Company’s common stock to Trillium Partners, L.P. The convertible note has principal of $
On April 8, 2024, ReachOut Technology acquired a majority of the assets of Singer networks, LLC in exchange for cash, notes payable, and restricted shares of a new series of convertible preferred. The holders may convert the new preferred into shares of the Company’s common stock. The transaction was deemed to be an asset acquisition and applied acquisition accounting under ASC 805.
On May 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On May 31, 2024, YCRM issued a convertible note payable and warrants to purchase to the Company’s common stock to Trillium Partners, L.P. The convertible note has principal of $
On June 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On July 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On July 11, 2024, the Company issued to Trillium Partners LP in conversion of $
On August 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On September 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
On October 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward Looking Information and Factors That May Affect Future Results
This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-KT for the year ended December 31, 2023 as filed with the SEC on September 11, 2023.
We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.
Company Overview
ReachOut Technology is not your typical Managed Service Provider (MSP). It is a transformative force in cybersecurity and IT services, dedicated to serving Small to Medium Sized Businesses (SMBs) with unparalleled excellence. Its innovative approach and unwavering commitment to superior solutions have established the organization as industry trailblazers, redefining standards and crafting extraordinary client experiences. At ReachOut, its partners are more than just clients; they are integral members of a movement that is reshaping the future of cybersecurity. ReachOut is on a relentless pursuit to revolutionize the Cybersecurity & IT Service Provider landscape for SMBs, with the goal of creating the first nationwide brand in its sector. The company is leveling the playing field, ensuring that businesses, regardless of size or location, have access to top-tier security solutions.
Organizational History
Yuengling’s Ice Cream Corporation, (f/k/a Aureus, Inc.) (“Yuengling’s,” “YCRM,” “we,” “us,” or the “Company”) was incorporated in Nevada on April 19, 2013, under the name “Aureus Incorporated.” We were initially organized to develop and explore mineral properties in the state of Nevada. Effective December 15, 2017, we changed our name to “Hohme, Inc.,” and, effective February 7, 2019, we changed our name to “Aureus, Inc. and on September 14, 2021, the Company changed their name to Yuengling’s Ice Cream Corporation”. We are currently active in the state of Nevada.
In November, 2023, after the close of the 2023 fiscal year, YCRM completed its acquisition of ReachOut Technology (“ReachOut”). ReachOut is a Managed Service Provider (MSP) that provides cybersecurity and IT services to Small to Medium Sized Businesses (SMBs). Management is highly experienced with business operation as well as acquisition and integration. After the closing of the ReachOut transaction, the Company agreed to assign the ice cream assets to Mid Penn Bank in return for the cancellation of the bank debt. The Company also ceased its Aureus Micro Markets operations at the time the ReachOut agreement was signed.
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Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since inception, has sustained net losses of $9,022,709 for the three months ended March 31, 2024, and has incurred negative cash flows from operations for the period. As of March 31, 2024, the working capital deficit, stockholders’ deficit, and accumulated deficit was $29,852,997, $31,437,658 and $33,869,257 respectively. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern for the next twelve months is dependent upon its ability to generate sufficient cash flows from operations to meet its obligations. In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities. The issuance of additional equity would result in dilution to existing shareholders. If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company would be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on the business, financial condition, and results of operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities as a result of this uncertainty.
Results of Operations for the three months ended March 31, 2024 and 2023
Revenue
We had $2,097,229 in revenue for the three months ended March 31, 2024, compared to $827,290 for the three months ended March 31, 2023. The increase in revenue is primarily due to the acquisition of Red Gear in October, 2023.
Cost of Goods Sold
We incurred $1,045,439 in costs of goods sold for the three months ended March 31, 2024, compared to $424,767 for the three months ended March 31, 2023. This increase is primarily due to the acquisition of Red Gear in October, 2023.
Impairment Loss
We incurred $2,117,502 in impairment loss for the three months ended March 31, 2024 compared to $0 for the three months ended March 31, 2023.
General and administrative expenses
We had $308,612 of general and administrative expenses (“G&A”) for the three months ended March 31, 2024, compared to $142,029 for the three months ended March 31, 2023, an increase of $166,583 or 117%.
Compensation
We had $900,474 in compensation for the three months ended March 31, 2024 compared to $253,656 of compensation for the three months ended March 31, 2023. Stock compensation expense was $0 and $7,500 for the three months ended March 31, 2024 and 2023, respectively.
Professional expenses
We incurred $335,258 of professional fees for the three months ended March 31, 2024, compared to $79,711 for the three months ended March 31, 2023, an increase of $255,547 or 320%. Professional fees generally consist of audit, legal, accounting and investor relation service fees.
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Other income (expense)
For the three months ended March 31, 2024, we had total other expense of $6,412,653, compared to total other expenses of $96,442 for the three months ended March 31, 2023. In the current period we incurred a loss of $16,613,323 from securities issuances having embedded derivatives. In the most recent period, we had FMV changes of $9,418,088, Gain on debt extinguishment of $1,170,433, and Interest Expense of $387,851.
In the prior period we incurred $16,166 from a loss from issuances and conversions, FMV changes of $79,682, and Interest expense of 159,958.
Net loss
We incurred a net loss of $9,022,709 for the three months ended March 31, 2024, compared to a net loss of $176,815 for the three months ended March 31, 2023. Our net loss was due to intangibles impairment, higher compensation, increased interest expense, and a greater loss due to issuances of securities having embedded derivatives.
Liquidity and Capital Resources
Cash flow from operations
Cash used in operating activities for the three months ended March 31, 2024 was $163,231 compared to $72,258 of cash used in operating activities for the three months ended March 31, 2023.
Cash Flows from Investing
We used $53,896 for investing activities for the three months ended March 31, 2024, compared to using $35,766 for investing activities for the three months ended March 31, 2023.
Cash Flows from Financing
For the three months ended March 31, 2024, we netted $254,635 from financing activities. We received $287,705 from proceeds from a loan (Fox) and $490,000 from the issuance of convertible notes. We repaid $92,295 on the Fox loan, $270,452 on the Fora loan and $113,177 on repayment of seller notes. Finally, we had a new vehicle loan of $53,896, a repayment of vehicle loans of $17,775, and repayments of affiliate advances of 83,267.
For the three months ended March 31, 2023, we netted $279,516 from financing activities. We received $613,800 from the proceeds from the Fora loan and repaid $64,138 for the Fora loan and $93,216 in repayment to a seller’s note.
Critical Accounting Policies
Refer to Note 2 of our financial statements contained elsewhere in this Form 10-Q for a summary of our critical accounting policies and recently adopted and issued accounting standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to smaller reporting companies.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer who also acts as our principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. The disclosure controls and procedures ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer concluded that, as of December 31, 2023, these disclosure controls and procedures were not effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 26, 2024, ReachOut Technology Corp. (“ReachOut”), a wholly-owned subsidiary of the Company filed a lawsuit (Case No. 1:24-cv-03408) in the United States District Court for the Northern District of Illinois, against the former members of Red Gear, LLC (“Red Gear”) related to certain representations and warranties made by the Defendants, Luciano Aguayo and Armando Gonzalez, in the Membership Interest Purchase Agreement, dated September 29, 2023 and closing on October 2, 2023, under which ReachOut acquired 100% of Red Gear. The lawsuit was served on the defendants on April 30, 2024, and the amend below were served in June 2024.
In June 2024, ReachOut amended its complaint in the above case including fraud, post-closing misappropriation of funds and opportunities, tortious interference, breach of fiduciary duty, and post-termination illegal activities in violation of the Computer Fraud and Abuse Act (CFAA) attempting to take control of RedGear systems.
On July 2, 2024, the United States District Court for the Northern District of Illinois entered a Temporary Restraining Order against the Defendants in the above case, based on the federal Computer Fraud and Abuse Act, a statute designed to protect against computer hacking.
As of the filing date of this report no probable outcome has been determined in the above case.
ITEM 1A. RISK FACTORS
Not applicable to smaller reporting companies
ITEM 2. Recent Issuances of Unregistered Securities
The Company has authorized 8,750,000 Series C Preferred Shares of Stock, effective December 13, 2023. The shares have a stated value of $3.00 per share, earns a 2% dividend on the stated value, which is cumulative and payable solely upon redemption. The stock has voting rights equal to the number of common shares into which the preferred shares may be converted. At any time following 180 days from the date of issuance the preferred stock in aggregate can be converted into 87.5% of the outstanding common stock for a period of twenty-four months from the date of issuance of the Series C Preferred Stock.
Under the terms of the Share Exchange Agreement the Company issued 8,750,000 shares of Series C Preferred Stock to the owners of ReachOut common stock in exchange for 100% of the shares of ReachOut.
The Company has authorized 1,250,000 Series D Preferred Shares of Stock, effective December 13, 2023. The shares have a stated value of $1.00 per share, earns a 2% dividend on the stated value, which is cumulative and payable solely upon redemption. The stock has voting rights equal to the number of common shares into which the preferred shares may be converted. At any time following 180 days from the date of issuance the preferred stock in aggregate can be converted into 12.5% of the outstanding common stock for a period of twenty-four months from the date of issuance of the Series D Preferred Stock.
Under the terms of the Security Purchase Agreement to issue Trillium Partners 1,000,000 shares of Series D Preferred Stock for a financing commitment and 250,000 shares to Everett Dickson as consideration for surrendering 4,525,000, shares of Series A Preferred Stock.
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On November 10, 2023, YCRM issued a convertible note payable, warrants to purchase to the Company’s common stock and Series D Preferred Shares to Trillium Partners, L.P. The convertible note has principal of $470,000, bears interest at 12%, matures on May 31, 2025 and may be converted to common shares at the lower of $0.0003 or 50% of the lowest traded price during the thirty days prior to conversion. $436,000 was received as cash and $34,000 was charged to OID to be amortized over the term of the note. Due to the variable conversion price the note includes a bifurcated derivative valued on issuance and for each reporting date. The initial derivative liability was $1,842,315, $1,406,315 was charged to loss on issuance (derivative expense) and $436,000 was charged to debt discount to be amortized over the term of the note.
On December 1, 2023, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $15,000, bears interest at 12%, matures on August 31, 2024 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the note’s fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $15,000 was charged to interest expense on issuance.
On January 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $15,000, bears interest at 12%, matures on September 30, 2024 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the note’s fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $15,000 was charged to interest expense on issuance.
On January 11, 2024, YCRM issued a convertible note payable and warrants to purchase to the Company’s common stock to Trillium Partners, L.P. The convertible note has principal of $539,000, bears interest at 12%, matures on May 31, 2025 and may be converted to common shares at the lower of $0.0003 or 50% of the lowest traded price during the thirty days prior to conversion. $500,000 was received as cash and $39,000 was charged to OID to be amortized over the term of the note. Due to the variable conversion price the note includes a bifurcated derivative valued on issuance and for each reporting date. The initial derivative liability was $16,608,715, $16,108,715 was charged to loss on issuance (derivative expense) and $500,000 was charged to debt discount to be amortized over the term of the note.
On February 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on October 31, 2024 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On March 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on November 30, 2024 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On April 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on December 31, 2024 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On April 3, 2024, YCRM issued a convertible note payable and warrants to purchase to the Company’s common stock to Trillium Partners, L.P. The convertible note has principal of $135,000, bears interest at 12%, matures on June 15, 2025 and may be converted to common shares at the lower of $0.0003 or 50% of the lowest traded price during the thirty days prior to conversion. The warrants allow the holder to purchase 18,939,394 shares of common stock for $0.0003 (subject to certain specified adjustments) for a period of seven years from the date of issuance.
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On May 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on January 31, 2025 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On June 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on February 28, 2025 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On July 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on March 31, 2025 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On July 11, 2024, the Company issued 34,600,233 to Trillium Partners LP in conversion of $8,035 of accrued interest along with $2,345 of incurred conversion fees.
On August 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on April 30, 2025 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
On September 1, 2024, YCRM issued a convertible note payable to Frondeur Partners LLC. The convertible note has principal of $10,000, bears interest at 12%, matures on May 31, 2025 and may be converted to common shares at or 50% of the lowest traded price during the thirty days prior to conversion. The principal amount was charged to professional services. Due to the notes fixed conversion price, it is treated as stock settled debt under ASC 480, a put premium of $10,000 was charged to interest expense on issuance.
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. MINE SAFETY DISCLOSURES
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
The following documents have been filed as part of this report.
| Incorporated by reference | ||||||||||||
| Exhibit Number | Exhibit Description |
Filed herewith |
Form |
Period ending |
Exhibit | Filing date | ||||||
| 31.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act | X | ||||||||||
| 32.1 | Section 1350 Certification | X | ||||||||||
| 101.INS | Inline XBRL Instance Document | |||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | |||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |||||||||||
| 104 | Cover Page Interactive Data File (formatted in iXBRL, and included in exhibit 101). | X | ||||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
Yuengling’s Ice Cream Corporation
| Name | Title | Date | ||
| /s/ Richard Jordan | President and Chief Executive Officer | November 15, 2024 | ||
| Richard Jordan |
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