(Expressed in U.S. dollars)
Notes to the Financial Statements
Years Ended July 31, 2019 and 2018
(Expressed in U.S. dollars)
1. Nature of Operations and Continuance of
Business
Green Hygienics Holdings Inc. (the “Company”) was incorporated in the State of Nevada on June 12, 2008 as Silver Bay Resources, Inc. On June
30, 2010, the name was changed to Takedown Entertainment Inc. On July 24, 2012, the Company changed its name to Green Hygienics Holdings Inc.
The Company is an innovative, full-scope, science-driven, premium hemp cultivation and branding enterprise focused on the cultivation and
processing of industrial hemp for cannabidiol (“CBD”). The Hemp Farming Act of 2018 removed hemp from Schedule I controlled substances (defined as cannabis with less than 0.3% THC) making it an ordinary agricultural commodity.
The Company’s business model includes generating revenues from the sale of hemp and premium-grade CBD products; creating trusted global
consumer brands; developing valuable IP; and growing the company rapidly through strategic acquisitions. With direct regard to acquisitions, the Company acts as a business accelerator and a vertical integrator focusing to support rapid
growth and development of companies with extraordinary potential.
On June 10, 2019, the company secured a multiyear purchase order for the sale of hemp to U.S. Tobacco De Mexico. Under the terms of the
contract, the Company is required to deliver a total $56.4 million worth of hemp flower over a five year period to US Tobacco De Mexico for use in the production of CBD hemp cigarettes.
On June 14, 2019, the Company secured from the County of San Diego Department of Agriculture, Weights and Measures, a grower registration for
industrial hemp cultivation.
On July 22, 2019, the Company secured licenses for the processing of hemp in the state of North Carolina.
The licenses were granted to the Company’s newly formed subsidiary, Coastal Labs North Carolina LLC, by the North Carolina Industrial Hemp
Commission. The Company’s second subsidiary in the state is Green Hygienics North Carolina LLC, which will be partnering for cultivation this year with the intention of meeting the earnings qualification to be licensed on its own for next
year’s cultivation.
The Company created Coastal labs and Green Hygienics near the end of July. There was no accounting activity prior to July 31, 2019. The Company’s policy is to
consolidate all entities which we control and or own more than 51% of the voting stock. These entities are expected to have accounting activity during subsequent periods and will be consolidated accordingly.
On August 26, 2019, the Company the completed the acquisition of the 824-acre Potrero Ranch Property near San Diego, California for a total
purchase price of $4 million. The Company will utilize the land and buildings for industrial hemp for CBD cultivation. The property includes over 400,000 square feet of outbuildings which are currently being converted into greenhouses.
Going Concern
These financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and
discharge its liabilities in the normal course of business. The Company has not generated revenues since inception and is unlikely to generate earnings in the immediate or foreseeable future. The continuation of the Company as a going
concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. As at July 31, 2019, the
Company has not generated any revenues, has a working capital deficiency of $885,133 and has an accumulated deficit of $42,766,142 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going
concern. 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.
2. Significant Accounting Policies
(a) Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and
are expressed in U.S. dollars.
(b) Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 in the reporting period. The Company regularly evaluates
estimates and assumptions related to deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
(c) Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance and trust funds to be cash
equivalents.
(d) Inventory
Inventory is carried at the lower of cost or net realizable value, with the cost being determined on a first-in, first-out
(FIFO) basis. The Company periodically reviews physical inventory and will record a reserve for excess and/or obsolete inventory if necessary. As of the date of this report, no reserve was deemed necessary.
(e) Impairment of Long-Lived Assets
The Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected cash flows, in which case the assets are written
down to fair value, which is determined based on discounted future cash flows or appraised values.
(f) Related Party Transactions
The Company follows ASC 850, Related Party Disclosures, for the identification of
related parties and disclosure of related party transactions. In accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of financial statements.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Income Taxes”. The asset and liability
method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to
reduce deferred tax assets to the amount that is believed more likely than not to be realized.
2. Significant Accounting Policies (continued)
(h) Foreign Currency Translation
The Company’s functional and reporting currency is the U.S. dollar. Transactions in foreign currencies are translated into the currency of
measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting
exchange gains and losses are recognized in the statement of operations.
(i) Financial Instruments and Fair Value Measures
ASC 820, “Fair Value Measurements and Disclosures”, requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the
asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or
model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or liabilities.
The Company’s financial instruments consist principally of cash, accounts payable and accrued liabilities, loans payable, and amounts due to
related parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate
their current fair values because of their nature and respective maturity dates or durations.
(j) Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” and ASC 505, “Equity Based
Payments to Non-Employees”, 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.
(k) Loss Per Share
The Company computes earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic
and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the
average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As
at July 31, 2019 and 2018, the Company does not have any potentially dilutive shares.
2. Significant Accounting Policies (continued)
(l) Comprehensive Loss
ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive loss and its components in the financial
statements.
(m) Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the
financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of
operations.
3. Deposits
During the year ended July 31, 2019, the Company advanced funds of $100,000 toward the acquisition of property known as the Potrero Ranch. The
Company completed the acquisition on August 24, 2019.
4. Inventory
Inventory consists of hemp seeds. Inventory is recorded at cost.
5. Fixed Assets
Fixed assets recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’
estimated useful lives using the straight-line method. Estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. When certain events or changes in operating conditions occur, asset lives may be
adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts. No depreciation has been recorded to date due to immateriality as the assets were acquired near year end.
Fixed assets consist of the following:
|
Useful Life
|
|
Balance at
July 31, 2018
|
|
|
Additions
|
|
|
Amortization
|
|
|
Balance at
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production equipment
|
5 years
|
|
$
|
-
|
|
|
$
|
46,379
|
|
|
$
|
-
|
|
|
$
|
46,379
|
|
Buildings and improvements
|
15 years
|
|
|
-
|
|
|
|
90,657
|
|
|
|
-
|
|
|
|
90,657
|
|
Furniture and office equipment
|
5 years
|
|
|
-
|
|
|
|
8,102
|
|
|
|
-
|
|
|
|
8,102
|
|
|
|
|
$
|
-
|
|
|
$
|
145,138
|
|
|
$
|
-
|
|
|
$
|
145,138
|
|
Fixed asset costs are being depreciated using the straight-line method based on the useful life of the asset. No depreciation expense has been
recorded for the year ended July 31, 2019 due to the immateriality as the assets were acquired near year end.
6. Loans Payable
(a) As at July 31, 2019, the Company owes $155,250 (2018 - $nil) to a non-related party, which bears interest at the rate of 10% per annum,
is unsecured and due and payable on or before December 19, 2019.
(b) As at July 31, 2019, the Company owes $nil (2018 - $18,750) to a non-related party, which is non-interest bearing, unsecured, and due on
demand. During the year ended July 31, 2018, the amount owing was transferred to a company controlled by the President of the Company.
7. Related Party Transactions
(a) As at July 31, 2019, the Company owes $56,824 (2018 - $56,824) to a company
controlled by the CEO of the Company. The debt bears interest at 5% per annum, is unsecured, and is due on demand. As at July 31, 2019, accrued interest of $14,825 (2018 - $11,961) has been included in accounts payable and accrued
liabilities.
(b) As at July 31, 2019, the Company owes $696,074 (2018 - $116,137) to a company
controlled by the CEO of the Company. The debt includes funds advanced to the Company for business development purposes is non-interest bearing, unsecured, and due on demand.
(c) As at July 31, 2019, the Company owes $27,500 (2018 - $nil) to a director of the
Company for accrued consulting fees. The debt is non-interest bearing, unsecured, and due on demand and is included in accounts payable.
(d) During the year ended July 31, 2019, the Company incurred $30,000 (2018 - $30,000)
in consulting fees to a company controlled by the CEO of the Company.
(e) During the year ended July 31, 2019, the Company incurred $30,000 (2018 - $nil) in
consulting fees to the CTO of the Company.
(f) During the year ended July 31, 2019, the Company incurred $27,500 (2018 - $nil) in
consulting fees to a VP and Director of the Company.
(g) During the year ended July 31, 2019, the Company incurred $15,000 (2018 - $nil) in
consulting fees to the President of a subsidiary of the Company.
(h) During the year ended July 31, 2019, the Company incurred $15,000 (2018 - $nil) in
consulting fees to the CEO of a subsidiary of the Company.
(i) Imputed interest of $22,009 was recorded for the above related party debts.
8. Share Issuances
(a) During the year ended July 31, 2019, the Company issued 500,000 common shares to
the Chief Development Officer of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
(b) During the year ended July 31, 2019, the Company issued 500,000 common shares to
the Business Development Officer of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
(c) During the year ended July 31, 2019, the Company issued 500,000 common shares to
the Chief Technology Officer of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
(d) During the year ended July 31, 2019, the Company issued 50,000 common shares to
the Head of Research and Development of a subsidiary of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
(e) During the year ended July 31, 2019, the Company issued 200,000 common shares to
the Chief Development Officer of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
(f) During the year ended July 31, 2019, the Company issued 200,000 common shares to
the President of a subsidiary of the Company in exchange for services rendered. The shares were valued based on OTC’s closing trade price on the date of the agreement.
9. Commitments
(a)On April 1, 2019, the Company entered into a consulting agreement with the Chief Development Officer of the Company, Hamid Rowshan, whereby
the Company agreed to pay a to be negotiated consulting fee for an initial period of three months, which can be extended to five years upon mutual agreement.
On April 1, 2019, the Company entered into a consulting agreement with the Business Development Officer of the Company, Paymon Omidi, whereby
the Company agreed to pay a to be negotiated consulting fee for an initial period of three months, which can be extended to five years upon mutual agreement.
(b) On April 1, 2019, the Company entered into a consulting agreement with the Head of
Research and Development of a subsidiary of the Company, Kiarash Mirkia. Pursuant to the terms of the agreement, the Company issued the consultant 50,000 common shares upon execution of the agreement.
(c) On June 1, 2019, the Company entered into a consulting agreement with the CEO of a
subsidiary of the Company, Kavan Thanasith, whereby the Company agreed to pay a consulting fee of $7,500 per month for a period of five years. The monthly fee will increase to: $10,000 per month if the Company generates gross revenue of
$1,000,000 per month; $12,500 per month if the Company generates gross revenue of $1,500,000 per month; $15,000 per month if the Company generates gross revenue of $2,000,000 per month and $20,000 per month if the Company generates gross
revenue of $2,500,000 per month. The consultant shall also be granted 200,000 common shares per year for a period of five years.
(d) On June 1, 2019, the Company entered into a consulting agreement with the
President of a subsidiary of the Company, whereby the Company agreed to pay a consulting fee of $7,500 per month for a period of five years. The monthly fee will increase to: $10,000 per month if the Company generates gross revenue of
$1,000,000 per month; $12,500 per month if the Company generates gross revenue of $1,500,000 per month; $15,000 per month if the Company generates gross revenue of $2,000,000 per month and $20,000 per month if the Company generates gross
revenue of $2,500,000 per month. The consultant shall also be granted 200,000 common shares per year for a period of five years.
10. Income Taxes
The Company has net operating losses carried forward of $5,237,753 available to offset taxable income in future years
which commence expiring in fiscal 2028.
The Company is subject to United States federal and state income taxes at an approximate rate of 26.42% (2018 – 26.42%).
The reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Company’s income tax expense as reported is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Income tax recovery at statutory rate
|
|
|
(387,218
|
)
|
|
|
(34,099
|
)
|
Change in enacted tax rates
|
|
|
-
|
|
|
|
6,993
|
|
Change in valuation allowance
|
|
|
387,218
|
|
|
|
27,106
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
–
|
|
|
|
–
|
|
The significant components of deferred income tax assets and liabilities as at July 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Net operating losses carried forward
|
|
$
|
1,009,928
|
|
|
|
712,710
|
|
Valuation allowance
|
|
|
(1,009,928
|
)
|
|
|
(712,710
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
|
–
|
|
|
|
–
|
|
The 2017 Act reduces the corporate tax rate from 34% to 21% for tax years beginning after December 31, 2017. For net operating losses arising
after December 31, 2017, the 2017 Act limits a taxpayer’s ability to utilize net operating losses carryforwards to 80% of taxable income. In addition, net operating losses arising after 2017 can be carried forward indefinitely, but
carryback is generally prohibited. Net operating losses generated in tax years beginning before January 1, 2018 will not be subject to the taxable income limitation. The 2017 Act would generally eliminate the carryback of all net operating
losses arising in a tax year ending after 2017 and instead would permit all such net operating losses to be carried forward indefinitely.
As at July 31, 2019, the Company is in arrears on filing its statutory corporate income tax returns and the amounts presented above are based
on estimates. The actual losses available could differ from these estimates.
11. Subsequent Events
(a) On August 23, 2019, a company (Alita Capital Inc.) owned by the President of the Company executed on a Purchase and
Sale Agreement to acquire the 824-acre Potrero Ranch Property near San Diego, California (the Agreement”). Alita in advance of the close immediately assigned the Agreement to the Green Hygienics Holdings Inc.
The Property now owned fully by Green Hygienics includes 824 acres of land and 400,000 square feet of outbuildings. The
total purchase cost of the Property is $4,510,000. The Vendor agreed to a take-back mortgage of $2,750,000 (the ‘Mortgage”) and the Company borrowed $1,760,000 (the “Loan”) by way of a second mortgage to complete the acquisition. The terms
of the Mortgage include interest at the rate of 6% per annum with monthly payments of interest only.commencing September 23, 2019. The maturity date of the Mortgage is August 23, 2024. The terms of the Loan include interest at 15% per annum
with monthly payments of $22,000 commencing September 15, 2019. The maturity date of the Loan is August 15, 2024.
(b) On August 1, 2019, the Company entered into a consulting agreement with the CEO of the Company, whereby the Company agreed to pay a
consulting fee of $7,500 per month for a period of three years and whereby the Company granted the Consultant an option to acquire 250,000 common shares of the Company or 250,000 Options at 10% below market value at the date of grant upon
execution of the consulting agreement for an additional 2 years.
(c) On August 1, 2019, the Company entered into a consulting agreement with the Chief Agricultural Operations Manager whereby the Company
agreed to pay a signing bonus of $6,000 and a consulting fee of $6,000 per month for a period of six months. At the end of the six-month period, the Company may evaluate the performance with regards to an extension of the agreement. The
Company also granted the Consultant an option to acquire 25,000 common shares of the Company or 25,000 Options at 10% below market value at the date of grant upon execution of the consulting agreement.
(d) On August 1, 2019, the Company entered into a consulting agreement with the Chief Project Manager whereby the Company agreed to pay a
signing bonus of $15,000 and a consulting fee of $7,500 per month for a period of five years. The Company also granted the Consultant an option to acquire 100,000 common shares of the Company or 100,000 Options priced at $0.50 per share
upon execution of the consulting agreement and an additional 100,000 common shares or Options priced at 10% below market value at the date of grant six months after the execution of the agreement.
(e) On August 1, 2019, the Company entered into a consulting agreement with the Assistant Agricultural Operations Manager whereby the Company
agreed to pay a signing bonus of $4,000 and a consulting fee of $2,000 per month for a period of six months. At the end of the six-month period, the Company may evaluate the performance with regards to an extension of the agreement. The
Company also granted the Consultant an option to acquire 25,000 common shares of the Company or Options at $0.50 per share upon execution of the consulting agreement and an additional 25,000 common shares or Options at 10% below market
value at the date of grant six months after the execution of the agreement.
(f) On August 1, 2019, the Company granted an option to a non-related party to acquire 50,000 common shares of the Company at 10% below market
value at the date of grant for services rendered.
(g) On September 1, 2018, the Company entered into a consulting agreement with a director of the Company, whereby the Company agreed to pay a
consulting fee of $2,500 per month for a period of two years, which can be extended to four years upon mutual agreement. Additionally, the Company will either grant the director 100,000 shares of common stock per year or 100,000 stock
options per year to purchase shares of the Company’s common stock priced at 10% below market value at the date of grant.
(h) On September 1, 2018, the Company entered into a consulting agreement with the CTO, whereby the Company agreed to pay a consulting fee of
$2,500 per month for a period of two years commencing August 1, 2018. The agreement can be extended to four years upon mutual agreement. Upon completion of a minimum $1,000,000 financing, the Company will increase this payment to $5,000 per
month. Upon completion of a minimum $5,000,000 financing or profitable operations, the Company will increase this payment to an amount mutually agreed upon that reflects the market rate for services provided by the CTO.