NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Dewmar International BMC (“we”, “our”, the “Company”) was formed as a Nevada corporation on March 13, 2009. Today, Dewmar International BMC is a diversified operating company headquartered in Clinton, Mississippi. The Company conducts business across a variegated set of categories and sectors including consumer goods, wholesale trade, pharmaceuticals and health sciences. The Company and its subsidiaries develop market and distribute goods, therapeutics and services in national and international markets through licensing agreements, e-commerce platforms, fee-for-service arrangements and distribution contracts.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The accompanying interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the Company’s opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results for the full years. While management of the Company believes that the disclosures presented herein and adequate and not misleading, these interim financial statements should be read in conjunction with the audited combined financial statements and the footnotes thereto for the periods ended December 31, 2013 filed in our Annual Report on Form 10K.
NOTE 3. CONVERTIBLE NOTES PAYABLE
In October, 2012, the Company entered into a 10% Contingently Convertible Promissory Note with Birr Marketing Group, Inc. for $20,000 with a due date of April 1, 2013. At June 30 2014, the Company revalued the fair market value of the derivative liability and recorded a loss of $66,974 on derivative liability.
On April 16, 2013, the Company entered into a sixth Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”) a Delaware Corporation for an 8% contingently convertible promissory note with an aggregate principal amount of $42,500 which together with any unpaid accrued interest was due on December 21, 2013.
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On January 2, 2014, Asher converted the remaining $6,500 of its outstanding notes payable and $1,700 accrued interest into 34,166,667 shares of common stock at a conversion price of $0.00024. After conversion, a principal balance of $0 remained on the notes payable. On the day of conversion, the Company revalued the derivative liability and recorded a loss on the derivative liability of $4,425; and reduced the pro-rated balance of the derivative liability by $17,877 into additional paid in capital. As such, the derivative liability had a $0 balance after conversion on January 2, 2014. In 2014, the Company accelerated amortization of the discount of $1,670 into interest expense.
On April 7, 2013, the Company entered into a convertible promissory note with a vendor to satisfy outstanding invoices in the amount of $68,000. The note bears no interest and was convertible into shares of common stock. On June 30, 2014; the Company re-valued the derivative liability and recorded a loss on derivative liability of $3,611 making the balance in the derivative liability at June 30, 2014 $69,806. The Company also recorded $32,435 amortization of the original discount into interest expense.
On May 21, 2013, the Company entered into a second Convertible Promissory Note with Continental Equities, LLC, a New York limited liability corporation for an 8% convertible promissory note in the aggregate principal amount of $30,000, which together with any unpaid accrued interest is due on May 20, 2014. $28,500 of the proceeds was funded directly to the company while $1,500 was recorded as original issuance discount.
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On January 21, 2014, Continental converted the remaining $17,760 of its outstanding notes payable into 64,581,818 shares of common stock at a conversion price of $0.000275. On the day of conversion, the Company revalued the derivative liability and recorded a gain on derivative liability of $28 and reduced the pro-rated portion of the derivative liability by $20,975 into additional paid in capital bringing the derivative liability to $0. The Company also accelerated the amortization of $7,433 of the original discount into interest expense.
On December 10, 2013, the Company entered into an assignment agreement where the Company assigned a previously entered into $17,500 Notes payable with Pitts Riley to Microcap Equity Group, LLC, a third party. As such the Company entered into a 10% Convertible note with Microcap Equity Group for $17,500 which matured on December 10, 2014.
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On January 27, 2014, Microcap converted the remaining $7,400 of the notes payable into 52,857,142 shares of common stock at a conversion price of $0.00014 bringing the notes payable balance to $0. On the day of conversion, the Company re-valued the derivative liability and recorded a gain on the derivative liability of $335 and reduced the pro-rated portion of the derivative liability of $25,958 into additional paid in capital. Additionally, the company accelerated the amortization of $3,952 of the original discount into interest expense.
During the year ended December 31, 2013, the Company entered into two 10% Contingently Convertible Promissory Notes with Birr Marketing Group, Inc. for $28,000 and $22,820 with due dates of June 4, 2014 and June 26, 2014. After the due dates, the notes became convertible at a fixed price of $0.001 into the Company’s common shares at the Holder’s option. On June 6, 2014 and June 26, 2014, these notes were in default and were due and payable immediately. On the respective due dates, the Company created a derivative liability of $80,642 and $165,906, respectively, with a resulting combined loss on derivative liability of $246,548. On June 30, 2014, the Company re-valued the derivative liability to be $87,433 and $107,280 respectively, resulting in a combined gain on derivative liability of $51,834. See Note 4 for a description of why these notes were treated as a derivative.
On December 24 ,2013, The Company entered into an assignment agreement where the Company assigned a previously entered into $48,470 Notes Payable to Pitts Riley to Magna Group, LLC, a third party. As such the Company entered into a 10% Convertible note with Magna Group for $48,470 on December 26, 2013. The Note matured on December 26, 2014. On January 6, 2014, Magna converted the remaining $14,000 of the original notes payable into 50,909,090 shares of common stock at a conversion price of $0.00028. After conversion, $0 remained on the original notes payable. On the day of conversion, the Company revalued the derivative liability and recorded a loss on derivative liability of $10,305 and reduced the pro-rated portion of the derivative liability by $24,831 into additional paid in capital. The Company also accelerated the remaining discount of $14,000 into interest expense.
In summary, during the periods ended June 30, 2014 and 2013, the Company recorded a total of $66,308 and $124,400, respectively in interest expense. During periods ended June 30, 2014 and 2013, the amount of interest expense associated with the amortization of discounts associated with the amortization of the debt discounts established by derivative liabilities in the convertible notes was $59,490 and $109,226, respectively.
NOTE 4. DERIVATIVE LIABILITY
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion features of certain of the Company’s Convertible Promissory Note (described in Note 3), do not have a fixed settlement provision because conversion of the Notes will be lowered if the Company issues securities at lower prices in the future. This provision contained in these notes tainted the other convertible notes and therefore the other convertible notes have been treated as derivative liabilities. In accordance with the FASB authoritative guidance, the conversion feature of the Notes were separated from the host contract and recognized as a derivative instrument. The conversion feature of the above described notes have been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
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The following table summarizes the derivative liabilities included in the consolidated balance sheet at June 30, 2014:
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|
| |
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Derivative liability
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|
|
Derivative liabilities as of December 31, 2013
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$
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151,120
|
|
Net Loss on derivative liability
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|
279,666
|
|
Debt discount
|
|
-
|
|
Settlement of derivative liability due to conversion of related notes
|
|
(89,641)
|
|
Derivative liabilities as of June 30, 2014
|
$
|
341,145
|
NOTE 5. STOCKHOLDERS’ DEFICIT
Shares Issued for Cash
During the period ended June 30, 2014, the Company issued 161,538,888 shares of common stock for $303,620 in cash.
Shares Issued for Services
During the period ending June 30, 2014, the Company issued 130,000,000 shares to consultants for services rendered. The Company estimated the fair market value of the shares issued to be $922,000 and recorded this as stock based compensation. In addition, the Company cancelled a consulting agreement which it had previously accounted for and as such reversed 100,000,000 shares and a corresponding $48,000 from share based compensation.
Shares Issued for Conversion of Notes Payable
During the period ended June 30, 2014, the Company issued 202,514,717 shares of common stock related to conversions of various notes payable. See Note 3 for further discussion.
NOTE 6. RELATED PARTY TRANSACTIONS
Sales to Related Party Distributor
The Company is engaged with a distributor that is wholly-owned by the Company’s CEO (the “Distributor”). The Distributor is responsible for shipping out product samples, transferring small quantities of product to local distributors at the request of the Company, sales of product to local retailers or small wholesalers and for the fulfillment of online sales orders. The Company may withdraw cases of product from the Distributor at the Company’s will for Company use, for which the Company will provide the Distributor with a credit memo based on a per-case price equal to the price paid by the Distributor to the Company.
At June 30, 2014 and December 31, 2013, receivable from the Distributor was $21,509 and $4,085, respectively. During the six months ended June 30, 2014 and 2013, revenue generated from related parties totaled $21,924 and $4,605, respectively.
Advances to Related Party
At both June 30, 2014, and December 31, 2013, the Company had outstanding accounts receivable of $9,332 from a company owned by the CEO’s wife. These receivables represent shipping reimbursements erroneously billed by logistics and shipping companies. The Company paid these invoices and then in turn generated invoices to the company owned by the CEO’s wife for reimbursement.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Employment Agreement
On January 1, 2011, the Company entered into employment agreement with Dr. Moran (“Employee”) to serve as President and Chief Executive Officer of the Company. The employment commenced on January 1, 2011 and runs for the period through January 1, 2015. The Company will pay Employee, as consideration for services rendered, a base salary of $120,000 per year.
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As additional compensation, Employee is eligible to receive one percent of the issued and outstanding shares of the Company if the gross revenues hit specified milestones for each fiscal year under the agreement. The Company will provide additional benefits to Employee during the employment term which include, but are not limited to, health and life insurance benefits, vacation pay, expense reimbursement, relocation reimbursement and a Company car. If Employee dies, the Company will pay the designated beneficiary an amount equal to two years’ compensation, in equal payments over the next twenty four months.
In the event Employee’s employment is constructively terminated within five years of the commencement date, Employee shall receive a termination payment, which will be determined according to a schedule based upon the number of years since the commencement of the contract, within a range of $120,000 to $400,000. Additionally, Employee shall continue to receive the additional benefits mentioned above for a period of two years from the termination date. If the constructive termination date is later than five years after the commencement date, Employee shall receive the lesser amount of an amount equal to his aggregate base salary for five years following the date of the termination date, or an amount equal to his aggregate base salary through the end of the term. Additionally, Employee shall continue to receive the additional benefits mentioned above during the period he is entitled to receive the base salary.
For both the period ended June 30, 2014 and 2013, the Company incurred $64,208 base salary to Dr. Moran, which was included as a component of general and administrative expenses. The Company recorded total accrued payroll to Dr. Moran in the amounts of $522,502 and $494,000 in accounts payable and accrued liabilities on its consolidated balance sheets at June 30, 2014and December 31, 2013, respectively.
Legal Proceedings
The Company is aggressively defending itself in all of the below proceedings. The Company’s management believes the likelihood of future liability to the Company for these contingencies is remote, and the Company has not recorded any liability for these legal proceedings at June 30, 2014 and December 31, 2013. While the results of these matters cannot be predicted with certainty, the Company’s management believes that losses, if any, resulting from the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
On January 20, 2011, a claim was filed against Dewmar International BMC, Inc.(“Dewmar”) by Corey Powell, in Ascension Parish, LA 23rd Judicial District Court. Corey Powell was a former distributor of LEAN, a relaxation beverage marketed by Dewmar. Powell filed suit to recover allegedly unpaid commissions, “invasion fees” and “finder’s fees.” The commissions related to payments allegedly owed for Powell’s direct sale of LEAN product to wholesalers and retailers. The invasion fees relate to payments allegedly owed to Powell when the LEAN product was sold by other wholesalers in his geographic territory. The finders’ fees relate to payments allegedly owed to Powell for introducing investors to the Dewmar’s management. Discovery is complete. Dewmar has vigorously contested each and every one of the plaintiff’s allegations and has instructed counsel to proceed to trial on the merits which is scheduled this summer. Plaintiff sent a settlement demand earlier this year which was rejected by Dewmar. Currently, there is no trial date set.
NOTE 8. SUBSEQUENT EVENTS
During the quarter ended September 30, 2014, Dewmar accounted for the issuance of 55,000,000 shares due under various consulting agreements.
On December 4, 2014, Health & Wellness Research Consortium, LLC, (“Health & Wellness”) was created with Dewmar owning 100% of the LLC membership units. The business objective of Health & Wellness is to develop, implement and execute healthcare sales and marketing strategies for pharmacies, clinics and hospitals in order to help the client broaden market presence, influence effective prescribing behaviors and ultimately maximize their return on assets.
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