UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                               to                               

 

Commission files number 000-54830

 

SUNSTOCK, INC.

(Exact Name of Registrant as Specified in its Charter)

 

SANDGATE ACQUISITION CORPORATION

(Former Name of Registrant as Specified in its Charter)

 

Delaware   46-1856372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

111 Vista Creek Circle

Sacramento, California 95835

(Address of principal executive offices) (zip code)

 

916-860-9622

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

 

Class

Outstanding at

November 19, 2014

Common Stock, par value $0.0001   9,231,397

 

Documents incorporated by reference: None

 

 

 

 
 

 

TABLE OF CONTENTS

 

Part I - Financial Information    
       
Item 1. Financial Statements (unaudited except as noted)   3
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   4
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   6
       
Item 4. Controls and Procedures   6
       
Part II - Other Information    
       
Item 1. Legal Proceedings   8
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   8
       
Item 3. Defaults Upon Senior Securities   8
       
Item 4. Submission of Matters to a Vote of Security Holders   8
       
Item 5. Other Information   9
       
Item 6. Exhibits   9

 

2
 

  

Part I - Financial Information

 

ITEM 1. FINANCIAL STATEMENTS

 

Condensed Balance Sheets as of September 30, 2014 and December 31, 2013 (audited)   F-1
     
Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013   F-2
     
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013   F-3
     
Notes to Condensed Financial Statements   F-4 - F-8

 

3
 

 

SUNSTOCK, INC.

CONDENSED BALANCE SHEETS

 

   September 30, 2014   December 31, 2013 
   (Unaudited)     
ASSETS          
Current assets          
Cash  $15,028   $10,632 
Inventory   27,500    - 
Prepaid expenses   2,378    94,976 
Note Receivable from Shareholder   33,061    - 
Total Current Assets   77,967    105,608 
Property and equipment-net   8,404    - 
Security deposits   4,756    5,226 
Total assets  $91,127   $110,834 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $18,559   $935 
Accrued litigation   55,200    55,200 
Loan from shareholder   -    6,694 
Total Current Liabilities   73,759    62,829 
Total liabilities   73,759    62,829 
           
Stockholders’ equity          
Preferred stock; $0.0001 par value, 20,000,000 shares authorized; zero shares issued and outstanding  $-   $- 
Common stock, $0.0001 par value, 100,000,000 shares authorized; 9,231,397 and 7,044,000 shares issued and outstanding, respectively   923    704 
Subscriptions receivable   (16,000)   (16,000)
Additional paid - in capital   285,318    221,977 
Accumulated deficit   (252,873)   (158,676)
Total stockholders’ equity   17,368    48,005 
Total liabilities and stockholders’ equity  $91,127   $110,834 

 

The accompanying notes are an integral part of the unaudited condensed financial statements

 

F-1
 

 

SUNSTOCK, INC.

CONDENSED STATEMENT OF OPERATIONS

(Unaudited)

 

   For the three   For the three   For the nine   For the nine 
   months ended   months ended   months ended   months ended 
   Sept. 30, 2014   Sept. 30, 2013   Sept. 30, 2014   Sept. 30, 2013 
                 
Revenue  $53,821   $-   $145,071   $- 
                     
Cost of revenue   25,153    -   $85,417    - 
Gross profit   28,668    -    59,654    - 
                     
Operating expenses   41,631    90,903   $153,851    90,903 
                     
Income (Loss) before income tax   (12,963)   (90,903)   (94,197)   (90,903)
Income tax   -    -    -    - 
                     
Net income (loss)  $(12,963)  $(90,903)  $(94,197)  $(90,903)
                     
Income (loss) per share - basic and diluted  $(0.00)  $(0.05)  $(0.01)  $(0.01)
                     
Weighted average shares - basic and diluted   9,225,377    1,817,272    8,918,438    15,092,267 

 

The accompanying notes are an integral part of the unaudited condensed financial statements

 

F-2
 

 

SUNSTOCK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the nine   For the nine 
   months ended   months ended 
   Sept. 30, 2014   Sept. 30, 2013 
OPERATING ACTIVITIES          
Net loss  $(94,197)  $(90,903)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation   497    - 
Common stock issued for services   3,000    - 
Changes in operating assets and liabilities          
Inventories   (27,500)   - 
Prepaid expenses   92,598    - 
Deposits   470    - 
Accounts payable and accrued liabilities   17,624    (350)
Deferred revenue   -    - 
           
Net cash provided by (used in) operating activities   (7,508)   (91,253)
           
INVESTING ACTIVITIES          
Purchase of equipment   (8,901)   - 
Note Receivable from Shareholder   (33,061)   - 
           
Cash provided by (used in) investing activities   (41,962)   - 
           
FINANCING ACTIVITIES          
Loan from shareholder   -    90,004 
Subscriptions receivable   -    (21,000)
Proceeds from loan to shareholder   144    (1,803)
Proceeds from issuance of common stock   53,722    64,603 
           
Net cash provided by (used in) financing activities   53,866    131,804 
           
Net increase (decrease) in cash   4,396    40,551 
           
Cash, beginning of period   10,632    2,000 
           
Cash, end of period  $15,028   $42,551 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS          
Taxes paid  $-   $- 
Interest paid  $-   $- 
Issuance of common stock upon conversion of loan from shareholder  $6,838   $- 

 

The accompanying notes are an integral part of the unaudited condensed financial statements

 

F-3
 

  

SUNSTOCK, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

This summary of significant accounting policies is presented to assists the reader in understanding and evaluating the Company’s financial statements. The financial statements and notes are the representations of the Company’s management, which is responsible for their integrity and objectivity. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

 

NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NATURE OF OPERATIONS

 

Sunstock, Inc. (formerly known as Sandgate Acquisition Corporation) (“Sunstock” or “the Company”) was incorporated on July 23, 2012 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions.

 

On July 18, 2013, the Company has changed its name from Sandgate Acquisition Corporation to Sunstock, Inc. and filed a Form 8-K with the Securities and Exchange Commission noticing such name change.

 

On July 18, 2013, Jason Chang and Dr. Ramnik S. Clair were named as the directors of the Company.

 

On October 30, 2013, the Company entered into a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build out a retail store which the Company opened in February 2014. The Company opened its second retail store in May 2014.

 

BASIS OF PRESENTATION

 

A summary of the Company’s critical accounting policies are disclosed below. The Company’s critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in more detail in the Company’s 2013 Annual Report on Form 10-K.

 

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements and should be read in conjunction with the 10-K. The accompanying unaudited condensed financial statements include all adjustments, composed of normal recurring adjustments, considered necessary by management to fairly state our results of operations, financial position and cash flows. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

 

USE OF ESTIMATES

 

The preparation of unaudited condensed 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 periods. Actual results could differ from those estimates.

 

CONCENTRATION OF RISK

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places its cash with high quality banking institutions. The Company did not have cash balances in excess of the Federal Deposit Insurance Corporation limit as of September 30, 2014.

 

REVENUE RECOGNITION

 

Our retail stores record revenue at the point of sale. Total revenues do not include sales tax because the Company is a pass-through conduit for collecting and remitting sales taxes. Revenue is recognized on the sale of a product when the product is shipped or delivered, which is when the risk of loss transfers to our customers, and collection of the sale is reasonably assured. As substantially all sales are cash or credit card sales we did not maintain a reserve for bad debt as of September 30, 2014 or December 31, 2013.

 

F-4
 

 

SUNSTOCK, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

INVENTORY

 

Inventory is stated at the lower of cost or market, using the first-in, first-out (FIFO) method of accounting. The company’s inventory consists entirely of finished goods. The cost of the Company’s inventory includes amounts paid to suppliers and freight costs incurred in connection with the delivery of product to our retail stores. The Company conducts a physical inventory and records adjustments to inventory through cost of goods sold for damaged, lost or stolen inventory (inventory shrinkage) at the end of each quarter beginning with the quarter ended September 30, 2014.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over three to five years. Improvements to leased property are depreciated over the life of the lease or the life of the improvement, whichever is less.

 

Stock Based Compensation - The Company accounts for stock issued to non-employees in accordance with the provisions of FASB ASC 505-50 “Equity Based Payments to Non-Employees”. FASB ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be 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 occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date).

 

INCOME TAXES

 

Under ASC 740, “Income Taxes”, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

LOSS PER COMMON SHARE

 

Basic loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. As of September 30, 2014, there are no outstanding dilutive securities.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

F-5
 

 

SUNSTOCK, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 - GOING CONCERN

 

The Company has not posted operating income since inception. It has an accumulated deficit of $252,873 as of September 30, 2014. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders and/or other third parties.

 

These unaudited condensed financial statements have been prepared on a going concern basis, which implies the Company will continue to meet its obligations and continue its operations for the next fiscal year. The continuation of the Company as a going concern is dependent upon financial support from its stockholders, the ability of the Company to obtain necessary equity financing to continue operations, successfully locating and negotiate with a business entity for the combination of that target company with the Company.

 

There is no assurance that the Company will ever be profitable. The unaudited condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 will have on our Condensed Consolidated Financial Statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern.” The amendments in this update provide guidance in U.S. GAAP about management’s responsibilities to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods after December 15, 2016 and early application is permitted. The Company is currently assessing this guidance for future implementation.

 

F-6
 

 

SUNSTOCK, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following as of:

 

   September 30, 2014   December 31, 2013 
         
Furniture and equipment  $8,901   $- 
           
Less – accumulated depreciation   (497)   - 
   $8,404   $- 

 

NOTE 5 - ACCRUED LITIGATION

 

In April 2014, the Company received notice that a shareholder had filed a lawsuit against the Company. The Company estimates it’s exposure to be $55,200, and has reflected this amount in accrued litigation on the accompanying balance sheet as of September 30, 2014.

 

NOTE 6 - RELATED PARTY BALANCES

 

On February 1, 2014, the Company issued 1,846,012 shares of common stock to Jason Chang, the Director, who is also a majority shareholder of the Company, for an aggregate price of $18,460. The shareholder paid for these shares by converting the loan from shareholder ($6,838 as of February 1, 2014), and paying $5,218 in the second quarter with the remaining balance of $6,404 being paid in the quarter ending September 30, 2014.

 

In August 2014, the Company entered into a note receivable agreement of approximately $33,000 with the Company’s CEO and chairman of the board of directors. At September 30, 2014, the entire balance was due. In November 2014, such amount was reclassified to compensation expense. Effective July 30, 2002, Section 402 of the Sarbanes-Oxley Act of 2002 amended the Securities Exchange Act of 1934 to prohibit U.S. and foreign companies with securities traded in the United States of America from making, or arranging for third parties to make, nearly any type of personal loan to their directors and executive officers. Violations of the Sarbanes-Oxley loan prohibition are subject to the civil and criminal penalties applicable to violations of the Exchange Act.

 

The Company has not incurred any salaries and related expenses during 2014. The Company’s officer and store employees have contributed their time without compensation, nor any amounts due. The employees operate the Company’s store (two stores through August 2014) seven days per week and Jason Chang, CEO, has been in charge of the Company’s operations since July 2013. The Company approximates the quarterly expense would total $40,000 to hire and pay for comparable services. No such amounts have been recorded for the nine months ended September 30, 2014.

  

NOTE 7 - SUBSCRIPTIONS RECEIVABLE

 

As of September 30, 2014, the company had subscriptions receivable totaling to $16,000. Of this amount, the company has moved to restrict this stock as this amount relates to the shareholder litigation as mentioned in footnote 5, Accrued Litigation above. This amount is reflected as subscriptions receivable on the equity portion of the balance sheet on the accompanying unaudited condensed financial statements as of September 30, 2014.

 

NOTE 8 - COMMITMENTS

 

On October 30, 2013, the Company entered into a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build out a retail store which the Company began operating on February 10, 2014. Additionally, the Company entered into a lease agreement on October 30, 2013 for 2,239 square feet of retail shop space for this store. The lease requires combined monthly payments of base rent of $3,733 for thirty six months beginning February 2014. On April 8, 2014 the Company entered into a sixty-seven month lease agreement for its second retail store. The lease requires monthly payments of base rent of $4,756, with free rent for months one through four, month seven, month nine and month eleven. The base rent increases gradually over the term of the lease. The company has recorded deferred rent related to this lease, which approximated $16,000 and was included in accounts payable in the accompanying balance sheet of September 30, 2014. This store began operations on May 8, 2014.

 

On August 21, 2014 the first store was forced to close due to below code electrical wiring the landlord had provided. Perishable inventory at this store was relocated to the second store as nonperishables were moved into storage along with fixed assets until a new location is expected to open in the first quarter of 2015. Related rents and associated costs have ceased with a final settlement pending.

 

F-7
 

 

SUNSTOCK, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 9 - STOCKHOLDER’S EQUITY/(DEFICIT)

 

The Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. As of September 30, 2014, 9,231,397 shares of common stock and no preferred stock were issued and outstanding.

 

During the nine months ended September 30, 2014, the Company issued 2,187,397 common shares to third parties at prices from $0.01 to $0.65.

 

As described in Note 6, on February 1, 2014 the Company issued 1,846,012 common shares to the Company’s president, who is also a director and majority shareholder of the Company, at a price of $0.01 per share for an aggregate price of $18,460.

 

On March 15, 2014, the Company issued 30,000 shares of the Company’s common stock to a director, who is also a Senior Vice President, for a price of $3,000, or $0.10 per share for service rendered. In August 2014, the Company issued 15,385 shares of common stock for $10,000 at $0.65 per share.

 

NOTE 10 - RESTATEMENTS

 

Revenues

 

The original accounting for June 2014 sales were improperly deferred based on the cash not being deposited in the Company’s bank account. Based on management’s analysis of the underlying data, it determined that there was evidence of the sale transactions based on daily sales logs and the fact that such amounts were not deposited into the Company’s bank account was not a component of the Company’s revenue recognition policy.

 

The effect of these changes impacted the condensed balance sheet and condensed statements of operations for the quarter ended June 30, 2014. Accordingly, the condensed balance sheet, statements of operations and statement cash flows for the period described in the preceding sentence have been retroactively adjusted as summarized below:

 

Effect of Correction  As Previously
Reported
   Adjustment   As Restated 
             
Balance sheet at June 30, 2014:               
Inventory  $43,474   $(21,450)  $22,024 
Deferred revenue   33,000   $(33,000)  $- 
Accumulated deficit   (251,482)  $11,550   $(239,932)
Total stockholders’ equity  $2,355   $11,550   $13,905 
                
Statement of Operations for the quarter ended June 30, 2014:               
Revenue  $38,113   $33,000   $71,113 
Cost of sales   24,744    21,450    46,194 
Net Loss   (13,083)   11,550    (1,533)
EPS, Basic and Diluted  $-   $-   $- 
                
Statement of Operations for the six months ended June 30, 2014:               
Revenue  $58,189   $33,000   $91,189 
Cost of sales   38,775    21,450    60,225 
Net Loss   (92,806)   11,550    (81,256)
EPS, Basic and Diluted  $(0.01)  $-   $(0.01)

 

NOTE 11 - SUBSEQUENT EVENTS

 

There are no subsequent events.

 

F-8
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

This Quarterly Report contains forward-looking statements. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as “believes,” “anticipates,” “expects,” “intends” and similar expressions. Forward looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the uncertainty of growth in market acceptance for our technology, a history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, a reliance on our future customers’ ability to develop and sell products that incorporate our technology, our customer concentration and dependence on a limited number of customers, the uncertainty of demand for our technology in certain markets, the length of a product development and release cycle, our ability to manage growth effectively, our dependence on key members of our management and development team, uncertainty regarding expansion or other corporate transactions and our ability to obtain adequate capital to fund future operations, For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the filing date of this quarterly report. Actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under the applicable securities laws.

 

The following Management’s Discussion and Analysis should be read in conjunction with the condensed financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K.

 

Company Overview

 

Sunstock, Inc., formerly Sandgate Acquisition Corporation (“Sunstock”) was incorporated on July 23, 2012 under the laws of the State of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions.

 

Since inception Sunstock has been in the developmental stage and its operations to date have been limited to issuing shares of common stock and filing a registration statement on Form 10 with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 as amended to register its class of common stock. The Company also has opened its first and second discount retail stores in February and May 2014. In August of 2014, the first store was forced to close due to landlord substandard building code construction. Related rent and associated costs have ceased with a final settlement pending. The company has targeted a replacement location and plans on opening in the first quarter of 2015.

 

Sunstock had been formed to provide a method for a foreign or domestic private company to become a reporting company with a class of securities registered under the Securities Exchange Act of 1934.

 

With the redemption of 19,500,000 shares of stock and the issuance of the 1,000,000 shares of stock, on July 19, 2013 the Company effected a change in its control and the new majority shareholder(s) elected new management of the Company. A Form 8-K was filed on July 22, 2013 noticing the change in control and the resignation of the then officers and directors and election of new directors and officers.

 

New management intends to develop the Company for the acquisition and operation of hotels, discount retail stores, and residential properties in the high demand areas of California, particularly Southern California and the San Francisco Bay Area. In September 2013, new management developed plans to open and operate two retail stores in Sacramento, California. On October 30, 2013, the Company entered into a Purchase Agreement with Dollar Store Services, Inc. to develop, design and build out a retail store which the Company began operating in February 2014. Additionally, the Company entered into a lease agreement on October 30, 2013 for 2,239 square feet of retail shop space for this store in Sacramento, California. The lease requires monthly payments for base rent of $3,733 for thirty six months beginning February 2014. In August of 201,4 the first store was forced to close due to landlord substandard building code construction. The company has targeted a replacement location and plans on opening in the first quarter of 2015.

 

Management opened an additional retail store in Sacramento, California in May 2014 and entered into a retail shop lease for sixty-seven months beginning May 2014 for approximately 4,756 square feet. The monthly base rent for this location is currently $4,756, with seven months of free rent throughout the first eleven months. The base rent will gradually increase until the term expires in 2019.

 

As of the date of this report, no business combinations have been entered into or effected. When any such business combination is effected, if any, the Company will file a Form 8-K.

 

The most likely target companies are those seeking the perceived benefits of a reporting corporation. Such perceived benefits may include facilitating or improving the terms on which additional equity financing may be sought, providing liquidity for incentive stock options or similar benefits to key employees, increasing the opportunity to use securities for acquisitions, providing liquidity for shareholders and other factors.

 

Business opportunities may be available in many different industries and at various stages of development, all of which will make the task of comparative investigation and analysis of such business opportunities difficult and complex.

 

In analyzing prospective business opportunities, Sunstock may consider such matters as the available technical, financial and managerial resources; working capital and other financial requirements; history of operations, if any; prospects for the future; nature of present and expected competition; the quality and experience of management services which may be available and the depth of that management; the potential for further research, development, or exploration; specific risk factors not now foreseeable but which may be anticipated; the potential for growth or expansion; the potential for profit; the perceived public recognition or acceptance of products, services, or trades; name identification; and other relevant factors. This discussion of the proposed criteria is not meant to be restrictive of the virtually unlimited discretion of Sunstock to search for and enter into potential business opportunities.

 

A combination will normally take the form of a merger, stock-for-stock exchange or stock-for-assets exchange. In most instances the target company will wish to structure the business combination to be within the definition of a tax-free reorganization under Section 351 or Section 368 of the Internal Revenue Code of 1986, as amended.

 

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Sunstock has, and will continue to have, limited capital with which to provide the owners of business entities with any cash or other assets.

 

Sunstock has generated limited revenues from operations since inception. The continuation of Sunstock as a going concern is dependent upon financial support from its stockholders, its ability to obtain necessary equity financing, and its ability to generate sufficient cash flows from its new and planned discount retail stores to continue operations.

 

Tiber Creek Corporation, a corporation solely owned by the former president of the Company, a former majority shareholder of the Company and a current owner of 250,000 shares of the Company, paid, without expectation of repayment at any time, all expenses incurred by Sunstock until the change in control.

 

The Company paid $85,000 to Tiber Creek Corporation for consulting fees during the year ended December 31, 2013.

 

The Company has sustained operating losses since inception. It has an accumulated deficit of $252,873 as of September 30, 2014. The Company’s auditors have issued a note regarding the continuation of the Company as a going concern in their audit opinion for the year ended December 31, 2013. Continuation of the Company as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, and /or obtain additional financing from its stockholders and/or other third parties.

 

Critical Accounting Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve more significant judgments and estimates used in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and any changes in the different estimates that could have been used in the accounting estimates that are reasonably likely to occur periodically could materially impact our condensed financial statements.

 

Our most critical accounting policies and estimates that may materially impact our results of operations include:

 

REVENUE RECOGNITION

 

Our retail stores record revenue at the point of sale. Total revenues do not include sales tax because the Company is a pass-through conduit for collecting and remitting sales taxes. Revenue is recognized on the sale of a product when the product is shipped or delivered, which is when the risk of loss transfers to our customers, and collection of the sale is reasonably assured. As substantially all sales are cash or credit card sales we did not maintain a reserve for bad debt as of September 30, 2014 or December 31, 2013

 

5
 

 

USE OF ESTIMATES

 

The preparation of unaudited condensed 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 periods. Actual results could differ from those estimates.

 

INVENTORY

 

Inventory is stated at the lower of cost or market, using the first-in, first-out (FIFO) method of accounting. The company’s inventory consists entirely of finished goods. The cost of the Company’s inventory includes amounts paid to suppliers and freight costs incurred in connection with the delivery of product to our retail stores. The Company conducts a physical inventory and records adjustments to inventory through cost of goods sold for damaged, lost or stolen inventory (inventory shrinkage) at the end of each quarter beginning with the quarter ended September 30, 2014.

 

Discussion of the Three Months and Nine Months ended September 30, 2014

 

The Company generated revenues during the three months and nine months ended September 30, 2014 of $53,821 and $145,071, respectively, as compared to no revenues posted for the three and nine months ended September 30, 2013. The increase in revenues is primarily due to the commencement of operations and sales at its first and second retail locations.

 

During the three months and nine months ended September 30, 2014, the Company posted operating loss of $12,963 and a net loss of $94,197 respectively, as compared to a net loss of $90,903 for both the three and nine months ending September 30, 2013.

 

During the nine months ended September 30, 2014, the Company used net cash of $7,508 in its operations. During such period, the Company also generated cash from financing activities in the amount of $53,866. The Company had a cash balance of $15,028 as of September 30, 2014.

 

Liquidity and Capital Resources

 

As of September 30, 2014, the Company had $15,028 in cash and $27,500 in inventory. During the nine months ended September 30, 2014, the Company raised $53,722 in cash from stock sales.

 

Contractual Obligations

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

 

Off-balance Sheet Arrangements

 

The Company has not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be considered material to investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Information not required to be filed by Smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Pursuant to Rules adopted by the Securities and Exchange Commission, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules. This evaluation was done as of the end of the fiscal year under the supervision and with the participation of the Company’s principal executive officer (who is also the principal financial officer). There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation. Based upon that evaluation, he believes that the Company’s disclosure controls and procedures are not effective in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely. The principal executive officer is directly involved in the day-to-day operations of the Company.

 

6
 

 

Management’s Report of Internal Control over Financial Reporting

 

The Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Rule 13a-15 of the Securities Exchange Act of 1934. The Company’s officer, its president, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2014 based on the criteria establish in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2014, based on those criteria. A control system can provide only reasonably, not absolute, assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues have been detected.

 

Material Weaknesses:

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses identified are:

 

1. Inadequate number of personnel that could accurately and timely record and report the Company’s financial statements in accordance with GAAP;

 

We did not employ an adequate number of people to ensure a control environment that would allow for the accurate and timely reporting of the financial statements.

 

2. Ineffective controls to ensure that the accounting for transactions are recorded in accordance with GAAP financial statements;

 

During the year ended December 31, 2013, audit adjustments were made to the general ledger, which collectively could have a material effect on the financial statements.

 

Notwithstanding the existence of these material weaknesses in internal control over financial reporting, we believe that the financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition in conformity with U.S. generally accepted accounting principles (GAAP). Further, we do not believe the material weaknesses identified had an impact on prior financial statements.

 

Remediation:

 

As part of our ongoing remedial efforts, we have and will continue to, among other things:

 

1. Expanded our accounting policy and controls organization by recently hiring qualified accounting and finance personnel;

 

2. Increase our efforts to educate both our existing and expanded accounting policy and control organization on the application of the internal control structure;

 

3. Emphasize with management the importance of our internal control structure;

 

4. Seek outside consulting services where our existing accounting policy and control organization believes the complexity of the existing exceeds our internal capabilities.

 

5. Plan to implement improved accounting systems.

 

We believe that the foregoing actions will improve our internal control over financial reporting, as well as our disclosure controls and procedures. We intend to perform such procedures and commit such resources as necessary to continue to allow us to overcome or mitigate these material weaknesses such that we can make timely and accurate quarterly and annual financial filings until such time as those material weaknesses are fully addressed and remediated.

 

This Quarterly 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 temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Quarterly Report.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting during its first fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In April 2014, the Company received notice that a shareholder had filed a lawsuit against the Company. The Company estimates the cost of this lawsuit will be approximately $55,200, and has reflected this amount in accrued litigation on the accompanying balance sheet as of September 30, 2014.

 

There is no other litigation pending or threatened by or against the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Since inception, the Company has sold securities which were not registered as follows:

 

Date   Name  Number of Shares   Consideration 
July 30, 2012   Tiber Creek Corporation (1)   10,000,000   $1,000 
July 30, 2012   MB Americus LLC (2)   10,000,000   $1,000 
July 19, 2013   Jason C. Chang (3)   1,000,000   $100 
October 18, 2013   Jason C. Chang (3)   4,200,000   $96,244 
October 21, 2013   Dr. Ramnik S. Clair (4)   240,000   $60,000 
July 19, 2013 - December 31, 2013   Other parties   1,104,000   $64,130 
February 1, 2014   Jason C. Chang (3)   1,846,012   $18,460 
March 15, 2014   Dr. Ramnik S. Clair (4)   30,000   $3,000 
January 1, 2014 - September 30, 2014   Other parties   311,385   $42,100 

 

(1) James M. Cassidy, the former president and a director of the Company, is the sole shareholder and director of Tiber Creek Corporation, a Delaware corporation, and Mr. Cassidy may be deemed to be the beneficial owner of the shares of stock owned by Tiber Creek Corporation. Mr. Cassidy redeemed 9,750,000 of these shares for $975 on July 18, 2013.

 

(2) James McKillop is the sole principal of MB Americus LLC, a California limited liability corporation. Mr. McKillop is deemed to be the beneficial owner of the shares of stock owned by MB Americus LLC. Mr. McKillop redeemed 9,750,000 of these shares for $975 on July 18, 2013.

 

(3) Jason C. Chang is the president and a director of the Company.

 

(4) Dr. Ramnik S. Clair is the Senior Vice President and a director of the Company.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

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ITEM 5. OTHER INFORMATION

 

(a) Not applicable.

 

(b) Item 407(c)(3) of Regulation S-K:

 

During the quarter covered by this Report, there have not been any material changes to the procedures by which security holders may recommend nominees to the Board of Directors.

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

31 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

9
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SUNSTOCK, INC.
     
Dated: November 19, 2014 By: /s/ Jason C. Chang
    Jason C. Chang
    President, Chief Financial Officer
    for the period covered by this Report

 

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EXHIBIT 31

 

CERTIFICATION PURSUANT TO SECTION 302

 

I, Jason C. Chang, certify that:

 

1. I have reviewed this Form 10-Q for the period ended September 30, 2014 of Sunstock, Inc. (formerly Sandgate Acquisition Corporation).

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 19, 2014 /s/ Jason C. Chang
  Chief Executive Officer and
  Chief Financial Officer for
  Period covered by the report

 

 
 

  

 

EXHIBIT 32

 

CERTIFICATION PURSUANT TO SECTION 906

 

Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned officer of Sunstock Inc. (formerly Sandgate Acquisition Corporation (the “Company”)), hereby certify to my knowledge that:

 

The Report on Form 10-Q for the period ended September 30, 2014 of the Company fully complies, in all material respects, with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

Date: November 19, 2014 /s/ Jason C. Chang
  Chief Executive Officer and
  Chief Financial Officer for
  Period covered by the report