JKSM Jacksam Corporation (PK)

 Notes to Condensed Consolidated Financial Statements

Note 1: Organization and Nature of Operations

Jacksam Corporation dba Convectium is a technology company focused on developing and commercializing products of vaporizer cartridge filling & capping, pre-roll filling, and other automation systems. The Company’s product line primarily consisted of the 710 Shark cartridge filling machine, the 710 Captain cartridge capping machine, the “PreRoll-ER” pre-roll & cone filling machine, customizable and C-Cell cartridges, and accessories. The Company’s customers are primarily businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors and growers, multi-state operators, and distributors. The Company utilizes its direct sales force, website, strategic partners’ sales force, independent sales representatives, and a wide range of referral network to sell its products.

The Company was incorporated in the State of Nevada on September 21, 1989 under the name of Fulton Ventures, Inc. Since incorporated, the Company has engaged in a variety of businesses, but has been inactive since late 2014 through the Merger that closed on September 14, 2018. Since the Merger, the Company has been operated under the control of current management and continued to operate the business of Jacksam Corporation, described herein, as our sole business. 

Note 2: Significant Accounting Policies

Basis of Preparation

The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) under the accrual basis of accounting. These financial statements are presented in U.S. dollars and are prepared on a historical cost basis, except for certain financial instruments which are carried at fair value. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2022 in the Form 10-K filed on April 17, 2023. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the Form 10-K have been omitted.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Jacksam Corporation and its wholly owned subsidiary. All intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements is in conformity with U.S. GAAP and requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, estimate of fair value of share-based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future nonconforming events. Accordingly, actual results could differ significantly from estimates.

Risks and Uncertainties

The Company’s operations are subject to risk and uncertainties including financial, operational, regulatory and other risks including the potential risk of business failure. The Company has experienced, and in the future, expects to continue to experience, variability in its sales and earnings. The factors expected to contribute to this variability include, among others, (i) the uncertainty associated with the commercialization and ultimate success of the product, (ii) competition inherent at large national retail chains where product is expected to be sold, (iii) general economic conditions, and (iv) the related volatility of prices pertaining to the cost of sales.

During the three months ended March 31, 2023, three individual customers accounted for 29%, 18% and 18% of the Company’s revenue.

Cash and Cash Equivalents

Cash and cash equivalents are carried at cost and consist of cash on hand and demand deposits placed with banks or other financial institutions, and all highly liquid investments with an original maturity of three months or less. Federal Deposit Insurance Corporation (“FDIC”) deposit insurance covers $250,000 per depositor, per FDIC-insured bank, per ownership category. The Company has no amounts in excess of the FDIC limit as of March 31, 2023.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future bad debts, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. As of March 31, 2023 and December 31, 2022, the Company had recorded an allowance for doubtful accounts of $264,659, respectively.

Inventory

Inventories are stated at the lower of cost, determined on the average cost basis, or net realizable value. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.

The March 31, 2023 and December 31, 2022 inventory consisted entirely of finished goods. The Company will maintain an allowance based on specific inventory items that have shown no activity over a 60-month period. The Company tracks inventory as it is disposed, scrapped or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. As of March 31, 2023 and December 31, 2022, the Company’s inventory allowance was estimated at $18,800.

Property and Equipment

Property and equipment are measured at cost, less accumulated depreciation, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation of property and equipment is provided utilizing the straight-line method over the estimated useful lives, ranging from 5 to 7 years of the respective assets. Expenditures for maintenance and repairs are charged to expense as incurred. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the statements of operations.

Fair Value of Financial Instruments

The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value:

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses, certain notes payable and deferred revenue are an approximate of their fair values because of the short maturity of these instruments. The Company’s derivative liabilities recognized at fair value on a recurring basis are a level 3 measurement. See Note 6.

Binomial Calculation Model

The Company uses a binomial calculator model to determine fair market value of derivative liabilities, warrants and options issued.

Preferred Stock Subject to Possible Redemption

The Company accounts for its preferred stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity”. Preferred stock subject to mandatory redemption (if any) are classified as a liability instrument and are measured at fair value. Conditionally redeemable preferred stock (including preferred stock that feature redemption rights that are either within the control of the holder or subject to the redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred stock is classified as stockholders’ equity.

Revenue Recognition

The Company derives revenues from the sale of machines and non-machine products (customizable and C-Cell cartridges and accessories). The Company recognizes revenue in accordance with ASC 606. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.

Revenue is recognized based on the following five step model:

Performance Obligations

Sales of machines and non-machine products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. The customer has a 10-day period to inspect the equipment and may return the product if it does not meet the agreed-upon specifications. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost plus margin approach when one is not available. Historically, the Company’s contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized at a point in time related to the sale of machines and non-machine products.

Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Payment terms between invoicing and when payment is due is less than one year. As of March 31, 2023, none of the Company’s contracts contained a significant financing component.

The Company elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with an end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year.

The majority of the Company’s contracts offer an assurance-type warranty of the products at no additional cost for a period of 3 years. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. At the time a sale is recognized, the Company estimated future warranty costs, which were trivial.

Transaction Price Allocated to the Remaining Performance Obligations

At a given point in time, the Company may have collected payment for future sales of product to begin production. These transactions are deferred until the product transfers to the customer and the performance obligation is considered complete. As of March 31, 2023, $912,358 in revenue is expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period. The Company expects to recognize all of our unsatisfied (or partially unsatisfied) performance obligations as revenue in the next twelve months.

Contract Costs

Costs incurred to obtain a customer contract are not material to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with a duration of one year or less, which are expensed and included within cost of goods and services.

Critical Accounting Estimates

Estimates are used to determine the amount of any variable consideration in contracts and the standalone selling price among separate performance obligations. The Company reviews and updates these estimates regularly.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises that are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation.

The following table presents the effect of potential dilutive issuances for the years ended March 31, 2023 and 2022:

During the three months ended March 31, 2023 and 2022, the impact of 15,189,056 warrants, respectively,  to purchase common stock, as their impact would be anti-dilutive since the warrants have no intrinsic value. The calculation for each period presented also excludes 2,777,778 shares not yet issued related to conversions of debt that occurred in 2020. Additionally, 2,222,223 shares to be issued as part of the share payable equity balances as of March 31, 2022 are excluded from the calculation of weighted average shares outstanding for the three months ended March 31, 2022.

Income Tax Provision

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. 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 the Statements of Operations in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.  

The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Accrued interest and penalties are included within the related tax liability.

Going Concern

The Company’s financial statements are prepared using U.S. GAAP to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have a source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully execute the business plan and attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the SEC, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.

Historically, it has mostly relied upon convertible notes payable and cash flows from operations to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.

Advertising and Marketing Expenses

The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $220 and $6,500 for the three months ended March 31, 2023 and 2022, respectively.

Research and Development Costs

Research and development costs are expensed as incurred. The Company incurred no research and development costs during the three months ended March 31, 2023 and 2022.

Lease arrangements

The Company follows the guidance of ASC 842 for accounting for leases. Transactions give rise to leases when the Company receives substantially all the economic benefits from and has the ability to direct the use of specified property and equipment. The Company determines if an arrangement is a lease at inception. The operating lease ROU assets are included within the Company’s non-current assets and lease liabilities are included in current or non-current liabilities on the Company’s consolidated balance sheets.

ROU assets represent the Company’s right to use, or control the use of, a specified asset for the lease term. Lease liabilities are the Company’s obligation to make lease payments arising from a lease and are measured on a discounted basis. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term on the commencement date. The operating lease ROU asset includes any lease payments made and initial direct costs incurred and excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments continues to be recognized on a straight-line basis over the lease term.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective and will not have a material effect on its consolidated financial position or results of operations upon adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”(“ASU 2016-13”). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. Further, ASU 2016-13 made certain targeted amendments to the existing impairment standards for available for sale (“AFS”) debt securities. An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company determined that the update applied to its trade accounts receivable and adopted the guidance on January 1, 2023 with no material impact to the Company’s financial statements or results of operations. The Company will estimate its expected credit losses based on the expected losses on its receivables based on a variety of data, including current economic conditions in the Company’s industry and the credit status of the Company’s customers.

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.

Depreciation expense amounted to $96 and $364 for the three months ended March 31, 2023 and 2022, respectively.

On June 2, 2020, the Company received $150,000 under the Small Business Administration’s Economic Injury Disaster Loan. The loan bears interest at a fixed rate of 3.75%, and matures on May 26, 2050, payable monthly with payments of $731 beginning twelve months after issuance. The loan gives the Small Business Administration a security interest in all assets of the Company. As of March 31, 2023 and December 31, 2022, the Company owed a principal amount of $143,901 and $144,739 under this loan.

On September 29, 2021, the Company entered into a Revenue Loan and Security Agreement with an investor for up to a total amount of $1,000,000. Upon drawing from the facility and continuing thereafter until maturity or earlier prepayment in full, the Company shall pay monthly to the lender an amount equal to the product of (i) all revenue of the Company for the immediately preceding month multiplied by (ii) an applicable revenue percentage. On September 29, 2021, the Company borrowed $750,000 under the agreement and received initial cash proceeds of $727,500. The Company also paid an additional $5,000 in fees to the investor to secure the loan for total deferred financing fees of $27,500. On November 12, 2021, the Company issued a total of 843,750 shares of common stock to a lender in connection with the note payable issued. These shares had a fair value of $100,744 and were recorded as deferred finance costs. As of March 31, 2023 and December 31, 2022, the Company owed a principal amount of $635,658 and $730,783 under this loan, with remaining unamortized discount of $94,095 and $121,310, respectively.

In December 2022, the Company received cash proceeds of $52,475 under an unsecured short term financing agreement. The Company repaid the loan in full during the three months ended March 31, 2023.

On March 30^th, 2023, the Company entered into a line of credit agreement with a principal amount of $50,000, which was drawn in full as of March 31, 2023. The line of credit is unsecure, bears interest at 10% and matures on June 30, 2023. The Company paid $1,000 in deferred finance costs associated with the loan.

The Company amortized $7,711 and $49,980 of debt discount and deferred finance costs to interest expense related to notes payable and the line of credit during the three months ended March 31, 2023 and 2022, respectively.

Accrued interest on notes payable was $202,550 and $168,855 as of March 31, 2023 and December 31, 2022, respectively.

In June and July 2019, the Company issued convertible notes to 10 investors with an original principal amount of $2,388,889, receiving $1,583,333 in net cash proceeds (the “June 2019 Notes”). The June 2019 Notes matured on March 25, 2020 and are convertible into the Company’s common stock at a per share price of $0.35 at any time subsequent to the issuance date. The June 2019 Notes contain a down round feature, whereby any sale of common stock or common stock equivalent at a price per share lower than the conversion price of the June 2019 Notes will result in the conversion price being lowered to the new price. The warrants contain the same down round feature as the notes. As a result of a dilutive issuance during the year ended December 31, 2020, the exercise price of the remaining notes payable and the warrants is currently $0.18 per share.

During the year ended December 31, 2020, $1,500,000 of the principal on the June 2019 Notes was converted into the right to receive 7,883,599 shares of common stock, of which 5,105,821 were issued by March 31, 2023 and 2,777,778 were part of the subscriptions payable liability balance of $499,999 as of March 31, 2023 and December 31, 2022. See Note 7.

The Company was in default of the convertible debt outstanding as of December 31, 2022, which resulted in the conversion price on the outstanding note adjusting to be 60% of the lowest trading price in the 25 days prior to a conversion notice. During the three months ended March 31, 2023, following the previous extensions, the holder of $444,444 of the notes agreed to extend the repayment period to April 30, 2023. There were no other changes to terms of the convertible notes payable, and the amendments were accounted for as a debt modification. The Company is currently in default of this convertible note payable.

Derivative Liabilities

The fair values of the conversion option of outstanding convertible notes payable and common stock warrants were determined to be derivative liabilities under ASC 815 due to the default on convertible notes payable disclosed above, which resulted in a variable conversion price on the outstanding convertible note payable. The fair value of the derivative liabilities was estimated using a binomial model with the following assumptions:

All fair value measurements related to the derivative liabilities are considered significant unobservable inputs (Level 3) under the fair value hierarchy of ASC 820.

The table below presents the change in the fair value of the derivative liability during the three months ended March 31, 2023:

The total impact of derivative liabilities recognized in the Company’s consolidated statements of operations includes extinguishments due to repayments and the change in fair value of derivatives, with the Company recognizing a total gain of $123,301 and $287,098 during the three months ended March 31, 2023 and 2022, respectively.

Note 7: Equity

Common Stock

The Company’s Article of Incorporation authorize the Company to issue from 230,000,000 shares, consisting of two classes to be designated respectively, “Common Stock” and “Preferred Stock”, with all such shares having a par value of $0.001 per share, of which 200,000,000 shall be designated as Common stock and 30,000,000 designated as Preferred stock. 

As of March 31, 2023 and December 31, 2022, there are 2,777,778 shares remaining to be issued related to 2020 debt conversions of $499,999, which is included in Subscription payable on the consolidated balance sheets.

Series A Redeemable Preferred Stock

The Company created the 2,800,000 shares of Series A Preferred Stock out of the 10,000,000 shares of preferred stock authorized by the Company’s articles of incorporation by filing a certificate of designation as authorized by the Company’s board of directors (the “Certificate of Designation”).

The Series A Preferred Stock bears a cumulative dividend of 5.0% per annum on the original purchase price and is redeemable by the Company or upon a class vote by the holders of the Series A Preferred Stock at the original purchase price, plus any unpaid dividends then owing, payable in 4 equal quarterly payments. The Series A Preferred Stock converts into the Company’s common stock at a ratio of 2:1, subject to revision on the basis of standard weighted average anti-dilution protective provisions, at the option of the holders of the Series A Preferred Stock or automatically upon the occurrence of a merger, sale of the Company’s assets, or upon another Deemed Liquidation Event as defined in the Certificate of Designation. In the absence of an anti-dilution adjustment, the 2,800,000 shares of Series A Preferred Stock will convert into 1,400,000 shares of the Company’s common stock.

The Series A Preferred Stock votes with the Company’s common stock, as a single class, at a rate of 20 votes for each share of Series A Preferred Stock. The Series A Preferred Stock carries a liquidation preference and is participating. The Series A Preferred Stock carries standard protective provisions that preclude the Company from amending its articles of incorporation, bylaws or the terms of the Certificate of Designation adversely to the holders of the Series A Preferred Stock without their prior approval.

Due to the redemption feature, the Company accounts for the Series A Preferred Stock as temporary equity in accordance with ASC 480. The Series A Preferred Stock is accounted for at redemption value.

On May 26, 2021, the Company, entered into a subscription agreement (the “Preferred Stock Agreement”) with Mark Adams, Chief Executive Officer, President, and a member of Board of Directors of the Company. Mark Adams paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09. Scott Wessler, former Chairman of Board of Directors of the Company, paid $126,000 to purchase 1,400,000 shares of the Series A Preferred Stock, at a price per share of $0.09.

The Company accrued $3,107 in dividends on the Series A Preferred Stock for the three months ended March 31, 2023 and 2022, respectively. Total accrued dividends at March 31, 2023 and December 31, 2022 were $23,129 and $20,022, respectively. The redemption value of the Series A Preferred Stock as of March 31, 2023 and December 31, 2022 was $275,129 and $272,022, reflected as temporary equity on the Company’s consolidated balance sheet.

Series B Convertible Preferred Stock

In February 2022, the Company designated 1,000,000 shares of Series B Convertible Preferred Stock (“Series B”). The Series B has a par value of $0.0001 per share, a stated value of $1 per share and carries a dividend of 8%. The Series B are convertible into shares of common stock at a price of $0.06 per share, and contains an exercise price reset provision in the event of dilutive issuances of common stock or any common stock equivalent by the Company with a price below the exercise price.

The Series B holders do not have voting rights on matters other than those related to amending the certificate of incorporation of the Series B, altering voting or other powers of the Series B, or redemption or acquisition of outstanding Series B. For a period of one year following closing of the Series B funding, the Company may not authorize or create any class of stock that is senior to the Series B with respect to dividends, redemption or distribution of assets upon Liquidation. In the event of liquidation of the Company, the Series B holders shall be paid 125% of the Stated value plus 125% of any unpaid dividends.

During the three months ended March 31, 2022, the Company sold a total of 1,000,000 shares of Series B to two investors for net cash proceeds of $890,000 and issued warrants to purchase 4,000,000 shares of common stock at $0.20 per share for a period of five years. The Company also issued 2,000,000 shares of common stock with a fair value of $139,800 to the investors, which were recorded as a cost of capital with no expense recognized. The Company granted to the Investors the piggy-back registration rights.

The Company accrued $99,725 and $80,000 in dividends on the Series B Preferred Stock as of March 31, 2023 and  December 31, 2022, respectively.

The weighted average remaining contractual life is approximately 1.91 years for stock warrants outstanding with no intrinsic value of as of March 31, 2023. All of the above warrants were fully vested.

Note 8: Related Party

Mark Adams, CEO, invested $250,000 in the June 2019 Notes and converted his debt during the year ended December 31, 2020 into shares of common stock of 1,388,885, which have yet to be issued for a conversion value of $277,778. Mark Adams will also receive an additional 154,321 shares of common stock once the shares are issued. The Company’s former VP of sales also invested $100,000 in the June 2019 Notes and converted his debt during the year ended December 31, 2020 into shares of common stock of 555,556, which have yet to be issued for a conversion value of $111,111. The former VP of sales will also receive an additional 61,728 shares of common stock once the shares are issued.

Those shares were in subscriptions payable and presented on the balance sheet.

Mark Adams contributed $126,000 to purchase the Series A Preferred Stock during the year ended December 31, 2021, as discussed in Note 7.

Note 9: Leases, Commitments and Contingencies

Leases

The Company entered into a lease agreement for office space on February 2, 2022, for a term beginning February 15, 2022 through February 28, 2025. The lease requires payments of $3,267 per month through the lease term, increasing by 4% each year, with an option to renew. The Company recognized an initial right of use asset and lease liability of $105,822, based on the present value of the minimum lease payments. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial right-of-use (“ROU”) asset or lease liability. The Company’s lease agreements do not contain any material restrictive covenants.

The components of lease cost for operating leases for the three months ended March 31, 2023 and 2022 were as follows:

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at March 31, 2023 and December 31, 2022:

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company estimated its incremental borrowing rate to be 10%. The lease has a remaining term of 2.42 years and a weighted average rate of 10%.

The following table provides the maturities of lease liabilities at March 31, 2023:

Lawsuit

The Company has a pending lawsuit with one of its previous suppliers regarding defected cartridges. The Company is still evaluating the case and determining the impact of the case on the Company and as of the date of this report the amount or range of possible losses is not reasonably estimable.

Note 10: Accrued Liabilities – Other

Prior to the Merger, China Grand Resorts, Inc. recorded various liabilities that were incurred by former related parties. The current management team is not aware of any written agreements in place governing the terms of the loans nor have they been in contact with the debt holders however recognizes that China Grand Resorts, Inc. previously reported these amounts as liabilities of the Company. In accordance with ASC 405-20-40, the liabilities may only be removed from the Company’s financial statements if they are paid, formally settled or judicially released. Management believes the relevant statute of limitations has passed and that no enforceable legal claim exists in relation to these liabilities of $1,642,269 but does not believe that is sufficient to remove the liability from the financial statements. Management does not intend to remove these liabilities of $1,642,269 from the Company’s financial statements until such time that the liability is formally settled or judicially released in accordance with ASC 405-20-40. Due to the lack of written agreements and other factors noted above, management concluded to no longer accrue interest on these loans.