UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended
March 31, 2017
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ________________ to ________________
Commission
file number:
000-55120
First
Harvest Corp.
(Exact
name of registrant as specified in its charter)
Nevada
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46-2143018
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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5015
W. Nassau Street
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Tampa,
Florida
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33607
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code
(877) 749-5909
American
Riding Tours, Inc.
(Former
name or former address, if changed since last report)
Securities
registered under Section 12(b) of the Act:
None
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N/A
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Title
of each class
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Name
of each exchange on which registered
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Securities
registered under Section 12(g) of the Act:
None
Shares
of Common Stock, par value $0.001 per share
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate
by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
[ ] No [X]
Indicate
by checkmark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
[ ] No [X]
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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[ ] (Do not check if a smaller reporting company)
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Accelerated
filer
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[ ]
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Non-accelerated
filer
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[ ]
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Smaller
reporting company
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[X]
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Emerging
growth company [ ]
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
[ ] No [X]
The
aggregate market value of the voting and non-voting shares of common stock held by non-affiliates as of September 30, 2016 based
on the closing sales price of the common stock ($5.50) as reported by the OTC Markets was $1,284,833. For purposes of this computation,
all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should
not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.
As
of June 30, 2017, 26,257,572 shares of the registrant’s common stock were issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Not
Applicable
PART
I
Forward
Looking Statements.
Statements
in this current report on Form 10-K may be “forward-looking statements.” Forward-looking statements include, but are
not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements
relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates
and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results
may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous
factors, including those described above and those risks discussed from time to time in this report, including the risks described
under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this report and in other documents which we file with the Securities and Exchange Commission. In addition,
such statements could be affected by risks and uncertainties related to:
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our
ability to raise funds for general corporate purposes and operations;
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the
commercial feasibility and success of our technology and products;
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our
ability to recruit qualified management and technical personnel; and
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the
other factors discussed in the “Risk Factors” section and elsewhere in this report.
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Any
forward-looking statements speak only as of the date on which they are made, and except as may be required under applicable securities
laws, we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the
date of this current report.
ITEM
1. BUSINESS
General
First
Harvest Corp. (the “Company”) is a digital media platform including 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 March 31, 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.
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.
Company
To reach the pro-cannabis target audience,
our digital media platform (the “Platform”) currently consists of two elements we have developed:
(1)
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Hemp
Inc -
A mobile gaming app known as Hemp Inc (the “Game”) 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 the real life
cannabis culture and serves as a platform for advertising and ecommerce sales. This unique,
entrepreneurial game is similar in format to a
FarmVille
or
Clash Royale
type game for mobile gamers to develop, grow and dispense virtual cannabis and interact
with celebrities and advertisers’ “brands” within the game.
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The
development team for the Game is led by Danny Hammett, the former Executive Vice President at Activision (Nasdaq: ATVI). Mr. Hammett
was responsible for their intellectual property development and product launches, including creation of such iconic games as -
Call of Duty
,
Big Game Hunter
,
Tony Hawk
,
Spiderman
and
Toy Story
. He has put together a team
of developers with experience at such gaming and technology companies as Activision, Sega, MiniClip and DropBox.
The
Game is currently available for download on iTunes and is expected to be available on the Google Play Store in the third quarter
of 2017. It is a sales platform that uses a viral marketing strategy to take advantage of the social media reach of the celebrities
in the Game and the popularity of the cannabis legalization movement. This allows the Game to build its user base with a low acquisition
cost.
The
gameplay objective is to set up and grow a legal cannabis business in a virtual world, using business strategy to create an environment
full of prosperity and growth. The user establishes a grow operation and dispensary, hires staff, buys strains of cannabis to
grow, purchases tools, ancillary products and real estate for the cultivation and sale of cannabis and related products, and engages
in a business strategy to expand their operations. The Game objective is to also raise social awareness of the benefits of medical
cannabis and legalization. The Game has celebrities participating as avatars, which ties to the Game’s revenue model. The
celebrities include such recognized names as Jimi Hendrix, Cypress Hill and Melisa Etheridge, as well as such organizations as
the National Organization of the Reform of Marijuana Laws (NORML), Freedom Leaf and High Times Magazine. These celebrities will
promote the game via their social media channels, including Twitter, Facebook, YouTube and Instagram. The celebrity relationships
will create tie-ins to sell merchandise, concert tickets, and other celebrity endorsed products via ecommerce through the Game.
Our
primary target audience is enthusiasts of action-adventure and business strategy oriented mobile games, with an affinity toward
the legalization of medical and recreational/therapeutic cannabis. This is typically a mature, male dominated genre, between ages
17 - 35. In the U.S., people who spent money in their mobile games in 2015 paid an average of $87 on in-app purchases in free-to-play
mobile games, according to a March 2016 report from digital commerce analyst Slice Intelligence. This information is based upon
more than 4 million digital purchasers in the U.S. The report also states that 10% of mobile users account for 90% of revenue
from in-app purchases. We believe this is a highly engaged audience that provides daily revenue opportunities for the Game.
Both
the mobile gaming market and the cannabis market are expected to experience double-digit compound annual growth rates over the
next five years. According to
Newzoo
Global Games Market Report, in 2016 mobile games will generate $36.9 billion in revenues,
and according to the
Investing.com
and
Forbes
research, the cannabis industry is already developed into an estimated
$50 billion market, albeit primarily illegal.
(2)
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www.cannavoices.com
– A member-based social media platform for subscribers to participate in
an open forum with other pro-cannabis supporters, similar in form to an interactive Facebook-style
social media platform.
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Under
this platform, members share cannabis-related news, events, culture, technology, business insights, and inspiration while networking
with like-minded individuals, all within one platform. Each member builds a unique personal profile by sharing and documenting
his individual voice and journey into realizing the benefits of cannabis. We also intend to publish, through this platform, a
quarterly on-line magazine with content designed using an elegant, enlightened theme to promote more social acceptance of cannabis.
This model has a broad appeal to cannabis-affinity groups and has a proven advertising revenue model.
Our
primary target audience is socially-active Millennials (ages 18-33) and Generation X’ers (ages 34-50) who own a smartphone
and use cannabis, either medically or therapeuticly. This group is a regular consumer of games, apps, music, movies and online
content and is comfortable with making purchases online and through mobile applications. It is estimated that approximately 68%
(56.4 million) of the 83 million Millennials and 52% (32.7 million) of the 63 million Generation X’ers favor cannabis legalization,
according to the U.S. Census Bureau 2010 and 2014 Pew Research Study. Our social and digital media platforms are focused on bridging
the gap between brand conscious advertisers and the estimated 89 million cannabis legalization supporters in this target audience.
We
believe that by combining three of the fastest growing business sectors – cannabis, social media and mobile gaming, along
with our world-class development team led by the former Executive Vice President of Activision, together with our promotional
celebrities and entities, our Platform can become a premiere advertising medium in the cannabis industry.
According
to the results of a recent Gallup Poll release October 19, 2016, 60% of Americans support the legalization of cannabis. In a separate
Quinnipiac Poll published on February 23, 2017, 93% of Americans favor the use of legalized cannabis for medical purposes if prescribed
by a doctor.
From
a member or gamer perspective, the Platform eliminates the stigma of cannabis as an illicit drug and provides an affinity driven
ecosystem that attracts, engages and inspires members through mobile gaming, social and digital media, ecommerce and education,
while advancing a cause they already support.
From
an advertiser perspective, the Platform provides a brand-safe environment to reach a large, self-identified, socially active,
web-savvy, niche audience with targeted advertisements uniquely matched to their social engagement habits.
Popular
social media platform companies like Facebook, LinkedIn, Twitter, Instagram, YouTube and Google+ do not provide advertisers the
ability to tap into this segmented market due to restrictive protocols found within their terms of service. By leveraging the
Platform, advertisers now have the ability to gain crucial behavioral analytics across several media platforms in order to dramatically
increase their brand’s reach, viral marketing, and results.
The
Platform creates cross-advertising opportunities. In addition to attracting new members and gamers, both elements of the Platform
provide unique user insights and highly actionable intelligence that can better align an advertiser’s products and solutions
directly with a more inclined prospect. Whether to expand a member’s knowledge, enjoy an entertaining mobile game, discover
alternative therapies, referrals to celebrity affiliates’ ecommerce sites or just join the biggest social movement since
prohibition repeal, the Platform empowers members and advertisers alike to connect the voices that change the world.
Revenue
Model
The
Game is a “freemium” download and has a three-pronged model to generate revenue:
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(1)
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In-app
micro-transactions where gamers are continually offered in-game characters, accessories and dead-drops for enhanced game play
for a small payment, typically $0.99 - $9.99;
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(2)
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Branding
and ad-placement within the game; and
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(3)
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Celebrity
affiliate agreements for revenue share via in-app ecommerce purchases.
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While
the Game has generated some revenue to date, Cannavoices has not received any revenue, and will not until the developer has been
repaid in full for the development costs. The Game was soft-launched in May 2016 and is now available to download on iTunes and
is expected to be available on the Google Play Store in the third quarter of 2017.
The
social media platform was launched in the third quarter of 2015 and is being updated to tie together with the Game analytics to
target advertising directly to users based on their preferences. We intend to use the Game and the social media platform to build
our subscriber base and boost users’ engagement with the Platform.
The
Company is 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 the Game and social media platform. The Company may explore these opportunities through the acquisition
of operating companies, asset purchases or internal development.
Advertising
Our
advertising services offer creative ways for marketers and advertisers to reach and engage with our audience. The goal of the
engagement-based advertising is to enhance the user experience while delivering real value to advertisers, including:
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Branded
goods and celebrity sponsorships that integrate relevant advertising and messaging within the game-play and social media platforms;
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Engagement
ads, product placement and offers in which game players and social media users engage with advertisers or sign up for third-party
promotions; and
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Display
ads in the Game and on the social media platform with online content, including banner advertisements.
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Management
anticipates reaching a large base of therapeutic and medicinal cannabis users through our integrated game and social media platform.
Much like Facebook’s model, management believes that it will be easier to on-board advertisers and charge higher fees once
the Platform has reached a large enough base and has the metrics to show user analytics of a targeted audience.
Research
and Development
Management
believes in continued investment in enhancing existing game-play and digital media with upgrades and developing new digital offerings,
software development tools and code modification. We currently have a team of contract software developers managing our existing
offerings and researching future enhancements. The Company also entered into a game development and licensing agreement with HKA
Digital Limited (“HKA”) on October 2, 2015. HKA is majority owned by a shareholder of the Company. The Company paid
HKA a total of $1,195,400 through March 31, 2017.
Intellectual
Property
We
own the social media platform “www.cannavoices.com,” the digital magazine by the same name “Cannavoices,”
and have a licensing agreement with HKA for the mobile gaming software of “
Hemp Inc.
” Our business is significantly
based on the creation, acquisition, use and protection of intellectual property. Some of this intellectual property is in the
form of software code, development tools and trade secrets that we use to develop our digital content and games and enable them
to run properly on multiple platforms. Other intellectual property we utilize includes product and celebrity names and audio-visual
elements, including graphics, music, story lines and interface design.
While
some of this intellectual property was created by us, we have also acquired rights to proprietary intellectual property. We have
also obtained rights to use intellectual property through licenses and service agreements with third parties. These licenses typically
limit our use of intellectual property to specific uses and for specific time periods.
We
protect our intellectual property rights by relying on federal, state and common law protections, as well as contractual restrictions.
We seek intellectual property protection and trademark protection as appropriate covering development and inventions originating
from us. We control access to proprietary technology by entering into confidentiality agreements with certain of our independent
contractors and consultants. In addition to these arrangements, we also rely on a combination of trade secret, copyright, trademark,
trade dress and domain names to protect our intellectual property.
Competition
The
Company faces significant competition in all aspects of its business. Specifically, we compete for the leisure time, attention
and discretionary spending of our players with other social game and digital media developers on the basis of a number of factors,
including quality of player experience, brand awareness and reputation and access to distribution channels.
There
currently is not a significant player in the cannabis digital media market. However, the industry is evolving rapidly and is becoming
increasingly competitive. Other developers of digital media and social games could develop more compelling content that competes
with our social games and adversely affect our ability to attract and retain players and their entertainment time. These competitors,
including companies of which we may not be currently aware, may take advantage of social networks, access to a large user base
and their network effects to grow rapidly and virally.
Our
competitors include:
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Developers
for Web and Mobile Games: We face competition from a number of competitors who develop web and mobile games. Some of these
competitors have significant financial, technical and other resources, greater name recognition and longer operating histories
and may create games that appeal to our players. The mobile game sector specifically is characterized by frequent product
introductions, rapidly emerging mobile platforms, new technologies and new mobile application storefronts.
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Other
Game Developers: Our players may also play other games on personal computers and consoles, some of which include social features
that compete with our social games and have community functions where game developers can engage with their players.
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Government
Regulation
The
Company is subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet,
many of which are still evolving and could be interpreted in ways that could harm our business. In the United States and internationally,
laws relating to the liability of providers of online services for activities of their users and other third parties are currently
being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright
and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the
content provided by users. Any court ruling or other governmental action that imposes liability on providers of online services
for the activities of their users and other third parties could harm our business. We are potentially subject to a number of foreign
and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence or
mature content, many of which are ill defined, still evolving and could be interpreted in ways that could harm our business or
expose us to liability.
In
addition, rising concern about the use of social networking technologies for illegal conduct, such as the unauthorized dissemination
of national security information, money laundering or supporting terrorist activities may in the future produce legislation or
other governmental action that could require changes to our games or restrict or impose additional costs upon the conduct of our
business.
We
may also offer our players various types of sweepstakes, giveaways and promotion opportunities. We are subject to laws in a number
of jurisdictions concerning the operation and offering of such activities, many of which are still evolving and could be interpreted
in ways that could harm our business. Any court ruling or other governmental action that imposes liability on providers of online
services could result in criminal or civil liability and could harm our business.
In
the area of information security and data protection, many states have passed laws requiring notification to users when there
is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring
the adoption of minimum information security standards that are often vaguely defined and difficult to implement. The costs of
compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our
part to comply with these laws may subject us to significant liabilities.
We
are also subject to federal, state and foreign laws regarding privacy and protection of player data, including the collection
of data from minors. We post our Privacy Policy and Terms of Service online, in which we describe our practices concerning the
use, transmission and disclosure of player data. Any failure by us to comply with our posted privacy policy or privacy related
laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business.
In addition, the interpretation of many data protection laws, and their application to the Internet is unclear and in a state
of flux.
The
regulatory status of the cannabis industry is shifting rapidly at the state level, with momentum toward a change at the federal
level through pressure on the U.S. Congress and the White House. Current federal regulations classify cannabis as a Schedule 1
substance, defined as “drugs with no currently accepted medical use and a high potential for abuse.” This drug classification
also includes heroin, LSD and ecstasy.
The
legal cannabis industry has evolved considerably over the past 3-5 years. We believe the industry has reached the tipping point
for legalization through pressure from citizens’ groups in individual states for the legalization of medical and/or recreational
cannabis. As reported by Pew Research Center in April 2015, nearly half (49%) of Americans say they have tried cannabis, and 12%
have tried it within the past year.
In
a Quinnipiac Poll published on February 23, 2017, 93% of Americans favor the use of legalized cannabis for medical purposes if
prescribed by a doctor. This trend is further illustrated in recent surveys of public opinion for cannabis legalization rapidly
outpacing opposition. A majority of Americans now favor broad legalization of cannabis. Opinions have changed drastically since
1969, when Gallup first asked the question and found that just 12% favored legalizing cannabis use compared to 60% in 2016.
Millennials
(currently 18-34) have been in the forefront of this change: 71% favor legalizing cannabis use, by far the highest percentage
of any age cohort. But across all generations - except for the Silent Generation (ages 71- 88) – support for legalization
has risen sharply over the past decade to more than 56% according to a Pew Research Center . The Quinnipiac Poll from February
2017 also found that 71% of respondents agree that the government should not enforce federal laws against cannabis in states that
have legalized medical or recreational cannabis use.
Public
support has given rise to the passage of new cannabis laws and regulations in a number of states, as well as multiple legal reforms
on legislative dockets. Each state’s legal environment is unique, making it critical for businesses to know and understand
the regulatory landscape on a state-by-state basis.
Another
regulatory variable adding to the complexity of the legal cannabis market are the local laws at the municipality and county levels.
Even when a state enacts legislation legalizing cannabis, each level of local government has the right to exercise restrictions
on cannabis activities, such as retail, consumption, transportation and cultivation. Zoning is an area of particular concern,
which is set forth at the local level. This can restrict where businesses can be located and the manner and size in which they
operate. Understanding individual state’s laws and local regulations requires business operators and investors to account
for multiple levels of regulatory compliance, such as how cannabis may be sourced, processed, distributed, and to whom, where
and how it may be sold.
State
Legal Status
While
new state-level legalization efforts continue to expand the number of states involved in the cannabis industry, only a handful
of existing states have any meaningful full-scale operations for the cultivation and distribution of cannabis. This presents a
significant growth opportunity for investment over the next several years as the existing legalized states and new states’
markets come online.
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Medical
Cannabis Legalization - 29 states have legalized medical cannabis, plus the territories of Guam and Puerto Rico and Washington,
D.C.
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“Low
THC, High Cannabidiol (CBD)” products – An additional 17 states (in addition to the above) now recognize cannabis
or cannabidiol derived products for medical reasons in limited situations or as a legal defense. These programs are not counted
as comprehensive medical cannabis programs as the 29 states with some form of medical cannabis legalization.
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Recreational
Cannabis Legalization - 8 states (AK, CA, CO, ME, MA, NV, OR, WA, plus Washington, D.C.) have passed laws that allow for adult
recreational/therapeutic use of cannabis
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Industrial
Hemp – 30 states recognize hemp as an industrial product
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Federal
Legal Status
Cannabis
is still classified as an illegal substance in the U.S. The Drug Enforcement Agency (“DEA”) and the Food and Drug
Administration (“FDA”) currently classify cannabis as a Schedule 1 drug under the Controlled Substances Act. The classification
makes cannabis illegal under federal law to cultivate, manufacture, distribute or possess cannabis, and has created a discrepancy
between state’s rights and federal law.
This
discrepancy has created a complicated environment for cannabis businesses in regards to restrictive banking regulations, interstate
trade, IRS tax code and federal bankruptcy laws, especially for companies that directly “touch the plant” such as
growers and distributors. For example, since the possession or distribution of cannabis violates federal law, banks that provide
services may face the threat of prosecution or sanctions. As a result of being denied banking services or direct access to conventional
loans, many of the companies that grow or distribute cannabis directly are forced to transact business on a cash-only basis.
The
banking issues created by the federal laws have required the cannabis industry to focus on viable alternatives and have created
opportunities for new providers, from finance companies to security and software firms. The issue of interstate trade requires
companies that grow or distribute cannabis to duplicate efforts within each state they wish to legally operate and has limited
the development of ‘national’ brands. These laws do not directly affect companies operating in ancillary businesses.
Both
Congress and the White House are working to clarify the federal position on cannabis while still protecting states’ rights.
In 2013, then U.S. Deputy Attorney General James Cole issued an enforcement policy memo to all U.S. attorneys detailing the priorities
of the Department of Justice (“DOJ”) when enforcing federal drug laws in states that legalized or decriminalized cannabis.
The “Cole Memo” ultimately emphasizes the need for robust state regulation of cannabis. The memorandum “rests
on its expectation that state and local governments that have enacted laws authorizing cannabis-related conduct will implement
strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety,
public health, and other law enforcement interests.”
In
February 2014, the White House and the Department of the Treasury gave a roadmap for conducting transactions with cannabis companies
operating within state regulations. The most sweeping federal reforms to date, however, have come from Congress in the Rohrabacher-Farr
Amendment as part of the federal Omnibus Spending Bill that first passed in 2014 and has continued with the 2017 federal spending
bill. Congress voted to protect state medical cannabis and hemp laws from federal interference and cut the DEA’s budget.
As an example of increased support for the removal of federal laws banning medical cannabis, the medical cannabis-protecting amendment
passed the House 219-189 in 2014 and was accepted by a larger 242-186 majority in 2015, with even more support from both parties
year-over-year.
The
Senate first introduced The Compassionate Access, Research Expansion and Respect States (CARERS) Act in March 2015 and reintroduced
it in June 2017, co-sponsored by Senator Rand Paul (R-KY), Senator Corey Booker (D-NY) and Kirsten Gillibrand (D-NY), the bill
would end federal prohibition of medical cannabis and take steps to improve research.
Ancillary
Cannabis-Related Businesses:
As
more states enact cannabis legislation, the demand for cannabis-related products and services grows. The rapid expansion of the
cannabis market combined with more sophisticated management teams and business models entering the market has spurred the development
of numerous cannabis-related niche markets. These ancillary markets that do not physically “touch the plant” include
infrastructure and support for the cannabis industry in such areas as social media, security, consulting, delivery systems, financial
services, software & high-tech, electronic hardware, infused products, extracts & oils, hemp production, ancillary cultivation
solutions, and retail.
The
federal government still classifies cannabis as a Schedule 1 substance, which leaves many traditional businesses fearing reputational
and legal risks of serving the cannabis industry. However, ancillary businesses that do cater to the legal cannabis industry are
well positioned to benefit from the growth in the industry.
Market
The
legal cannabis markets in the United States are expanding rapidly. There are now twenty-nine states, plus Guam, Puerto Rico and
Washington, D.C., with medical cannabis programs and eight of these states (Alaska, California, Colorado, Maine, Massachusetts,
Nevada, Oregon and Washington), plus Washington, D.C. have also legalized cannabis for recreational use.
We
believe the market will continue to rapidly expand as existing states broaden the definition of the approved uses for cannabis
(i.e. from medicinal to recreational/therapeutic use) and additional states legalize cannabis for at least some purposes. Despite
the fact that the Federal Controlled Substances Act makes the use and possession of cannabis illegal on a national level, recent
guidance from the federal government suggests that it will continue to tolerate legalization at the state level, especially when
backed by strong and effective regulation. We believe it is significant that in 2017, the Congressional Spending Bill specifically
prevents the Justice Department from spending money to enforce the federal ban on growing or selling cannabis in states where
cannabis has been approved.
The
Company believes that not since the repeal of Prohibition in 1933, has a consumer product business opportunity of this magnitude
been created simply by changes in the law. According to an
IBISWorld
report, the cannabis industry is expected to achieve
rapid growth over the next five years. We believe the industry will continue to benefit from increasingly favorable attitudes
towards medical cannabis-based treatments and applications as acceptance and legitimacy of cannabis continues to grow.
Medical
Cannabis Market
The
last five years have seen a dramatic shift in public opinion on medical cannabis, which is reflected in the direction of individual
states toward legalization. A Quinnipiac Poll published in February 2017, reported 93% of Americans favor the use of legalized
cannabis for medical purposes if prescribed by a doctor
.
Twenty-nine states, plus Guam, Puerto Rico and Washington, D.C.,
have enacted medical cannabis laws, and there are approximately 1.2 million registered patients within these states. The five
states with the largest known current registered medical cannabis patient populations are: California, Colorado, Michigan, Oregon
and Washington.
An additional 17 states (in addition to the above) now recognize cannabis
or cannabidiol derived products for medical reasons in limited situations or as a legal defense. These programs are not counted
as comprehensive medical cannabis programs as the 29 states with some form of medical cannabis legalization.
Cannabis
has been used for medicinal purposes for thousands of years and has proven to be an effective treatment for pain relief, inflammation
and a number of other medical disorders. According to an
IBISWorld
report, new medical research and changing public opinion
have boosted industry growth.
Doctors
may prescribe ‘legalized’ medical cannabis in approved states where patients can receive a “recommendation”
from a state-approved, licensed physician for the treatment of certain conditions specified by the state. Medical cannabis is
being used to treat severe or chronic pain, inflammation, nausea and vomiting, neurologic symptoms (including muscle spasticity),
glaucoma, cancer, multiple sclerosis, post-traumatic stress disorder, anorexia, arthritis, Alzheimer’s, Crohn’s disease,
fibromyalgia, ADD, ADHD, Tourette’s syndrome, spinal cord injury and numerous other conditions. Cannabis oil has also been
proven effective in treating epileptic seizures in children.
Recreational
Cannabis Market
Eight
states have legalized recreational cannabis – Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Washington,
plus Washington, D.C. In November 2012, Colorado voters legalized recreational cannabis use. This history-changing legislation
created a window of opportunity for the commercialization and state taxation of a plant group that has, until recently, been virtually
untouchable and has set the wheels in motion for other states to follow. In July of 2014, Washington State launched its recreational
program and in November 2014, while Oregon and Alaska and the District of Columbia voted to introduce recreational programs commencing
in 2015. In November 2016, California, Maine, Massachusetts, and Nevada all passed ballot initiatives for the legalization of
recreational cannabis. A Gallup Poll survey from October 2016 showed that 60% of Americans are in favor of legalizing cannabis.
The
U.S. Cannabis Market
In
a
Bank of America / Merrill Lynch
cannabis industry research report from December 2015, estimates of the total market size
for cannabis sales in the U.S. ranges from $33 billion to $100 billion. That said, according to the report total legal (medical
and recreational) cannabis sales could reach $35 billion by 2020.
Another
recent cannabis industry research report from
Ackrell Capital
forecasts the potential growth of the overall legal
cannabis consumer market size to $100 billion by 2029 with over 50 million estimated users.
According
to an industry research and investment forum, the
ArcView Group
, legal U.S. cannabis sales increased to $5.4 billion for
2015 from $4.6 billion in 2014 and includes medical and adult consumer sales. This annual gain was largely fueled by the growth
in consumer sales, as additional states have approved adult recreational cannabis use. According to ArcView estimates, in 2013
the legal U.S. cannabis market was only a $1.4 billion industry and is targeted to grow to approximately $10 billion in legal
sales by 2018 as public opinion on legalizing cannabis has shifted overwhelmingly towards legalization in the last few years.
According
to a
Cowen & Co.
cannabis industry research report,
The Cannabis Compendium: Cross-Sector Views on A Budding Industry
,
published September 12, 2016, “Cannabis prohibition has been in place for 80+ years, but the tides are clearly turning.
Potential product applications range from recreational, to health & wellness, to therapeutic, to pharmaceutical. A lack of
robust science has proven problematic, given the plant’s many active ingredients (including THC, the only psychotropic compound
of 60+). Proponents point to cannabis’ wide use over thousands of years, skeptics advocate for science, and opponents voice
concern.”
The
Cowen report expects the recreational cannabis market to increase 9x over the next 10 years, assuming federal legalization. The
report estimates there are over 32 million yearly cannabis users in the U.S. (and close to 9 million daily users). With an approximately
$6 billion in legal cannabis sales in 2016 (recreational and medial), the report anticipates the transitioning of the informal
market and capitalizing on growing incidence, higher per caps, and premiumization should drive this increase
.
The reports
project a 24% 10-year revenue compound annual growth rate, or CAGR, which the report states is hard to find in consumer staples,
in particular with a $50+ billion end-point.
According
to the government sponsored National Survey on Drug Use and Health (“NSDUH”), there were 19.8 million “current”
cannabis users in the U.S. in 2013 (used within the past month), up from 14.5 million in 2007. These self-reported results may
be conservative based on the reluctance of respondents to admit to the use of an illegal substance in a government-sponsored survey.
For example, an international review found general population surveys underestimate alcohol consumption, sometimes by more than
50 percent. These studies suggest that it may be appropriate to inflate the NSDUH-only consumption estimates by a factor of two.
Consider that the average cannabis user may spend approximately $1,800 per year on cannabis, according to some estimates (approximately
the same estimated amount spent annually by a pack-a-day cigarette smoker). Hence, the low and high industry sales estimate using
the NSDUH data range from $36 billion to $72 billion.
By
comparison, U.S. beer market sales last year were estimated at $102 billion, the U.S. cigarette market at $66 billion and U.S.
coffee market at $30 billion.
It
is estimated that for every $1 of legally sold cannabis an additional $2.60 of economic value enters the American economy through
ancillary businesses. The cannabis market differs from other emerging markets in that businesses typically expend considerable
resources to stimulate demand, while in the cannabis industry significant demand already exists. The demand continues to outpace
legal supply due to limitations in state regulations, federal drug, tax and banking laws, and lack of interstate trade.
As
more states embrace legalization in some form and existing state programs mature, the demand for cannabis related real estate
continues to increase.
We
believe Denver provides a good foundation to look at the market as a whole. According to a recent report by the CBRE Group, more
than 3.7 million square feet of property is utilized in the cultivation, production, distribution and retailing of cannabis products
in the Denver area. With 29 states allowing some form of cannabis production and distribution, the demand for real estate is poised
to grow, potentially to more than 100 million square feet nationwide by 2020.
The
rapid rate at which available property has been occupied in Denver by cannabis industry businesses has implication for other states
and municipalities where cannabis is legal, particularly in states that have legalized recreational cannabis. We believe that
Oregon and Washington, for example, will see similar real estate absorption trends and expect that states with larger populations,
such as California, will experience massive demand once a stronger and more effective state regulatory system is adopted.
Recent
Developments
Financings
with EMA Financial, LLC
On
April 10, 2017 and May 15, 2017, the Company entered into Securities Purchase Agreements (“SPAs”) with EMA Financial,
LLC (“EMA”), wherein the Company issued convertible promissory notes in the aggregate principal amount of $259,500
(the “EMA Notes”) and warrants to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share
(“EMA Warrants”).
The
EMA Notes bear interest at 12% per annum. The maturity dates of the EMA Notes are April 10, 2018 and May 15, 2018 (the “EMA
Note Maturity Dates”). Any amount of principal or interest that is due under the EMA Notes, which is not paid by the Note
Maturity Dates, will bear interest at the rate of 24% per annum until it is paid.
The
EMA Notes are convertible by EMA into shares of Common Stock at any time on or after 180 days following their issue dates at the
applicable conversion price. The conversion price will be the lower of (i) the closing sale price of the Common Stock on the Principal
Market on the trading day immediately preceding the Closing Date and (ii) 50% of the lowest sale price for the Common Stock on
the Principal Market during the 25 consecutive trading days immediately preceding the date of conversion (the “Conversion
Date”). If the Company fails to register the shares of Common Stock underlying the EMA Notes within 180 days of their issue
dates, the conversion price will be permanently reduced to: (i) the closing sale price of the Common Stock on the Principal Market
on the trading day immediately preceding the Closing Date (as defined therein) and (ii) 40% of the lowest sale price for the Common
Stock on the Principal Market during the 25 consecutive trading days immediately preceding the Conversion Date.
EMA
does not have the right to convert the EMA Notes into Common Stock if such conversion would result in EMA’s beneficial ownership
exceeding 4.9% of our outstanding Common Stock at that time. At any time during the period beginning on their issue dates and
ending on the date which is six (6) months following their issue dates (“Prepayment Termination Dates”), the Company
shall have the right, exercisable on not less than five trading days prior written notice to EMA, to prepay the outstanding balance
on the EMA Notes (principal and accrued interest) (the “Prepayment Amount”), in full, at a price of either 135% of
the Prepayment Amount if such payment is made between the 91
st
and 180
th
day following their issue dates
or at a price of 125% of the Prepayment Amount if such payment is made within 90 days of their issue dates.
All
amounts due under the EMA Note become immediately due and payable by us upon the occurrence of an event of default, including
but not limited to (i) our sale of all or substantially all of our assets, (ii) our failure to pay the amounts due at maturity,
(iii) our failure to issue shares of Common Stock upon any conversion of the EMA Notes, (iv) our breach of the covenants, representations
or warranties under the EMA Notes, (v) our appointment of a trustee, (vi) a judgment against us in excess of $50,000 (subject
to a 20 day cure period), (vii) our liquidation, (viii) the filing of a bankruptcy petition by us or against us, (ix) our failure
to remain current in our reporting obligations under the Securities Exchange Act of 1934, (x) the delisting of our Common Stock
from the OTCQB or equivalent exchange, (xi) a restatement of our financial statements for any period from two years prior to the
Note Issuance Date until the Note has been paid in full, or (xi) our effectuation of a reverse stock split without 10 days prior
written notice to EMA. We are required to pay the Default Sum, which is defined in the EMA Note, depending on the event of default
that has occurred.
The
Company agreed to reserve an initial 2,445,000 shares of Common Stock for conversions under the EMA Notes (the “Initial
Reserve”), and also agreed to adjust the Initial Reserve to ensure that it always equals at least ten times the total number
of Common Stock that is actually issuable if the entire Note is converted.
The
EMA Warrants are immediately exercisable. The exercise price of the Warrants is subject to adjustment for stock dividends and
splits, and also subject to dilution protection in the event that the Company issues shares of Common Stock or securities convertible
into Common Stock at an effective price per share that is less than the original exercise price of the EMA Warrants.
Pursuant
to the SPAs, in the event that at any time on or prior to the date which is six months following the closing of the EMA financings,
if the Company desires to borrow funds, raise additional capital and/or issue additional promissory notes, whether convertible
into shares of securities of the Company or otherwise (a “Prospective Financing”), EMA shall have the right of first
refusal to participate in the Prospective Financing, and the Company shall provide written notice containing the terms of such
Prospective Financing to the Purchaser prior to effectuating any such transaction, provided that this right shall not apply to
any transaction in which the Company receives more than $250,000 of net proceeds in a single transaction.
Financings
with Auctus Fund, LLC
On
April 7, 2017 and May 15, 2017 the Company issued convertible promissory notes in the aggregate principal amount of $259,500 (the
“Auctus Notes”) to Auctus Fund, LLC, a Delaware limited liability company (“Auctus”). The Company issued
the Auctus Notes pursuant to securities purchase agreements (the “Auctus SPAs”), entered into by the Company and Auctus.
Pursuant to the SPAs, the Company also issued warrants to Auctus purchase 125,000 shares of Common Stock at an exercise price
of $2.00 per share (“Auctus Warrants”).
The
Auctus Notes bear interest at the rate of 12% per annum and mature on April 7, 2018 and May 15, 2018 (the “Auctus Maturity
Dates”). Any amount of principal or interest on the Auctus Notes which is not paid when due shall bear interest at the rate
of twenty-four percent (24%) per annum from the due date thereof until the same is paid (the “Default Interest”).
The Company has the right to prepay the Auctus Notes with a premium of up to 135% of all amounts owed to Actus, depending upon
when the prepayment is effectuated. The Auctus Notes may not be prepaid after the 180
th
day after their issue dates.
All
principal and accrued interest on the Auctus Notes is convertible into shares of the Company’s common stock at the election
of Auctus at any time at a conversion price equal to the lesser of (i) either a 50% (in the case of $84,500 of the principal amount
of the Auctus Notes) or 60% (in the case of $175,000 of the principal amount of the Auctus Notes) discount to the lesser of the
lowest traded price and closing bid price of the Common Stock during the 25 trading days prior to the closing dates of the Auctus
Financings and (ii) the Variable Conversion Price (which is defined as either 50% (in the case of $84,500 of the principal amount
of the Auctus Notes) or 40% (in the case of $175,000 of the principal amount of the Auctus Notes) of the lesser of the lowest
traded price and closing bid price of the common stock during the 25 trading day period prior to conversion). If, at any time
when the Auctus Notes are issued and outstanding, the Company issues or sells, or is deemed to have issued or sold shares of common
stock, except for shares of Common Stock issued directly to vendors or suppliers of the Company in satisfaction of amounts owed
to such vendors or suppliers (provided, however, that such vendors or suppliers shall not have an arrangement to transfer, sell
or assign such shares of Common Stock prior to the issuance of such shares), for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less
than the conversion price of the Auctus Notes that are then in effect on the date of such issuance of such shares of Common Stock
(a “Auctus Dilutive Issuance”), then immediately upon the Auctus Dilutive Issuance, the conversion price of the Auctus
Notes will be reduced to the amount of the consideration per share received by the Company in such Auctus Dilutive Issuance.
The
Company will not conduct any equity financing (including debt with an equity component) (“Future Offerings”) during
the period ending twelve (12) months following the Auctus financing closing dates, unless it shall have first delivered to Auctus,
at least seventy two (72) hours prior to the closing of such Future Offering, written notice describing the proposed Future Offering,
including the terms and conditions thereof, and providing Auctus an option during the seventy two (72) hour period following delivery
of such notice to purchase the securities being offered in the Future Offering on the same terms as contemplated by such Future
Offering.
The
Auctus Warrants are immediately exercisable. The exercise price of the Auctus Warrants is subject to adjustment for stock dividends
and splits, and also subject to dilution protection in the event that the Company issues shares of Common Stock or securities
convertible into Common Stock at an effective price per share that is less than the original exercise price of the Auctus Warrants.
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.
Employees
We
do not have any employees and utilize independent contractors and consultants as needed. We believe we have favorable relations
with our independent contractors and consultants.
ITEM
1A. RISK FACTORS
An
investment in the Company’s common stock involves a high degree of risk. In determining whether to purchase the Company’s
common stock, an investor should carefully consider all of the material risks described below, together with the other information
contained in this report. An investor should only purchase the Company’s securities if he or she can afford to suffer the
loss of his or her entire investment.
We
have a limited operating history and a history of operating losses and face many of the risks and difficulties frequently encountered
by an early stage company.
We were formed in June 2015 and have a limited
operating and performance history. Therefore, there is limited historical financial information upon which to base an evaluation
of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently
encountered by companies in their early stages of operations. We have generated net losses since we began operations, including
$2,527,325 for the period ended from Inception (June 5, 2015) through March 31, 2016 and $4,535,060 for the year ended
March 31, 2017. The amount of future losses and when, if ever, we will achieve profitability are uncertain. To date, our efforts
have been focused primarily on the development and marketing of our business model, development of relationships with advertisers,
creation of intellectual property, acquisition of licensed properties and production of the Cannavoices Platform.
Our
future success will depend on our ability to compete for the leisure time, attention and discretionary spending of our players
and to maintain our relationships with advertisers in our target industry. This will require a sustained marketing effort and
acceptance of the Platform, careful planning for the creation of new intellectual property and management of the properties we
currently license the rights to, and development of relationships with advertisers in our target industry. Our ability to continue
to meet the ever-changing standards of customers and advertisers is not proven.
We
will need to secure additional financing.
We
anticipate that we will require additional funds for our operations. If we are not successful in securing additional financing,
we may be unable to execute our business strategy, which could result in curtailment of our operations.
Our
ability to raise additional capital is uncertain and dependent on numerous factors beyond our control including, but not limited
to, economic conditions and availability or lack of availability of credit. We may also be restricted by the terms of the EMA
and Auctus Financings.
If
we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
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develop
or enhance our Game;
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continue
to expand our development, sales and marketing teams;
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acquire
complementary technologies, products or businesses;
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expand
our global operations;
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hire,
train and retain employees; and
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respond
to competitive pressures or unanticipated working capital requirements.
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To
the extent that we raise additional capital through the sale of equity or convertible debt securities, then-existing stockholders’
interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely
affect their rights as common stockholders. Debt financing and preferred equity financing, if available, may involve agreements
that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making
capital expenditures or declaring dividends.
We
received a report from our independent registered public accounting firm with an explanatory paragraph for the year ended March
31, 2017 with respect to our ability to continue as a going concern. The existence of such a report may adversely affect our stock
price and our ability to raise capital.
In their report dated June 30, 2017,
our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern
as we have not generated revenue and incurred a net loss of $4,535,060 at March 31, 2017. As of March 31, 2017, we had
an accumulated deficit of $7,062,385 and expect to continue incurring net losses for the near future. Furthermore, if we
were forced to liquidate our assets, the amount realized could be substantially lower than the carrying value of these assets.
Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including
obtaining additional funding from the sale of our securities or obtaining loans from various financial institutions or lenders
where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances
that such methods will prove successful.
If
the Platform fails to gain market acceptance, we may not have sufficient capital to pay our expenses and to continue to operate.
Our
ultimate success depends on generating advertising revenues from the Platform. We may not achieve and sustain sufficient market
acceptance of the Platform to generate sufficient revenues to cover our costs and allow us to become profitable or even continue
to operate.
We
may be unable to successfully develop our business.
There
can be no assurance that our business strategies will lead to profits. We face risks and uncertainties relating to our ability
to successfully implement our strategies of creating and maintaining relationships with advertisers in our target industry, and
capturing the leisure time, attention and discretionary spending of our players. Despite our early entry into the cannabis digital
media market, and the fact we face no significant direct competitor in this market, we do not know how successfully we will compete
with other mobile game developers and platforms or whether we will be successful in the long or short term with our target customers.
We have an unproven business model, and operate in a competitive and evolving market. In particular, our business model is based
on an expectation that we will be able to be a profitable part of the community of those who support cannabis legalization, and
that demand for our role as a link between socially active supporters of cannabis legalization and brand-conscious advertisers
will sustain itself or increase.
If
we are unable to maintain a good relationship with our advertising partners, our business will suffer.
We
will generate substantially all of our revenue through advertising partnerships and expect to continue to do so for the foreseeable
future. Any deterioration in our relationship with our advertising partners would harm our business.
If
we are unable to maintain a relationship with our celebrity players, our business may suffer.
We
have a number of registered celebrity users of the Cannavoices Platform, and we believe their registrations have helped publicize
our company and are a substantial attraction to new registered users. To the extent celebrity usage of the Cannavoices Platform
declines, it may affect our ability to attract or retain registered users of our platform and this would harm our business.
We
may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build
brand awareness.
We
may need to make greater investments than originally planned in advertising and promotional activity in order to build brand awareness.
This may cause a strain on our operation and management, which may affect our business.
We
operate in a new and rapidly changing niche in the online gaming and advertising industry, which makes it difficult to evaluate
our business.
The
cannabis digital media niche, on which our business model is founded, is a new and rapidly evolving one. The growth of the niche
and the level of demand and market acceptance of the Platform are subject to a high degree of uncertainty. Our future operating
results will depend on numerous factors affecting the cannabis digital media niche, many of which are beyond our control, including:
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Continued
worldwide growth of a community of cannabis legalization supporters, which may be affected in ways we cannot predict by changes
in or discussions surrounding government regulation of cannabis;
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Changes
in consumer demographics and public tastes and preferences;
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The
availability and popularity of other forms of entertainment;
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The
worldwide growth of personal computer, broadband Internet and mobile device users, and the rate of any such growth; and
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General
economic conditions, particularly economic conditions adversely affecting discretionary consumer spending.
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Our
ability to plan for development of the Cannavoices Platform, including our approach to marketing and promotional activities, will
be significantly affected by our ability to anticipate and adapt to relatively rapid changes in the tastes and preferences of
our current and potential consumers. New and different types of entertainment may increase in popularity at the expense of the
Cannavoices Platform. A decline in the popularity of the cannabis legalization movement, or of online gaming as a form of entertainment
and community building, would harm our business and prospects.
The
online game development industry is intensely competitive. We face competition from a number of companies, most of whom have greater
resources, and if we are unable to compete effectively or expand into new markets, our business could be negatively impacted.
Competition
among web and mobile game developers is intense. We compete on the basis of pricing made available to our advertising partners,
the appeal of game content and features to the end user, the features and functionality of our software products and the relevance
and popularity of cannabis legalization. There are a number of established, well-financed companies producing game content that
will potentially compete with the Cannavoices Platform. Most of our competitors may have access to greater capital resources than
we do and as a result may be better positioned to compete in the marketplace.
We
may not be able to adequately safeguard our intellectual property rights from unauthorized use, and we may become subject to claims
that we infringe on others’ intellectual property rights.
Our
business is significantly based on the creation, acquisition, use and protection of intellectual property. We protect our intellectual
property rights by relying on federal, state and common law protections, as well as contractual restrictions. We seek intellectual
property protection and trademark protection as appropriate covering development and inventions originating from us. We control
access to proprietary technology by entering into confidentiality agreements with certain of our independent contractors and consultants.
In addition to these arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress and domain
names to protect our intellectual property. These measures afford only limited protection and may not preclude competitors from
developing products or services similar or superior to ours. Moreover, the laws of certain foreign countries do not protect intellectual
property rights to the same extent as the laws of the United States.
Although
we implement protective measures and intend to defend our proprietary rights, our efforts may not be successful. From time to
time, we may litigate within the United States or abroad to enforce our issued or licensed patents, to protect our trade secrets
and know-how or to determine the enforceability, scope and validity of our proprietary rights and the proprietary rights of others.
Enforcing or defending our proprietary rights can involve complex factual and legal questions and can be expensive, would require
management’s attention and might not bring us timely or effective relief.
Furthermore,
third parties may assert that our products or processes infringe upon their intellectual property rights. Although there are no
pending or threatened intellectual property lawsuits against us, we may face litigation or infringement claims in the future.
Infringement claims could result in substantial judgments, and could result in substantial costs and diversion of our resources
even if we ultimately prevail. A third party claiming infringement may also obtain an injunction or other equitable relief which
could effectively block our use of allegedly infringing intellectual property. Although we may seek licenses from third parties
covering intellectual property that we are allegedly infringing, we may not be able to obtain any such licenses on acceptable
terms and conditions, if at all.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our
ability to grow successfully requires that we have an effective planning and management process. The expansion and growth of our
business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth
successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls,
systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond
effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s
business, financial condition, results of operations and future prospects.
Unforeseen
“bugs” or errors in the Cannavoices Platform could harm our brand, which could worsen our operating results.
The
Cannabis Platform may in the future contain errors or “bugs” that are not detected until after the platform is in
online use. Any such errors could harm the overall experience for our users and reduce the number of users. Resolving such errors
could also disrupt our operations, cause us to divert resources from other projects, or harm our operating results.
Catastrophic
events may disrupt our business.
Our
systems and operations are vulnerable to damage or interruption from fires, floods, power losses, telecommunications failures,
cyber-attacks, terrorist attacks, acts of war, human errors, break-ins and similar events. Additionally, we rely on our network,
data centers and third-party infrastructure and enterprise applications, internal technology systems and our website for our development,
marketing and operational support activities. In the event of a catastrophic event, we may be unable to continue our operations
and may endure system interruptions, reputational harm, delays in our product development, and lengthy interruptions in our services,
breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.
Any
new or changes made to laws, regulations, rules or other industry standards affecting our business may have an adverse impact
on our financial results.
We
are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet,
many of which are still evolving and could be interpreted in ways that could harm our business. In the United States and internationally,
laws relating to the liability of providers of online services for activities of their users and other third parties are currently
being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright
and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the
content provided by users. Any court ruling or other governmental action that imposes liability on providers of online services
for the activities of their users and other third parties could harm our business. We are potentially subject to a number of foreign
and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many
of which are ill defined, still evolving and could be interpreted in ways that could harm our business or expose us to liability.
In
addition, rising concern about the use of social networking technologies for illegal conduct, such as the unauthorized dissemination
of national security information, money laundering or supporting terrorist activities may in the future produce legislation or
other governmental action that could require changes to our games or restrict or impose additional costs upon the conduct of our
business.
We
also offer our players various types of sweepstakes, giveaways and promotion opportunities. We are subject to laws in a number
of jurisdictions concerning the operation and offering of such activities, many of which are still evolving and could be interpreted
in ways that could harm our business. Any court ruling or other governmental action that imposes liability on providers of online
services could result in criminal or civil liability and could harm our business.
In
the area of information security and data protection, many states have passed laws requiring notification to users when there
is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring
the adoption of minimum information security standards that are often vaguely defined and difficult to implement. The costs of
compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our
part to comply with these laws may subject us to significant liabilities.
We
are also subject to federal, state and foreign laws regarding privacy and protection of player data, including the collection
of data from minors. We post our Privacy Policy and Terms of Service online, in which we describe our practices concerning the
use, transmission and disclosure of player data. Any failure by us to comply with our posted privacy policy or privacy related
laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business.
In addition, the interpretation of many data protection laws, and their application to the Internet is unclear and in a state
of flux.
Our
success will be dependent on our ability to attract and retain key personnel.
We
believe our success depends on the continued service of our key technical and management personnel, particularly our chief executive
officer, Kevin Gillespie, and upon our ability to attract and retain qualified employees, independent contractors and consultants,
particularly highly skilled game designers, product managers and engineers. The competition for technical personnel is intense,
and the loss of key personnel or the inability to hire such personnel when needed could have a material adverse impact on our
results of operation and financial condition.
Laws
and regulations affecting the cannabis industry are constantly changing, and this may affect our consumer base in ways that we
are unable to predict.
Local,
state and federal medical cannabis laws and regulations are broad in scope and subject to evolving interpretations. We cannot
predict the nature of any future laws, regulations, interpretations or applications that may affect us, nor can we determine what
effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on the
vitality of the cannabis legalization movement or the unification or popularity of the community in favor of legalization, the
members of which community form our anticipated consumer base and underpin our business model.
We
have identified material weaknesses in our internal control over financial reporting, which could result in material misstatements
in our financial statements.
We
have concluded that there are material weaknesses in our internal control over financial reporting due to our small size. Specifically,
we lack a functioning audit committee due to a lack of independent board members, resulting in ineffective oversight in the establishment
and monitoring of required internal controls and procedures and we did not have sufficient personnel in our accounting and financial
reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for
adequate review of the financial statements. These material weaknesses could result in the inability to detect or prevent, on
a timely basis, material misstatements of our financial statements.
A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or
detected and corrected on a timely basis. The existence of this issue could adversely affect us, our reputation or investors’
perceptions of us. We plan to add independent members to the board of directors in the future, which we anticipate will have some
financial experience. In addition, as funds permit, we intend to hire accounting employees. We believe these measures will remediate
the control deficiencies. However, we cannot, at this time, estimate how long it will take before these measures are fully implemented,
and our measures may not prove to be successful in remediating these material weaknesses. If our remedial measures are insufficient
to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over
financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements.
Risks
Related to Our Common Stock
There
is not an active liquid trading market for the Company’s common stock.
The
Company’s common stock is quoted on the OTC Pink Market under the symbol “HVST”. However, there has been minimal
reported trading to date in the Company’s common stock, and we cannot give any assurance that an active trading market will
develop. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of our securities.
This severely limits the liquidity of the common stock, and may adversely affect the market price of our common stock. A limited
market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other
companies or assets by using common stock as consideration.
If
an active market for the Company’s common stock develops, there is a significant risk that the Company’s stock price
may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
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variations
in our quarterly operating results;
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announcements
that our revenue or income are below analysts’ expectations;
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general
economic slowdowns;
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sales
of large blocks of the Company’s common stock; and
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announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments.
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Our
common stock is subject to the “penny stock” rules of the Securities and Exchange Commission, which may make it more
difficult for stockholders to sell our common stock.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny
stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity
and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information
and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination,
and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and
may cause a decline in the market value of its stock.
Because
we became a public company by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.
Because
we became public through a “reverse acquisition,” securities analysts of brokerage firms may not provide coverage
of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given
that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.
Applicable
regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for
the Company to retain or attract qualified officers and directors, which could adversely affect the management of its business
and its ability to obtain or retain listing of its common stock.
We
may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for
effective management because of the rules and regulations that govern publicly held companies, including, but not limited to,
certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series
of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of
new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with these changes may deter
qualified individuals from accepting roles as directors and executive officers.
Further,
some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s
independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting
and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors,
the management of its business and its ability to obtain or retain listing of our shares of common stock on any stock exchange
(assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or
detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price
of our common stock.
We
must maintain effective internal controls to provide reliable financial reports and detect fraud. The Company has been assessing
its internal controls to identify areas that need improvement. It is in the process of implementing changes to internal controls,
but has not yet completed implementing these changes. Failure to implement these changes to the Company’s internal controls
or any others that it identifies as necessary to maintain an effective system of internal controls could harm its operating results
and cause investors to lose confidence in the Company’s reported financial information. Any such loss of confidence would
have a negative effect on the trading price of the Company’s stock.
Voting
power of our shareholders is highly concentrated in our chief executive officer.
Our
chief executive officer, Kevin Gillespie, beneficially owns approximately 23% of our outstanding shares of common stock.
Such concentrated control of the Company may adversely affect the price of our common stock. A shareholder that acquires common
stock may have no effective voice in the management of the Company. Sales by insiders or affiliates of the Company, along with
any other market transactions, could affect the market price of our common stock.
As
a result of this significant ownership, Mr. Gillespie will have a significant influence on any action to:
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Elect
or defeat the election of our directors;
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Amend
or prevent amendment of our articles of incorporation; and
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Effect
or prevent a merger, sale of assets or other corporate transaction.
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We
do not intend to pay dividends for the foreseeable future.
We
have paid no dividends on our common stock to date and we do not anticipate paying any cash dividends to holders of our common
stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of
the business, we currently anticipate that we will retain any earnings to finance our future expansion and for the implementation
of our business plan. A lack of a dividend can further affect the market value of our stock, and could significantly affect the
value of any investment in our Company.
Our
articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders,
which could adversely affect the rights of the holders of our common stock.
Our
Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of
Directors has the authority to issue up to 10,000,000 shares of our preferred stock without further stockholder approval. As a
result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred
right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of
common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power
than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common
stock or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares
of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.
As
an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements
does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under
the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit
of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained
a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary
to make the statements not misleading. Such an action could hurt our financial condition.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
Our
corporate headquarters are located at 5015 W. Nassau Street, Tampa, Florida 33607. The Company utilizes approximately 4,500 square
feet of office space from related parties. The amount the Company pays to the related parties for rent varies from month-to-month.
We have no leases as of the date of this filing.
ITEM
3. LEGAL PROCEEDINGS.
We
are not party to any material legal proceedings.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Our
common stock was originally listed on the OTC Pink tier of the over-the-counter market on May 13, 2014 under the symbol “AMRD”.
Effective July 28, 2016 our symbol was changed to “HVST”. There has been very limited trading in our common stock
to date. There are no assurances that an active market will ever develop for the Company’s stock
As
of June 29, 2017, the last reported sales price reported on the OTC Pink Markets for our common stock was $2.90
per share. The following table sets forth the high and low closing bid prices for our common stock for the fiscal quarter indicated
as reported on OTC Pink tier of the over-the-counter market. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Effective
September 23, 2016, the Company’s board of directors authorized a one-for-ten reverse stock split (the “Reverse Split”).
As a result of the Reverse Split, every 10 shares of Common Stock issued and outstanding prior to the Reverse Split were converted
into 1 new share of Common Stock. All share and related information presented in the 10K and related financial statements and
accompanying footnotes have been adjusted to reflect the decreased number of shares resulting from this action.
Year
ended March 31, 2016
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High
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Low
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First
Quarter
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$
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3.25
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$
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3.25
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Second
Quarter
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$
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3.25
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$
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3.25
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Third
Quarter
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$
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15.00
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$
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3.00
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Fourth
Quarter
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$
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61.40
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$
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5.50
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Year
ended March 31, 2017
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High
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Low
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First
Quarter
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$
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26.90
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$
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5.50
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Second
Quarter
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$
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19.56
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$
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1.40
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Third
Quarter
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$
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6.00
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$
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2.25
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Fourth
Quarter
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$
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4.85
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$
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1.68
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Holders
As
of the date of this report, we had approximately 256 holders of record of our common stock. The number of record holders was determined
from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names
of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is ClearTrust,
LLC, located at 16540 Pointe Village Drive, Suite 210, Lutz, Florida 33558.
Dividends
We
have never declared or paid any cash dividends on our capital stock. The payment of dividends on our common stock in the future
will depend on our earnings, capital requirements, operating and financial condition and such other factors as our Board of Directors
may consider appropriate. We currently expect to use all available funds to finance the future development and expansion of our
business and do not anticipate paying dividends on our common stock in the foreseeable future.
Equity
Compensation Plan Information
The
Company does not have any equity compensation plans or any individual compensation arrangements with respect to its common stock
or preferred stock. The issuance of any of our common or preferred stock is within the discretion of our Board of Directors, which
has the power to issue any or all of our authorized but unissued shares without stockholder approval.
Recent
Sales of Unregistered Securities
The Company is authorized to issue up to
1,000,000,000 shares of common stock, $.001 par value. The Company has no authorized preferred stock. As of March 31, 2017 and
2016, the Company had 24,666,182 and 20,332,311 shares of common stock issued and outstanding, respectively.
In June 2015, the Company issued an aggregate
of 17,685,608 shares of common stock to founders for services at par value.
In July 2015, the Company sold an aggregate
of 669,996 shares of common stock for $590,000 priced between $0.75 and $2.00 per share.
In August 2015, the Company sold an aggregate
of 52,499 shares of common stock for $55,000 priced between $0.75 and $2.00 per share.
In September 2015, the Company sold an
aggregate of 348,666 shares of common stock for $364,000 priced between $0.75 and $2.00 per share.
In October 2015, the Company sold an aggregate
of 240,350 shares of common stock for $280,700 priced between $1.00 and $2.00 per share.
In December 2015, the Company sold an aggregate
of 500,763 shares of common stock for $636,525 priced between $1.00 and $2.00 per share.
In January 2016, the Company sold an aggregate
of 192,500 shares of common stock for $205,000 priced between $1.00 and $2.00 per share.
In February 2016, the Company sold an aggregate
of 50,000 shares of common stock for $100,000 priced at $2.00 per share.
In March 2016, the Company sold an aggregate
of 591,929 shares of common stock for $451,001 priced between $0.50 and $2.00 per share.
In April 2016, the Company sold an aggregate
of 245,666 shares of common stock between $0.50 and $1.00 per share, for gross proceeds of $180,000.
In April 2016, the Company issued an aggregate
of 1,798,588 shares of common stock to various individuals for services valued at $1,348,941.
In May 2016, the Company sold an aggregate
of 305,832 shares of common stock between $0.75 and $1.00 per share, for gross proceeds of $247,500.
In June 2016, the Company sold an aggregate
of 53,667 shares of common stock between $0.75 and $1.00 per share, for gross proceeds of $49,000.
In July 2016, the Company sold 63,333 shares
of common stock at $0.75 per share, for gross proceeds of $47,500.
In August 2016, the Company sold 100,000
shares of common stock at $0.75 per share, for gross proceeds of $75,000.
Effective September 1, 2016, the Company
issued an aggregate of 1,334,262 shares of common stock in exchange for the acquisition of 100% of the outstanding common stock
of FH Acquisition Corp.
In September 2016, the Company sold an
aggregate of 133,334 shares of common stock at $0.75 per share, for gross proceeds of $100,000.
In September 2016, the Company sold an
aggregate of 93,000 shares of common stock at $1.00 per share, for gross proceeds of $93,000.
In October 2016, the Company sold an aggregate
of 20,000 shares of common stock at $0.75 per share, for gross proceeds of $15,000.
In October 2016, the Company sold an aggregate
of 61,500 shares of common stock at $1.00 per share, for gross proceeds of $61,500.
In November 2016, the Company sold an aggregate
of 30,000 shares of common stock at $0.75 per share, for gross proceeds of $22,500.
In November 2016, the Company sold an aggregate
of 5,000 shares of common stock at $1.00 per share, for gross proceeds of $5,000.
In December 2016, the Company issued an
aggregate of 25,000 shares of common stock to an individual for services valued at $18,750.
On February 10, 2017, the Company is deemed
to have issued 540,740 shares of common stock, which represented the outstanding shares prior to the closing of the Merger Agreement.
(see Note 1 – Nature of Business – Financial Statements Presented)
In February 2017, the Company sold an aggregate
of 40,000 shares of common stock at $1.00 per share, for gross proceeds of $40,000.
In March 2017, the Company sold an aggregate
of 11,000 shares of common stock at $1.00 per share, for gross proceeds of $11,000.
In March 2017, the Company sold an aggregate
of 51,747 shares of common stock at $1.00 per share, for the conversion of convertible notes payable and accrued interest of $51,747.
In March 2017, the Company issued an aggregate
of 755,500 shares of common stock to an individual for services valued at $755,500.
As
of March 31, 2017, there had been no stock options or warrants granted.
See
the disclosure under “Item 1- Business – Recent Developments” for a description of our recent financings with
EMA and Auctus.
The
transactions described above were exempt from registration under Section 4(a)(2) of the Securities Act.
ITEM
6. SELECTED FINANCIAL DATA.
Not
applicable to a smaller reporting company.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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.
General
The
Company is a digital media platform including 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 March 31, 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.
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”), First Harvest Corp. (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 Year Ended March 31, 2017 compared to the Period Ended from Inception (June 5, 2015) to March 31, 2016
Revenues
and Cost of Goods Sold
. We had no revenues or cost of goods sold during the year ended March 31, 2017 and from inception
through March 31, 2016.
Total Operating
Expenses
. Total operating expenses for the year ended March 31, 2017 were $4,405,848, as compared to $2,527,325
for the period ended from Inception to March 31, 2016, an increase of $1,878,523, or 74.3%. This increase was
primarily due to the increase in general and administrative expenses.
General and administrative expenses for
the year ended March 31, 2017 were 3,830,448, an increase of $1,923,123 or 100.8%, from $1,907,325 for the period ended
from Inception to March 31, 2016. This increase was primarily due to moving from a start-up phase to increased
compensation for subcontractors, consultants and professional fees to support our digital media platform and administrative
expenses, as well as legal and accounting expenses associated with our reverse merger transaction.
During the year ended March 31, 2017, we incurred
non-cash compensation expense of $2,123,191 as part of general and administrative expenses by issuing shares of common
stock to various individuals as an incentive for participating in our operations and development compared to $17,686 during the
period ended from Inception to March 31, 2016, an increase of $2,105,505 or 119.0%. 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 year ended March 31, 2017 were 626,176, a decrease of $530,707 or 45.9%, from $1,156,883 for the period ended
from Inception to March 31, 2016. The decrease was primarily due to the increased use of outside contractors for professional
services, while prior year related party compensation offset certain expenses related to the management fees and start-up of the
business operations.
Research and development expenses for the
year ended March 31, 2017 were 575,400, an decrease of $44,600 or 7.2%, from $620,000 for the period ended from Inception to
March 31, 2016. The decrease was primarily related to our shift in development work to our beta-test launch of our mobile
gaming app, which commenced in May 2016. Our research and development expenses relate to our outside gaming app development costs
for our mobile gaming app,
Hemp Inc.,
performed by HKA. During the year ended March 31, 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.
Other Income (Expense)
.
Interest income for the year ended March 31, 2017 was $6,000, an increase from $-0- for the period ended from Inception to
March 31, 2016. The interest income is accrued interest related to our $100,000 convertible note receivable from a social
media company. We also incurred an increase in interest expense during the year ended March 31, 2017 of $135,212 compared to
$-0- during the period ended from Inception to March 31, 2016 due to the notes payable the Company entered into during the year.
Net Loss
. As a result of the
foregoing, the net loss for the year ended March 31, 2017 was $4,535,060 or $0.20 per common share, basic and diluted, as compared
to a loss from operations of $2,527,325 or $0.13 per common share, basic and diluted, for the period ended from Inception to
March 31, 2016, an increase of $2,007,735 or 79.4%.
Going
Concern
In their report dated
June 30, 2017, our independent registered public accounting firm stated that our financial statements for the year ended
March 31, 2017 and the period ended from Inception to March 31, 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 $4,535,060 at March 31, 2017. We had an accumulated deficit of $7,062,385 as of March 31, 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 increase 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 the 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 March 31, 2017 compared to March 31, 2016:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Change
|
|
Current Assets
|
|
$
|
-
|
|
|
$
|
54,901
|
|
|
$
|
(54,901
|
)
|
Current Liabilities
|
|
$
|
1,445,552
|
|
|
$
|
-
|
|
|
$
|
1,445,552
|
|
Working Capital Deficiency
|
|
$
|
(1,445,552
|
)
|
|
$
|
54,901
|
|
|
$
|
(1,500,453
|
)
|
As of March 31, 2017 and March 31, 2016, we
had a working capital deficiency of $1,445,552 and a working capital surplus $54,901, respectively, an increase of $1,500,453
or 2,733.0%. The working capital deficiency was due to increased accounts payable and notes payable outstanding at
year ended March 31, 2017.
For
the year ended March 31, 2017 and the period from Inception to March 31, 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 year ended March 31, 2017, we
used net cash of $2,184,502 in operations, and generated $2,129,771 cash from financing activities, including common stock sales
and issuance of notes payable. During the period from Inception to March 31, 2016, we used net cash of $2,527,325 in operations,
generated $2,682,226 cash from financing activities from common stock sales and used $100,000 in investing activities related
to the note receivable from a social media company.
Sources
of Liquidity
Common Stock.
During the period
ended from Inception to March 31, 2016, we sold an aggregate of 2,646,703 shares of common stock for gross proceeds of $2,682,226. During
the year ended March 31, 2017, we sold an aggregate of 1,150,332 shares of common stock for gross proceeds of $935,000.
During the period from April 1, 2017 through the date of this filing, we sold an aggregate of 288,000 shares of common stock
for gross proceeds of $288,000.
Note
Payable.
On April 27, 2016, we entered into a secured promissory note (the “Secured Note”) for the principal
amount of $600,000 , net of debt discount of $20,000. At March 31, 2017, the principal amount of $600,000 plus accrued
interest remained due.
Convertible
Promissory Notes Payable.
During the year ended March 31, 2017, the Company entered into a series of short-term convertible
promissory notes in the aggregate amount of $664,000. At March 31, 2017, the principal amount of $614,000 plus accrued interest
remained due. During the period from April 1, 2017 through the date of the filing, we entered into a short-term convertible promissory
note in the amount of $25,000, and the Company issued an aggregate of 241,007 shares of common stock for the conversion of these
short-term convertible notes payable in the amount of $224,094.
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 amount of $519,000.
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 year ended March
31, 2017 and from inception through March 31, 2016, we have not recognized any revenue.
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.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market
risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, commodity prices and
equity prices. We do not hold any market risk sensitive investments.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our
financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a) of this Form
10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On
October 16, 2015, we received notice of the resignation of Seale & Beers, CPAs (“Seale & Beers”), as our independent
registered public accounting firm.
The
audit reports of Seale & Beers on the financial statements for the past two years did not contain any adverse opinion or disclaimer
of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the audit
report of Seale & Beers, dated June 25, 2015 on the consolidated financial statements of the Company as of and for the fiscal
years ended March 31, 2015 and 2014 noted that the Company’s history of no revenues, recurring losses and recurring negative
cash flow from operating activities and an accumulated deficit, raise substantial doubt about the Company’s ability to continue
as a going concern.
During
our two most recent fiscal years and through
all subsequent interim periods preceding
Seale
& Beers
’s resignation
, we had no disagreements with Seale & Beers on
any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Seale & Beers, would have caused it to make reference to the subject matter of such
disagreements in its report on our financial statements for such periods.
During
our two most recent fiscal years and through the date of termination of Seale & Beers, there were no reportable events as
defined under Item 304(a)(1)(v) of Regulation S-K adopted by the SEC.
Effective
October 16, 2015, we appointed RBSM LLP as our new independent registered public accounting firm. The decision to engage RBSM
LLP was recommended and approved by our board of directors. During the two most recent fiscal years and through the date of engagement,
we did not consult with RBSM LLP regarding either (1) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (2) any matter that
was either the subject of a disagreement (as defined in Regulation S-K Item 304(a)(1)(v)), during the two most recent fiscal years.
ITEM
9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
Our
disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange are designed to ensure that
information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated
and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions
regarding required disclosures.
Management,
with the participation of the Chief Executive Officer (who is also our principal financial officer), has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on such evaluation, the
Chief Executive Officer concluded that, as of March 31, 2017, our disclosure controls and procedures were not effective. Our disclosure
controls and procedures were not effective because of the “material weaknesses” described below under “Management’s
Report on Internal Control over Financial Reporting,” which are in the process of being remediated as described below under
“Management Plan to Remediate Material Weaknesses.”
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision
of, our Chief Executive Officer and affected by our Board of Directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with GAAP. Internal control over financial reporting includes those policies and procedures that:
|
●
|
pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
|
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and our Board of Directors; and
|
|
|
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on our financial statements
|
Because
of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute,
assurance that the objectives of the control system are met and may not prevent or detect misstatements. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override.
Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process,
and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Further, over time control
may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
We
conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control
— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its
assessment, management has concluded that we had certain control deficiencies described below that constituted material weaknesses
in our internal controls over financial reporting. As a result, our internal controls over financial reporting were not effective
as of March 31, 2017.
A
“material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual
or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of management’s review of the investigation issues and results, and other internal reviews and evaluations that
were completed after the end of fiscal year 2017 related to the preparation of management’s report on internal controls
over financial reporting required for this annual report on Form 10-K, management concluded that we had material weaknesses in
our control environment and financial reporting process consisting of the following:
|
1)
|
lack
of a functioning audit committee due to a lack of independent board members, resulting in ineffective oversight in the establishment
and monitoring of required internal controls and procedures; and
|
|
|
|
|
2)
|
We
did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve
adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control
deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial
statements will not be prevented or detected on a timely basis. For example, in connection with the preparation of our 2016
annual report, we became aware of conversions of preferred stock into common stock that occurred during the quarter ended
December 31, 2015, which were not reported in the quarterly report on Form 10-Q for the quarter ended December 31, 2015. While
the number of shares converted and the impact on the financial statements was immaterial, the lack of personnel was a contributing
factor in not determining that corrections needed to be made.
|
We
do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition
and results of operations for the fiscal year ended March 31, 2017. However, management believes that the lack of a functioning
audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in
the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in
our financial statements in future periods.
Management
Plan to Remediate Material Weaknesses
Management
is pursuing the implementation of corrective measures to address the material weaknesses described below. In an effort to remediate
the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate,
the following series of measures:
We
plan to appoint one or more outside directors to our Board of Directors who shall be appointed to an audit committee resulting
in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal
controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available
to us. Additionally, we will create written policies and procedures for accounting and financial reporting with respect to the
requirements and application of GAAP and SEC disclosure requirements.
In
addition, when funds are available, we will hire knowledgeable personnel with technical accounting expertise to further support
our current accounting personnel. As our operations are relatively small and we continue to have net cash losses each quarter,
we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash
basis or until our operations are large enough to justify the hiring of additional accounting personnel. As necessary, we will
engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.
Due
to the fact that our internal accounting staff consists solely of a principal financial officer, additional personnel will also
ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will
also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this
will greatly decrease any control and procedure issues we may encounter in the future.
We
believe the remediation measures described above will remediate the material weaknesses we have identified and strengthen our
internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue
to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve
our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or
determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
This
annual report does not include an attestation report by RBSM LLP, our independent registered public accounting firm regarding
internal control over financial reporting. As a smaller reporting company, our management’s report was not subject to attestation
by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide
only management’s report in this annual report.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Our
executive officers, directors and significant employees and their ages and their respective positions as of March 31, 2017 were
as follows:
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Kevin
Gillespie
|
|
48
|
|
Chief
Executive Officer, Chairman, President, and Director
|
Officers
are elected annually by the Board of Directors (subject to the terms of any employment agreement), at our annual meeting, to hold
such office until an officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or
is removed by the Board.
Background
of Executive Officers and Directors
Kevin
Gillespie
Kevin
Gillespie, has been President, Chief Executive Officer and director of First Harvest Corp. since July 2016 and President, Chief
Executive Officer and director of Cannavoices since June 2015. Since November 2014, Mr. Gillespie has been the President and Chief
Executive Officer of First Harvest Financial, Inc. (“FHF”), a financial consulting company. Since October 2015, Mr.
Gillespie has been the Chairman of the Board of Directors of The Great American Rolling Paper Company (“GARP”), (formerly
operating as Watchtower Masterpieces, Inc.), a rolling paper distribution company. Since April 2016, Mr. Gillespie has been the
Managing Member of Lexington Tech Ventures Management LLC (“Lexington”), a financial consulting company. Since November
2015, Mr. Gillespie has been the President and Chief Executive Officer of FH Acquisition Corp. (“FHA”), a financial
consulting company. Between February 2015 and October 2016, Mr. Gillespie was the President and Chief Executive Officer of FHF
Opportunity Fund I, LLC (“FHO Fund”). Since April 2016, Mr. Gillespie has been a Member and Managing Director of Midtown
Partners & Co, LLC, a registered broker-dealer. Between May 2011 and January 2015, Mr. Gillespie was a Vice President at JP
Turner & Company, LLC, a registered broker-dealer. Mr. Gillespie previously worked for Gunn Allen Financial, a regional asset
management firm in Florida, for 15 years. Mr. Gillespie holds series 7 and 63 licenses with the Financial Industry Regulatory
Authority, Inc. (FINRA). Mr. Gillespie’s financial industry experience qualifies him to serve on the Company’s board
of directors.
Board
Leadership Structure and Role in Risk Oversight
Due
to the small size and early stage of the Company, we have not adopted a formal policy on whether the Chairman and Chief Executive
Officer positions should be separate or combined. Mr. Gillespie currently serves as our sole officer and director.
Our
Board of Directors is primarily responsible for overseeing our risk management processes on behalf of the Company. The Board of
Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate
regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company
and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent
with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible
for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing
the risks facing our company and that our board leadership structure supports this approach.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent
of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers,
directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section
16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive
officers and directors, we believe that as of the date of this report our sole officer and director was not current in his16(a)
reports.
Involvement
in Certain Legal Proceedings
To
our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten
years:
|
1.
|
any
bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that time;
|
|
|
|
|
2.
|
any
conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
|
|
|
|
|
3.
|
being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or
banking activities or to be associated with any person practicing in banking or securities activities;
|
|
|
|
|
4.
|
being
found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have
violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
|
|
|
|
5.
|
being
subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or
regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or
|
|
|
|
|
6.
|
being
subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization,
any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over
its members or persons associated with a member.
|
Board
Committees
There
are currently no committees of the Board of Directors, and the Company does not presently have a director who meets the definition
of an “audit committee financial expert,” because the Company does not currently have the resources to retain one.
Code
of Ethics
We
have not yet adopted a Code of Ethics although we expect to do so in the future as we develop our infrastructure and business.
Limitation
of Liability of Directors
Pursuant
to the Nevada Revised Statutes (“NRS”), our Articles of Incorporation exclude personal liability for our directors
for monetary damages based upon any violation of their fiduciary duties as directors, except as to liability for any breach of
the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law,
or any transaction from which a directors receives an improper personal benefit. This exclusion of liability does not limit any
right which a Director may have to be indemnified and does not affect any director’s liability under federal or applicable
state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in
connection with any claim against a directors if he acted in good faith and in a manner he believed to be in our best interests.
Nevada
Anti-Takeover Law and Charter and By-law Provisions
The
anti-takeover provisions of Sections 78.411 through 78.445 of the NRS apply to the Company. Section 78.438 of the Nevada law prohibits
the Company from merging with or selling more than 5% of our assets or stock to any shareholder who owns or owned more than 10%
of any stock or any entity related to a 10% shareholder for three years after the date on which the shareholder acquired the Company
shares, unless the transaction is approved by the Company’s Board of Directors. The provisions also prohibit the Company
from completing any of the transactions described in the preceding sentence with a 10% shareholder who has held the shares more
than three years and its related entities unless the transaction is approved by our Board of Directors or a majority of our shares,
other than shares owned by that 10% shareholder or any related entity. These provisions could delay, defer or prevent a change
in control of the Company.
ITEM
11. EXECUTIVE COMPENSATION.
Summary
Compensation Table
The
following table provides certain summary information concerning compensation awarded to, earned by or paid to the our sole officer
and director for the fiscal year ended March 31, 2017 and from inception through March 31, 2016.
Name
& Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change
in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings ($)
|
|
|
All
Other
Compensation
($) (1)
|
|
|
Total
($)
|
|
Kevin
Gillespie
|
|
2017
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
270,571
|
|
|
$
|
270,571
|
|
Chief
Executive Officer
|
|
2016
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
$
|
540,700
|
|
|
$
|
540,700
|
|
Kevin
Gillespie was paid $270,571 by the Company as a subcontractor for the fiscal year end March 31, 2017. For the period from inception
through the period ended March 31, 2016, he was paid $141,200 by a related party as a subcontractor on behalf of the Company,
and he was paid $399,500 by the Company as a subcontractor. He currently has no formal compensation agreement.
Employment
Contracts and Termination of Employment and Change-In-Control Arrangements
None.
Grants
of Plan-Based Awards During Fiscal Year
None.
Outstanding
Equity Awards at Fiscal Year-End
None.
Director
Compensation
No
director received any compensation for services as director in the last two fiscal years.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information, as of June 29, 2017, with respect to the beneficial ownership of the Company’s
outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers
and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each
of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
Name of Beneficial Owner (1)
|
|
Common
Stock
Beneficially
Owned
|
|
|
Percentage
of
Common
Stock (2)
|
|
Directors
and Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Gillespie
|
|
|
5,941,929
|
(3)
|
|
|
22.63
|
%
|
|
|
|
|
|
|
|
|
|
All
officers and directors as a group (one person)
|
|
|
5,941,929
|
(3)
|
|
|
22.63
|
%
|
|
|
|
|
|
|
|
|
|
Beneficial
owners of more than 5%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Hammett
|
|
|
2,800,000
|
|
|
|
10.66
|
%
|
|
|
|
|
|
|
|
|
|
Mediverse,
LLC (4)
|
|
|
1,572,653
|
|
|
|
5.99
|
%
|
|
|
|
|
|
|
|
|
|
(1)
Except as otherwise indicated, c/o First Harvest Corp., 5015 W. Nassau Street, Tampa, Florida 33607.
(2)
Applicable percentage ownership is based on 26,257,572 shares of common stock outstanding as of the date of filing of this
report, together with securities exercisable or convertible into shares of common stock within 60 days of such date for each stockholder.
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with
respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of the date of the
filing this report are deemed to be beneficially owned by the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership
of any other person.
(3)
Includes 300,000 shares of First Harvest Corp. common stock owned by First Harvest Financial, Inc. Mr. Gillespie, as the sole
officer, director and shareholder of First Harvest Financial, Inc., has investment and voting control over the shares held by
this entity.
(4) Mediverse, LLC, who’s managing Managing
Member is Edward C. White, Jr., P.O. Box 19739, Panama City Beach, FL 32417
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The
Company’s related parties are First Harvest Financial, Inc. (“FHF”), Lexington Tech Ventures Management, LLC
(“Lexington”), 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 year ended
March 31, 2017 and from inception through March 31, 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 year ended March 31, 2017 and from inception through March 31, 2016, respectively: (a) FHF - $71,600 and $315,000
for management fees, and $103,000 and $126,800 for payments to subcontractors, (b) Lexington - $3,000 and $160,000
for management and subcontractor fees, and (c) GARP - $80,693 and $10,294 for management and
subcontractor fees.
The
Company incurred rent expense to FHF of $97,312 and $4,089 for the year ended March 31, 2017 and from inception through
March 31, 2016, respectively. The Company has no formal lease with FHF.
The
Company purchased a convertible promissory note receivable for $100,000 face value of the convertible promissory note from FHO.
See Note 4 – Convertible Promissory Note Receivable.
On
September 1, 2016, the Company entered into a share exchange agreement with FHA, a consolidated VIE of the Company, whereby all
the issued and outstanding capital stock of FHA was acquired by the Company in exchange for 1,334,262 newly issued shares of the
Company’s common stock. FHA shares were exchanged on a one-for-one basis with shares of the Company’s common stock.
The
majority shareholder of the related parties described above is the president and largest shareholder of the Company. He was
paid $270,571 and $399,500 by the Company as a subcontractor for the year ended March 31, 2017 and from inception
through March 31, 2016, respectively. He was also paid $0 and $141,200 by FHF as a subcontractor on behalf of the Company for
the year ended March 31, 2017 and from inception through March 31, 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 a shareholder of the Company. The Company paid
HKA $575,400 and $620,000 for the year ended March 31, 2017 and from inception through March 31, 2016, respectively. The
total value of the Development Agreement is $2,000,000 based on certain development parameters and ongoing scope of
work.
On
May 9, 2016, a shareholder loaned the Company $7,500 for audit fees. On May 11, 2016, a shareholder loaned the Company $1,000
for audit fees. On June 20, 2016, a shareholder loaned the Company $1,500 for audit fees. During the quarter ended September 30,
2016, a shareholder loaned the Company $10,725 for audit and transfer agent fees. As of March 31, 2017, $20,725 of this loan remained
due. The loan bears no interest and is due upon demand.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our
principal accountant for the audit and review of our annual and quarterly financial statements was RBSM LLP. The following table
shows the fees paid or accrued by us to RBSM LLP during these periods:
|
|
For
Year
Ended
March 31, 2017
|
|
|
For
the Year
Ended
March 31, 2016
|
|
(1)
Audit Fees (1)
|
|
$
|
48,500
|
|
|
$
|
11,000
|
|
(2)
Audit-Related Fees
|
|
|
-
|
|
|
|
-
|
|
(3)
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
(4)
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
(1)
Audit Fees include fees billed and expected to be billed for services performed to comply with Generally Accepted Auditing Standards
(GAAS), including the recurring audit of the Company’s financial statements for such period included in this Annual Report
on Form 10-K and for the reviews of the quarterly financial statements included in the Quarterly Reports on Form 10-Q filed with
the SEC.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
Financial statements included following the signature page.
(d)
Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
2.1*
|
|
Agreement
and Plan of Merger and Reorganization, dated February 10, 2017 among First Harvest Corp., CV Acquisition Corp. and Cannavoices,
Inc.
|
|
|
|
3.1****
|
|
Certificate
of Amendment to the Articles of Incorporation, as filed with the Secretary of State of the State of Nevada on September 7,
2016.
|
|
|
|
3.2****
|
|
Certificate
of Amendment to the Articles of Incorporation, as filed with the Secretary of State of the State of Nevada on September 7,
2016.
|
|
|
|
3.3*****
|
|
Bylaws
|
|
|
|
4.1**
|
|
Warrant
issued to EMA Financial, LLC, dated April 10, 2017
|
|
|
|
4.2**
|
|
Warrant
issued to Auctus Fund, LLC Stock, dated April 7, 2017
|
4.3***
|
|
Warrant
issued to Auctus Fund, LLC dated May 15, 2017
|
|
|
|
4.4***
|
|
Warrant
issued to EMA Financial, LLC Dated May 15, 2017
|
|
|
|
10.1*
|
|
Game
Development and License Agreement, dated October 2, 2015, by and between Cannavoices, Inc. and HKA Digital Limited
|
|
|
|
10.2*
|
|
Assignment
of Note, dated March 31, 2016, by and between Cannavoices, Inc. and FH Opportunity Fund 1, LLC
|
|
|
|
10.3*
|
|
Loan
Agreement, dated April 27, 2016, by and between Cannavoices, Inc. and Hit Sum To Me, LLC
|
|
|
|
10.4*
|
|
Promissory
Note, dated April 27, 2016, issued by Cannavoices, Inc. to Hit Sum To Me, LLC
|
|
|
|
10.5*
|
|
Security
Agreement, dated April 27, 2016, by and between Cannavoices, Inc. and Hit Sum To Me, LLC
|
|
|
|
10.6*
|
|
Form
of Convertible Promissory Note, dated July 20, 2016, issued by Cannavoices, Inc.
|
|
|
|
10.7*
|
|
Form
of Convertible Promissory Note, dated November 10, 2016, issued by Cannavoices, Inc.
|
|
|
|
10.8*
|
|
Form
of Convertible Promissory Note, dated December 14, 2016, issued by Cannavoices, Inc.
|
|
|
|
10.9*
|
|
Form
of Convertible Promissory Note, dated January 10, 2017, issued by Cannavoices, Inc.
|
|
|
|
10.10**
|
|
Securities
Purchase Agreement between First Harvest Corp. and EMA Financial, LLC dated April 10, 2017
|
|
|
|
10.11**
|
|
12%
Convertible Note between First Harvest Corp. and EMA Financial, LLC dated April 10, 2017
|
|
|
|
10.12**
|
|
Securities
Purchase Agreement between First Harvest Corp. and Auctus Fund, LLC dated April 7, 2017
|
|
|
|
10.13**
|
|
12%
Convertible Note between First Harvest Corp. and Auctus Fund, LLC dated April 7, 2017
|
|
|
|
10.14***
|
|
Securities
Purchase Agreement between First Harvest Corp and Auctus Fund, LLC dated May 15, 2017
|
|
|
|
10.15***
|
|
12%
Convertible Note between First Harvest Corp and Auctus Fund, LLC dated May 15, 2017
|
|
|
|
10.16***
|
|
Securities
Purchase Agreement between First Harvest Corp and EMA Financial LLC dated May 15, 2017
|
|
|
|
10.17***
|
|
12%
Convertible Note between First Harvest Corp and EMA Financial LLC dated May 15, 2017
|
|
|
|
10.18***
|
|
Amendment
to Securities Purchase Agreement between First Harvest Corp and EMA Financial dated May 23, 2017
|
|
|
|
21.1*
|
|
List
of Subsidiaries
|
|
|
|
31.01
|
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.02
|
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.01
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101
|
|
The
following materials from the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, formatted in XBRL (Extensible
Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated
Statements of Comprehensive Loss, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements
of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
|
*Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the SEC on February 10, 2017.
**Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 14, 2017.
***Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the SEC on May 25, 2017.
****Incorporated
by reference to the Company’s Current Report on Form 8-K, filed with the SEC on September 9, 2016.
*****Filed
as an exhibit to the Registration Statement on Form S-1, filed with the SEC on September 20, 2013.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
FIRST
HARVEST CORP.
|
|
|
Date:
June 30, 2017
|
By:
|
/s/
KEVIN GILLESPIE
|
|
|
Kevin
Gillespie
|
|
|
Chief
Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Position
|
|
Date
|
|
|
|
/s/
KEVIN GILLESPIE
|
|
Chief
Executive Officer (Principal Executive Officer, Principal Financial
|
|
|
Kevin
Gillespie
|
|
Officer and Principal Accounting Officer) and Director
|
|
June
30, 2017
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
First
Harvest Corp.
We
have audited the consolidated balance sheets of First Harvest Corp. and subsidiaries (the Company) as of March 31, 2017 and 2016
and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended
March 31, 2017 and from Inception (June 5, 2015) to March 31, 2016. First Harvest Corp’s management is responsible for these
consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based
on our audit.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of First Harvest Corp. and subsidiaries as of March 31, 2017 and 2016, and the results of its operations and its cash flows for
the year ended March 31, 2017 and from Inception (June 5, 2015) to March 31, 2016, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company has suffered losses from operations, which raise substantial doubt
about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/
RBSM LLP
Henderson,
Nevada
June
30, 2017
FIRST
HARVEST CORP.
Consolidated
Balance Sheets
(Audited)
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
54,901
|
|
Prepaid expenses
|
|
|
|
|
|
|
-
|
|
Total current assets
|
|
|
-
|
|
|
|
54,901
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Convertible note receivable
|
|
|
100,000
|
|
|
|
100,000
|
|
Interest receivable
|
|
|
6,000
|
|
|
|
-
|
|
Total other assets
|
|
|
106,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
106,000
|
|
|
$
|
154,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
211,723
|
|
|
$
|
-
|
|
Bank overdraft
|
|
|
771
|
|
|
|
-
|
|
Due to related party
|
|
|
20,725
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
614,000
|
|
|
|
-
|
|
Notes payable, net of debt discount of $1,667
|
|
|
598,333
|
|
|
|
-
|
|
Total current liabilities
|
|
|
1,445,552
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 24,666,182 and 20,332,311
shares issued and outstanding as of 3/31/2017 and 03/31/2016, respectively.
|
|
|
24,666
|
|
|
|
20,332
|
|
Additional paid-in capital
|
|
|
5,698,167
|
|
|
|
2,661,894
|
|
Accumulated deficit
|
|
|
(7,062,385
|
)
|
|
|
(2,527,325
|
)
|
Total stockholders’ (deficit) equity
|
|
|
(1,339,552
|
)
|
|
|
154,901
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
|
$
|
106,000
|
|
|
$
|
154,901
|
|
The
accompanying notes are an integral part of these consolidated audited financial statements.
FIRST
HARVEST CORP.
Consolidated
Statements of Operations
(Audited)
|
|
For The Year
|
|
|
Inception
|
|
|
|
Ended
March 31, 2017
|
|
|
(June 5, 2015) to
March 31, 2016
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,204,272
|
|
|
|
750,442
|
|
General and administrative - Related Party
|
|
|
626,176
|
|
|
|
1,156,883
|
|
Research and development - Related Party
|
|
|
575,400
|
|
|
|
620,000
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
4,405,848
|
|
|
|
2,527,325
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(4,405,848
|
)
|
|
|
(2,527,325
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME/(EXPENSE)
|
|
|
|
|
|
|
|
|
Interest income, related party
|
|
|
6,000
|
|
|
|
-
|
|
Interest expense
|
|
|
(135,212
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total other income/(expense)
|
|
|
(129,212
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(4,535,060
|
)
|
|
$
|
(2,527,325
|
)
|
|
|
|
|
|
|
|
|
|
BASIC LOSS PER COMMON SHARE
|
|
$
|
(0.20
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC
|
|
|
23,027,894
|
|
|
|
18,751,669
|
|
The
accompanying notes are an integral part of these consolidated audited financial statements.
FIRST
HARVEST CORP.
Consolidated Statement of Stockholders'
Equity (Deficit)
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders’
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 5, 2015 (inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to founders
|
|
|
17,685,608
|
|
|
|
17,686
|
|
|
|
(17,686
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock or cash
|
|
|
2,646,703
|
|
|
|
2,646
|
|
|
|
2,679,580
|
|
|
|
-
|
|
|
|
2,682,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,527,325
|
)
|
|
|
(2,527,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
|
20,332,311
|
|
|
$
|
20,332
|
|
|
$
|
2,661,894
|
|
|
$
|
(2,527,325
|
)
|
|
$
|
154,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
1,150,332
|
|
|
|
1,150
|
|
|
|
933,850
|
|
|
|
-
|
|
|
|
935,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to founders
|
|
|
1,798,588
|
|
|
|
1,799
|
|
|
|
1,347,142
|
|
|
|
-
|
|
|
|
1,348,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for services
|
|
|
780,500
|
|
|
|
780
|
|
|
|
773,470
|
|
|
|
-
|
|
|
|
774,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization of the Company
|
|
|
552,704
|
|
|
|
553
|
|
|
|
(69,884
|
)
|
|
|
-
|
|
|
|
(69,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for the conversion of convertible promissory notes
|
|
|
51,747
|
|
|
|
52
|
|
|
|
51,695
|
|
|
|
-
|
|
|
|
51,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,535,060
|
)
|
|
|
(4,535,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
24,666,182
|
|
|
$
|
24,666
|
|
|
$
|
5,698,167
|
|
|
$
|
(7,062,385
|
)
|
|
$
|
(1,339,552
|
)
|
FIRST
HARVEST CORP.
Consolidated
Statements of Cash Flows
(Audited)
|
|
For The Year
|
|
|
Inception
|
|
|
|
Ended
|
|
|
(June 5, 2015) to
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,535,060
|
)
|
|
$
|
(2,527,325
|
)
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Stock issued for services and expenses
|
|
|
2,123,191
|
|
|
|
-
|
|
Debt discount
|
|
|
18,333
|
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Increase in interest receivable, related party
|
|
|
(6,000
|
)
|
|
|
-
|
|
Decrease in other receivables
|
|
|
12,000
|
|
|
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
203,034
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,184,502
|
)
|
|
|
(2,527,325
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Convertible note receivable
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
|
771
|
|
|
|
-
|
|
Proceeds from common stock issued for cash
|
|
|
935,000
|
|
|
|
2,682,226
|
|
Proceeds from convertible notes payable
|
|
|
614,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
580,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,129,771
|
|
|
|
2,682,226
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
(54,731
|
)
|
|
|
54,901
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
54,731
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
-
|
|
|
$
|
54,901
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
88,867
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Debt discount
|
|
$
|
1,667
|
|
|
$
|
-
|
|
Non cash stock issued in advance for prepaid expense
|
|
$
|
18,750
|
|
|
$
|
-
|
|
Liabilities assumed during reverse merger
|
|
$
|
70,725
|
|
|
$
|
-
|
|
Stock issued for settlement of notes and interest
|
|
$
|
51,747
|
|
|
$
|
-
|
|
Recapitalization
|
|
$
|
(69,331
|
)
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated audited financial statements.
The
consolidated financial statements presented are those of First Harvest Corp. (the “Company”). The Company is an early
stage company with
a digital media platform including mobile gaming app development, digital
and social media, ecommerce and education with a focus on the cannabis industry and emerging growth sectors. The Company
has
not generated any revenue as of March 31, 2017
. The Company plans to generate revenue primarily
through in-app sales and advertising services.
The
Company was incorporated under the laws of the State of Nevada on February 27, 2013 as American Riding Tours, Inc. On July 5,
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.
Financial
Statements Presented
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.
The
sole officer, one of the directors and (prior to closing of the Merger Agreement) the largest stockholder of Cannavoices was Kevin
Gillespie, who is also the sole officer, director and largest stockholder of the Company.
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.
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 year ended March 31, 2017 incurred a net loss
of $4,535,060. The Company has an accumulated deficit of $7,062,385 as of March 31, 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. 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. As of the date of the share exchange agreement, FHA is a wholly-owned subsidiary of the Company.
The
Company previously determined FH Acquisition Corp. (“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 US 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 March 31, 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.
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 years ended March 31, 2017 and from inception through March 31, 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 March 31, 2017, the Company had
no 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 US 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)
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 the year ended March 31, 2017, they were anti-dilutive.
|
|
For the
Year Ended
March 31, 2017
|
|
|
From inception through
March 31, 2016
|
|
Net Loss
|
|
$
|
(4,535,060
|
)
|
|
$
|
(2,527,325
|
)
|
Weighted Average Shares
|
|
|
23,027,894
|
|
|
|
18,751,669
|
|
Net Loss Per share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.13
|
)
|
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 year ended March 31, 2017 and from inception through
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 March 31, 2017.
The
balance of the convertible promissory note receivable, including accrued interest at March 31, 2017 was $106,000. For the year
ended March 31, 2017, the Company recognized $6,000 in interest income.
On
April 27, 2016, the Company entered into a promissory note for the principle amount of $600,000, net of associated discount of
$20,000. The note bears interest at 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 – April 27, 2017. The Company reached agreement with the holder of the promissory note to extend
the maturity date until July 1, 2017.
The
outstanding principal of the promissory note at March 31, 2017 was $600,000, net of debt discount of $1,667. For the year ended
March 31, 2017, the Company recognized $82,500 in interest expense and amortization of debt discount of $18,333, respectively,
included in interest expense in the accompanying statement of operations. As of March 31, 2017, the Company recorded $15,000 in
accrued interest expense.
6.
|
CONVERTIBLE
PROMISSORY NOTES PAYABLE
|
On
July 20, 2016, the Company entered into a Convertible Promissory Note (the “Note”) with a lender in which the lender
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 – 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 March 31, 2017.
The
outstanding balance of the convertible promissory note at March 31, 2017 was $200,000 and classified as a short-term liability.
For the year ended March 31, 2017, the Company recognized $20,918 in interest expense in the accompanying statement of operations.
As of March 31, 2017, the Company recorded $2,500 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 in which the lenders advanced the Company $165,000. 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 November Short-Term Notes was due and payable by the Company on the ninety-day
anniversary date of the November Short-Term Notes – February 8, 2017. The November Short-Term Notes are a general
unsecured obligation of the Company. At each lender’s election, the principal balance and accrued interest on the
November Short-Term Notes may be converted into common stock of the Company at a fixed rate of $1.00 per share. The Company
reached agreement with the holders of the November Short-Term Notes to extend the maturity date. (see Note 11 –
Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the November Short-Term Notes at March 31, 2017 was $115,000 and classified as a short-term liability.
For the year ended March 31, 2017, the Company recognized $5,836 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 in which the lenders advanced the Company $73,000. 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 December Short-Term Notes was due and payable by the Company on the ninety-day anniversary date of the December
Short-Term Notes – March 14, 2017. The December Short-Term Notes are a general unsecured obligation of the Company. At each
lender’s election, the principal balance and accrued interest on the December Short-Term Notes may be converted into common
stock of the Company at a fixed rate of $1.00 per share. The Company reached agreement with the holders of the December Short-Term
Notes to extend the maturity date. (see Note 11 – Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the December Short-Term Notes at March 31, 2017 was $73,000 and classified as a short-term liability. For
the year ended March 31, 2017, the Company recognized $2,017 in interest expense.
On January 6, 2017, the Company entered into
a convertible short-term promissory note (the “January 6 Short-Term Note”) with a lender in which the lender advanced
the Company $50,000. Interest accrues at a rate of 6% 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 Note will be due and payable by the Company on the
ninety-day anniversary date of the Note – April 6, 2017. 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 $0.75 per share. The Company reached agreement with the holder of the January 6 Short-Term Notes to extend
the maturity date. (see Note 11 – Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the January 6 Short-Term Note at March 31, 2017 was $50,000 and classified as a short-term liability. For
the year ended March 31, 2017, the Company recognized $690 in interest expense.
On
January 10, 2017, the Company entered into a series of Convertible Short-Term Promissory Notes (the “January Short-Term
Notes”) with lenders in which the lenders advanced the Company $40,000. 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 January Short-Term Notes will be due and payable by the Company on the ninety-day anniversary date of the January
Short-Term Notes – April 10, 2017. The January Short-Term Notes are a general unsecured obligation of the Company. At each
lender’s election, the principal balance and accrued interest on the January Short-Term Notes may be converted into common
stock of the Company at a fixed rate of $1.00 per share.
The Company reached agreement with the holders of the January
Short-Term Notes to extend the maturity date. (see Note 11 – Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the January Short-Term Notes at March 31, 2017 was $40,000 and classified as a short-term liability. For
the year ended March 31, 2017, the Company recognized $792 in interest expense.
On
February 10, 2017, the Company entered into a Convertible Short-Term Promissory Note (the “February 10 Short-Term Note”)
with a lender in which the lender advanced the Company $40,000. Interest accrues at a rate of 6% 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
February 10 Short-Term Note was due and payable by the Company on the forty-five day anniversary date of the February 10 Short-Term
Note – March 27, 2017. The February 10 Short-Term Note is a general unsecured obligation of the Company. At the lender’s
election, the principal balance and accrued interest on the February 10 Short-Term Note may be converted into common stock of
the Company at a fixed rate of $0.75 per share. The Company reached agreement with the holder of the February 10 Short-Term Note
to extend the maturity date. (see Note 11 - Subsequent Events - Convertible Promissory Notes Payable).
The
outstanding balance of the February 10 Short-Term Notes at March 31, 2017 was $40,000 and classified as a short-term liability.
For the year ended March 31, 2017, the Company recognized $322 in interest expense.
On
February 11, 2017, the Company entered into a series of Convertible Short-Term Promissory Notes (the “February Short-Term
Notes”) with lenders in which the lenders advanced the Company $60,000. 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 February Short-Term Notes will be due and payable by the Company on the ninety-day anniversary date of the February
Short-Term Notes – May 12, 2017. The February Short-Term Notes are a general unsecured obligation of the Company. At each
lender’s election, the principal balance and accrued interest on the February Short-Term Notes may be converted into common
stock of the Company at a fixed rate of $1.00 per share.
The Company reached agreement with the holders of the February
Short-Term Notes to extend the maturity date. (see Note 11 – Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the February Short-Term Notes at March 31, 2017 was $60,000 and classified as a short-term liability. For
the year ended March 31, 2017, the Company recognized $630 in interest expense.
On March 2, 2017, the Company entered into
a series of Convertible Short-Term Promissory Notes (the “March Short-Term Notes”) with lenders in which the lenders
advanced the Company $36,000. 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 March Short-Term Notes will be
due and payable by the Company on the ninety-day anniversary date of the March Short-Term Notes – May 12, 2017. The March
Short-Term Notes are a general unsecured obligation of the Company. At each lender’s election, the principal balance and
accrued interest on the March Short-Term Notes may be converted into common stock of the Company at a fixed rate of $1.00
per share. The Company reached agreement with the holders of the March Short-Term Notes to extend the maturity date. (see Note
10 – Subsequent Events – Convertible Promissory Notes Payable)
The
outstanding balance of the March Short-Term Notes at March 31, 2017 was $36,000 and classified as a short-term liability. For
the year ended March 31, 2017, the Company recognized $224 in interest expense.
7.
|
STOCKHOLDERS’
EQUITY AND CONTRIBUTED CAPITAL
|
Recent Sale of Securities
The Company is authorized to issue up to
1,000,000,000 shares of common stock, $.001 par value. The Company has no authorized preferred stock. As of March 31, 2017 and
2016, the Company had 24,666,182 and 20,332,311 shares of common stock issued and outstanding, respectively.
In
June 2015, the Company issued an aggregate of 17,685,608 shares of common stock to founders for services at par value.
In
July 2015, the Company sold an aggregate of 669,996 shares of common stock for $590,000 priced between $0.75 and $2.00
per share.
In
August 2015, the Company sold an aggregate of 52,499 shares of common stock for $55,000 priced between $0.75 and $2.00
per share.
In
September 2015, the Company sold an aggregate of 348,666 shares of common stock for $364,000 priced between $0.75 and $2.00
per share.
In
October 2015, the Company sold an aggregate of 240,350 shares of common stock for $280,700 priced between $1.00 and $2.00
per share.
In
December 2015, the Company sold an aggregate of 500,763 shares of common stock for $636,525 priced between $1.00 and $2.00
per share.
In
January 2016, the Company sold an aggregate of 192,500 shares of common stock for $205,000 priced between $1.00 and $2.00
per share.
In
February 2016, the Company sold an aggregate of 50,000 shares of common stock for $100,000 priced at $2.00 per share.
In
March 2016, the Company sold an aggregate of 591,929 shares of common stock for $451,001 priced between $0.50 and $2.00
per share.
In
April 2016, the Company sold an aggregate of 245,666 shares of common stock between $0.50 and $1.00 per share, for gross
proceeds of $180,000.
In
April 2016, the Company issued an aggregate of 1,798,588 shares of common stock to various individuals for services valued at
$1,348,941.
In
May 2016, the Company sold an aggregate of 305,832 shares of common stock between $0.75 and $1.00 per share, for gross
proceeds of $247,500.
In
June 2016, the Company sold an aggregate of 53,667 shares of common stock between $0.75 and $1.00 per share, for gross
proceeds of $49,000.
In
July 2016, the Company sold 63,333 shares of common stock at $0.75 per share, for gross proceeds of $47,500.
In
August 2016, the Company sold 100,000 shares of common stock at $0.75 per share, for gross proceeds of $75,000.
Effective
September 1, 2016, the Company issued an aggregate of 1,334,262 shares of common stock in exchange for the acquisition of 100%
of the outstanding common stock of FH Acquisition Corp.
In
September 2016, the Company sold an aggregate of 133,334 shares of common stock at $0.75 per share, for gross proceeds
of $100,000.
In
September 2016, the Company sold an aggregate of 93,000 shares of common stock at $1.00 per share, for gross proceeds of
$93,000.
In
October 2016, the Company sold an aggregate of 20,000 shares of common stock at $0.75 per share, for gross proceeds of
$15,000.
In
October 2016, the Company sold an aggregate of 61,500 shares of common stock at $1.00 per share, for gross proceeds of
$61,500.
In
November 2016, the Company sold an aggregate of 30,000 shares of common stock at $0.75 per share, for gross proceeds of
$22,500.
In
November 2016, the Company sold an aggregate of 5,000 shares of common stock at $1.00 per share, for gross proceeds of
$5,000.
In
December 2016, the Company issued an aggregate of 25,000 shares of common stock to an individual for services valued at $18,750.
On February 10, 2017, the Company is deemed
to have issued 540,740 shares of common stock, which represented the outstanding shares prior to the closing of the Merger Agreement.
(see Note 1 – Nature of Business – Financial Statements Presented)
In
February 2017, the Company sold an aggregate of 40,000 shares of common stock at $1.00 per share, for gross proceeds of
$40,000.
In
March 2017, the Company sold an aggregate of 11,000 shares of common stock at $1.00 per share, for gross proceeds of $11,000.
In
March 2017, the Company sold an aggregate of 51,747 shares of common stock at $1.00 per share, for the conversion of convertible
notes payable and accrued interest of $51,747.
In
March 2017, the Company issued an aggregate of 755,500 shares of common stock to an individual for services valued at $755,500.
As
of March 31, 2017, there had been no stock options or warrants granted.
At March 31, 2017 and 2016, the Company
had federal operating loss carry forwards of $1,926,288 and $985,658, respectively, which begins to expire in 2036.
The provision for income taxes differs from the amounts which would be provided by applying the statutory
federal income tax rate of 39% to net loss before provision for income taxes for the following reasons:
|
|
|
March 31, 2017
|
|
|
|
March 31, 2016
|
|
Income tax benfit at statutory rate
|
|
$
|
(940,630
|
)
|
|
$
|
(985,658
|
)
|
Net deferred tax asset
|
|
|
940,630
|
|
|
|
985,658
|
|
Income tax expense per books
|
|
$
|
-
|
|
|
$
|
-
|
|
Net deferred tax assets
consist of the following components as of:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
NOL carryover
|
|
$
|
(4,939,194
|
)
|
|
$
|
(2,527,325
|
)
|
Total deferred tax assets
|
|
|
1,926,288
|
|
|
|
985,658
|
|
Valuation allowance
|
|
|
(1,926,288
|
)
|
|
|
(985,658
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The valuation allowance for deferred tax
assets as of March 31, 2017 and 2016 was $1,926,288 and $985,658, respectively, which will begin to expire 2036. In assessing
the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled
reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment.
As a result, management determined it was more likely than not the deferred tax assets would not be realized as of March 31, 2017
and 2016 and maintained a full valuation allowance.
Reconciliation between the statutory rate and the effective tax rate is as follows at March 31, 2017 and
2016:
|
|
2017
|
|
|
2016
|
|
Federal statutory rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(4.00
|
)%
|
|
|
(4.00
|
)%
|
Change in valuation allowance
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
9.
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s related parties are First Harvest Financial, Inc. (“FHF”), Lexington Tech Ventures Management, LLC
(“Lexington”), 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 years ended March
31, 2017 and from inception through March 31, 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 years
ended March 31, 2017 and 2016, respectively: (a) FHF - $71,600 and $315,000 for management fees, and $103,000 and $126,800 for
payments to subcontractors, (b) Lexington - $3,000 and $160,000 for management and subcontractor fees, and (c) GARP - $80,693
and $10,294 for management and subcontractor fees.
The
Company incurred rent expense to FHF of $97,312 and $4,089 for the year ended March 31, 2017 and from inception through March
31, 2016, respectively. The Company has no formal lease with FHF.
The
Company purchased a convertible promissory note receivable for $100,000 face value of the convertible promissory note from FHO.
See Note 4 – Convertible Promissory Note Receivable.
On
September 1, 2016, the Company entered into a share exchange agreement with FHA, a consolidated VIE of the Company, whereby all
the issued and outstanding capital stock of FHA was acquired by the Company in exchange for 1,334,262 newly issued shares of the
Company’s common stock. FHA shares were exchanged on a one-for-one basis with shares of the Company’s common stock.
The
majority shareholder of the related parties described above is the president and largest shareholder of the Company. He was paid
$270,571 and $399,500 by the Company as a subcontractor for the year ended March 31, 2017 and from inception through March
31, 2016, respectively. He was also paid $0 and $141,200 by FHF as a subcontractor on behalf of the Company for the year ended
March 31, 2017 and from inception through March 31, 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 a shareholder of the Company. The Company paid HKA $575,400
and $620,000 for the year ended March 31, 2017 and from inception through March 31, 2016, respectively. The total value
of the Development Agreement is $2,000,000 based on certain development parameters and ongoing scope of work.
On
May 9, 2016, a shareholder loaned the Company $7,500 for audit fees. On May 11, 2016, a shareholder loaned the Company $1,000
for audit fees. On June 20, 2016, a shareholder loaned the Company $1,500 for audit fees. During the quarter ended September 30,
2016, a shareholder loaned the Company $10,725 for audit and transfer agent fees. As of March 31, 2017, $20,725 of this loan remained
due. The loan bears no interest and is due upon demand.
10.
|
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 March 31, 2017.
Convertible
Notes Financing
In
April and May the Company entered into four separate Securities Purchase Agreements with two lenders (“Holders”) for
the sale of short-term convertible notes (“Convertible Notes Financing”) in the aggregate amount of $519,000. The
Convertible Notes Financing bears interest at 12% per annum and matures at the one-year anniversary date (“Maturity Date”).
If the Convertible Notes Financing and accrued interest balance are not paid or converted by the Maturity Date, then the default
interest rate shall be 24% per annum. The Convertible Notes Financing and accrued interest can be converted in whole or in part
to the Company’s common stock at the Holder's option at any time after 180 days following the issuance date. The Convertible
Notes Financing can be prepaid at prices between 125% to 135% of the outstanding balance up to 180 days after the issuance date.
The conversion price is calculated as 40% to 60% of the market price, which is determined by a discount based on the lesser of
the stock price on the issuance date or the lowest traded price of the common stock during the 25-trading day period prior to
conversion. The Holders were also issued warrants to purchase an aggregate of 250,000 shares of the Company’s common stock
at an exercise price of $2.00 per share.
Convertible Promissory Notes Payable
November Short Term Notes - During the
period from April 1, 2017 through the date of these financial statements, the Company converted $5,000 of the principal balance
plus accrued interest into 5,195 shares of common stock at $1.00 per share. The Company repaid an aggregate of $97,500 of the
principal balance plus accrued interest, and the principal balance outstanding as of the date of these financial statements is
$12,500, which has been extended by agreement with the lender.
December Short Term Notes - During the
period from April 1, 2017 through the date of these financial statements, the Company converted an aggregate of $38,000 of the
principal balance plus accrued interest into an aggregate of 39,253 shares of common stock at $1.00 per share. The principal balance
outstanding as of the date of these financial statements is an aggregate of $35,000, which has been extended by agreement with
the lenders.
January 6 Short Term Notes - During the
period from April 1, 2017 through the date of these financial statements, the Company converted $50,000 of the principal balance
plus accrued interest into 67,653 shares of common stock at $0.75 per share. There is no principal balance outstanding.
January Short Term Notes - During the period
from April 1, 2017 through the date of these financial statements, the Company converted an aggregate of $30,000 of the principal
balance plus accrued interest into an aggregate of 30,600 shares of common stock at $1.00 per share. The principal balance outstanding
as of the date of these financial statements is an aggregate of $10,000, which has been extended by agreement with the lenders.
February 10 Short Term Notes - During the
period from April 1, 2017 through the date of these financial statements, the Company repaid $40,000 of the principal balance
plus accrued interest. There is no principal balance outstanding.
February Short Term Notes - During the
period from April 1, 2017 through the date of these financial statements, the Company converted an aggregate of $60,000 of the
principal balance plus accrued interest into an aggregate of 61,324 shares of common stock at $1.00 per share. There is no principal
balance outstanding.
March Short Term Notes - During the period
from April 1, 2017 through the date of these financial statements, the Company converted an aggregate of $36,000 of the principal
balance plus accrued interest into an aggregate of 36,982 shares of common stock at $1.00 per share. There is no principal balance
outstanding.
On
May 16, 2017, the Company entered a convertible short-term promissory note (the “May 16 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 Note will be due
and payable by the Company on the ninety-day anniversary date of the Note – August 14, 2017. 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 April 1, 2017 through
the date of these financial statements, the Company sold an aggregate of 288,000 shares of common stock, resulting in gross proceeds
of $288,000 at $1.00 per share. The Company issued an aggregate of 241,007 shares of common stock for the conversion of convertible
notes payable and accrued interest in the amount of $224,094 at conversion prices between $0.75 and $1.00 per share (see
above – Convertible Promissory Notes Payable). The Company issued an aggregate of 1,062,383 shares of common stock to
various individuals for services valued at $1,062,383.