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SUNSET ISLAND GROUP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/22/2020 | 03:55pm EDT

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our unaudited financial statements are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to "common shares" refer to the common shares in our capital stock.

As used in this quarterly report, the terms "we", "us", "our" and "our Company" mean Sunset Island Group, Inc. and our wholly owned subsidiary, VBF Brands, Inc., a California corporation, unless otherwise indicated.



General Overview


Sunset Island Group, Inc. ("SIGO" or the "Company") was originally incorporated in the State of Colorado on September 29, 2005 as Gulf West Property, Inc. On October 25, 2005 the Company changed its name to Titan Global Entertainment, Inc. On May 7, 2008, the Company changed its name to Sunset Island Group, Inc.

Our business and corporate address is 20420 Spence Rd., Salinas, CA 93908, our phone number is (424) 239-6230. Our corporate website is www.sunsetislandgroup.com.

Until December 31, 2017, we operated our business through our then wholly owned subsidiary, Battle Mountain Genetics, Inc., a California corporation ("BMG"). The Company currently conducts its business operations through its wholly owned subsidiary VBF Brands, Inc. ("VBF Brands" or "VBF"). VBF Brands operated as a nonprofit mutual benefit entity until December 21, 2017 when it was converted to a for profit entity. Prior to December 21, 2017, VBF Brands operated as a collective pursuant to California's Compassionate Use Act. Upon the conversion of VBF Brands to a for profit entity the Company began operating all of its cannabis related business through VBF Brands and BMG ceased active operations. One hundred percent of the issued and outstanding shares of BMG's capital stock was transferred, in December, 2017 to T.J. Magallanes, a former officer and director of SIGO.

We have one subsidiary, VBF Brands, Inc., a California, corporation.

We have never declared bankruptcy, been in receivership.



Our Current Business


Our principal line of business is the growing, cultivation, production and distribution of adult and medicinal cannabis.

The Company currently leases the following real property in Northern California: greenhouse space of approximately 12,000 square feet; vacant land of approximately 10,000 square feet that can developed for additional greenhouse use; and 2,400 square feet for drying, curing, manufacturing, trimming and distribution activities.




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Federal Regulation


The Company, by and through VBF (a wholly-owned subsidiary) engages in the direct growth, cultivation, harvesting and distribution of cannabis containing psychoactive amounts of the THC molecule, for use in the medicinal cannabis industry

Cannabis is illegal under federal law and is a "Schedule 1" drug under the Controlled Substances Act (21 U.S.C. § 811) (the "CSA"). As a Schedule 1 drug, cannabis is viewed as being highly addictive and having no medical value. The United States Drug Enforcement Agency ("DEA") enforces the CSA, and persons violating it are subject to federal criminal prosecution. The criminal penalty structure in the CSA is determined based on the specific predicate violations, including but not limited to: simple possession, drug trafficking, attempt and conspiracy, distribution to minors, trafficking in drug paraphernalia, money laundering, racketeering, environmental damage from illegal manufacturing, continuing criminal enterprise, and smuggling. A first conviction under the CSA can generally result in possible fines from $250,000 to $50 million dollars, and incarceration for periods generally from five and up to forty years. For a second conviction, fines increase generally from $500,000 to $75 million dollars, and incarceration for periods generally from ten years to twenty years to life.

The federal government recently issued guidance to federal prosecutors concerning marijuana enforcement under the CSA. On January 4, 2018, Attorney General Jeff Sessions issued a memorandum for all United States Attorneys concerning federal cannabis enforcement generally. The Department of Justice (the "DOJ") rescinded all previous prosecutorial guidance issued by it regarding cannabis, including the August 29, 2013 memorandum by James Cole, then Deputy Attorney General (the "Cole Memorandum").

The Cole Memorandum previously set out the DOJ's prosecutorial priorities in light of various states legalizing cannabis for medicinal and/or recreational use. The Cole Memorandum provided that when states have implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities. A strong and effective regulatory system, according to the Cole Memorandum, would affirmatively address federal priorities by, for example, implementing effective measures to prevent diversion of cannabis outside of the regulated system and to other states, prohibiting access to cannabis by minors, and replacing an illicit cannabis trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for. In such circumstances, consistent with the traditional allocation of federal-state efforts in this area, the Cole Memorandum provided that enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing cannabis-related activity. If state enforcement efforts did not protect against the harms set forth above, the federal government could seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on those harms.

The rescission of the Cole Memorandum created material uncertainty as it relates to how the DOJ will evaluate cannabis cases for prosecution and introduced risk into the Company's business as it relates to the research, growth, cultivation, development, manufacturing, marketing and sale of its cannabis products.

Current guidance requires U.S. Attorneys to decide whether or not to pursue prosecution of cannabis activity based upon factors including: the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. The guidance reiterates that the cultivation, distribution and possession of cannabis continues to be a crime under the CSA.

On March 23, 2018, President Donald J. Trump signed into law a $1.3 trillion-dollar spending bill that included an amendment known as "Rohrabacher-Blumenauer," which prohibits the DOJ from using federal funds to prevent certain states "from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana."

The United States Food & Drug Administration (the "FDA") is generally responsible for protecting the public health by ensuring the safety, efficacy, and security of (1) prescription and over the counter drugs; (2) biologics including vaccines, blood & blood products, and cellular and gene therapies; (3) foodstuffs including dietary supplements, bottled water, and baby formula; and, (4) medical devices including heart pacemakers, surgical implants, prosthetics, and dental devices.




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Regarding its regulation of drugs, the FDA process requires a review that begins with the filing of an "Investigational New Drug" (IND) application, with follow on clinical studies and clinical trials that the FDA uses to determine whether a drug is safe and effective, and therefore subject to approval for human use by the FDA.

Aside from the FDA's mandate to regulate drugs, the FDA also regulates dietary supplement products and dietary ingredients under the Dietary Supplement Health and Education Act of 1994. This law prohibits manufacturers and distributors of dietary supplements and dietary ingredients from marketing products that are adulterated or misbranded. This means that these firms are responsible for evaluating the safety and labeling of their products before marketing to ensure that they meet all the requirements of the law and FDA regulations, including, but not limited to the following labeling requirements: (1) identifying the supplement; (2) nutrition labeling; (3) ingredient labeling; (4) claims; and, (5) daily use information.

The FDA has not approved cannabis as a safe and effective drug for any indication. As of the date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our cannabis products.

The FDA has concluded that cannabis is excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug & Cosmetic Act, respectively. The FDA's position is that because cannabis is a Schedule 1 drug under the CSA, and therefore are illegal drugs that are under the purview of the DEA and DOJ who are charged with enforcing CSA. However, at some indeterminate future time, the FDA may choose to change its position concerning cannabis and may choose to enact regulations that are applicable to cannabis products as either drugs or supplements. In this event, our cannabis products may be subject to regulation.

In addition to strict compliance with all applicable California cannabis related laws and regulations, the Company's activities intend to comply with the parameters of a recent 9th Cir. Federal Appellate Court decision, United States v. McIntosh, 2016 DJDAR 8484 (Aug. 16, 2016), which held: "the U.S. Department of Justice cannot spend money to prosecute federal marijuana cases if the defendants comply with state guidelines that permit the drug's sale for medical purposes". The Court reasoned that "if the DOJ punishes individuals for engaging in activities permitted under state law (such as the use, cultivation, distribution and possession of medical marijuana), then the DOJ is preventing state law from being implemented as a practical matter." "By officially permitting certain conduct, state law provides for non-prosecution of individuals who engage in such conduct. If the federal government prosecutes such individuals, it has prevented the state from giving practical effect to its law providing for non-prosecution of individuals who engage in the permitted conduct." This ruling is consistent with Congress's "Rohrabacher-Blumenauer" amendment, discussed above, which prohibits the DOJ from using federal funds to prevent certain states "from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana."



State Regulation


The State of California requires companies engaged in the cannabis operations to be licensed by the State of California. The Company is regulated by multiple agencies in California:



   ·  The Bureau of Cannabis Control (Bureau) is the lead
      agency in regulating commercial cannabis licenses for
      medical and adult-use cannabis in California. The Bureau
      is responsible for licensing retailers, distributors,
      testing labs, microbusinesses, and temporary cannabis
      events.

   ·  CalCannabis Cultivation Licensing, a division of the
      California Department of Food and Agriculture (CDFA),
      ensures public safety and environmental protection by
      licensing and regulating commercial cannabis cultivators
      in California.

   ·  Manufactured Cannabis Safety Branch, a division of the
      California Department of Public Health, (CDPH). MCSB is
      responsible for regulation of all commercial cannabis
      manufacturing in California. MCSB strives to protect
      public health and safety by ensuring commercial cannabis
      manufacturers operate safe, sanitary workplaces and
      follow good manufacturing practices to produce products
      that are free of contaminants, meet product guidelines
      and are properly packaged and labeled.





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These 3 divisions require the Company (via VBF) to maintain its licensing packages and be compliant with all local, state and environmental regulations. The Company estimates that the cost of licensing each year will be approximately $50,000 - $100,000 per year. The amount may vary year to year depending on what changes, if any, are made to applicable regulations and if any upgrades are required to be made on the property.

The Company (via VBF) currently is licensed by the State of California for the following activities:

Adult Use and Medicinal Distributor License Provisional

Valid 5-17-19 to 5-16-20

Lic# C11-0000102-LIC


Provisional Cannabis Cultivation License (Nursery)

Valid 8-7-19 to 8-7-20

Lic # PAL18-0003152


Provisional Cannabis Cultivation License (Adult Use Small Mixed Light Tier2)

Valid 3/15/19- to 3/15/20

Lic# PAL18-0000119



Annual Manufacturing License

Adult and Medicinal Cannabis Products-Provisional

Type 6 Non Volatile Solvent Extraction

Valid 4-11-29 to 4-11-20

Lic# CDPH-10002395


The Company (via VBF) grows its own cannabis plants through its Cannabis Cultivation License. The material grown and harvested from its cultivation operations are either packaged and sold through the Company's Distribution license (via VBF) or processed through its Manufacturing license (via VBF) which is later sold through its Distribution license (via VBF). This allows the Company (by and through VBF) to sell products it manufactures (at reduced cost since the raw materials are self-grown), as well as products manufactured by third parties.

On January 29, 2018, the Company (via VBF) received its Distributor licenses from the State of California for Adult Use and Medicinal Use.

On April 11, 2019, VBF received its Annual Manufacturing License from the State of California. VBF also received its Provisional Cannabis Cultivation License.



Results of Operations


We have not earned any operational revenues from our inception on September 29, 2016 through July 31, 2018.

Three Months Ended July 31, 2018 Compared to Three Months Ended July 31, 2017



                                  Three Months Ended
                                       July 31,
Statement of Operations Data:     2018          2017         Changes

Revenue                         $       -     $       -     $       -
Operating expenses                350,314       174,562       175,752
Other expenses                    599,140             -       599,140
Net loss                        $ 949,454$ 174,562$ 774,892

Our interim condensed consolidated financial statements report a net loss of $949,454 for the three months ended July 31, 2018 compared to a net loss of $174,562 for the three months ended July 31, 2017. Our losses have increased by $777,109, primarily as a result of an increase in general and administration expenses, such as travel expense, county tax, and management fees and an increase in other expenses related to amortization of debt discount and interest expense from convertible notes.




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Nine Months Ended July 31, 2018 Compared to Nine Months Ended July 31, 2017



                                    Nine Months Ended
                                        July 31,
Statement of Operations Data:      2018           2017          Changes

Revenue                         $         -     $       -     $         -
Operating expenses                1,130,036       288,964         841,072
Other expenses                      996,634             -         996,634
Net loss                        $ 2,126,670$ 288,964$ 1,837,706

Our interim condensed consolidated financial statements report a net loss of $2,128,887 for the nine months ended July 31, 2018 compared to a net loss of $288,964 for the nine months ended July 31, 2017. Our losses have increased by $1,837,706, primarily as a result of an increase in labor, supplies and greenhouse lease related to the cultivation of medical cannabis with the operations commenced in March 2017, an increase in general and administration expenses and an increase in other expenses related to amortization of debt discount and interest expense from convertible notes.

Liquidity and Capital Resources



Working Capital



                                  As of             As of
                                 July 31,        October 31,
Balance Sheet Data:                2018             2017            Changes

Cash and cash equivalents      $     52,236$      24,656$     27,580

Total current assets           $     52,236$      24,656$     27,580
Total current liabilities         2,209,800            74,731        2,135,069
Working capital (deficiency)   $ (2,157,564 )$     (50,075 )$ (2,107,489 )




Cash Flows



                                                   Nine Months Ended
                                                       July 31,
Cash Flow Data:                                   2018            2017         Changes

Cash Flows used in Operating Activities $ (1,183,709 )$ (286,737 )$ (896,972 ) Cash Flows provided by Financing Activities 1,211,289 285,767 925,522 Net Change in Cash During Period

              $     27,580$     (970 )$   28,550

Our total current assets as of July 31, 2018 were $52,236 as compared to current assets of $24,656 as of October 31, 2017. The increase was primarily due to an increase cash, from the issuance of convertible notes during the nine months ended July 31, 2018.

Our total current liabilities as of July 31, 2018 were $2,209,800 as compared to total current liabilities of $74,731 as of October 31, 2017. The increase was primarily due to an increase in convertible notes, related party notes payable, derivative liabilities, note accrued interest and dividend payable.




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The report of our auditors on our audited consolidated financial statements for the fiscal year ended October 31, 2017, contains a going concern qualification as we have suffered losses since our inception. We have minimal assets and have achieved no operating revenues since our inception. We have been dependent on sales of equity securities to conduct operations. Unless and until we commence material operations and achieve material revenues, we will remain dependent on financings to continue our operations.



Operating Activities


Net cash used in operating activities during the nine months ended July 31, 2018 was $1,183,709, compared to $286,737 net cash used in operating activities during the nine months ended July 31, 2017. The increase in cash used in operating activities was mainly due to an increase in net loss.



Investing Activities


During the nine months ended July 31, 2018 and 2017, our Company did not have any investing activities.



Financing Activities


Cash provided by financing activities during the nine months ended July 31, 2018 was $1,213,289. During the nine months ended July 31, 2018, our Company received $1,244,750 from convertible notes offset by the use of the proceeds from a convertible note to repay another convertible note of $220,000, $117,200 from related party notes payable and $79,068 from capital contribution. During the nine months ended July 31, 2017, the Company received $281,700 from related party notes payable.



Cash Requirements


We will require additional capital as we expand our business operations. Initially, to carry out our business plan, we will need to raise additional capital through operations, or the issuance of our equity and/or debt securities. There can be no assurance that we will be able to raise additional capital or, if we are able to raise additional capital, the terms we be favorable to us. Currently we do not have any inventory and therefore we have no product to sell to generate operating revenues.

These conditions indicate a material uncertainty that casts significant doubt about our ability to continue as a going concern. We require additional debt or equity financing to have the necessary funding to continue operations and meet our obligations. We have continued to adopt the going concern basis of accounting in preparing our financial statements.



Future Financings


We anticipate continuing to rely on sales of our equity and/or debt securities in order to continue to fund our business operations. Issuances of additional shares of our capital stock will result in dilution to our existing stockholders. There is no assurance that we will achieve any additional sales of our equity securities or arrange for debt or other financing to fund our planned business activities.

Off-Balance Sheet Arrangements

As of July 31, 2018, we do not have any off-balance sheet arrangements.

© Edgar Online, source Glimpses

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