The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Description of the Company
Stony Hill Corp. was incorporated on February 21, 2014 under the laws of the State of Nevada, under the name “First Fixtures, Inc.” We amended our Articles of Incorporation to change our name to “Stony Hill Corp.” on October 13, 2016. From our formation on February 21, 2014 until November 4, 2016, we were engaged in the business of being an online shopping mall specializing in bathroom and kitchen fixtures and faucets. Colin Povall served as President, Treasurer and sole director from February 21, 2014, until his resignation on October 3, 2016. Concurrent with his resignation, Mr. Povall appointed Damian Marley as the President and Chief Executive Officer, and sole member of the Board of Directors, Dan Dalton as the Treasurer, and John Brady as the Secretary, of the Company. On February 10, 2017, the board of directors appointed Chris Bridges as our President. Concurrent with the appointment of Mr. Bridges, Damian “Jr. Gong” Marley resigned as our President and Chief Executive Officer. Effective March 9, 2017, Chris Bridges was also appointed a director of the Company. Accordingly, Damian Marley and Chris Bridges presently comprise the board of directors of the Company.
On October 3, 2016, the Company declared a 1-for-10 reverse stock split. All share and per share amounts disclosed herein have been retroactively restated as if the split had occurred as of the earliest period presented.
From inception until we completed our reverse acquisition of Stony Hill Ventures, we were engaged in the principal business of being online shopping mall specializing in bathroom and kitchen fixtures and faucets.
Merger
On November 4, 2016, Stony Hill Corp. entered into a Share Exchange Agreement (the “Share Exchange Agreement”), by and among the Company, Stony Hill Ventures Corp., a Nevada corporation (“Stony Hill Ventures”), and the holders of common stock of Stony Hill Ventures. The holders of the common stock of Stony Hill Ventures consisted of 26 stockholders.
Prior to the share exchange, 6,002,584 shares of the Company's common stock were cancelled. Under the terms and conditions of the Share Exchange Agreement, the Company offered, sold and issued 10,840,000 shares of common stock in consideration for all the issued and outstanding shares in Stony Hill Ventures. The effect of the issuance was that Stony Hill Ventures shareholders held, at the time, approximately 73% of the issued and outstanding shares of common stock of the Company.
As of November 4, 2016, Damian Marley, the Company’s then new President and Chief Executive Officer, and then sole member of the Board of Directors, was the holder of 3,150,000 shares of common stock of the Company. Dan Dalton, the Company’s new Treasurer, was the holder of 2,250,000 shares of common stock of the Company. John Brady, the Company’s new Secretary, is holder of 2,000,000 shares of common stock of the Company. The Company’s officers and sole director, therefore, controlled an aggregate of 7,400,000, or approximately 48.5%, of the outstanding common stock of the Company, on a fully diluted basis, upon completion of the transaction.
As a result of the share exchange, Stony Hill Ventures is now a wholly-owned subsidiary of the Company.
The share exchange transaction with Stony Hill Ventures was treated as a reverse acquisition, with Stony Hill Ventures as the acquiror and the Company as the acquired party. Unless the context suggests otherwise, when we refer in this Form 8-K to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Stony Hill Ventures.
Basis of presentation – Unaudited Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2018, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2017, which are included in the Company’s Report on Form 10-K for such year filed on June 29, 2017.
STONY HILL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
Going concern
These condensed statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As reflected in the condensed consolidated financial statements, the Company has only recently started to generate revenues from its business operations and incurred a net loss of $197,204 and used $50,545 of cash from operating activities during the three months ended June 30, 2017. Further, the Company’s independent auditors in their audit report for fiscal year ended March 31, 2017 expressed substantial doubt about the Company’s ability to continue as a going concern. These and other factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and income from operations. The Company will need and is currently working on obtaining additional funds to operate its business through and beyond the date of this Form 10-Q filing. There is no assurance that such funds will be available or at terms acceptable to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders in the case of convertible debt and equity financing.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries: Vita Products LLC, a wholly-owned subsidiary; and VitaCBD LLC, an 80% owned entity, both Washington limited liability companies. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates and Assumptions
Preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Among other things, management estimates include the collectability of its accounts receivable, recoverability of inventory, assumptions made in determining impairment of investments and intangible assets, accruals for potential liabilities, and realization of deferred tax assets. These estimates generally involve complex issues and require judgments, involve analysis of historical information and the prediction of future trends, and are subject to change from period to period. Actual amounts could differ significantly from these estimates.
Revenue Recognition
The Company receives revenue from two main sources - license fees and sale of products. For license fees, revenue arrangements provide for the payment of contractually determined monthly ongoing fees in consideration for the grant of right to use intellectual property of the Company, including trademark, trade dress, images, likenesses and other associated intellectual property, such as the name “Stony Hill” related to Damian Marley and in some cases mutually agreed upon marketing and special appearances by certain members of the Company. Revenue from product sales relate to shipments of cannabidiol (“CBD”) brand products. There is no right of returns other than for goods damaged during shipment.
For both license fees and sale of products, revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) all obligations have been substantially performed pursuant to the terms of the arrangement, (iii) amounts are fixed or determinable, and (iv) the collectibility of amounts is reasonably assured.
STONY HILL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
Advertising
The Company expenses advertising costs as incurred. Advertising expense for the three months ended June 30, 2017 and 2016 amounted to $11,570 and nil, respectively, and are included in "General and Administrative expenses" in the Condensed Consolidated Statements of Operations.
Earnings (Loss) per Share
The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items. For the three months ended June 30, 2017 and 2016, there were no common stock equivalents outstanding.
Weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented.
Investments
For investments that are not required to be consolidated, the Company uses either the equity method or the cost method of accounting. The Company uses the equity method for unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. The Company uses the cost method for all other investments. Under the cost method, there is no change to the cost basis unless there is an other-than-temporary decline in value or dividends are received. If the decline is determined to be other-than-temporary, the Company writes down the cost basis of the investment to a new cost basis that represents realizable value. Distributions received from the income of an investee on cost method investments are included in "Equity method investments (loss)/income, net." Investments accounted for under the equity method or cost method of accounting above are included in the caption "Equity investments" on the Condensed Consolidated Balance Sheets.
Intangible Asset
Intangible assets are recorded when such assets are acquired and are amortized over the estimated useful life of the intangible asset. The Company regularly reviews intangible assets to determine if facts and circumstances indicate that the useful lives have changed from the original estimate or that the carrying amount of the assets may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets and occur in the period in which the impairment determination was made.
STONY HILL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company will adopt the provisions of this statement in the quarter beginning April 1, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 3 – INVESTMENT
Equity investments relate to purchases of stock in certain entities with ownership percentages of less than 5% and consist of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Cannabi-Tech Ltd.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Hightimes Holdings Corp.
|
|
|
250,000
|
|
|
|
250,000
|
|
Precision Cultivation Systems, LLC
|
|
|
50,000
|
|
|
|
-
|
|
|
|
$
|
350,000
|
|
|
$
|
300,000
|
|
In November 2016, the Company purchased 29,571 shares of Preferred A stock at a price of $1.69086 per share for less than 5% investment in Cannabi-Tech Ltd. (“Cannabi”), a private company incorporated in the State of Israel. Cannabi is a provider of lab-grade medical cannabis quality control testing systems used to test the quality of medical marijuana flowers.
In January 2017, the Company entered in to an agreement to purchase 59,524 shares of Class A common stock at a price of $4.20 per share for less than 5% investment in Hightimes Holdings Corp. (“Hightimes”), a private company incorporated in the State of Delaware. The agreement was finalized on May 31, 2017. Hightimes owns Hight Times Magazine and hosts festivals, events and competitions including the High Times Cannabis Cup and multiple e-commerce properties, including HighTimes.com, CannabisCup.com and 420.com.
STONY HILL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
In June 2017, the Company entered in a Subscription Agreement to purchase 0.5% interest in Precision Cultivation Systems, LLC (“Precision”), a limited liability private company incorporated in Delaware, for a purchase price of $50,000. Precision is developing a growth system that capitalizes on a patent-pending cultivation method that utilizes proprietary irrigation and root zone conditioning. As part of the Subscription Agreement, $42,500 of the investment is subject to repayment on a pro-rata basis with other investors who have entered into similar Subscription Agreements. Amounts subject to repayment are solely at the discretion of Precision.
As the Company does not participate in the management of these companies nor has the ability to exercise significant influence over these companies, the Company recorded these investments at cost and will recognize dividends, if any, when received, and will recognize gains or loss upon either selling the securities or recognize a loss prior to selling the securities if there is evidence that the fair market value of the investment has declined to below the recorded historical cost.
NOTE 4 –INTANGIBLE ASSET
On February 23, 2017, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with mCig, Inc., a Nevada corporation (“mCig”) for a total purchase price of $1,144,000, which the Company recorded an intangible asset of $1,138,135 consisting of the Vita CBD brand name and $5,865 of inventory received from mCig. The VitaCBD business is primarily a line of cannabidiol (“CBD”) retail brand products that include CBD tinctures, ejuices, edibles, islates, salves, waxes, oils and capsules, as well as related trade names, social media, accounts and other related assets. In May 2017, the Company issued 150,000 shares at a price of $2.84 in conjunction with the Asset Purchase Agreement, which had been previously reflected as Common Stock to be Issued in the Company’s March 31, 2017 consolidated financial statements.
The intangible is being amortized over a period of 5 years, the estimated life of the brand acquired. Amortization totaled $56,128 for the three months ended June 30, 2017 and will total $224,512 for the fiscal year ending March 31, 2018 and $224,512 in each of the following 4 years and $15,575 thereafter.
In accordance with the Asset Purchase Agreement, if the average common stock market price of the Company’s common stock held by mCig falls below $1.57 per share, or $550,000 total value (“Market Value”), during any 7-day period during the first year following the Second Stock Issuance (May 24, 2017), then the Company is obligated to issue to mCig additional shares of the Company’s common stock to increase the then Market Value held by mCig to $550,000. As of June 30, 2017, the trading price of common stock held by mCig was above the Market Value threshold.
NOTE 5 – RELATED PARTY TRANSACTIONS
As of March 31, 2017, the Company owed $19,287 of reimbursable expenses to an advisor and an officer of the Company for general and administrative expenses paid on behalf of the Company by the advisor and officer. During the three months ended June 30, 2017, the advisor and officer advanced an additional $7,946. During the three months ended June 30, 2017, the Company repaid $18,787 of the amounts owed. As such, outstanding balance owed as of June 30, 2017 was $8,446. All amounts owed are payable on demand and are unsecured.
In view of the Company’s limited operations and resources, none of the Company’s directors and/or officers received any compensation from the Company during the three months ended June 30, 2017.
Upon issuance of the initial shares of common stock of the Company to Damian Marley, the Company obtained an exclusive, perpetual, royalty-free license from Damian Marley with respect to his name, likeness, image and voice for use in our businesses. The Company also obtained the right to intellectual property, including trademark, trade dress, images, likenesses and other associated intellectual property, such as the name “Stony Hill” related to Damian Marley.
STONY HILL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS PERIODS ENDED JUNE 30, 2017 AND 2016
(unaudited)
NOTE 6 – LICENSE AND MARKETING AGREEMENTS
On May 25, 2017, the Company entered into two (2) separate Marketing Agreements (the “Agreements”) with unaffiliated entities (the “Licensees”), effective May 15, 2017. Pursuant to the Agreements, the Company licensed the name and phrase “Damian Marley’s Stony Hill” (the “License”) to the Licensees for use in the State of Colorado and Oregon, for a term which expires on February 28, 2018. Under the Agreements, the Licensees are obligated to pay the Company a cash fee of $5,000 as consideration for each retail location of the Licensees that use the License. During the period ended June 30, 2017, no retail locations opened and therefore, no cash fee earned under the Agreements. Additionally, six (6) months after the effective date of the Agreements, the Licensees are obligated to pay the Company an amount equal to 10% of the net profits of the sale of a dispensary.
NOTE 7 – EQUITY
Establishment of Advisory Board and Adoption of Charter
On April 28, 2017, the Company established an advisory board (the “Advisory Board”) and approved and adopted a charter (the “Advisory Board Charter”) to govern the Advisory Board. The Advisory Board shall be comprised of one or more directors, and up to six independent, non-Board, non-employee members, all of whom shall be appointed and subject to removal by the Board of Directors at any time. In connection with the establishment of the Advisory Board, the Board of Directors appointed Dr. James Mulé, an independent, non-Board and non-Company employee to the Advisory Board. In connection with Dr. Mulé’s appointment to the Advisory Board, the Company entered into a Consulting Agreement (the “Consulting Agreement”), dated effective May 1, 2017, whereby the Company shall pay Dr. Mulé an annual consulting fee of $50,000 worth of shares of common stock of the Company, based on the stock price of the Company on the last day of each calendar year, and reimburse Dr. Mulé for reasonable out-of-pocket expenses. Pursuant to the terms of the Consulting Agreement, the annual consulting fees of $50,000 worth of shares are nonrefundable. AS such, the Company accrued the $50,000 as consulting fee during the period ended June 30, 2017 and the Company recorded the $50,000 commitment as common stock to be issued in the Company’s accompanying condensed consolidated statement of stockholders’ equity. In addition, the Dr. Mulé may be eligible for an annual discretionary bonus based on performance and entirely at the discretion of Board. The Consulting Agreement has a term of three years.