2.
|
GOING
CONCERN AND MANAGEMENT’S PLAN
|
These
financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The Company has not generated revenue and during the quarter
ended June 30, 2017 and incurred a net loss of $4,114,390. The Company has an accumulated deficit of $11,176,775 as of June 30,
2017. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders,
the ability to raise equity or debt financing, and the attainment of profitable operations from the Company’s future business.
Additionally, the Company is actively seeking strategic alliances in order to accelerate its growth in the industry. These factors
raise substantial doubt regarding the Company’s ability to continue as a going concern for one year from the date these
financial statements are issued. These financial statements do not include any adjustments to the recoverability and classification
of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries, including Cannavoices, Inc. and FH
Acquisition Corp. (“FHA”) All significant intercompany balances and transactions have been eliminated in consolidation.
Consolidated
Variable Interest Entity (“VIE”)
On
September 1, 2016, Cannavoices entered into a share exchange agreement with FHA, whereby all the issued and outstanding capital
stock of FHA was exchanged for 1,334,262 newly issued shares of the Cannavoices’ common stock. FHA shares were exchanged
on a one-for-one basis with the shares of the Cannavoices’ common stock. Effective on the date of the share exchange agreement,
FHA became a wholly-owned subsidiary of the Company.
The
Company previously determined FHA was a VIE and Cannavoices was the primary beneficiary. This was concluded as FHA collected capital
raised from investors and funded invoices of Cannavoices as directed by the Cannavoices’ Board of Directors. The Company
has presented the financial statements on a consolidated basis since FHA’s inception (November 23, 2015). Accordingly, intercompany
activity between the Company and FHA are eliminated in consolidation.
Use
of Estimates
The
financial statements and accompanying notes are prepared in accordance with U.S. GAAP, which requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
significant estimates and assumptions include the fair value of the Company’s stock and the valuation allowance relating
to the Company’s deferred tax assets.
Revenue
Recognition
In
accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”)
Topic 13,
Revenue Recognition
, the Company recognizes revenues when it is realized or realizable and earned. The Company
records revenues when the following four fundamental criteria under SAB Topic 13 are met: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable, and
(iv) collection of the resulting receivable is reasonably assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as advances from customers on the balance sheet. For the period from February 27, 2013
(inception) to June 30, 2017, the Company did not recognize any revenue.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation”
using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as
consideration are measured and recognized based on the fair value of the equity instruments issued.
The
Company accounts for stock-based compensation to consultants and other third parties in accordance with ASC 505-50 “Equity-Based
Payments to Non-Employees.” Compensation expense is determined at the “measurement date.” The expense is recognized
over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains
uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.
Dividends
The
Company has not adopted any policy regarding payment of dividends. No dividends have been paid during any of the periods shown.
Advertising
Costs
The
Company’s policy regarding advertising is to expense advertising when incurred. The Company did not incur any advertising
expense for the quarters ended June 30, 2017 and June 30, 2016, respectively.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with an original maturity of three months or less when purchased to
be cash equivalents, to the extent the funds are not being held for investment purposes. As at June 30, 2017 and March 31, 2017,
the Company had no cash or cash equivalents.
Fair
Value of Financial Instruments
The
carrying amounts (if any) of cash, accounts payable, and accrued liabilities approximate fair value due to the short-term nature
of these instruments.
The
Company measures the fair value of financial assets and liabilities based on the guidance of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) in accordance with U.S. GAAP, ASC 820 “Fair
Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair
value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
ASC
820 describes three levels of inputs that may be used to measure fair value:
Level
1 — quoted prices in active markets for identical assets or liabilities
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
Convertible
Instruments
U.S.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported
in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described
under applicable ASC 480-10.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company
records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption.
Derivative
Financial Instruments
The
Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company
with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that
such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that
(i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event
is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other
free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities
is required.
The
Company’s free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the
issuance of debt and of embedded conversion options with convertible debentures. The Company evaluated these derivatives to assess
their proper classification in the balance sheet as of June 30, 2017 using the applicable classification criteria enumerated under
ASC 815-Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features do not contain
fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could not ensure it
would have adequate authorized shares to meet all possible conversion demands.
As
such, the Company was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark
to market all such derivatives to fair value at the end of each reporting period.
Net
Loss per Common Share
Basic
loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average
number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net loss available
to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average
number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Although
there were common stock equivalents as of June 30, 2017, they were anti-dilutive.
|
|
For the Three
Months Ended
June 30, 2017
|
|
|
For the Three
Months Ended
June 30, 2016
|
|
Net Loss
|
|
$
|
(4,114,390
|
)
|
|
$
|
(2,364,866
|
)
|
Weighted Average Shares
|
|
|
25,785,906
|
|
|
|
20,456,161
|
|
Net Loss Per share
|
|
$
|
(0.16
|
)
|
|
$
|
(0.12
|
)
|
The
following financial instruments were not included in the diluted loss per share calculation as of June 30, 2017 and 2016 because
their effect was anti-dilutive:
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase Common Stock
|
|
|
541,667
|
|
|
|
-
|
|
Convertible notes
|
|
|
489,833
|
|
|
|
-
|
|
Total
|
|
|
1,031,500
|
|
|
|
-
|
|
Income
Taxes
The
Company provides for income taxes under ASC 740 “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires
the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based
on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these
differences are expected to reverse.
The
Company classifies interest expense and any related penalties related to income tax uncertainties as a component of income tax
expense. No interest or penalties have been recognized as of and for the quarters ended June 30, 2017 and 2016.
ASC
740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be realized.
Impairment
of Long-Lived Assets
The
Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may
not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived
assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows.
If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or the fair value less costs to sell.
Recent
Accounting Pronouncements
In
May 2017, FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which
amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing
guidance on the various types of changes which would trigger modification accounting for share-based payment awards. ASU 2017-09
is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would
be the Company’s fiscal year ending March 31, 2019. Early adoption is permitted, including adoption in any interim period,
for public business entities for reporting periods for which financial statements have not yet been issued. While the Company
does not expect the adoption of ASU 2017-09 to have a material effect on its business, the Company is still evaluating any potential
impact that adoption of ASU 2017-09 may have on its financial position, results of operations or cash flows.
In
October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to
improve and simplify the accounting for the income tax consequences of intra-entity transfers of assets other than inventory,
requiring companies to recognize income tax consequences upon the transfer of the asset to a third party. ASU 2016-16 is effective
for annual periods beginning after December 15, 2017, and interim periods within those annual periods, which would be the Company’s
fiscal year ending March 31, 2019. While the Company does not expect the adoption of ASU 2016-16 to have a material effect on
its business, the Company is still evaluating any potential impact that adoption of ASU 2016-16 may have on its financial position,
results of operations or cash flows.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash
Payments, which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement
of cash flows. The Company does not expect the adoption of ASU 2016-15 to have a material effect on its business, its financial
position, results of operations or cash flows.
In
March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation – Improvements to Employee Share-Based
Payment Accounting. ASU 2016-09 simplifies the accounting for several aspects of the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement
of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods, which would be the Company’s fiscal year ending March 31, 2018. The Company does not expect the adoption
of ASU 2016-09 to have a material effect on its business, its financial position, results of operations or cash flows.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this update supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments
in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years, which would be the Company’s fiscal year ending March 31, 2020. The Company does not expect the adoption of ASU 2016-09
to have a material effect on its business, its financial position, results of operations or cash flows.
In
January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The updated guidance
enhances the reporting model for financial instruments, and requires entities to use the exit price notion when measuring the
fair value of financial instruments for disclosure purposes, and the separate presentation of financial assets and financial liabilities
by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying
notes to the financial statements. The guidance is effective for annual and interim reporting periods beginning after December
15, 2017. The Company expects that this guidance will not have a material effect on its financial statements.
In
November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”),
which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet.
The ASU simplifies the current guidance in ASC 740, which requires entities to separately present deferred tax assets and liabilities
as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15,
2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an
interim or annual reporting period. The Company expects that this guidance will not have a material effect on its financial statements.
In
August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern,” which impacts
the accounting guidance related to the evaluation of an entity’s ability to continue as a going concern. The amendment establishes
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as
a going concern in connection with preparing financial statements for each annual and interim reporting period. The amendment
also gives guidance to determine whether to disclose information about relevant conditions and events when there is substantial
doubt about an entity’s ability to continue as a going concern. The amended guidance is effective prospectively for fiscal
years beginning after December 15, 2016. The Company has adopted this new guidance effective as of the inception date. The adoption
of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting
standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods
or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services.
In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim
reporting periods within those periods). Early adoption is permitted to the original effective date for annual reporting periods
beginning after December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively
to each prior period (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial application
(modified retrospective). The Company will adopt ASU 2014-09 beginning April 1, 2018 and apply the full retrospective approach.
Until such time as the Company makes an acquisition or commences monetizing its assets, the Company does not know what the impact
of this new standard will be or if it will impact the Company’s disclosure.
4.
|
CONVERTIBLE
PROMISSORY NOTE RECEIVABLE
|
On
March 31, 2016, the Company purchased a convertible promissory note from a related party (the “Assignor”) in the principal
amount of $100,000. The convertible promissory note was assigned to the Company for $100,000 in cash consideration and the Assignor
of the convertible promissory note relinquished any further participating interest. The convertible promissory note accrues interest
at 6% compounded annually and matures on November 30, 2017. The convertible promissory note is convertible into equity of the
social media company, who is the maker of the note, upon events not certain to occur as of June 30, 2017.
The
balance of the convertible promissory note receivable, including accrued interest at June 30, 2017 and March 31, 2017 was $107,500
and $106,000, respectively. For the three months ended June 30, 2017 and 2016, the Company recognized $1,500 in interest income,
respectively.
On
April 27, 2016, the Company issued a promissory note in the principle amount of $600,000, net of associated discount of $20,000.
The note bears interest at a rate of 15% per annum and interest payments were to be paid monthly beginning June 1, 2016. The Company
has the right to prepay the note at any time without penalty. The promissory note is secured by a security interest in all of
the assets of the Company. The principal and accrued interest of the note will be due and payable by the Company on the one-year
anniversary date of the note, or April 27, 2017. The Company reached agreement with the holder of the promissory note to extend
the maturity date until July 1, 2017, and is currently negotiating an additional extension and terms of repayment.
The outstanding principal of the promissory
note at June 30, 2017 and March 31, 2017 was $600,000 and $598,333, respectively. For the three months ended June 30, 2017 and
2016, the Company recognized $22,500 and $15,000 in interest expense and amortization of debt discount of $1,667 and $5,000,
respectively, included in interest expense in the accompanying statement of operations. As of June 30, 2017, the Company recorded
$15,000 in accrued interest expense.
6.
|
CONVERTIBLE
PROMISSORY NOTES PAYABLE
|
On
July 20, 2016, the Company issued a convertible promissory note (the “Note”) to a lender which advanced the Company
$200,000. Interest accrues at a rate of 15% per annum and is due on the first of each month. Unless earlier converted into the
Company’s common stock (as discussed below), the principal and any unpaid accrued interest on the note will be due and payable
by the Company on the one-year anniversary date of the note, or July 20, 2017. The note is a general unsecured obligation of the
Company. At the lender’s election, the principal balance and unpaid accrued interest on the note may be converted into common
stock of the Company at a fixed rate of $0.75 per share. The Company determined that the Note is out of money, as there is no
difference between the fair value of the stock ($0.75/share) and the contractual conversion price ($0.75/share), and hence no
debt discount was recognized as at June 30, 2017.
The
outstanding balance of the convertible promissory note at June 30, 2017 was $200,000 and classified as a short-term liability.
For the three months ended June 30, 2017 and 2016, the Company recognized $7,500 and $0 in interest expense in the accompanying
statement of operations. As of June 30, 2017 and March 31, 2017, the Company recorded $2,500 and $2,500, respectively in accrued
interest expense.
On
November 10, 2016, the Company entered into a series of convertible short-term promissory notes (the “November Short-Term
Notes”) with lenders that have an outstanding principal balance of $12,500 plus accrued interest of $2,380 at June 30, 2017.
The Company reached a verbal agreement with the holder of the balance of the November Short-Term Notes to extend the maturity
date and the notes continues to accrue interest at a rate of 10% per annum. For the three months ended June 30, 2017, the Company
recognized $981 in interest expense.
On December 14, 2016, the Company entered
into a series of convertible short-term promissory notes (the “December Short-Term Notes”) with lenders that have
an outstanding principal balance of $35,000 plus accrued interest of $1,840 at June 30, 2017. The Company reached a verbal
agreement with the holders of the balance of the December Short-Term Notes to extend the maturity date and the notes continue
to accrue interest at a rate of 10% per annum. For the three months ended June 30, 2017, the Company recognized $1,076 in interest
expense.
On January 10, 2016, the Company entered into
a series of convertible short-term promissory notes (the “January Short-Term Notes”) with lenders that have an outstanding
principal balance of $10,000 plus accrued interest of $441 at June 30, 2017. The Company reached a verbal agreement with
the holders of the balance of the January Short-Term Notes to extend the maturity and the notes continue to accrue interest at
a rate of 10% per annum. For the three months ended June 30, 2017, the Company recognized $249 in interest expense.
On
May 16, 2017, the Company entered into a convertible short-term promissory note (the “May Short-Term Note”) with a
lender in which the lender advanced the Company $25,000. Interest accrues at a rate of 10% per annum and is due at maturity. Unless
earlier converted into the Company’s common stock (as discussed below), the principal and accrued interest on the May Short-Term
Note will be due and payable by the Company on the ninety-day anniversary date of the May Short-Term Notes, or August 14, 2017.
The May Short-Term Note is a general unsecured obligation of the Company. At the lender’s election, the principal balance
and accrued interest on the May Short-Term Note may be converted into common stock of the Company at a fixed rate of $1.00 per
share. For the three months ended June 30, 2017, the Company recognized $308 in interest expense.
On
June 30, 2017, the Company entered into a series of convertible short-term promissory notes (the “June Short-Term Notes”)
with lenders in which the lenders advanced the Company $125,000. Interest accrues at a rate of 10% per annum and is due at maturity.
Unless earlier converted into the Company’s common stock (as discussed below), the principal and accrued interest on the
June Short-Term Notes will be due and payable by the Company on the sixty-day anniversary date of the June Short-Term Notes, or
August 29, 2017. The June Short-Term Notes are a general unsecured obligation of the Company. At each lender’s election,
the principal balance and accrued interest on the June Short-Term Notes may be converted into common stock of the Company at a
fixed rate of $1.00 per share. For the three months ended June 30, 2017, the Company recognized $48 in interest expense.
|
7.
|
CONVERTIBLE
NOTES FINANCING
|
Convertible
Notes Financing were comprised of the following as of June 30, 2017 and March 31, 2017:
|
|
June
30, 2017
|
|
|
March
31, 2017
|
|
Auctus Fund LLC notes payable
|
|
$
|
259,500
|
|
|
$
|
-
|
|
EMA Financial LLC
|
|
|
259,500
|
|
|
|
-
|
|
Total notes payable
|
|
|
519,000
|
|
|
|
-
|
|
Less unamortized debt discount
|
|
|
(418,592
|
)
|
|
|
-
|
|
Total notes payable net of unamortized debt discount
|
|
|
100,408
|
|
|
|
-
|
|
Less current portion
|
|
|
(100,408
|
)
|
|
|
-
|
|
Long term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Auctus
Fund LLC
During
the three months ended June 30, 2017, the Company entered into securities purchase agreements with Auctus Fund LLC (“Auctus”)
for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500 (the “Auctus Notes”). In
connection with the issuance of the convertible promissory notes, the Company issued five year warrants to purchase up to 125,000
shares of the Company’s common stock at an exercise price of $2.00 per share. The issued warrants contain certain reset
provisions requiring both the number of warrants and exercise price to be adjusted for any subsequent equity transactions (as
defined).
The
Auctus Notes bear interest at the rate of 12% per annum. As of the three months ended June 30, 2017, all interest and principal
must be repaid one year from the issuance date, with the last note being due May 15, 2018. The Auctus Notes are convertible into
common stock, at holder’s option, at a 40% to 50% discount to the lowest closing bid price of the Company’s common
stock during the 25 trading day period prior to conversion. The Company has identified the embedded derivatives related to the
Auctus Notes and issued warrants. These embedded derivatives included certain conversion features and reset provisions.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of Auctus Notes and to fair value as of each subsequent reporting date which at June 30, 2017 was $552,570
and $841,391 for the debt derivative and warrant liability, respectively. At the inception of the Auctus Notes, the Company determined
the aggregate fair value of $811,555 and $423,011 of the embedded debt derivatives and warrant liability, respectively.
EMA
Financial LLC
During
the three months ended June 30, 2017, the Company entered into securities purchase agreements with EMA Financial LLC (“EMA”)
for the sale of 12% convertible promissory notes in aggregate principal amount of $259,500 (the “EMA Notes”). In connection
with the issuance of the convertible promissory notes, the Company issued five year warrants to purchase up to 125,000 shares
of the Company’s common stock at an exercise price of $2.00 per share. The issued warrants contain certain reset provisions
requiring both the number of warrants and exercise price to be adjusted for any Subsequent Equity Sales (as defined in the warrants).
The
EMA Notes bear interest at the rate of 12% per annum. As of the three months ended June 30, 2017, all interest and principal must
be repaid one year from the issuance date, with the last note being due May 15, 2018. The EMA Notes are convertible into common
stock, at holder’s option, at a 50% discount (as amended) to the lowest closing bid price of the common stock during the
25 trading day period prior to conversion. The Company has identified the embedded derivatives related to the EMA Notes and issued
warrants. These embedded derivatives included certain conversion features and reset provisions.
The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of
the inception date of EMA Notes and to fair value as of each subsequent reporting date which at June 30, 2017 was $632,616 and
$720,900 for the debt derivative and warrant liability, respectively. At the inception of the EMA Notes, the Company determined
the aggregate fair value of $979,651 and $419,280 of the embedded debt derivatives and warrant liability, respectively.
Summary:
The
Company has identified the embedded derivatives and warrant liability related to the Auctus and EMA promissory notes and related
issued warrants. The accounting treatment of derivative financial instruments requires that the Company record fair value of the
derivatives as of the inception date of these notes and to fair value as of each subsequent reporting date which at June 30, 2017
was $1,185,185 and $1,562,291 for the debt derivative and warrant liability, respectively.
The
fair value of the embedded derivatives and warrant liability at issuance of the Auctus and EMA promissory notes, were determined
using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility
of 242.58% to 245.43%, (3) weighted average risk-free interest rate of 1.08% to 1.92%, (4) expected lives of 1.00 to 5.00 years,
and (5) estimated fair value of the Company’s common stock from $3.06 to $3.74 per share.
The
initial fair value of the embedded debt derivative and warrant liability in aggregate of $2,633,498 was allocated as a debt discount
up to the proceeds of the notes ($470,500) with the remainder ($2,162,998) charged to current period operations as interest expense.
For the three months ended June 30, 2017, the Company amortized an aggregate of $100,408 of debt discounts to current period operations
as interest expense.
|
8.
|
DERIVATIVE
LIABILITIES
|
Warrant
liability
In
fiscal 2017, in connection with the issuance of convertible promissory notes, as discussed in Note 7, the Company issued five
year warrants to purchase up to 250,000 shares of the Company’s common stock with an exercise price of $2.00 per share with
anti-dilutive (reset) provisions.
The
Company has identified embedded derivatives related to the issued warrants. These embedded derivatives included certain and anti-dilutive
(reset) provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of
the derivatives as of the inception date and to fair value as of each subsequent reporting date.
At
June 30, 2017, the fair value of the reset provision related to the embedded warrant liability of $1,562,291 was determined using
the Binomial Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 234.00%; risk free rate: 1.89%;
and expected life: 4.77 to 4.87 years. The Company recorded a loss on change in warrant liabilities of $720,000 during the three
months ended June 30, 2016.
Convertible
notes
In
fiscal 2017, the Company issued convertible promissory notes.
These
promissory notes are convertible into common stock, at holders’ option, at a discount to the market price of the Company’s
common stock. The Company has identified the embedded derivatives related to these promissory notes relating to certain anti-dilutive
(reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial
instruments requires that the Company record fair value of the derivatives as of the inception date of these notes and to fair
value as of each subsequent reporting date.
The
fair value of the embedded derivatives at June 30, 2017, in the amount of $1,185,185, was determined using the Binomial Option
Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 234.00%, (3) weighted average
risk-free interest rate of 1.24%, (4) expected lives of 0.77 to 0.87 years, and (5) estimated fair value of the Company’s
common stock of $2.90 per share. The Company recorded a gain on change in derivative liabilities of $606,021 during the three
months ended June 30, 2017.
Based
upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of
ASC 815-40 to its outstanding convertible promissory notes. Pursuant to the sequencing approach, the Company evaluates its contracts
based upon earliest issuance date.
|
9.
|
FAIR
VALUE MEASUREMENT
|
The
Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”).
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets
and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market
in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such
as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC
825-10 establishes three levels of inputs that may be used to measure fair value:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level
3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or
liabilities.
All
items required to be recorded or measured on a recurring basis are based upon level 3 inputs.
To
the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon
adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial
statements.
The
carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings
(including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term
maturity.
As
of June 30, 2017 and March 31, 2017, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The
Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in notes 6 and
8. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes
that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result
in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair
values using the methods discussed in Notes 6 and 8 are that of volatility and market price of the underlying common stock of
the Company.
As
of June 30, 2017 and March 31, 2017, the Company did not have any derivative instruments that were designated as hedges.
The
derivative and warranty liabilities as of June 30, 2017, in the amount of $2,747,476 have a level 3 classification.
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30,
2017:
|
|
Warrant
Liability
|
|
|
Debt
Derivative
|
|
Balance, March 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
Total (gains) losses
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note or warrant issuance
|
|
|
842,291
|
|
|
|
1,791,207
|
|
Mark-to-market at June 30, 2017:
|
|
|
720,000
|
|
|
|
(606,022
|
)
|
Balance, June 30, 2017
|
|
|
1,562,291
|
|
|
|
1,185,185
|
|
Net gain (loss) for the period included in earnings relating to the liabilities held at June 30, 2017
|
|
$
|
(720,000
|
)
|
|
$
|
606,022
|
|
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period.
The Company’s stock price decreased approximately 5% from April 7, 2017 to June 30, 2017. As the stock price decreases for
each of the related derivative instruments, the value to the holder of the instrument generally decreases. Additionally, stock
price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s
derivative instruments.
The
estimated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected
volatility would generally result in a higher fair value measurement.
10.
|
STOCKHOLDERS’
EQUITY AND CONTRIBUTED CAPITAL
|
Recent
Sale of Securities
The
Company is authorized to issue up to 500,000,000 shares of common stock, $0.001 par value. The Company is authorized to issue
up to 10,000,000 of blank check preferred stock. As of June 30, 2017, the Company had 26,257,572 shares of common stock and 0
shares of preferred stock issued and outstanding, respectively.
In
April 2017, the Company issued 67,653 shares of common stock at $0.75 per share, for the conversion of a convertible note and
accrued interest thereon of $50,740.
In
April 2017, the Company issued an aggregate of 120,957 shares of common stock at $1.00 per share, for the conversion of convertible
notes and accrued interest thereon of $120,957.
In
April 2017, the Company issued an aggregate of 902,500 shares of common stock to an individual for services valued at $902,500.
In
May 2017, the Company sold an aggregate of 258,000 shares of common stock at $1.00 per share, for gross proceeds of $258,000.
In
May 2017, the Company sold an aggregate of 21,559 shares of common stock at $1.00 per share, for the conversion of convertible
notes payable and accrued interest of $21,559.
In
May 2017, the Company issued an aggregate of 159,883 shares of common stock to an individual for services valued at $159,883.
In
June 2017, the Company sold an aggregate of 30,000 shares of common stock at $1.00 per share, for gross proceeds of $30,000.
In
June 2017, the Company issued 30,838 shares of common stock at $1.00 per share, for the conversion of a convertible note and accrued
interest thereon of $30,838.
As
of June 30, 2017, there had been no stock options granted and 250,000 warrants outstanding as granted in the Convertible Notes
Financing.
In
connection with the foregoing, the Company relied upon the exemption from securities registration provided by Section 4(a)(2)
under the Securities Act of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.
11.
|
RELATED PARTY TRANSACTIONS
|
The
Company’s related parties are First Harvest Financial, Inc. (“FHF”) and The Great American Rolling Paper Company
(“GARP”), by common ownership and management.
The
related parties have provided certain management services and incurred expenses on behalf of the Company for the three months
ended June 30, 2017 and 2016, including accounting, administration, management, marketing, IT support, rent, due diligence and
evaluation of acquisition candidates. The related parties have been reimbursed the following for the three months ended June 30,
2017 and 2016, respectively: (a) FHF - $31,600 and $2,500 for management and subcontractor fees, and (b) GARP - $38,500 and $0
for management and subcontractor fees.
The
Company incurred rent expense to FHF of $22,600 and $0 for the three months ended June 30, 2017 and 2016, respectively. The Company
has no formal lease with FHF. For the three months ended June 30, 2016, the Company incurred rent expense of $33,812 to FHA.
The
majority shareholder of the related parties described above is the president and largest shareholder of the Company. He was paid
$109,473 and $97,500 by the Company as a subcontractor for the three months ended June 30, 2017 and 2016, respectively. He currently
has no formal compensation agreement. He is currently involved in other business activities and may, in the future, become involved
in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting
between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.
The
Company entered into a game development and licensing agreement with HKA Digital Limited (“HKA”) on October 2, 2015
(the “Development Agreement”). HKA is majority owned by an officer and director of the Company. The Company paid HKA
$164,000 and $510,000 for the three months ended June 30, 2017 and 2016, respectively. The total value of the Development Agreement
is $2,000,000 based on certain development parameters and ongoing scope of work.
12.
|
COMMITMENTS AND CONTINGENCIES
|
Litigations,
Claims and Assessments
In
the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There were
no such matters that were deemed material to the financial statements as of June 30, 2017.
Convertible
Promissory Notes Payable
December
Short Term Notes - During the period from July 1, 2017 through the date of these financial statements, the Company repaid $5,000
of the principal balance plus accrued interest of $296. The principal balance outstanding as of the date of these financial statements
is an aggregate of $30,000, which has been extended by agreement with the lenders.
On
July 5, 2017, the Company entered a convertible short-term promissory note (the “July 5 Short-Term Note”) with a lender
in which the lender advanced the Company $25,000. Interest accrues at a rate of 10% per annum and is due at maturity. Unless earlier
converted into the Company’s common stock (as discussed below), the principal and accrued interest on the July 5 Short-Term
Note will be due and payable by the Company on the sixty-day anniversary date of the Note, or September 3, 2017. The July 5 Short-Term
Note is a general unsecured obligation of the Company. At the lender’s election, the principal balance and accrued interest
on the July 5 Short-Term Note may be converted into common stock of the Company at a fixed rate of $1.00 per share.
On July 18, 2017, the Company entered into
a series of a convertible short-term promissory notes (the “July 18 Short-Term Notes”) with lenders in which the lenders
advanced the Company an aggregate of $50,000. Interest accrues at a rate of 10% per annum and is due at maturity. Unless earlier
converted into the Company’s common stock (as discussed below), the principal and accrued interest on the July 18 Short-Term
Note will be due and payable by the Company on the ninety-day anniversary date of the Note, or October 16, 2017.
The July 18 Short-Term Note is a general unsecured obligation of the Company. At the lender’s election, the principal balance
and accrued interest on the July 18 Short-Term Note may be converted into common stock of the Company at a fixed rate of $1.00
per share.
On
July 20, 2017, the holder of the $200,000 convertible promissory note payable elected to convert the Note at $0.75 per share into
266,667 shares of common stock.
On
August 3, 2017, the Company entered a convertible short-term promissory note (the “August Short-Term Note”) with a
lender in which the lender advanced the Company $20,000. Interest accrues at a rate of 10% per annum and is due at maturity. Unless
earlier converted into the Company’s common stock (as discussed below), the principal and accrued interest on the August
Short-Term Note will be due and payable by the Company on the 180-day anniversary date of the Note, or January 30, 2018. The Note
is a general unsecured obligation of the Company. At the lender’s election, the principal balance and accrued interest on
the Note may be converted into common stock of the Company at a fixed rate of $1.00 per share.
Common
Stock
During
the period from July 1, 2017 through the date of these financial statements, the Company sold 3,000 shares of common stock, resulting
in gross proceeds of $3,000 at $1.00 per share. The Company issued an aggregate of 280,000 shares of common stock to various individuals
for services valued at $280,000.
ISWI
- Asset Purchase Agreement
On
July 19, 2017, the Company entered into an asset purchase agreement (the “Agreement”) with Interactive Systems Worldwide,
Inc. (“ISWI”). Pursuant to the Agreement, the Company purchased from ISWI all of its assets (the “Interactive
Assets”), which include software systems developed by ISWI for the purposes of wagering on sporting events called the SportXction
®
Software System and other related intellectual property rights. The Company did not assume any of ISWI’s liabilities.
In consideration for the Interactive Assets, the Company issued to ISWI 2,000,000 shares of Company’s common stock.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking
statements that reflect Management’s current views with respect to future events and financial performance. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate” and “continue,” or similar words. Those statements include statements
regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which
such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by
such forward-looking statements.
Readers
are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with
the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially
from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that
our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for our services, fluctuations in pricing
for materials, and competition.
Business
Overview
First
Harvest Corp. (the “Company”) is a digital media platform which includes mobile gaming app development, digital and
social media, ecommerce and education, with a focus on the cannabis industry and emerging growth sectors. The Company is an early-stage
company and has not generated any revenue as of June 30, 2017. The Company plans to generate revenue primarily through in-app
sales and advertising services.
We
are developing our platform as a way for niche cannabis-related companies, as well as mainstream advertisers to reach a pro-cannabis
audience. We believe our platform solves the communication challenge between pro-legalization supporters of medical and therapeutic
cannabis and advertisers that want to reach this growing demographic.
Our
mobile gaming app
Hemp Inc
is now available for download on iTunes and is expected to be available in the U.S. on the Google
Play Store in the third quarter of 2017.
Hemp Inc
is a business strategy, role playing game providing the user the experience
of growing and dispensing cannabis in a virtual environment. It is a strategy-based game that mimics real-life cannabis culture
and serves as a platform for advertising and ecommerce sales. We have also launched our social media platform
Cannavoices
(www.cannavoices.com),
which is a member-based social media platform for subscribers to participate in an open forum with other pro-cannabis supporters.
We
intend to use
Hemp Inc
and
Cannavoices
to build our subscriber base and boost users’ engagement within our
platform to gather analytics and target advertising directly to users based on their preferences. We are also exploring opportunities
to expand a suite of mobile games and apps that may or may not be cannabis related, but target similar audience demographics as
Hemp Inc
and
Cannavoices
to buildout our platform. We may explore these opportunities through the acquisition of
operating companies, asset purchases or internal development. Additional information on the Company may be found on our website:
www.FirstHarvestCorp.com.
We
were originally incorporated on February 27, 2013 as American Riding Tours, Inc., a Nevada corporation. Our initial business plan
related to providing motorcycle tours. Effective July 22, 2016, the Company changed its name to “First Harvest Corp.”
Prior to the reverse acquisition described below, the Company did not have any significant assets or operations.
On
February 10, 2017 (the “Closing Date”), the Company entered into and closed an agreement and plan of merger and reorganization
(the “Merger Agreement”), with CV Acquisition Corp., a wholly-owned subsidiary of the Company (“Acquisition
Corp.”), and Cannavoices, Inc. (“Cannavoices”). Pursuant to the Merger Agreement, effective on the Closing Date
(i) Acquisition Corp. merged with and into Cannavoices, such that Cannavoices, the surviving corporation, became a wholly-owned
subsidiary of the Company, and (ii) the Company issued 23,267,231 shares of common stock to the shareholders of Cannavoices, representing
approximately 97.7% of the Company’s outstanding shares of common stock, following the closing of the Merger Agreement,
in exchange for the cancellation of all of the issued and outstanding shares of common stock of Cannavoices.
Cannavoices
was incorporated on June 5, 2015 as a Florida corporation. Effective on the Closing Date, pursuant to the Merger Agreement, Cannavoices
became a wholly-owned subsidiary of the Company. The acquisition of Cannavoices is treated as a reverse acquisition, and the business
of Cannavoices became the business of the Company. Cannavoices was deemed the accounting acquirer, while the Company was deemed
the legal acquirer. At the time of the reverse recapitalization, the Company was not engaged in any active business.
The
consolidated financial statements of the Company are those of First Harvest Corp. and of the consolidated entities from the Closing
Date and subsequent periods.
Results
of Operations
For
the Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016
Revenues
and Cost of Goods Sold
. We had no revenues or cost of goods sold during the three months ended June 30, 2017 and 2016.
Total
Operating Expenses
.
Total operating expenses for the three months ended June 30, 2017 were $1,700,897, as compared to
$2,358,866 for the three months ended June 30, 2016, a decrease of $657,969, or 27.9%. This decrease was primarily due to the
decrease in compensation expense under general and administrative expenses and a decrease in research and development expenses.
General
and administrative expenses for the three months ended June 30, 2017 were $1,334,724, a decrease of $389,330 or 22.6%, from $1,724,054
for the three months ended June 30, 2016. This decrease was primarily due to the decrease in subcontractor and consulting fees
as the Company moved out of its development phase, which required additional personnel in 2016 than the current beta-testing phase.
During the three months ended June 30,
2017, we incurred total non-cash expense of $1,067,477 as part of general and administrative expenses by issuing shares of common
stock to various individuals as non-cash compensation incentive for participating in our operations and development valued at
$1,062,383 and $5,094 in shares of common stock issued as payment of interest on convertible short term notes, compared to total
non-cash expense of $1,457,805 in shares of common stock issued for non-cash compensation during the three months ended June 30,
2016, a decrease of $390,328 or 26.8%. The decrease was primarily due to lower subcontractor and consulting fees. By issuing shares
in lieu of cash consideration, we were able to utilize outside expertise for project management and preserve cash.
General
and administrative expenses to related parties for the three months ended June 30, 2017 were $202,173, an increase of $68,361
or 51.1%, from $133,812 for the three months ended June 30, 2016. The increase was primarily due to the use of related parties
to offset certain expenses related to management fees instead of using outside contractors for professional services.
Research
and development expenses to related parties for the three months ended June 30, 2017 were $164,000, a decrease of $337,000 or
67.3%, from $501,000 for the three months ended June 30, 2016. The decrease was primarily related to our shift in development
work to our beta-test promotions and updates of our mobile gaming app. Our research and development expenses relate to our outside
gaming app development costs for our mobile gaming app,
Hemp Inc,
performed by HKA Digital Limited. During the three months
ended June 30, 2017, we have primarily been in beta-test mode of our mobile gaming app to determine technical feasibility and
the additional development direction of the app for the targeted audience.
Total
Other Income/(Expense)
. Total other expenses for the three months ended June 30, 2017 were $2,413,493, as compared to
$6,000 for the three months ended June 30, 2016, an increase of $2,407,493, or 40,124.9%. This increase was primarily due to the
increase in non-cash interest expense and change in derivative liabilities associated with the accounting treatment for the convertible
notes financing from two institutions in the aggregate amount of $519,000 and related issuance of 250,000 warrants (“Convertible
Notes Financing”).
Interest
income for the three months ended June 30, 2017 was $1,500, which reflected no change from the three months ended June 30, 2016.
The interest income is accrued interest related to our $100,000 convertible note receivable from a social media company.
Total
interest expense for the three months ended June 30, 2017 was $2,301,015, an increase of $2,293,515 or 30,580.2%, from $7,500
for the three months ended June 30, 2016.
For
the three months ended June 30, 2017, the Company incurred $37,609 in interest expense ($32,515 paid in cash and $5,094 paid in
stock) related to its convertible promissory notes payable, an increase of $30,109 or 401.5%, from $7,500 for the three months
ended June 30, 2016.
For the three months ended June 30, 2017, the Company incurred non-cash interest expense of $2,263,406 related
to the accounting treatment for embedded debt derivative and warrant liability charges compared to $0 for the three months ended
June 30, 2016. The Company has identified the embedded derivative and warrant liability related to the Convertible Notes Financing.
The accounting treatment of the derivative financial instruments requires that the Company record fair value of the derivatives
as of the inception date of these notes and to fair value as of each subsequent reporting date which at June 30, 2017 was $1,185,185
and $1,562,291 for the debt derivative and warrant liability, respectively. The fair value of the embedded derivatives and warrant
liability at issuance of the Convertible Notes Financing, were determined using the Binomial Option Pricing Model. The initial
fair value of the embedded debt derivative and warrant liability in aggregate of $2,633,498 was allocated as a debt discount up
to the net proceeds of the notes, or $470,500, with the remainder $2,162,998 charged to current period operations as interest expense.
In addition, the Company amortized an aggregate of $100,408 of debt discount to current period operations as interest expense.
The
Company incurred a net loss on the change in the derivative liability for the three months ended June 30, 2017 of $113,978 compared
to $0 for the three months ended June 30, 2016. The notes issued pursuant to the Convertible Notes Financing are
convertible
into common stock, at the holders’ option, at a discount to the market price of the Company’s common stock. In addition,
the Company issued an aggregate of 250,000 warrants to such holders. The Company has identified the embedded derivatives related
to these promissory notes and warrants relating to certain conversion features and anti-dilutive (reset) provisions. The accounting
treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception
date of these notes and warrants, and to fair value as of each subsequent reporting date. The fair value of the embedded derivatives
related to the notes at June 30, 2017 was $1,185,185, and the Company recorded a gain on change in debt derivative liabilities
of $606,021 for the three months ended June 30, 2017. The fair value of the embedded derivatives related to the warrants at June
30, 2017 was $1,562,291, and the Company recorded a loss on change in warrant derivative liabilities of $720,000 for the three
months ended June 30, 2017.
The change in the derivative liability expense was attributable
to the change in the input variables that factors in stock price, risk-free rate, volatility, and duration outstanding for the
notes and warrants.
Net
Loss
. As a result of the foregoing, the net loss for the three months ended June 30, 2017 was $4,114,390 or $0.16 per
common share, basic and diluted, as compared to a loss from operations of $2,364,866 or $0.12 per common share, basic and diluted,
for the three months ended June 30, 2016, an increase of $1,749,524 or 74.0%.
Reconciliation
of GAAP to non-GAAP Financial Measures
The
following table contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles
(“GAAP”). Such measures, which are unaudited and should only be read in conjunction with our financial statements
and related notes included elsewhere in this report, are intended to serve as a supplement to the GAAP results. The unaudited
non-GAAP information reflects the adjustment to GAAP Net Income Attributable to Common Shareholders on a non-GAAP basis, whereby
the effect of non-cash adjustments for each period presented for stock-based compensation and the interest expense related to
the accounting treatment for embedded debt derivative and warrant liability charges and the change in the fair value of derivatives
associated with the Convertible Notes Financing added back to the GAAP Net Income Attributable to Common Shareholders. This non-GAAP
adjustment has been used to calculate the non-GAAP earnings per share. The non-GAAP operating results for the quarters presented
are not necessarily indicative of results for any future periods, but management believes these non-GAAP financial measures provide
useful information to investors for a more accurate picture of the Company’s operations on an ongoing basis.
First
Harvest Corp.
RECONCILIATION
OF GAAP TO NON-GAAP FINANCIAL MEASURES
|
|
For the Three Months Ended
June 30, 2017
|
|
|
For the Three Months Ended
June 30, 2016
|
|
|
|
|
|
|
|
|
GAAP NET LOSS
|
|
$
|
(4,114,390
|
)
|
|
$
|
(2,364,866
|
)
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
Add:
Non-Cash Stock-based Compensation Charge
|
|
$
|
1,062,383
|
|
|
$
|
1,457,805
|
|
Non-Cash Charge for Interest Expense Related to Embedded
Debt Derivative and Warrant Liability
|
|
|
2,263,406
|
|
|
|
-
|
|
Non-Cash Charge for Change in the Fair Value of Derivative
|
|
|
113,978
|
|
|
|
-
|
|
Total Non-Cash Charges
|
|
$
|
3,439,767
|
|
|
$
|
1,457,805
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Net Loss
|
|
$
|
(674,623
|
)
|
|
$
|
(907,061
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP Earnings Per Share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Going
Concern
Our
independent registered public accounting firm stated that our financial statements for the three months ended June 30, 2017 and
2016 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue
raised as we have not generated revenue and incurred a net loss of $4,114,390 for the three months ended June 30, 2017. We had
an accumulated deficit of $11,176,775 as of June 30, 2017, expect to generate net losses for the near future, and require additional
financing to fund future operations. Our financial statements contain additional note disclosures describing the circumstances
that led to this disclosure.
Our
operations have not yet resulted in revenue generation and we have financed our activities using equity and debt financings. Our
ability to continue as a going concern is subject to our ability to achieve and maintain profitable operations or obtain necessary
funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans from various
financial institutions or private sources, where possible. Our lack of revenue and continued net operating losses increases the
difficulty in meeting such goals and there can be no assurances that such methods will prove successful. While we continually
look for additional financing sources, in the current economic environment, the procurement of outside funding is difficult and
there can be no assurance that such financing will be available on terms acceptable to us, if at all.
Therefore,
management plans to raise capital to finance our operating and capital requirements. However, we may be unable to do so on terms
that are acceptable to us, if at all, particularly given current capital market and overall economic conditions. While we are
devoting our best efforts to achieve our business plans, there is no assurance that any such activity will generate funds that
will be available for operations. These conditions raise substantial doubt about our ability to continue as a going concern.
Liquidity
and Capital Resources
The
following table summarizes total current assets, liabilities and working capital at June 30, 2017 compared to March 31, 2017:
|
|
June 30, 2017
|
|
|
March 31, 2017
|
|
|
Change
|
|
Current Assets
|
|
$
|
51,250
|
|
|
$
|
-
|
|
|
$
|
51,250
|
|
Current Liabilities
|
|
$
|
4,038,215
|
|
|
$
|
1,445,552
|
|
|
$
|
2,592,663
|
|
Working Capital Deficiency
|
|
$
|
(3,986,965
|
)
|
|
$
|
(1,445,552
|
)
|
|
$
|
(2,541,413
|
)
|
As
of June 30, 2017 and March 31, 2017, we had a working capital deficiency of $3,986,965 and $1,445,552, respectively, an increase
of $2,541,413 or 175.8%. The increase in working capital deficiency was primarily due to the accounting treatment related to the
Convertible Notes Financing for the embedded debt derivative and warrant liability of $2,747,476 at June 30, 2017 compared to
$0 at March 31, 2017. The derivative financial instruments require that the Company record fair value of the derivatives as of
the inception date of the Convertible Notes Financing and to fair value as of each subsequent reporting date which at June 30,
2017 was $1,185,185 and $1,562,291 for the debt derivative and warrant liability, respectively.
For
the three months ended June 30, 2017 and 2016, we recorded no revenue. As a result, we do not have any capital resources to meet
our projected cash flow requirements to conduct our proposed operations. We presently do not have any available credit, bank financing
or other external sources of liquidity. Therefore, we will require additional financing in order to develop our business. We cannot
predict whether this additional financing will be in the form of equity or debt, or be in another form. We may not be able to
obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable
to implement our current plans for operations and these circumstances would have a material adverse effect on our business, prospects,
financial condition and results of operations.
During the three months ended June 30, 2017,
we used net cash of $683,979 in operations, and generated $735,229 net cash from financing activities, including common
stock sales and issuance of notes payable. During the three months ended June 30, 2016, we used net cash of $1,109,219 in operations,
and generated $1,056,500 net cash from financing activities from common stock sales and issuance of notes payable.
Sources
of Liquidity
Common
Stock.
During the three months ended June 30, 2017, we sold an aggregate of 288,000 shares of common stock for gross proceeds
of $288,000. During the period from July 1, 2017 through the date of this filing, we sold an aggregate of 3,000 shares of common
stock for gross proceeds of $3,000.
Convertible
Notes Financing.
In April and May 2017, the Company entered into four separate securities purchase agreements with two
lenders for the sale of short-term convertible notes in the aggregate principal amount of $519,000.
Convertible
Promissory Notes Payable.
During the three months ended June 30, 2017, the Company entered into a series of short-term
convertible promissory notes in the aggregate principal amount of $150,000. During the period from July 1, 2017 through the date
of the filing, we entered into a series of short-term convertible promissory notes in the aggregate principal amount of $95,000.
During the three months ended June 30, 2017, the Company issued an aggregate of 241,007 shares of common stock for the conversion
of the short-term convertible notes payable in the amount of $224,094. During the period from July 1, 2017 through the date of
the filing, the Company issued 266,667 shares of common stock for the conversion of a short-term convertible notes payable in
the amount of $200,000.
Off-Balance
Sheet Arrangements
We
do not have 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, revenue or expenses, results or operations, liquidity, capital expenditures or capital
resources that is material to investors.
Critical
Accounting Policies and Estimates
Revenue
Recognition
: We recognize revenue related to product sales when (i) persuasive evidence of the arrangement exists, (ii) shipment
has occurred, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured. For the period from February
27, 2013 (inception) to June 30, 2017, we have not recognized any revenue.
Stock-Based
Compensation:
We account for stock-based compensation in accordance with ASC 718 “Compensation – Stock Compensation”
using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as
consideration are measured and recognized based on the fair value of the equity instruments issued. We account for stock-based
compensation to consultants and other third parties in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees.”
Compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of
the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially
records compensation expense based on the fair value of the award at the reporting date.
Convertible
Instruments:
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them
as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument
and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with
changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be
conventional, as that term is described under applicable ASC 480-10.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company
records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption.
Derivative
Financial Instruments:
The Company classifies, as equity, any contracts that (i) require physical settlement or net-share
settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement
or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as
assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract
if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common
stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification
between assets and liabilities is required.
The
Company’s free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the
issuance of debt and of embedded conversion options with convertible debentures. The Company evaluated these derivatives to assess
their proper classification in the balance sheet as of June 30, 2017 using the applicable classification criteria enumerated under
ASC 815-Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise features do not contain
fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company could not ensure it
would have adequate authorized shares to meet all possible conversion demands.
As
such, the Company was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark
to market all such derivatives to fair value at the end of each reporting period.
Recent
Pronouncements
We
have evaluated all the recently issued accounting pronouncements through the filing date of these financial statements and do
not believe that any of these pronouncements will have a material impact on our financial position and results of operations.
JOBS
Act
On
April 5, 2012, the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can
take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended for
complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption
of certain accounting standards until those standards would apply to private companies. We are electing to delay such adoption
of new or revised accounting standards and, as a result, we may not comply with new or revised accounting standards at the same
time as other public reporting companies that are not “emerging growth companies.”
In
addition, we intend to rely on other exemptions from reporting and disclosure requirements that are offered by the JOBS Act, including
(i) an exemption from the need to provide an auditor’s attestation report on our system of internal control over financial
reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, and (ii) an exemption from the need to comply with any PCAOB requirement
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the
audit and our financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following
our first sale of common equity securities under an effective registration statement or until we no longer qualify as an “emerging
growth company,” whichever is earlier.