Overview

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Report before deciding to purchase, hold or sell our common stock.

Sunstock, Inc. ("Sunstock" or "the Company") was incorporated on July 23, 2012, as Sandgate Acquisition Corporation, 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 changed its' name from Sandgate Acquisition Corporation to Sunstock, Inc. On the same date, Jason Chang and Dr. Ramnik S Clair were named as 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. 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. The Company's second store was relocated in December of 2015 under lease running through June 2017 and operated on a month to month lease from then until the store was closed in September 2018. The Company currently operates no variety retail stores.

On October 22, 2018, the Company acquired all assets and liabilities of the Retail Store of Sacramento, California. Included in the assets acquired was approximately $60,000 in precious metals inventory and approximately $13,000 in net fixtures. Also included were any licenses and permits, customer lists, logo, trade names, signs, and websites. Financing of the purchase was by $20,056 cash, $33,000 unsecured note payable with principal payments of $1,000 per week for 33 weeks starting January 1, 2019 with 4.5% annual interest accrued on the unpaid balance (total accrued interest due August 27, 2019), and the assumption of liabilities and lease obligations. The Retail Store specializes in buying and selling gold, silver, and rare coins, and is one of the leading precious metals retailers in the greater Sacramento metropolitan area.





Critical Accounting Policies

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of 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.





9






Revenue Recognition

The Company follows Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). The guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

The Company's principal activities from which it generates revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. These contracts define each party's rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid at time of sale via credit card, check, or cash when products are sold direct to consumers.

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer of a product to customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. The Company has concluded the sale of product and related shipping and handling are accounted for as the single performance obligation.

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. We do not issue refunds.

The Company recognizes revenue when it satisfies a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company or when a point of sale transaction is completed. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales. The Company does not accept returns.





Stock-Based Compensation:

All share-based payments are recognized in the consolidated financial statements based upon their fair values.

The Company recognizes stock-based compensation expense in accordance with the provisions of ASC 718, Compensation - Stock Compensation ("ASC 718"). ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees, directors and non-employees based on the grant date fair value of the awards. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is primarily recognized over the term of the consulting agreement. In accordance with FASB guidance, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes.





10

2020 Year-End Analysis Results of Operations

Comparison of the Years Ended December 31, 2020 and 2019

For the year ended December 31, 2020, revenues were $10,072,770, an increase of $3,924,329 from $6,148,441 for 2019. The increase in revenue was primarily due to discounts to large purchasers of coins and more people considering coins a safe haven in 2020 due to Covid-19 and political uncertainty.

For the year ended December 31, 2020, cost of goods sold were $9,843,157, an increase of $3,901,418 from $5,941,739 for 2019 due to the increase in revenue.

For the year ended December 31, 2020, gross profit was $229,613 (2.3%), an increase of $22,911 from a gross profit of $206,702 (3.4%) for 2019.

For the year ended December 31, 2020, operating expenses were $1,638,250, a decrease of $7,125,808 from $8,764,057 for 2019. Stock based compensation was $974,600 for 2020, a decrease of $6,860,550 from $7,835,150 in 2019. $5,865,950 was for employee stock based compensation and $894,600 was for consultant stock based compensation in 2019. Stock based compensation is based on the discretion of the CEO.

For the year ended December 31, 2020, the net income was $2,677,844, an increase of $12,802,910 from a loss of $10,125,066 for 2019. The net income for 2020 was due to $4,087,280 in net other income derived mainly from the settlement of $776,315 of debt and $3,240,220 reduction of derivative liability. The Company does not expect to enter into such debt agreements in the future, nor realize such income in the future. The accumulated deficit at December 31, 2020 was $60,207,492.

Liquidity and Capital Resources

As of December 31, 2020, the Company had $47,055 in cash, $219 in accounts receivable, $1,015,599 in inventories and $13,456 in prepaid expenses. During the year ended December 31, 2020, the Company used net cash of $414,280 in operations. During the year ended December 31, 2020, $307,700 in net cash was provided by financing activities as follows: the Company raised $25,000 in cash from a convertible note payable, $5,100 from shareholder receivable, $42,500 from the issuance of common stock, $400,000 from the issuance of preferred stock, $150,000 from an SBA loan, $359,838 in notes payable from related parties, and paid $110,000 on notes payable from related parties and $564,738 on convertible notes payable.

The Company has not posted operating income since inception. It has an accumulated deficit of $60,207,491 as of December 31, 2020. Therefore, there is 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 third parties.

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