You should read the following discussion of our financial condition and results
of operations together with the audited consolidated financial statements and
notes to the financial statements included elsewhere in this Annual Report. This
discussion contains forward-looking statements that involve risks and
uncertainties. The forward-looking statements are not historical facts, but
rather are based on current expectations, estimates, assumptions and projections
about our industry, business and future financial results. Our actual results
could differ materially from the results contemplated by these forward-looking
statements due to a number of factors, including those discussed under "Item 1A.
Risk Factors" and other sections in this Annual Report.
The following discussion highlights Pacific Ventures' results of operations and
the principal factors that have affected our financial condition as well as our
liquidity and capital resources for the periods described and provides
information that management believes is relevant for an assessment and
understanding of the statements of financial condition and results of operations
presented herein. The following discussion and analysis are based on Pacific
Ventures' audited Financial Report, which we have prepared in accordance with
United States generally accepted accounting principles. You should read this
discussion and analysis together with such financial statements and the related
notes thereto.
Basis of Presentation
The audited financial statements for our fiscal years ended December 31, 2018
and 2017 include a summary of our significant accounting policies and should be
read in conjunction with the discussion below. In the opinion of management, all
material adjustments necessary to present fairly the results of operations for
such periods have been included in these audited financial statements. All such
adjustments are of a normal recurring nature.
Overview
Overview 2017 - During 2017, the South Carolina distributor expanded the account
base for SnöBar and has many successful placements for the brand. Furthermore,
additional funding has also been unavailable to pursue additional geographic
markets, both domestic and international. Despite such challenges, during 2017,
the Company continued development of the Snobar Product Line with the goal to
fulfill the current orders that the brand has in hand from the Company's
distributor in South Carolina as well as from other accounts. In addition, the
Company further continued with its strategy of selectively pursue strategic
acquisitions in its industry and related industries, culminating in the
execution of the Asset Purchase Agreement with San Diego Farmers Outlet, Inc.
The Company is currently working on satisfying the closing conditions under the
Asset Purchase Agreement, including obtaining the necessary Financing, and hope
to close the transaction during the second quarter of 2018. There can be no
assurance, however, that the Financing and the asset acquisition will be
consummated or as to the date by which the asset acquisition may be consummated,
if at all.
Overview 2018 - During the 2018 fiscal year, the Company completed an asset
acquisition of San Diego Farmers Outlet, Inc. (SDFO), a California Corporation
with over thirty-five (35) years in business servicing restaurant and retail
produce customers in southern California's three largest counties, supplying
quality food and produce. SDFO does business under the name of Farmers Outlet
and San Diego Farmers Outlet. On Sept. 24, 2018, the Company announced the
signing of a definitive Asset Purchase Agreement to acquire a food and beverage
distribution company that is involved in the sale of food, beverages and general
merchandise to retailers, households, hotels, restaurants, "mom and pop"
markets, liquor stores, gas stations and other retail outlets.
Strategy
In Fiscal Year 2019, the Company's strategy is focused on:
? incrementally increase sales and profitability of San Diego Farmers Outlet
(SDFO)
? expanding Snöbar production and distribution
? acquisition of food production or distribution companies that are synergistic
with SDFO
We plan to grow SDFO's wholesale business by expanding its delivery territory
from 25 miles to a 40-mile radius, and add to the current fleet of delivery
trucks. The Company has already begun marketing to new restaurants in the area,
most notably Asian and Italian restaurants, and have let restaurants know that
SDFO can deliver the finest produce in market.
We plan to expand Snöbar production and distribution by partnering with
third-party manufacturers and co-packers, and with third-party distributors that
can sell Snöbar products to high-end restaurants, resorts, cruise lines and
hotels worldwide. Initially, the focus will be on establishing major accounts in
four core markets consisting of Southern California, Phoenix, Las Vegas and
Miami. The larger vision is to sell products in grocery stores such as Kroger,
Wal-Mart and others, and thereafter to begin a national marketing program to all
U.S. retailers. It is essentially a top down marketing plan where products are
placed with the largest retailer then trickle down to the smallest seller in
each market area
We plan to acquire food production and distribution businesses that will help
the Company grow its food, beverage and alcohol-related products businesses. We
continue to engage in preliminary discussions with potential investors in order
to properly fund potential acquisitions, however, there are no assurances that
the required funding will be available on terms acceptable to us, or at all.
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Going Concern
The accompanying consolidated financial statements have been prepared assuming
we will continue as a going concern. As discussed in this Annual Report and in
the notes to the Company's consolidated financial statements included elsewhere
herein, we have incurred operating losses, and as at December 31, 2018 and 2017,
we have accumulated deficit of $7,499,045 and $5,970,024, respectively. For the
year ended December 31, 2018, we have a working capital deficiency of
approximately $1,355,944. These factors raise substantial doubt about our
ability to continue as a going concern. Additionally, our independent registered
public accounting firm included an explanatory paragraph in their report for the
years ended December 31, 2018 and 2017 regarding concerns about our ability to
continue as a going concern.
Our ability to continue as a going concern is dependent upon our generating
operating cash flow and raising capital sufficient to fund operations. We have
discussed our strategy and plans relating to these matters elsewhere in this
Current Report although the consolidated financial statements included herein do
not include any adjustments that might result from the outcome of these
uncertainties. Our business strategy may not be successful in funding ongoing
operations and accelerating our domestic and international expansion, and if we
cannot continue as a going concern, our stockholders may lose their entire
investment in us.
Plan of Operations for the Next Twelve Months
Pacific Ventures will need approximately $500,000 to sustain operations for the
next 12 months. Our plan is to achieve meaningful sales revenue from the sale of
the SDFO products to meet our operating needs. However, it is very likely that
we will not be able to increase our sale revenue sufficiently to meet these
needs in time. It is also unlikely that we will be able to satisfy all of our
obligations to pay interest and repay principal in the estimated aggregate
amount of $976,120 due and payable within the next 12 months under the various
forms of our outstanding debt. Although we have been able to extend the maturity
dates as well as repayment terms of a substantial amount of such debt, there is
no assurance that we will be able to further extend such repayments or maturity
dates to avoid a default, as such further extension depends on the consent of
the holders of such debt. If we are unable to make such payments and repayments
and unable to extend and delay required payments or maturities of such debt, the
holders of such debt will have the right to take legal action seeking
enforcement of the debt. If any legal action is taken against us, we would face
the risk of having to deplete our limited cash resources to defend against such
suit or face the entry of a default judgment. In either event, such action would
have grave impact on our operations. Our ability to continue operations will be
dependent upon the successful completion of additional long-term or permanent
equity financing, the support of creditors and shareholders, and, ultimately,
the achievement of profitable operations. There can be no assurances that we
will be successful, which would in turn significantly affect our ability to be
successful in our new business plan. If not, we will likely be required to
reduce operations or liquidate assets. We will continue to evaluate our
projected expenditures relative to our available cash and to seek additional
means of financing in order to satisfy our working capital and other cash
requirements.
Critical Accounting Estimates
We regularly evaluate the accounting estimates that we use to prepare our
financial statements. A complete summary of these policies is included in the
Notes to our audited financial statements. In general, management's estimates
are based on historical experience, on information from third party
professionals, and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
15
We believe that of our significant accounting policies, which are described in
Note 2 to our consolidated financial statements, the following accounting
policies involve a greater degree of judgment and complexity. Accordingly, these
are the policies we believe are the most critical to aid in fully understanding
and evaluating our financial condition and results of operations.
Revenue Recognition - We are generating substantially all our revenue from the
domestic sale of fresh produce and food products. Farmers Outlet provides
specialty produce that the larger distributors do not carry on a daily basis.
Farmers Outlet's customers comprise restaurants, hotels, clubs and bars,
resorts, food trucks and caterers. Sales revenues are generally recognized when
the products are shipped or delivered to the customers, net of discounts,
returns and allowance and collectability is reasonably assured.
Concentrations of Credit Risk - Cash held in banks: we maintain cash balances at
a financial institution that is insured by the Federal Deposit Insurance
Corporation ("FDIC") up to federally insured limits. At times balances may
exceed FDIC insured limits. We have not experienced any losses in such accounts.
Accounts Receivable (AR): AR as at the years-ended December 31, 2018 and 2017,
were $280,142 and $6,589, respectively. Historically, customer accounts
typically are collected within a short period of time, and based on its
assessment of current conditions and its experience collecting such receivables,
management believes it has no significant risk related to its concentration
within its accounts receivable.
Results of Operations
Year ended December 31, 2018, as compared to the year ended December 31, 2017
Revenues and Cost of Goods Sold. Revenue for the fiscal year ended December 31,
2018 increased to $3,211,573 from $0 during the comparable period as a result of
the acquisition of San Diego Market Outlet, Inc.
Cost of goods sold is comprised of production costs, shipping and handling and
handling costs. For the fiscal year ended December 31, 2018, we had costs of
goods sold of $2,392,329, as compared to $0 in the comparable period ended
December 31, 2017. The percentage of COGS against sales was 0% in the fiscal
year ended December 31, 2017 to 74% in the fiscal year ended December 31, 2018.
Operating Expenses. Our SG&A expenses consist of sales and marketing,
professional services, rents, and general office expenses (including wages for
non-officer personnel). During the fiscal year ended December 31, 2018 our SG&A
expenses increased to $1,732,109 from $463,749 in the comparable prior period,
an increase of $1,268,360. These increases were the result of increases in
general office expenses, professional services and marketing expenses. In
December 31, 2018, total general office expense was $929,023, marketing expenses
was $130,851 and professional fees was $672,235. Depreciation expenses increase
from $3,995 to $17,626 for the fiscal years December 31, 2017 and December 31,
2018, respectively, due to the addition of depreciable assets in the second
quarter of 2018 related to the acquisition of San Diego Market Outlet, Inc.
Total operating expenses for the fiscal year ended December 31, 2018 were
$1,749,735 representing an increase of $1,262,747, as compared to $486,988for
the comparable prior period ended December 31, 2017.
Other Non-Operating Income and Expenses . Non-operating expenses for the fiscal
year ended December 31, 2018 were $617,368, consisting all in interest expense
compared to a non-operating expenses of $103,072, consisting of interest expense
of $124,963 and a gain in extraordinary items of $21,891, respectively, in the
comparable prior period ended December 31, 2017 .
Net Loss. Net loss for the fiscal year ended December 31, 2018 was $1,547,598,
an increase of $957,539 from $590,059 in the comparable prior period ended
December 31, 2017.
Financial Condition, Liquidity and Capital Resources
Fiscal years ended December 31, 2018 and 2017
As of December 31, 2018, we had a working capital deficit of $1,355,944
comprised of $151,058 in cash and cash equivalents, $280,142 of accounts
receivable, $160,858 inventory assets, and $1,500 in deposits which were offset
by accounts payable of $597,888, $286,598 in accrued expenses, $772,334 in
current notes payable, $203,786 in current note payable to a related party and
$88,896 in lease payable. For the fiscal year ended December 31, 2018 we used
$1,597,563 in operating activities. Cash used in investing activities totaled
$1,101,839, consisting of purchase of computers of $10,426, purchase of
equipment, building and improvement for $141,413 and for goodwill and intangible
assets $950,000, all of which related to the recent acquisition of San Diego
Farmers Market. Cash provided in financing activities totaled $2,850,389,
consisting of $2,742,721 in proceeds from notes payable, $432,641 in common
shares issued for debt conversion and $324,973 in repayment of notes payable.
In the comparable prior period in 2017, we had a working capital deficit of
$1,306,103 comprised of $69 in cash, $6,589 of accounts receivable, and $1,500
in deposits offset by $171,085 in accounts payable, $332,503 in accrued
expenses, $456,914 in current portion of notes payable, and $353,759 in current
portion of notes payable to a related party. We used $512,034 in cash from
operating activities. Cash provided in financing activities totaled $486,820,
consisting of $465,914 in proceeds from notes payable, $534,196 in the sale of
common stock, $747 in proceeds from related party notes payable and repayment of
notes for $514,038.
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At December 31, 2018, we had cash and cash equivalents of $151,058 as compared
to $69 at December 31, 2017.
Cash used in operations for the fiscal year ended December 31, 2018 was
$1,597,563 as compared to $512,034 in the comparable prior fiscal year ended
December 31, 2017. Cash used increased by $1,082,529 between periods.
For the fiscal year ended December 31, 2018, cash used in investing totaled
$1,101,839 all of which related to the recent acquisition of San Diego Farmers
Market. We had no cash from investing activities December 31, 2017.
Cash provided from financing activities at December 31, 2018 was $2,850,389 as
compared to $486,820 at December 31, 2017.
As of December 31, 2018, we had total current liabilities of $1,949,502 and
total liabilities were $4,250,582, as compared to $1,314,261 and $1,668,082,
respectively, for December 31, 2017.
We depend upon debt and/or equity financing to fund our ongoing operations and
to execute our business plan. If continued funding and capital resources are
unavailable at reasonable terms we may curtail our plan of operations. We will
be required to obtain alternative or additional financing from financial
institutions or otherwise, in order to maintain and expand our existing
operations. The failure by us to obtain such financing would have a material
adverse effect upon our business, financial condition and results of operations.
Capital Resources
Our principal sources of liquidity have been cash generated by issuing
convertible notes, loan proceeds and cash generated from operations. Management
estimates that the current funds on hand will be sufficient to continue
operations through March 31, 2019.
In order to be able to achieve our strategic goals, we need to further expand
our business and financing activities. Expanding market awareness of the SnöBar
products and our international distribution networks, together with further
improvement of the SnöBar products will require future capital and liquidity
expansion. Since 2013, our shareholders have contributed a significant amount of
capital making it possible for us to develop and market the SnöBar products. To
continue to develop our product offerings and expand our services and to realize
an international coverage a significant capital increase has been and will
continue to be required. We have drafted an investment plan and concluded we
should enter in the process of raising additional capital from current
shareholders and new investors.
We plan to continue raising capital in order to meet our liquidity needs.
However, we may be unable to raise sufficient additional capital when we need it
or to raise capital on favorable terms. If we are unable to obtain adequate
funds on reasonable terms, we may be required to significantly curtail or
discontinue operations or obtain funds by entering into financing agreements on
unattractive terms.
We do not currently have any contractual restrictions on our ability to incur
debt and, accordingly we could incur significant amounts of indebtedness to
finance operations. Any such indebtedness could contain covenants which would
restrict our operations.
Off-Balance Sheet Arrangements
There are no 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 is material to investors.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities in the consolidated financial statements and accompanying notes.
The SEC has defined a company's critical accounting policies as the ones that
are most important to the portrayal of the company's financial condition and
results of operations, and which require the company to make its most difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition, we have
identified the critical accounting policies and judgments addressed below. We
also have other key accounting policies, which involve the use of estimates,
judgments and assumptions that are significant to understanding our results,
which are described in Note 2 to our consolidated financial statements. Although
we believe that our estimates, assumptions and judgments are reasonable, they
are based upon information presently available. Actual results may differ
significantly from these estimates under different assumptions, judgments or
conditions.
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PACIFIC VENTURES GROUP, INC. 
