Item 1. BUSINESS.
Corporate History
SoOum Corp. (2015 to Present), (f/k/a Swordfish Financial, Inc., (2009-2015) (f/k/a Photo Control Corporation (1959-2004) and Nature Vision, Inc. (2004-2009)) (the “Company”, “we,” or “us”) was incorporated as a Minnesota corporation on August 19, 1959. On August 31, 2004, the Company changed its name to Nature Vision, Inc. in connection with a merger transaction with Nature Vision Operating Inc. (f/k/a Nature Vision, Inc.) a Minnesota corporation that was incorporated in 1998. As a part of the merger, Nature Vision Operating Inc. became a wholly-owned subsidiary of the Company. Upon the merger with Swordfish Financial, Inc., a Texas corporation on August 17, 2009, the shareholders of the Company owning a majority of the outstanding common stock voted to change the Company's name to Swordfish Financial, Inc. On November 12, 2014, SoOum, Corp., (“SoOum”) a Delaware corporation merged into the Company and on May 2, 2015 the shareholders voted to change the Company's name to SoOum Corp. Our executive offices are located at 590 Madison Avenue, Suite 1800 New York, NY 10022 our telephone number is (646) 801-3772; and our website is www.sooum.com.
Arbitrage Segment
The Company is an international commodity trading arbitrage firm, which uses its own proprietary technology to identify and exploit arbitrage opportunities. The Company performs arbitrage on a defined supply and demand conditions creating price discrepancies of physical commodities in opposing markets. The Company also plans to distribute trade intelligence to global subscribers in order to solve supply shortages and to bring new business to local manufacturers. This part of the business is in the development stage. Unlike specialized supply chains, the Company's solutions focus on broad, real time information management, reliable trade economics, fast computing and proprietary algorithms to find surpluses and fill shortages.
The Company takes a coordinated view of the global economy seeking out predictability within the global flow of commodities and finding the Company's strategic position within that dynamic. Then, the Company implements tactics from the ancient persistence hunt model (hereafter “PHM”) to manage a pool of projects and brings a portion of these potential transactions to closing.
Construction Services Segment
On October 6, 2016, the Company acquired all the outstanding ownership interests of Western Grade, LLC, an Arizona limited liability company. In accordance with the terms of the Exchange Agreement between the parties, the Western Grade members transferred all their outstanding ownership interests to SOOUM in consideration for 445,000,000 shares of the common stock of SOOUM. The common stock received by the Western Grade members represented an ownership interest in SOOUM of approximately 42%. Western Grade is now a wholly owned subsidiary of SOOUM.
Western Grade is an industrial contractor located near Flagstaff, Arizona. In addition, Western Grade specializes in utility site improvement and construction, excavating, paving, transport, earth moving, water movement and supply.
Western Grade's expertise and mission of water supply and delivery through large scale project management in canals, pipeline supply, and water supply project management, enhances SOOUM's pursuit of its ultimate mission of addressing shortage and minimizing scarcity.
Opportunity in Arbitrage Model
Commodities
The Company primarily focuses on commodities highly demanded in areas of conflict and frontier marketplaces. The Company categorizes transactions as soft commodity trades and hard commodity trades.
●
Soft Commodities Trades: rice, wheat, sugar, soybeans, meats, live cattle, seafood, live seafood and other soft commodities, as intelligence indicates.
●
Hard Commodities Trades: iron ore, crude oil, coal, salt, aluminum, copper, gold, silver, palladium and platinum, cement, fly ash, precious metals and other such hard commodities, as intelligence indicates.
Completion of Transactions
Closing Model
Seek out the following results:
1. Persistence over the long-run alleviates risk
2. Document accumulation creates a ratchet effect towards absolute finalization of transactions
Methodology
1.
Find - Intelligence Department (based upon scouting stage of the hunt)
a.
Objectives:
i.
Record first hand & economic “intelligence”
ii.
Pool large groups of “target” prices
iii.
Match (i.) “intelligence” & (ii.) - “targets” through the company's fast computing system (hereafter “Medee”)
2.
Filter - Development Department (based upon gathering and isolating stage of the hunt)
a.
Objectives:
i.
Attain due diligence on all matched transactions
ii.
Filter a list of the best 16 transactions
iii.
Attain binding agreements for all parties
3.
Close - Solutions Department (based upon killing stage of the hunt)
a.
Objectives:
i.
Create a closing package on best 5 transactions
ii.
Inspect, deliver and submit closing package to pertinent parties
Pricing Strategy
The Company seeks a pricing that offers the average or greater earnings taken from the pool of transactions. Earnings is calculated as the arbitrage existing across national borders, geographic barriers and economic shifts resulting from political activity or force majeure.
Since the Company is not building a supply chain it believes the following:
●
It carries much less facilities and labor liability.
●
It chooses transactions with least capital exposure by utilizing fast computing, discovering minimum costs and maximum exit.
●
Its delivered price will normally fall beneath our competitors' using less efficient methods of partnerships and cooperative pricing tactics.
Finding opposing targets and intelligence
Competition
The construction industry is highly competitive and the markets in which we compete have numerous and often large companies that provide similar services. In certain end markets there are competitors with significantly greater capabilities and resources. In our construction segment, we compete with a variety of national and regional contractors. We believe price, experience, reputation, responsiveness, customer relationships, project completion track record and quality of work are key factors in customers awarding contracts across our end markets.
Large Traders
Strengths: Massive capitalization, large ground operations
Weaknesses: Focused and specialized often geographically, leaving many opportunities.
SoOum Strategy: Take a small, individual, portion of an aggregate opportunity field. Spread across all commodities and focus on economics then transactions.
Medium-Size Traders
Strengths: More liquidity, well equipped
Weaknesses: In the long term these forms tend to become more specialized, finding themselves in direct competition of “Large Traders”. There being little focus on economic trends these companies normally begin specializing within one or few sectors.
SoOum Strategy: Do not compete head to head in these tight margin specializations but adjust to technological signals of superior opportunity within specific regions or commodities.
Non-Profit Organizations
Strengths: Access to capitalization, focus on humanitarian effort, governmental backing
Weakness: Incentive to find and close opportunity is low. Technology not meeting demand.
SoOum Strategy: Work closely with NGO's gleaning intelligence to feed a competitive system in recognizing demand and supply shifts, trends leading to shortage or surplus and methods advice for entering a new markets.
Marketing
SoOum markets and promotes within EMEA, Macedonia, and Russia/former USSR. It utilizes strategically located global business development offices (GBD's) managed by outside business developers. Internal team leaders check new deals against a robust intelligence database to find ways of enhancing the closing potential.
SoOum utilizes website SEO, table-top business development, government trade missions, trade expos, and networking through existing partnerships and business relationships to gain a growing reach to importers, suppliers, freight forwarders, intelligence sources and trade investors.
Proprietary scraping, analyzing and filtering software and applications coordinate massive data. While field entries, photo, video, live meetings are used by SoOum's deal architects to lift and deliver commodities and collect monies efficiently.
Opportunity in Construction Services
SoOum utilizes Western Grade LLC, a wholly owned subsidiary to build roads and bridges, as creating or enhancing infrastructure is needed to move commodities from one place to another. The Company intends to work with Western Grade which is equipped for; Industrial, Commercial and Residential Contracts and is technically capable to meet and exceed Federal Supplemental Specifications and other Governmental road specifications; as well as, specializing in utility site improvement and construction, excavating, paving, transport, earth moving, water movement and supply to gain revenue growth in these arenas.
Business Operations
Effective on the date of our merger with SoOum, November 12, 2014, the Company changed its business focus to commodities trading. In addition, with the acquisition of Western Grade LLC, the Company operates in the construction industry.
Item 1A.
Item 1A. RISK FACTORS.
Not applicable.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2. PROPERTIES.
The Company subleases its office and yard from Western Materials, a related party, on a month to month basis. Total rent expense during the three months ended December 31, 2016 was approximately $7,000.
The Company leases its corporate office space on an annual basis. Rent for the three months ended December 31, 2016 was $1,200.
In October 2016, the Company entered into a lease for WG's office. The terms of the base require monthly payments of $5,000 from October 1, 2016 through September 30, 2018.
Item 3.
Item 3. LEGAL PROCEEDINGS.
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations; provided that we do not currently have sufficient funds to satisfy our outstanding judgments as described above. We may become involved in material legal proceedings in the future.
Item 4.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information.
We had 2,029,245,095 shares of our common stock issued and outstanding as of June 30, 2017, which shares were held by 387 record holders.
Our common stock is currently quoted on the OTC Pink market (commonly referred to as the “pinksheets”) under the symbol “SOUM”. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock, for the quarters presented. Prices represent inter-dealer quotations without adjustments for markups, markdowns, and commissions, and may not represent actual transactions.
Common Stock
The Company's common stock is considered a "penny stock" as defined in the Commission's rules promulgated under the Exchange Act (the “Rules”). The Commission's rules regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000, exclusive of residence, or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus the Rules affect the ability of broker-dealers to sell the Company's shares should they wish to do so because of the adverse effect that the Rules have upon liquidity of penny stocks. Unless the transaction is exempt under the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the penny stock rules, the market liquidity for the Company's securities may be severely adversely affected by limiting the ability of broker-dealers to sell the Company's securities and the ability of purchasers of the securities to resell them.
Dividends
We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that our Board of Directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future. Additionally, the terms of our preferred stock impose restrictions on our ability to pay dividends.
Equity Compensation Plan Information
On October 13, 2015, the Company resolved to adopt the Employees, Directors and Consultants Stock Plan for the Year 2015. The purpose of this Plan is to enable the Company, to promote the interests of the Company and its stockholders by attracting and retaining employees, directors and consultants capable of furthering the future success of the Company and by aligning their economic interests more closely with those of the Company's stockholders, by paying their fees or salaries in the form of shares of the Company's common stock. 500,000,000 shares of common stock are registered to this plan at an offering price of $0.0001. The Plan expired on January 1, 2017.
Recent Sales Of Unregistered Securities
During the three months ended December 31, 2016 the Company issued the following securities:
●59,053,368 shares of common stock for note payable conversions valued at $27,265.
●15,000,000 shares of common stock to relieve accrued expenses valued at $45,000.
●445,000,000 shares of common stock for the purchase of Western Grade, valued at $2,225,000.
●625,000 shares of common stock were purchased for $500.
●436,200,000 shares of common stock upon conversion of Preferred Class D.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Not required for smaller reporting issuers.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with our audited consolidated financial statements and notes thereto appearing elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties, including information with respect to the plans, intentions and strategies for our businesses. The actual results may differ materially from those estimated or projected in any of these forward-looking statements.
Acquisition of Western Grade
On August 25, 2016, SoOum Corp (the “Predecessor”) entered into a Securities Purchase Agreement with one hundred percent (100%) of the members (the “Sellers”) of Western Grade LLC (the “Successor” or “WG”). Upon the closing of the transaction on October 6, 2016 (October 1, 2016 for accounting purposes), WG members transferred all of their outstanding ownership interests to SoOum Corp. In consideration, SoOum Corp. issued 445,000,000 shares of common stock to the Sellers. The common stock received by the members of WG, represent an ownership interest in SoOum Corp of approximately 42%. WGis now a wholly owned subsidiary of SoOum Corp. See Form 8-K filed by SoOum Corp. on October 6, 2016 for more detail.
The acquisition method of accounting was used to record assets acquired and liabilities assumed by Successor. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the consolidated financial statements of the Predecessor and Successor are not comparable in all material respects since those consolidated financial statements report financial position, results of operations, and cash flows of these two separate entities. Western Grade's fixed assets and identifiable intangible assets acquired were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of purchase price over the value of the net assets acquired was recorded as intangible assets, including an allocation to goodwill.
For periods after the acquisition of WG, our financial results are referred to as “Successor” and its results of operations combines SoOum Corp. operations and Western Grade's operations. For periods prior to the acquisition of WG our financial results are referred to as “Predecessor” and its operations includes only the operations of WG.
As with all acquisitions there are numerous challenges to integrating such businesses. As SoOum and WG operate in different industries, the streamlining of processes and procedures is challenging. Although management of the Company desires efficient operations between the entities, such operations could be impractical and result in ineffective or ceased operations.
Reportable Segments
Our reporting segments consist of: a) Arbitrage; and b) Construction Services; Our Chief Executive Officer has been identified as the chief decision maker. Our operations are conducted primarily within the United States of America
Results of Operations
Three Months Ended December 31, 2016 - Consolidated
Net revenue for the three months ended December 31, 2016 was $638,660. Cost of goods sold for the three months ended December 31, 2016 was $629,812. Our revenues and cost of sales were almost entirely related to our construction segment.
Total operating expenses were $149,841 for the three months ended December 31, 2016. The primary expenses for the three months ended December 31, 2016 were general and administrative expenses of $88,563, amortization expense of $7,500 and depreciation expense of $53,778. There were no significant expenses incurred by our Arbitrage segment. Approximately $56,000 were incurred by our construction segment and approximately $94,000 from corporate.
Total Other Income and (Expense) was approximately ($206,000) for the three months ended December 31, 2016. The primary other income and expenses for the three months ended December 31, 2016 were change in fair value of derivatives of approximately $307,000, loss on extinguishment of debt of approximately $(497,000) and interest expense of appproximately $(20,000).
Nine Months Ended September 30, 2016 Compared to Year Ended December 31, 2015 - Western Grade (Construction Segment)
Net revenue for the nine months ended September 30, 2016 and the year ended December 31, 2015 was $2,399,280 compared to $4,905,004, respectively. Cost of goods sold for the nine months ended September 30, 2016 and year ended December 31, 2015 was $1,983,804 compared to $4,254,201, respectively. Net loss for the nine months ended September 30, 2016 was $669,250
compared to net loss of $430,801 for the year ended December 31, 2015. During 2015 the Company's two (2) founding owners died in an accident. The Company reacted to this setback by not being as aggressive on projects and trying to re-group to recover from their loss. However, in this endeavor the company ended up with a larger net loss in 2016 than in 2015.
Total operating expenses were $1,106,408
for the nine months ended September 30, 2016 compared to $1,056,956 for the year ended December 31, 2015.
Total Other Income and (Expense) was $21,682
for the nine months ended September 30, 2016 compared to $(24,648) for the year ended December 31, 2015. The primary other income for the nine months ended September 30, 2016 were gain on sale of assets of $17,046 , interest income of $3,404,
interest expense of $21,162 and leased employee income of $22,394
compared to gain on sale of assets of $34,794, interest income of $4,746 and interest expense of $64,188 for the year ended December 31, 2015.
Liquidity and Capital Resources - Consolidated
Our operations used approximately $19,000 in cash for the three months ended December 31, 2016, primarily due to our net loss, offset by non-cash stock based compensation expenses. Our investing activities provided approximately $125,000 in cash for the three months ended December 31, 2016, primarily due to cash acquired in the purchase of WG. Cash provided during the three months ended December 30, 2016 from our financing activities was approximately $9,000, primarily from the borrowings on our lines of credit, net of convertible debt repayments.
Liquidity and Capital Resources - Western Grade
Our operations used approximately $246,000 in cash for the nine months ended September 30, 2016 compared to $8,000 for the year ended December 31, 2015. Cash required during the nine months ended September 30, 2016, came principally from cash proceeds from notes payable of approximately $1,010,000 and proceeds from notes payable member of approximately $178,000 for the nine months ended September 30, 2016. The company also received proceeds from the sale of equipment in the amount of approximately $105,000 during the nine months ended September 30, 2016. During the year ended December 31, 2015 cash required came principally from cash proceeds and repayment of debt netting to approximately $46,000. The company also received proceeds from the sale of equipment of $95,000 and purchased equipment in the amount of $137,000.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We incurred a net loss of and used cash in operations for the three months ended December 31, 2016 and had an accumulated deficit of approximately $ 21,000,000 as of December 31, 2016. We have managed our liquidity during the first, second and third quarters of 2016 through revenues and issuance of notes. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies
Revenue Recognition
The Company follows the percentage of completion method of accounting for construction contracts. Income is recognized in the ratio that costs incurred bears to estimated total costs. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of related billings is shown as a current asset, and the aggregate of billings on uncompleted contracts in excess of related costs and income recognized is shown as a current liability.
Revenue from cost-plus and time and material contracts are recognized currently as the work is performed and billed. Revenue from transportation services is recognized currently as the work is performed and billed.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.
For its non-construction contracts the Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
Fair Value of Financial Instruments
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts receivable, accounts payable, accrued liabilities, and notes payable approximate fair value given their short-term nature or effective interest rates.
Long-Lived Assets
The Company reviews our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the three months ended December 31, 2016, the Company did not recognize any impairment of our long-lived assets.
Employee Stock Based Compensation
Stock based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The grant date fair value of a stock based award is recognized as an expense over the requisite service period of the award on a straight-line basis.
For purposes of determining the variables used in the calculation of stock based compensation issued to employees, the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could have a material effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Employee Stock Based Compensation
Issuances of the Company's common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist as the instruments fully vested on the date of agreement, the Company determines such date to be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense in the accompanying statement of operations over the contract period. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.
Goodwill
Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. The Company uses a lattice model for valuation of the derivative.
When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the derivative instrument could be required within the 12 months of the balance sheet date.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements beginning on page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT OR ACCOUNTING AND FINANCIAL DISCLOSURE
Effective January 4, 2017, the Company dismissed Scrudato & Co., P.A. (“Scrudato”) from its position as the Company's independent registered public accounting firm. The Company's Board of Directors approved the dismissal. Scrudato's dismissal was prompted by the revocation of its registration with the Public Company Accounting Oversight Board (“PCAOB”). The revocation of Scrudato's registration was part of a sanction handed down by the PCAOB based upon findings that Scrudato violated PCAOB rules and standards in connection with the audits of five issuer clients, which five issuer clients did not include the Company.
On March 28, 2017, the Company engaged Hall & Company CPAs & Consultants, Inc. (“Hall & Co.”), located in Irvine, California as its new independent accountants to audit and review the Company's financial statements for the years December 31, 2015 and 2016, and to review the Company's unaudited financial statements for the quarterly period beginning with the quarter ending March 31, 2017.
On March 15, 2017, the Board of Directors approved the Company's engagement of Hall & Co. as its independent accountants.
The Registrant has not consulted with Hall & Co. regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrant's consolidated financial statements, and no written report or oral advice was provided to the Registrant by Hall & Co. concluding there was an important factor to be considered by the Registrant in reaching a decision as to an accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-k, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Principal Executive Officer and Principal Financial Officer, after considering the existence of material weaknesses identified, determined that our internal control over financial reporting disclosure controls and procedures were not effective as of December 31, 2016.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Principal Executive Officer and Principal Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies.
We identified the following deficiencies which together constitute material weaknesses in our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016:
1. Inadequate number of personnel that could accurately and timely record and report the Company's financial statements in accordance with GAAP;
2. We have not performed a risk assessment and mapped our processes to control objectives.
3. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.
The Company is continuing the process of remediating its control deficiencies. However, the material weakness in internal control over financial reporting that has been identified will not be remediated until numerous internal controls are implemented and operate for a period of time, are tested, and the Company is able to conclude that such internal controls are operating effectively. The Company cannot provide assurance that these procedures will be successful in identifying material errors that may exist in the financial statements. The Company cannot make assurances that it will not identify additional material weaknesses in its internal control over financial reporting in the future. Management plans, as capital becomes available to the Company, to increase the accounting and financial reporting staff and provide future investments in the continuing education and public company accounting training of our accounting and financial professionals.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control system, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
We regularly review our system of internal control over financial reporting to ensure we maintain an effective internal control environment. There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
Our directors and executive officers are as follows:
Name and Address
Age
Position(s)
William B. Westbrook
PO Box 431
Vernon, AZ 85940
President and Director
Luis J. Vega
1773 Carthage Ct.
Brownsville, TX 78520
COO and Director
Ronald Vega
222 Purchase Street #117
Rye, NY 10580
Director
BIOGRAPHY
The following sets forth biographical information regarding the Company's directors:
William Westbrook
Since February, 2013 Mr. Westbrook has served as President and CEO, and as a member of the Board of Directors of SoOum. From 2008 to 2013 Mr. Westbrook served as CEO of Estmar Global, Inc. located in West Point, Utah. Estmar Global, Inc. is an international trade company involved in the buying and selling of physical commodities. From 2008 to 2009 Mr. Westbrook served as a business and management consultant for Aspen Technologies, located in Burlington, Massachusetts. From 2007 to 2008 Mr. Westbrook acted as the budget director for Romney for President. William Westbrook served as assistant controller of the Lennar Corporation, located in Tucson, Arizona from 2006 to 2007. In 2001 Mr. Westbrook received a Bachelor of Arts degree in Economics from Brigham Young University, located in Provo, Utah.
Ronald A. Vega
Mr. Ronald A. Vega served as a Senior Indirect Tax Manager for BP Corporation located in Houston, Texas from March, 2004 through May, 2012. From June, 2012 through February, 2014 Mr. Vega served as Vice President of Business Development for DL Trading, LLC located in Katy, Texas. DL Trading, LLC is involved in the trading of previously undeveloped duty drawback recoveries associated with the importation and exportation of specific petro chemicals, plastics and chemical products. From June, 2013 to the present Mr. Vega was employed by Stelle Innovations, LLC as Vice President of Business Development and Operations. Stelle Innovations, LLC is located in Rye, New York and it is a provider of procurement and sourcing supply chain logistic services for companies engaged in capital improvement projects. From April, 2014 to the present Mr. Vega has served as the Chief Financial Officer and a Director of SoOum Corporation. In 1991, Mr. Vega received a BBA degree in Accounting from the University of Texas-Pan American located in Edinburgh, Texas. In May, 2000 Mr. Vega received a Juris Doctorate Degree from Indiana University School of Law, located in Indianapolis, Indiana.
Luis J. Vega
Mr. Luis J. Vega served in the United States Army from 1985 to 2005 as a Nuclear Biological Chemical Warfare Specialist Senior Procurement and Operations manager. From June 2005 to October 2007 Mr. Vega was an employee of SMI GMS at Fort Polk, LA as Senior Logistics Manager assisting deploying military units. From 2007 to August 2009 Mr. Vega was Business Development Manager of Estmar Global. From August, 2009 to October, 2010 Mr. Vega was a Civil Service Employee for the Department of Defense (DOD) and with Cubic Defense Applications located in Ft. Irwin, California, where he was in charge of Middle East, Europe and Asia operations. Cubic Defense Applications is a DOD contractor, and Mr. Vega served as a Training Analyst there. From December, 2010 to August, 2011 Mr. Vega was also employed by ConsultNet which is located in Salt Lake City, Utah. ConsultNet is a staffing and recruiting business, and Mr. Vega served as a recruiter. From 2014, to the present Mr. Vega has served as Chief Operations Officer and a member of the Board of Directors of SoOum. Mr. Vega received a Bachelor of Science degree in Health and Administration from the University of Phoenix in 2011. The University of Phoenix is located in Phoenix, Arizona. In December 2014, he received his Master's Degree in Health Administration from the University of Phoenix, located in Salt Lake City, Utah.
Corporate Governance
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. The Company has not formally adopted a written code of business conduct and ethics that governs the Company's employees, officers and directors as the Company is not required to do so.
In lieu of an Audit Committee, the Company's Board of Directors, is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company's independent public accountants. The Board of Directors reviews the Company's internal accounting controls, practices and policies.
Committees of the Board
Our Company currently does not have nominating, compensation, or audit committees or committees performing similar functions nor does the Company have a written nominating, compensation or audit committee charter. The Board of Directors believes that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by the directors.
Audit Committee Financial Expert
Our Board of Directors has determined that we do not have a board member that qualifies as an "audit committee financial expert " as defined in Item 407(D)(5) of Regulation S-K, nor do we have a Board member that qualifies as "independent" as the term is used in Item 7(d)(3)(iv)(B) of Schedule 14A under the Securities Exchange Act of 1934, as amended, and as defined by Rule 4200(a)(14) of the FINRA Rules.
We believe that our directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted in our circumstances given the stage of our development.
Board Meetings and Annual Meeting
During the fiscal year ended December 31, 2016, our Board of Directors held 3 formal meetings. We did not hold an annual meeting in 2016. All of our directors attended at least 75% of the meetings of the Board of Directors.
Code Of Business Conduct And Ethics
Each of the Company's directors and employees, including its executive officers, are required to conduct themselves in accordance with ethical standards set forth in the Code of Business Conduct and Ethics adopted by the Board of Directors. The Code of Business Conduct and Ethics was previously filed as Exhibit 14.1 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005. Any amendments to or waivers from the code will be posted on our website. Information on our website does not constitute part of this filing.
Shareholder Proposals
Our Company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The Board of Directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees to the Board of Directors and we do not have any specific process or procedure for evaluating such nominees. The Board of Directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment to the Board.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation earned during the last two fiscal years by our executive officers.
SUMMARY COMPENSATION TABLE*
Name and Principal Position
Year
Salary (1)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation ($)
All Other Compensation ($)
Total ($) (2)
William Westbrook
President, CEO and Director
$-0-
$-0-
$-0-
$-0-
$-0-
$1,830,000
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$1,830,000
Luis Vega
Secretary and Director
$-0-
$-0-
$-0-
$-0-
$3,500
$1,046,000
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$3,500
$1,046,000
Ronald Vega
Chief Operations Officer and Director
$-0-
$-0-
$-0-
$-0-
$3,500
$209,000
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$-0-
$3,500
$209,000
During the year ended 2016, 410,000,000 shares of common stock were issued to members of management.
* No executive employees received any Bonus, Option Awards, Non-Equity Incentive Plan Compensation or Nonqualified Deferred Compensation Earnings during the periods presented. Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
(1)Since the time of the merger with SoOum on November 12, 2014 and the election of new officers and directors, no salary was paid to the executive officers of the Company during fiscal years 2015 and 2016.
Employment Agreements
The Company has no employment contracts. There are no compensation plans or arrangements, including payments to be made by us with respect to our officers, directors, employees or consultants that would result from the resignation, retirement or any other termination of such directors, officers, employees or consultants. There are no arrangements for compensation to be paid to our directors, officers, employees or consultants that would result from a change-in-control.
Stock Options
The Company had no stock options outstanding at December 31, 2016.
Board of Director Compensation
Our executive directors did not receive any compensation for their service as Directors of the Company for the years ended December 31, 2015 and 2016.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information as of June 30, 2017 with respect to the beneficial ownership of our common stock, by (i) each stockholder known to be the beneficial owner of 5% or more of the outstanding common stock of the Company (based solely on the Company's record shareholders list, and Schedule 13D's and Section 16 reports filed with the SEC), (ii) each executive officer and director, and (iii) all executive officers and directors as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person's actual voting power at any particular date.
We believe that, except as otherwise noted and subject to applicable community property laws, each person named in the following table has sole investment and voting power with respect to the shares of common stock shown as beneficially owned by such person.
(1) As of June 30, 2017, applicable percentage ownership is based on voting and conversion rights outstanding consisting of 2,029,245,095 shares of common stock and 10,790,000 shares of Series B & C Preferred stock.
(2) Each share of Series B Preferred stock is convertible into one share of common stock and grants the holder 1,000 votes.
Each share of Series C Preferred stock is convertible into ten share of common stock and grants the holder 10,000 votes.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and officers, and persons who beneficially own more than 10% of a registered class of the Company's equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company's securities with the SEC on Forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of the forms received by it during the fiscal year ended December 31, 2016 and written representations that no other reports were required, the Company does not believe that any persons required to make filings under Section 16(a) during such fiscal year failed to file such reports or filed such reports late.
Item 13.
Item 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Review, Approval and Ratification of Related Party Transactions
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of related party transactions, with our executive officers, directors and significant stockholders. We intend to establish formal policies and procedures in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee thereof. On a moving forward basis, our directors will continue to approve any related party transaction.
Director Independence
We do not have an audit, compensation or nominating committee, but our entire Board of Directors acts in such capacities. Although our directors are not considered as “independent directors” pursuant to the provisions of Item 407(a) of Regulation S-K, we believe that the members of our Board of Directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The Board of Directors of our Company does not believe that it is necessary to have an audit committee, because we believe that the functions of an audit committee can be adequately performed by the Board of Directors. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stage of our development.
Related Party Transactions
Notes receivable related parties consist of the following. All notes are due on demand.
December 31, 2016
Notes Receivable
Western Capital PIT - 100% Owned by Shareholder
$ 156,231
Notes Payable
Western Materials - 50% Owned by Shareholder
(9,140)
Total Notes Receivable, net - Related Parties
$ 147,091
During the three months ended December 31, 2016 the Company purchased materials for approximately $13,000 from Western Materials a company partially owned by a shareholder of the Company. Additionally, the Company subleases its office and yard from Western Materials on a month to month basis. Total rent expense during the three months ended December 31, 2016 was approximately $7,000.
The Company leases a vehicle and equipment from a shareholder of the Company on an as needed basis. Rent expense was approximately $5,000 for the three months ended December 31, 2016.
Notes payable - Related Parties consisted of the following:
The notes to the former member of the Board of Directors are in default and the Company has included approximately $1,347,828 of accrued interest in accrued expenses at December 31, 2016.
December 31, 2016
R Kiphart - Former Member of Board of Directors - Unsecured
$ 1,045,000
R Kiphart - Former Member of Board of Directors - Secured
50,000
Joy Gillespie- Shareholder 139,078
Miscellaneous (a)
163,187
Total Notes Payable - Related Parties
$ 1,397,265
(a) The Company no longer has contact with these holders and, accordingly, has not accrued interest on such notes since December 2015. Such accrual would have increased accrued expenses by approximately $164,248 December 31, 2016 and increased interest expense by approximately $41,062 for the three months then ended.
At December 31, 2016, the Company owes a stockholder approximately $140,000. The borrowings are in default and all amounts under the note are due and payable. The note accrues interest at 5.16%.
Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
SoOum Corp. Financial Independent Public Accountant's Fees
The following table presents fees for professional services rendered by Hall & Company for the audit of the Company's financial statements for the years ended December 31, 2015 and 2016:
Audit Fees were for professional services for auditing and reviewing the Company's financial statements, as well as for consents and assistance with and review of documents filed with the Securities and Exchange Commission.
Pre-Approval Policy for Services of SoOum Financial Independent Auditors
The Board of Directors review the Form 10-Q and Form 10-K filings before their filing. In addition, the Board of Directors reviews the audit plans and anticipated fees for audit and tax work prior to the commencement of that work. All fees paid to the independent auditors are pre-approved by the Board of Directors. These services may include audit services, audit-related services, tax services and other services.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
Financial Statements:
__
Balance Sheets
__
Statements Of Operations
__
Statements Of Stockholders' Deficits
__
Statements Of Cash Flows
__
Notes to Financial Statements
__
2. Financial Statement Schedules
Schedules have been omitted because they are not required, not applicable, or the required information is otherwise included.
3. Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SoOum Corp.
Date: July 24, 2017
By /s/ William Westbrook
William Westbrook
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William Westbrook
WILLIAM WESTBROOK
President, Chief Executive Officer and Director
(Principal Executive Officer)
July 24, 2017
/s/ Ronald Vega
RONALD VEGA
Treasurer, Chief Financial Officer and Director
(Principal Financial/Accounting Officer)
July 24, 2017
Exhibit Index
* Filed herewith.
** Furnished herewith.
++XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SOOUM CORP.
New York, New York
FINANCIAL REPORTS
AT
DECEMBER 31, 2016
SOOUM CORP.
New York, New York
PAGE
Report of Independent Registered Public Accountant
Consolidated Balance Sheet at December 31, 2016
Consolidated Statement of Operations for the Three Months Ended December 31,
Consolidated 	 Statement of Stockholders' Deficit for the Three Months Ended December 31, 2016
Consolidated 	 Statement of Cash Flows for the Three Months Ended December 	 31, 2016
Notes 		 to Consolidated Financial Statements
-25
Western 		 Grade, LLC Fianancial Statements and Notes
G-1-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SoOum Corporation
We have audited the accompanying consolidated balance sheet of SoOum Corporation (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the three months then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SoOum Corporation as of December 31, 2016, and the results of its operations and its cash flows for the three months then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note N to the consolidated financial statements, although the Company has established a source of revenues to cover certain of its operating costs, it incurred a loss in 2016 and cannot support a salary for its chief executive officer. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to this matter is also described in Note N to the consolidated financial statements. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
HALL & COMPANY Certified Public Accountants and Consultants
Irvine, CA
July 24,
SoOum Corp.
New York, New York
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS
Current Assets
Cash and Cash Equivalents
$ 122,921
Accounts Receivable - Net of Allowance for Doubtful Accounts
112,929
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
3,628
Employee Advances
5,089
Notes Receivable - Related Parties
147,091
Total Current Assets
391,658
Property and Equipment - Net of Accumulated Depreciation
384,590
Intangibles - Net of Accumulated Amortization
532,500
Goodwill
2,537,697
Total Assets
$ 3,846,445
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Current Liabilities
Line of Credit
$ 977,933
Notes Payable - Current Portion
496,671
Notes Payable - Related Parties
1,397,265
Accounts Payable
1,633,811
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
32,957
Accrued Expenses
3,044,640
Customer Deposit
3,905
Judgements Payable
1,147,203
Stock Payable
5,000
Convertible Debt - Net of Discounts
486,460
Derivative Liability
641,271
Total Current Liabilities
9,867,116
Other Liabilities
Notes Payable - Net of Current Portion
78,808
Total Liabilities
9,945,924
Stockholders' Deficit
Common Stock - $.0001 Par; 5,000,000,000 Shares Authorized,
1,062,696,295 Issued and Outstanding
106,270
Preferred Stock: $0.0001 Par; 50,000,000 Shares Authorized,
25,000,000 Issued and Outstanding
2,500
Preferred Stock Class B: $0.0001 Par; 10,000,000 Shares Authorized,
9,100,000 Issued and Outstanding
Preferred Stock Class C: $0.0001 Par; 10,000,000 Shares Authorized,
1,690,000 Issued and Outstanding
Additional Paid-In-Capital
14,445,510
Accumulated Deficit
(20,654,838)
Total Stockholders' Deficit
(6,099,479)
Total Liabilities and Stockholders' Deficit
$ 3,846,445
The accompanying notes are an integral part of these consolidated financial statements
SoOum Corp.
New York, New York
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2016
Revenues, Net
$ 638,660
Cost of Sales
629,812
Gross Profit
8,848
Expenses
General and Administrative
149,841
Total Expenses
149,841
Loss Before Other Income and (Expense)
(140,993)
Other Income and (Expense)
Change in Fair Value of Derivative
307,944
Extinguishment of Debt
(497,295)
Other
(1,017)
Interest Expense
(20,296)
Interest Income
4,800
Total Other Income and (Expense), Net
(205,864)
Loss from Operations Before
Provision for Taxes
(346,857)
Provision for Taxes
-
Net Loss
$ (346,857)
Weighted Average Number of Common Shares Outstanding
Basic and Diluted
874,719,839
Net Loss Per Common Share - Basic & Diluted
($0.00)
The accompanying notes are an integral part of these consolidated financial statements
SoOum Corp.
New York, New York
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
SoOum Corp.
New York, New York
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT FOR THE THREE MONTHS ENDED DECEMBER 31 2016
The accompanying notes are an integral part of these consolidated financial statements
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - The Company
SoOum Corp., formerly known as Swordfish Financial, Inc., (a Texas Corporation), acquired 80% of the outstanding common stock of Nature Vision, Inc. pursuant to a stock acquisition/merger agreement on August 14, 2009. As a result of the merger, Nature Vision changed its name to Swordfish Financial, Inc. (“Swordfish”).
On September 23, 2014, Swordfish entered into a Securities Purchase Agreement with 100% of the common stock shareholders (the “Sellers”) of SoOum Corp. Upon the closing of the transaction on November 10, 2014, SoOum Corp. shareholders transferred all of their outstanding shares of common stock to SoOum Holdings, Inc., a wholly owned subsidiary of Swordfish. In consideration, Swordfish issued 9,100,000 shares of its Class B Preferred stock and 1,690,000 shares of its Class C preferred Stock. The Class B Preferred Stock is convertible at the rate of 1 common share to 1. The Class C Preferred Stock is convertible at the rate of 10 common shares to 1. Class B and Class C have voting rights of 1,000 to 1 per share. As a result of the merger Swordfish Financial, Inc. changed its name to SoOum Corp.
Effective with the merger, SoOum Corp. changed its business focus to international commodity trading arbitrage. The Company will use its own proprietary technology to identify and exploit arbitrage opportunities. SoOum also plans to distribute trade intelligence to global subscribers in order to solve supply shortages and bring new business to local manufacturers.
Material Definitive Agreement
On August 25, 2016, SoOum Corp (the “Predecessor”) entered into a Securities Purchase Agreement with one hundred percent (100%) of the members (the “Sellers”) of Western Grade LLC (the “Successor” or “WG”). Upon the closing of the transaction on October 6, 2016 (for accounting purposes), Western Grade LLC members transferred all of their outstanding ownership interests to SoOum Corp. In consideration, SoOum Corp. issued 445,000,000 shares of common stock to the Sellers. The common stock received by the members of Western Grade LLC, represent an ownership interest in SoOum Corp of approximately 42%. Western Grade LLC is now a wholly owned subsidiary of SoOum Corp. See Form 8-K filed by SoOum Corp. on October 6, 2016 for more detail.
The acquisition method of accounting was used to record assets acquired and liabilities assumed by Successor. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the consolidated financial statements of the Predecessor and Successor are not comparable in all material respects since those consolidated financial statements report financial position, results of operations, and cash flows of these two separate entities. Western Grade's fixed assets and identifiable intangible assets acquired were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of purchase price over the value of the net assets acquired was recorded as intangible assets, including an allocation to goodwill.
For periods after the acquisition of Western Grade (since October 6, 2016), our financial results are referred to as “Successor” and its results of operations combines SoOum Corp. operations and Western Grade's operations. For periods prior to the acquisition of Western Grade our financial results are referred to as “Predecessor” and its operations includes only the operations of Western Grade.
Successor
Western Grade LLC was formed as an Arizona Limited Liability Company in 2001. The latest date this entity can dissolve is December, 2050. WG operates as a general industrial contractor within the State of Arizona. Contracts are performed on a fixed price; fixed price per-unit; and a time and material basis. Additionally, WG provides transportation services, primarily hauling and delivering material aggregates.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - The Company - continued
Principles of Consolidation
The consolidated financial statements include the accounts of SoOum Corp., and its wholly owned subsidiaries; Nature Vision, Inc., Western Grade and SoOum (collectively the “Company”). All significant inter-company balances have been eliminated in consolidation.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company's financial position for the periods presented.
The Company currently operated in two business segments.
NOTE B - Summary of Significant Accounting Policies
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company's significant and critical accounting policies and practices are disclosed below.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents at financial institutions, which periodically may exceed federally insured amounts.
Income Taxes
The Company accounts for income taxes in accordance with generally accepted accounting principles which prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company evaluates all significant tax positions as required by accounting principles generally accepted in the United States of America. As of December 31, 2016, the Company does not believe that it has taken any positions that would require the recording of any additional tax liability nor does it believe that there are any unrealized tax benefits that would either increase or decrease within the next year. It is the Company's policy to recognize any interest and penalties in the provision for taxes.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - Summary of Significant Accounting Policies- continued
Use of Estimates
The preparation of financial statements in conformity with ”GAAP” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant assumptions by management include among others: allowance for doubtful costs and estimated earnings in of billings on contracts, billings in excess of costs and earnings on uncompleted contracts, fair value of derivative liabilities, recovery of goodwill, the valuation of equity based instruments and their beneficial conversion features. Actual results could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Accounts Receivable
Contract receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for doubtful accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable. Allowance for doubtful accounts was approximately $4,000 at December 31, 2016.
Property, Equipment and Depreciation
Property and equipment are stated at cost, less accumulated depreciation computed using the straight line method over the estimated useful lives as follows:
Construction Equipment and Trucks
5 - 7 Years
Office Equipment
3 - 7 Years
Maintenance and repairs are charged to expense. The cost of the assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts.
Fair Value of Financial Instruments
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts receivable, accounts payable, accrued liabilities, and notes payable approximate fair value given their short-term nature or effective interest rates.
Long-Lived Assets
The Company reviews our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the three months ended December 31, 2016, the Company did not recognize any impairment of our long-lived assets.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - Summary of Significant Accounting Policies - continued
Revenue Recognition
The Company follows the percentage of completion method of accounting for construction contracts. Income is recognized in the ratio that costs incurred bears to estimated total costs. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of related billings is shown as a current asset, and the aggregate of billings on uncompleted contracts in excess of related costs and income recognized is shown as a current liability.
Revenue from cost-plus and time and material contracts are recognized currently as the work is performed and billed. Revenue from transportation services is recognized currently as the work is performed and billed.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.
For its non-construction contracts the Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
Advertising Expense
Advertising costs are expensed as incurred and are included in general and administrative expense in the accompanying consolidated statements of operations. Advertising costs were approximately $1,000 for the three months ended December 31, 2016.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - Summary of Significant Accounting Policies - continued
Earnings per Share
Earnings per share of common stock are computed in accordance with the Financial Accounting Standards Board (“FASB”) ASC 260, “Earnings per Share”. Basic earnings per share are computed by dividing income or loss available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per share are calculated by adjusting the weighted average number of shares outstanding assuming conversion of all potentially dilutive stock options, warrants and convertible securities, if dilutive. Common stock equivalents that are anti-dilutive are excluded from both diluted weighted average number of common shares outstanding and diluted earnings per share.
Employee Stock Based Compensation
Stock based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The grant date fair value of a stock based award is recognized as an expense over the requisite service period of the award on a straight-line basis.
For purposes of determining the variables used in the calculation of stock based compensation issued to employees, the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could have a material effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial statements.
Non-Employee Stock Based Compensation
Issuances of the Company's common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. Although situations may arise in which counter performance may be required over a period of time, the equity award granted to the party performing the service is fully vested and non-forfeitable on the date of the agreement. As a result, in this situation in which vesting periods do not exist as the instruments fully vested on the date of agreement, the Company determines such date to be the measurement date and will record the estimated fair market value of the instruments granted as a prepaid expense and amortize such amount to general and administrative expense in the accompanying statement of operations over the contract period. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates.
Goodwill
Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - Summary of Significant Accounting Policies - continued
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. The Company uses a lattice model for valuation of the derivative.
When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense, using the effective interest method.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the derivative instrument could be required within the 12 months of the balance sheet date.
Concentrations, Risks, and Uncertainties
Seasonality
The business is subject to substantial seasonal fluctuations. Historically, a significant portion of net sales and net earnings have been realized during the period from April through October.
Reportable Segments
Our reporting segments consist of: a) Arbitrage; and b) Construction Services; Our Chief Executive Officer has been identified as the chief decision maker. Our operations are conducted primarily within the United States of America
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - Recently Issued Accounting Standards
Financial Accounting Standards Board, or FASB, Accounting Standards Update, or FASB ASU 2017-04 “Simplifying the Test for Goodwill Impairment (Topic 350)” - In January 2017, the FASB issued 2017-04. The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
FASB ASU 2017-01 “Clarifying the Definition of a Business (Topic 805)” - In January 2017, the FASB issued 2017-1. The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-15 “Statement of Cash Flows (Topic 230)” - In August 2016, the FASB issued 2016-15. Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU will not have a significant impact on our statement of cash flows.
FASB ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)” - In May 2016, the FASB issued 2016-12. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)” - In May 2016, the FASB issued 2016-11, which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - Recently Issued Accounting Standards - continued
FASB ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)” - In April 2016, the FASB issued ASU 2016-10, clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. We are currently assessing the impact of adoption of this ASU on our consolidated results of operations, cash flows and financial position.
FASB ASU 2016-09 “Compensation - Stock Compensation (Topic 718)” - In March 2016, the FASB issued ASU 2016-09, which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities to make a policy election to account for forfeitures as they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We do not expect this standard will have a significant impact on our consolidated financial statements and related disclosures.
FASB ASU 2016-02 “Leases (Topic 842)” - In February 2016, the FASB issued ASU 2016-02, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-17 ”Income Taxes (Topic 740)” - In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred tax assets and liabilities on the balance sheet. Previous GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. The amendment requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
FASB ASU 2015-16 “Business Combinations (Topic 805),” or ASU 2015-16 - In September 2015, the FASB issued ASU 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting period beginning after December 15, 2016, including interim periods within those fiscal years, with the option to early adopt for financial statements that have not been issued. We will apply this guidance to any business combinations that may occur.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - Recently Issued Accounting Standards - continued
FASB ASU 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory,” or ASU 2015-11 - In July 2015, the FASB issued ASU 2015-11, which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt as of the beginning of an annual or interim period. We do not expect the adoption of this ASU to have a significant impact on our financial position, results of operations and cash flows.
NOTE E - Notes Receivable, net - Related Parties
Notes receivable related parties consist of the following. All notes are due on demand.
December 31, 2016
Notes Receivable
Western Capital PIT - 100% Owned by Shareholder
$ 156,231
Notes Payable
Western Materials - 50% Owned by Shareholder
(9,140)
Total Notes Receivable, net - Related Parties
$ 147,091
NOTE F - Acquisition of Western Grade and Intangibles
On October 6, 2016, the Company exchanged each issued and outstanding share of membership interest of Western Grade, LLC (the "Acquisition") for the issuance of common shares of SoOum Corp. Upon the closing of the Acquisition, the Company received all of the operating assets of WG.
With the acquisition of WG, the Company plans to stabilize cash flow of SoOum and utilize WG for strategic growth.
The purchase price of WG was the issuance 445,000,000 shares of common stock valued at $2,225,000 (based on the Company's stock price on the date of issuance). The Company accounted for the Acquisition using the acquisition method of accounting.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - Acquisition of Western Grade and Intangibles - continued
The following table
approximates
the estimated fair values of the tangible and intangible assets acquired as of the date of acquisition:
Net assets acquired:
Current assets
$
576,000
Equipment
441,000
Other assets
--
Current liabilities
(1,544,000)
Other liabilities
(326,000)
Marketing related
240,000
Customer list
300,000
Goodwill
2,538,000
$
2,225,000
Goodwill is the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. In accordance with applicable accounting standards, goodwill is not amortized but instead is tested for impairment at least annually or more frequently if certain indicators are present.
Intangibles are recorded at cost. Marketing is not amortized as the life is indefinite. Customer List is amortized over a 10 year life.
December 31, 2016
Marketing Related
$ 240,000
Customer List
300,000
540,000
Less: Accumulated Amortization
(7,500)
Net Intangibles
$ 532,500
Amortization expense for the three months ended December 31, 2016 was $7,500.
As with all acquisitions, there are numberous challenges to integrating such businesses. As SoOum and WG operate in different industries, the streamlining of processes and procedures is challenging. Although management of the Company desires efficient operations between the entities, such operations could be impractical and result in ineffective or ceased operations.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - Property and Equipment
Property and equipment are recorded at cost and consisted of the following:
December 31, 2016
Construction Equipment and Trucks
$ 2,827,516
Office Equipment
67,966
$ 2,895,482
Less: Accumulated Depreciation
(2,510,892)
Net Property and Equipment
$ 384,590
Depreciation expense for the three months ended December 31, 2016 was $53,152.
Note H - Cost, Estimated Profits and Billings on Uncompleted Contracts
Costs, estimated profits and billings on uncompleted contracts consisted of the following:
December 31, 2016
Costs Incurred on Uncompleted Contracts
$ 115,632
Estimated Profits
14,100
Total
129,732
Billings on Uncompleted Contracts
(159,061)
$ (29,329)
Included in the Balance Sheet Under the Following Captions:
Costs and Estimated Profits in Excess of Billings on
Uncompleted Contacts
$ 3,628
Billings in Excess of Costs and Estimated Profits on
Uncompleted Contracts
(32,957)
Total
$ (29,329)
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Notes Payable
Notes payable consisted of the following:
December 31, 2016
Jeff Zernov (Former Chief Executive Officer) (a)
Payable August 17, 2010 at 15% Interest.
$ 290,000
Castaic (a)
Installment note payable annually at $17,171 including interest at 8.0% from January 2009 through January 2011.
30,620
Installment note payable monthly at $1,175 including interest at 8.0% from February 2008 through January 2011.
20,246
Innovative Outdoors (a)
Installment note payable monthly at $4,632 including interest at 7.0% from August 2008 through July 2011.
100,555
ALLY
Installment note payable of $773 per month including interest at 4%. Secured by vehicle.
19,271
Catapillar Financial Services
Installment note payable of $2,116 per month including interest at 4.42%. Secured by equipment.
59,036
Chase
Installment note payable of $748 per month including interest at 7.04%. Secured by vehicle.
11,034
John Deere
Installment note payable of $1,505 per month including interest at 8.4%. Secured by equipment.
44,717
Total Notes Payable
575,479
Less: Current Portion
496,671
Notes Payable - Net of Current Portion
$ 78,808
(a) The Company no longer has contact with these holders and, accordingly, has not accrued interest on such notes since 2014. Such accrual would have increased accrued expenses by approximately $13,652 at December 31, 2016 and increased interest expense by approximately $13,652 for the three months then ended.
Interest expense on notes payable for the three months ended December 31, 2016 was $14,375.
The Company has a line of credit with Peoples United Equipment Finance in the amount of $1,010,016 bearing interest at 7.25%. The outstanding balance at December 31, 2016 was $843,565.
The Company has a line of credit with National Bank in the amount of $150,000 bearing interest at 2.5%. The outstanding balance at December 31, 2016 was $134,368.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Annual maturities of notes payable for the five years succeeding December 31, 2016 are as follows:
Thereafter
$ 496,671
$ 52,046
$ 26,762
$ --
$ --
$ --
NOTE J - Convertible Promissory Notes Payable
As of December 31, 2016, the Company has outstanding nine (9) security purchase agreements with accredited investors for the sale of convertible promissory notes bearing interest at 10% - 12%, per annum. Pursuant to the convertible promissory notes the investor may convert the amount paid towards the Securities Purchase Agreements into common stock of the Company. Conversion prices vary based on the agreements and have various discount rates and terms. Trading price means the closing bid price on the OTC Market Over-the-Counter Bulletin Board Pink Sheets.
The conversion rights embedded in the Notes are accounted for as derivative financial instruments because of the down round feature of the conversion price. The embedded conversion feature was valued at the date of issuance and each reporting period using the Black-Scholes-Merton options pricing model with the following assumptions: risk free interest rates ranging from .07% to .45%, contractual expected life of six (6) to twelve (12) months, expected volatility of 185% to 931%, calculated using the historical closing price of the company's common stock, and dividend yield of zero, resulting in fair market value.
The Company had convertible debentures outstanding as follows:
Outstanding Balance of Convertible Debenture
Unamortized
Discount
Net of Principal and Unamortized Discount
Convertible Debentures
January 10, 2014 - Debenture
$ 7,150
$ --
$ 7,150
April 2, 2014 - Debenture
17,815
--
17,815
June 18, 2014 - Settlement Agreement
58,420
--
58,420
September 1, 2015 - Debenture
327,873
--
327,873
December 3, 2015 - Debenture
11,667
--
11,667
August 29, 2016 - Debenture
20,000
--
20,000
August 29, 2016 - Debenture
24,000
--
24,000
December 8, 2016 - Debenture
35,500
(30,965)
4,535
December 13, 2016 - Debenture
15,000
--
15,000
Total Convertible Debentures
$ 517,425
$ (30,965)
$ 486,460
In connection with the issuance of the note payable on December 8, 2016, the Company recorded a beneficial conversion feature of $35,500 based on the fixed conversion terms of such instrument. During the three months ended December 31, 2016, the Company amortized approximately $4,500 to interest expense.
Note K - Related Party Transactions
During the three months ended December 31, 2016 the Company purchased materials for approximately $13,000 from Western Materials a company partially owned by a shareholder of the Company. Additionally, the Company subleases its office and yard from Western Materials on a month to month basis. Total rent expense during the three months ended December 31, 2016 was approximately $7,000.
The Company leases a vehicle and equipment from a shareholder of the Company on an as needed basis. Rent expense was approximately $5,000 for the three months ended December 31, 2016.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Related Party Transactions - continued
Notes payable - Related Parties consisted of the following:
The notes to the former member of the Board of Directors are in default and the Company has included approximately $1,347,828 of accrued interest in accrued expenses at December 31, 2016.
December 31, 2016
R Kiphart - Former Member of Board of Directors - Unsecured
$ 1,045,000
R Kiphart - Former Member of Board of Directors - Secured
50,000
Joy Gillespie- Shareholder 139,078
Miscellaneous (a)
163,187
Total Notes Payable - Related Parties
$ 1,397,265
(a) The Company no longer has contact with these holders and, accordingly, has not accrued interest on such notes since December 2015. Such accrual would have increased accrued expenses by approximately $164,248 December 31, 2016 and increased interest expense by approximately $41,062 for the three months then ended.
At December 31, 2016, the Company owes a stockholder approximately $140,000. The borrowings are in default and all amounts under the note are due and payable. The note accrues interest at 5.16%.
Note L - Leases
The Company leases its corporate office space on an annual basis. Rent for the three months ended December 31, 2016 was $1,200.
In October 2016, the Company entered into a lease for WG's office. The terms of the base require monthly payments of $5,000 from October 1, 2016 through September 30, 2018.
Note M - Backlog
The estimated gross revenue to be received on signed contracts at December 31, 2016 was $117,000. This represents three (3) contracts awarded at December 31, 2016 and yet to be completed.
Note N - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital and has incurred an operating loss during the three months ended December 31, 2016. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management hopes to raise additional working capital through the issuance of stock and through additional loans from investors.
The ability of the Company to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until it is able to engage in profitable business operations. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing its services and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. The accompanying financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - Accrued Expenses
Accrued Expenses consisted of the following at December 31, 2016:
December 31,
Consulting Fees
$ 765,379
Interest
1,681,011
Miscellaneous
598,250
Total Accrued Expenses
$ 3,044,640
NOTE P - Stockholders' Equity
Increase in Authorized Shares
On February 6, 2017, the shareholders approved an amendment to the Company's articles of Incorporation to increase the number of authorized common stock to 20,000,000,000 shares from 5,000,000,000 shares.
Preferred Stock
In June 2011, the board of directors approved the designation of 25,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class A Preferred Stock. The Class A Preferred stock receive no dividends or liquidation preferences. Each share is entitled to the equivalent of 100 votes of common stock. Each share of Class A is convertible at a ratio of .01 share of Class A for 10 share of common.
In September 2014, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class B Preferred Stock. The Class B Preferred stock receives no dividends or liquidation preferences. Each share is entitled to the equivalent of 1,000 votes of common stock. Each share of Class B is convertible at a ratio of 1 share of Class B for 1 share of common.
In September 2014, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.0001 per share, of the Company as Class C Preferred Stock. The Class C Preferred stock receives no dividends or liquidation preferences. Each share is entitled to the equivalent of 10,000 votes of common stock. Each share of Class C is convertible at a ratio of 1 share of Class C for 10 share of common.
In January 2016, the board of directors approved the designation of 10,000,000 shares of preferred stock, par value $0.001 per share, of the Company as Class D Preferred Stock. The Class D Preferred stock participate in dividends declared on the Company's common stock on the basis of 1,000 shares of common per share of Class D and have no liquidation preference. Each share is entitled to the equivalent of 1,000 votes of common stock. Each share of Class D is convertible at a ratio of 1 share of Class D for 1,000 shares of common.
·
In January 2016, the Company issued 3,441,000 shares of Class D as compensation for services rendered. The Company recorded approximately $4,000,000 of expense related to such issuance.
·
In October 2016, the holders of the Class D converted all outstanding shares into 436,200,000 shares of the Company's common stock, foregoing any additional shares owed under the stated conversion terms.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock
On October 13, 2015, the Company resolved to adopt the Employees, Directors and Consultants Stock Plan for the Year 2015. The purpose of this Plan is to enable the Company, to promote the interests of the Company and its stockholders by attracting and retaining employees, directors and consultants capable of furthering the future success of the Company and by aligning their economic interests more closely with those of the Company's stockholders, by paying their fees or salaries in the form of shares of the Company's common stock. 500,000,000 shares of common stock are registered to this plan at an offering price of $0.0001. The Plan expired on January 1, 2017.
During the three months ended December 31, 2016, the Company issued 59,053,368 shares of common stock for the conversion of debt and accrued interest of approximately $27,000.
During the three months ended December 31, 2016, the Company issued 15,000,000 shares of common stock for services rendered. The estimated fair value of such shares was approximately $45,000, which was expensed upon issuance.
During the three months ended December 31, 2016, the Company issued 445,000,000 shares of common stock for the acquisition of WG (see Note F).
During the three months ended December 31, 2016, the Company issued 625,000 shares of its common stock for cash in the amount of $500.
NOTE Q - Commitments and Contingencies
Various creditors have brought legal proceedings for collections of their claims against the Company. Judgments payable at December 31, 2016 are $1,147,203.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - Fair Value
The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP. All assets and liabilities are recorded at historical cost which approximates fair value, and therefore, no items were valued according to these inputs.
The levels of fair value hierarchy are as follows:
-
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;
-
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and
-
Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. All assets and liabilities are at cost which approximates fair value and there are not items that were required to be valued on a non-recurring basis.
The following liabilities were valued at fair value as of December 31, 2016. No other items were valued at fair value on a recurring or non-recurring basis as of December 31, 2016.
The following table presents the approximate changes in fair value of the Company's embedded conversion features (See Note J) measured at fair value on a recurring basis for the three months ended December 31, 2016.
Balance - October 1, 2016
$ 759,964
Issuance of Embedded Conversion Feature
497,295
Change in Fair Value
(307,944)
Reclassification to Additional Paid in Capital
(308,044)
Balance - December 31, 2016
$ 641,271
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE S - Income Taxes
For the three months ended December 31, 2016, the Company incurred net losses and therefore has no tax liability. The Company's net operating loss carry-forwards may be carried forward and can be used through the year 2036 to offset future taxable income. In the future, the cumulative net operating loss carry-forward for income tax purposes may differ from the cumulative financial statement loss due to timing differences between book and tax reporting.
The provision for Federal income tax consists of the following for the three months ended December 31, 2016:
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as of December 31, 2016:
Deferred tax asset attributable to:
Net operating loss carryover
$ 3,085,784
Valuation allowance
(3,085,784
)
Net deferred tax asset
--
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur net operating loss carry forwards may be limited as to use in future years.
The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return years 2010 through 2015 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is subject to examination and currently does not have any ongoing tax examinations.
SOOUM CORP.
New York, New York
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - Segment Reporting
The Company's operations are organized into two segments: Construction and Arbitrage. All revenue originates and all assets are located in the United States. We have revised our disclosure to correspond to the information provided to the chief operating decision maker.
Three Months ended December 31, 2016
NOTE U - Subsequent Events
Subsequent to year ended December 31, 2016 the Company issued
966,548,800
shares of common stock. This stock was issued to pay vendors and for conversions of notes payable. The company also received $191,500 in debt proceeds subsequent to December 31, 2016.
=================================================================================================================
Western Grade, LLC
FINANCIAL REPORTS
AT
DECEMBER 31, 2016
Western Grade, LLC
PAGE
Report of Independent Registered Public Accountant G-2
Balance Sheets at September 30, 2016
and December 31, 2015
G-3
Statements of Operations for the Nine Months Ended September 30, 2016 and the Year Ended December 31, 2015
G-4
Statements 	 of Cash Flows for the Nine Months Ended September 	 30 , 	 2016 and the Year Ended December 31, 2015
G-5
Statement 	 of
Members' Deficit as of September 30,
and the Year Ended December 31, 2015
G-6
Notes 		 to Financial Statements
G-7-13
G-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Western Grade LLC
We have audited the accompanying balance sheets of Western Grade LLC (the “Company”) as of September 30, 2016 and December 31, 2015, and the related statements of operations, cash flows and changes in members' deficit for the nine months and year then ended, respectively. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2016 and December 31, 2015, and the results of its operations and its cash flows for the nine months and year then ended, respectively, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note K to the financial statements, although the Company has established a source of revenues to cover certain of its operating costs, it incurred a loss in 2015 and 2016 and had a working capital deficit at September 30, 2016 and December 31, 2015. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to this matter is also described in Note K to the financial statements. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
HALL & COMPANY Certified Public Accountants and Consultants
Irvine, CA
July 24,
G-2
Western Grade LLC
BALANCE SHEETS
September 30,
December 31,
ASSETS
Current Assets
Cash and Cash Equivalents
$ 118,142
$ 93,375
Accounts Receivable - Net
244,148
780,343
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
1,975
-
Investment
5,000
5,000
Notes Receivable - Related Parties
152,366
162,193
Total Current Assets
521,631
1,040,911
Property and Equipment - Net
441,225
696,256
Total Assets
$ 962,856
$ 1,737,167
LIABILITIES AND MEMBERS' DEFICIT
Liabilities
Current Liabilities
Line of Credit
$ 959,088
$ 795,268
Notes Payable - Current
59,751
91,629
Accounts Payable
414,839
637,150
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
68,359
138,440
Accrued Expenses
41,658
11,210
Total Current Liabilities
1,543,695
1,673,697
Other Liabilities
Notes Payable - Net of Current Portion
72,321
198,662
Note Payable - Member
253,687
84,998
Total Liabilities
1,869,703
1,957,357
Total Members' Deficit
(906,847)
(220,190)
Total Liabilities and Members' Deficit
$ 962,856
$ 1,737,167
The accompanying notes are an integral part of these financial statements
G-3
Western Grade LLC
STATEMENTS OF OPERATIONS
For the Nine Months Ended
Year Ended
September 30, 2016
December 31, 2015
Revenues, Net
$ 2,399,280
$ 4,905,004
Cost of Sales
1,983,804
4,254,201
Gross Profit
415,476
650,803
Expenses
General and Administrative
1,106,408
1,056,956
Total Expenses
1,106,408
1,056,956
Loss Before Other Income
(690,932)
(406,153)
Other Income and (Expense)
Gain on Sale of Assets
17,046
34,794
Interest Income
3,404
4,746
Interest Expense
(21,162)
(64,188)
Leased Employee Income
22,394
-
Total Other Income and (Expense)
21,682
(24,648)
Loss from Operations Before
Provision for Taxes
(669,250)
(430,801)
Provision for Taxes
-
-
Net Loss for the Period
$ (669,250)
$ (430,801)
The accompanying notes are an integral part of these financial statements
G-4
Western Grade LLC
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
G-5
Western Grade LLC
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
Balance - January 1, 2015
293,250
Members' Distributions
(82,639)
Net Loss
(430,801)
Balance - December 31, 2015
(220,190)
Members' Distributions
(17,407)
Net Loss
(669,250)
Balance - September 30, 2016
$ (906,847)
The accompanying notes are an integral part of these financial statements
G-6
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE A - Organization and Operations
Material Definitive Agreement
On August 25, 2016, SoOum Corp entered into a Securities Purchase Agreement with one hundred percent (100%) of the members (the "Sellers") of Western Grade LLC "Predecessor". Upon the closing of the transaction on October 6, 2016, Western Grade LLC members transferred all of their outstanding ownership interests to SoOum Corp ("Successor"). In consideration, SoOum Corp. issued 445,000,000 shares of common stock to the Sellers. The common stock received by the members of Western Grade LLC, represent an ownership interest in SoOum Corp of approximately 42% at that time. Effective October 1, 2016 (for accounting purposes), Western Grade LLC is now a wholly owned subsidiary of SoOum Corp. See Form 8-K filed by SoOum Corp. on October 6, 2016 for more detail.
The acquisition method of accounting was used to record assets acquired and liabilities assumed by Successor. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the financial statements of the Predecessor and Successor are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these two separate entities. Western Grade's fixed assets and identifiable intangible assets acquired were recorded based upon their estimated fair values as of the closing date of the Acquisition. The excess of purchase price over the value of the net assets acquired was recorded as goodwill.
For periods after the acquisition of Western Grade (since October 1, 2016), our financial results will be referred to as “Successor” and its results of operations combines SoOum Corp. operations and Western Grade's operations. For periods prior to the acquisition of Western Grade our financial results will be referred to as “Predecessor” and its operations includes only the operations of Western Grade.
Predecessor
Western Grade LLC (the “Company”) was formed as an Arizona Limited Liability Company in 2001. The latest date this Company can dissolve is December, 2050. The Company operates as a general industrial contractor within the State of Arizona. Contracts are preformed on a fixed price; fixed price per-unit; and a time and material basis. Additionally, the Company provides transportation services, primarily hauling and delivering material aggregates.
NOTE B - Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include all adjustments necessary for the fair presentation of the Company's financial position for the periods presented.
The Company currently operated in one business segment. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does not currently operate any separate lines of businesses or separate business entities.
NOTE C - Summary of Significant Accounting Policies
Summary of Accounting Policies
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company's significant and critical accounting policies and practices are disclosed below.
G-7
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE C - Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents at financial institutions, which periodically may exceed federally insured amounts.
Income Taxes
The Company, with the consent of its members, elected under the Internal Revenue Code to be an S Corporation, effective January 1, 2006. Accordingly, the shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore no provision or liability for federal income taxes has been included in these financial statements.
The Company's federal and state income tax returns are subject to possible examination by the taxing authorities until the expiration of the related statutes of limitation on those returns. In general, the federal and state tax returns have, respectively, a three and four-year statute of limitations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Contract Receivables
Contract receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance for doubtful accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to contract receivables. Allowance for doubtful accounts was $58,000 and $2,000 at September 30, 2016 and December 31, 2015, respectively.
Property, Equipment and Depreciation
Property and equipment are stated at cost, less accumulated depreciation computed using the straight line method over the estimated useful lives as follows:
Construction Equipment and Trucks
5 - 7 Years
Office Equipment
3 - 7 Years
Maintenance and repairs are charged to expense. The cost of the assets retired or otherwise disposed of and the related accumulated depreciation are removed from the accounts.
Sales Tax
The State of Arizona and other local governments impose a transaction privilege (sales) tax on contracts the Company is deemed to be the prime contractor. The Company performs work as both a general (prime) contractor, and as a subcontractor to other general contractors.
Fair Value of Financial Instruments:
The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts receivable, accounts payable, accrued liabilities, and notes payable approximate fair value given their short term nature or effective interest rates.
G-8
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE C - Summary of Significant Accounting Policies - continued
Long - Term Construction Contracts
The Company follows the percentage of completion method of accounting for construction contracts. Income is recognized in the ratio that costs incurred bears to estimated total costs. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of costs incurred and income recognized on uncompleted contracts in excess of related billings is shown as a current asset, and the aggregate of billings on uncompleted contracts in excess of related costs and income recognized is shown as a current liability.
Revenue from cost-plus and time and material contracts are recognized currently as the work is preformed and billed. Revenue from transportation services is recognized currently as the work is performed and billed.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general and administrative costs are charged to expense as incurred.
Advertising Expense
Advertising costs are expensed as incurred and are included in general and administrative expense in the accompanying statements of operations. Advertising costs were approximately $8,630 and $41,013 for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet, if material. During the nine months ended September 30, 2016 year ended December 31, 2015, we did not recognize any impairment of our long-lived assets.
Pending Accounting Pronouncements
There have been no recent accounting pronouncements issued which are expected to have a material effect on the Company's financial statements. Management continues to monitor and review recently issued accounting guidance upon issuance.
G-9
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE C - Summary of Significant Accounting Policies - continued
Fair Value of Financial Instruments
The Company follows the guidance of ASC 820: Fair Value Measurement and Disclosure. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs by used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company's assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Pursuant to ASC No. 820 “Fair Value Measurement and Disclosures,” the Company is required to estimate the fair value of all financial instruments included on its balance sheet. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to the short term nature of these financial instruments.
NOTE D -Notes Receivable - Related Parties
Notes receivable related parties consist of the following. All notes are due on demand.
September 30, 2016
December 31, 2015
Western Capital PIT - 100% Owned by Member
$ 156,231
$ 156,231
Western Materials - 50% Owned by Member
--
Western Materials - 50% Owned by Member (Payable)
(9,140)
--
Jeremy Flores - Member
5,275
5,275
Total Notes Receivable - Related Parties
$ 152,366
$ 162,193
G-10
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE E - Property and Equipment
Property and equipment are recorded at cost and consisted of the following:
September 30,
December 31,
Construction Equipment and Trucks
$2,831,764
$2,948,245
Office Equipment
72,179
72,179
$ 2,903,943
$ 3,020,424
Less: Accumulated Depreciation
(2,462,718)
(2,324,168)
Net Property and Equipment
$ 441,225
$ 696,256
Depreciation expense for the nine months ended September 30, 2016 and year ended December 31, 2015 was $167,334 and $238,179, respectively.
NOTE F - Cost, Estimated Profits and Billings on Uncompleted Contracts
Costs, estimated profits and billings on uncompleted contracts consisted of the following:
September 30,
December 31,
Costs Incurred on Uncompleted Contracts
$ 152,320
$ 1,052,579
Estimated Profits
29,451
125,858
Total
181,771
1,178,437
Billings on Uncompleted Contracts
(248,155)
(1,316,877)
$ (66,384)
$ (138,440)
Included in the Balance Sheet Under the Following Captions:
Costs and Estimated Profits in Excess of Billings on
Uncompleted Contacts
$ 1,975
$ --
Billings in Excess of Costs and Estimated Profits on
Uncompleted Contracts
(68,359)
(138,440)
Total
$ (66,384)
$ 138,440
G-11
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE G - Notes Payable
Notes payable consisted of the following:
Annual maturities of notes payable for the five years succeeding September 31, 2016 are as follows:
Thereafter
$ 59,751
$ 49,677
$ 22,644
$ --
$ --
$ --
Interest expense for the nine months ended September 30, 2016 and year ended December 31, 2015 was $113,440 and $64,188, respectively.
The Company has a line of credit with Peoples United Equipment Finance in the amount of $1,010,016 bearing interest at 7.25%. The outstanding balance at September 30, 2016 and December 31, 2015 was $959,088 and $795,268, respectively.
G-12
Western Grade LLC
NOTES TO AUDITED FINANCIAL STATEMENTS
NOTE H - Related Party Transactions
During the nine months ended September 30, 2016 and year ended December 31, 2015 the Company purchased materials for $229,281 and $167,490, respectively, from Western Materials a company related through common ownership. Additionally, the Company subleases its office and yard from Western Materials on a month to month basis. Total rent expense during the nine months ended September 30, 2016 and year ended December 31, 2015 was $7,539 and $13,396, respectively.
The Company leases a vehicle and equipment from a member of the Company on an as needed basis. Rent expense was $4,925 and $12,380 for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively.
At December 31, 2015 and September 30, 2016, the Company owes a LLC member approximately $85,000 and $153,000, respectively. Per the note agreement, the borrowings are in default and all amounts under the note are due and payable. The note accrues interest at 5.16%.
NOTE I - Leases
The Company leases its office space on an annual basis. Rent for the nine months ended September 30, 2016 and year ended December 31, 2015 was $21,625 and $37,839, respectively.
NOTE J - Backlog
The estimated gross revenue to be performed on uncompleted projects and signed contracts at September 30, 2016 was $499,000.
NOTE K - Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has negative working capital, has incurred operating losses
in 2016 and 2015. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management anticipates that it will be able to raise additional working capital through the issuance of stock and through additional loans from investors.
The ability of the Company to continue as a going concern is dependent on its ability to raise adequate capital to fund operating losses until it is able to engage in profitable business operations. To the extent financing is not available, the Company may not be able to, or may be delayed in, developing its services and meeting its obligations. The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements. The accompanying financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
G