The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
NOTE 1- Summary of History and Significant Accounting Policies
Nature of Operations
High Sierra Technologies, Inc., (the Company) was incorporated in the State of Nevada on August 6, 2018. It was formed with the intention that it would become the assignee, owner and licensor of certain Intellectual Property that was, prior to assignment, the property of Vincent C. Lombardi, Ph.D. (the Intellectual Property) who is an officer, director and co-founder of the Company. The Company was further formed with the goal that it would continue to develop and expand its intellectual property portfolio with an emphasis on the recreational cannabis industry as well as the industrial hemp industry.
The Company is a start-up that develops patents and other products used in the processing of cannabis, including industrial hemp, and currently are licensing these technologies to companies in the industry. The Company will likely incur research and development expenses in the future, and intends to develop a policy regarding the same. The Company is also growing industrial hemp on a 200 acre property it leases in McDermitt, Nevada and will incur ongoing expenses in relation to this project (See Note 8).
Gulf & Orient Steamship Company, LTD (Gulf) was incorporated in the State of Colorado on May 9, 1996. Gulf originally intended to engage in the business of marine transportation.
On November 1, 2017, Gulf incorporated Gulf Acquisition, Inc., a Utah corporation for the sole purpose of completing an Agreement and Plan of Merger.
On December 31, 2018, Gulf entered into a Share Exchange Agreement with the Company and all the shareholders of the Company. The shareholders of the Company were issued shares of the Gulfs common stock on a one for one share basis in exchange for their shares of the Companys common stock. The Share Exchange was treated as a recapitalization, and as a result, t
he consolidated financial statements are presented under successor entity reporting.
Basis of presentation
These consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended December 31, 2018, included in our Annual Report on Form 10-K for the year ended December 31, 2018.
The Company consolidates its subsidiaries (High Sierra Technologies, Inc., a Nevada corporation, and Gulf Acquisition, Inc., a Utah corporation) in accordance with ASC 810. All inter-company transactions have been eliminated during consolidation.
Concentration of Risk
The Company places its cash and temporary cash investments with established financial institutions. At times, such cash and investments may be in excess of the FDIC insurance limit.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
11
HIGH SIERRA TECNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718,
Compensation - Stock Based Compensation
and ASC 505,
Equity Based Payments to Non-Employees
, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based awards made to third parties, employees and directors, including stock options.
ASC 718 requires companies to estimate the fair value of share-based awards to employees and directors on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model as its method of determining fair value. This model is affected by the Company's stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company's expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the statement of operations over the requisite service period.
All transactions in which goods or third-party services are the consideration received for the issuance of equity instruments are accounted for under ASC 505 and are based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable on the earlier of the commitment date or completion date.
Investment in Growing Crops
The Companys Investment in Growing Crops represents the total cost of the crop inputs in the ground. These are recorded at cost and will be expensed to cost of goods sold once the crops are harvested and sold.
Long-lived Assets
Long-lived assets are stated at cost. Maintenance and repairs are expensed as incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the assets, which is five years.
Where an impairment of a propertys value is determined to be other than temporary, an impairment for the estimated potential loss is recorded to adjust the property to its net realizable value.
When items of building or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. The Company does not have any long-lived tangible assets, which are considered to be impaired as of June 30, 2019 or December 31, 2018.
The Company applies the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10,
Property, Plant and Equipment,
where applicable to all long lived assets. FASB ASC 360-10 addresses accounting and reporting for impairment and disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with FASB ASC 360-10. FASB ASC 360-10 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
Intangible Assets
Goodwill and intangible assets are reviewed for potential impairment in accordance with ASC 350,
Intangibles - Goodwill and other,
whenever events or circumstances indicate that their carrying amounts may not be recoverable. The Company had no such intangibles at June 30, 2019 or December 31, 2018, and recorded no impairment losses during the six months ended June 30, 2019.
12
HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
Revenue Recognition
The Company applies ASC 606 Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
Advertising
Advertising costs are expensed as incurred. Advertising expenses for the six months ended June 30, 2019 were $0.
Fair Value of Financial Instruments
The Company adopted FASB ASC 820, Fair Value Measurements and Disclosures, which provides a framework for measuring fair value under GAAP. Fair value is defined 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. The standard also expands disclosures about instruments measured at fair value and 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. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices for identical assets and liabilities in active markets;
Level 2 Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
Emerging Growth Company Critical Accounting Policy Disclosure
The Company qualifies as an emerging growth company under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. As an emerging grown company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company
has chosen to opt out of such extended transition period, and as a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies
.
Income Taxes
The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
13
HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (Section 740-10-25). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of Section 740-10-25.
Segments
The Company operates in several business segments, namely the businesses of (1) Product development, (2) Patent development, (3) Technology licensing and (4) Other services in the cannabis segment which includes industrial hemp.
Loss Per Share
Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period, unless their effect is anti-dilutive due to continuing losses. There were no potentially dilutive shares outstanding as of June 30, 2019 and December 31, 2018.
Recent Accounting Pronouncements
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations or financial position.
NOTE 2 Financial Condition and Going Concern
The Companys financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has sustained operating losses during the current year-to-date and may not achieve the level of profitable operations to sustain its activities. These factors raise substantial doubt as to its ability to obtain debt and/or equity financing and achieve profitable operations.
Management intends to raise additional operating funds through equity and/or debt offerings. However, there can be no assurance management will be successful in its endeavors. Ultimately, the Company will need to achieve profitable operations in order to continue as a going concern.
There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company it may be required to curtail its operations.
14
HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
NOTE 3 Investment in Growing Crops
Investment in growing crops consist of the cost of the crop inputs in the ground at June 30, 2019 and are recorded at cost and will be expensed to cost of goods sold once the crops are harvested and sold.
|
|
| |
|
June 30,
2019
|
|
December 31,
2018
|
Raw materials
|
$230,000
|
|
$ -
|
NOTE 4 Property and Equipment
At June 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
|
| |
|
Useful Lives
|
June 30,
2019
|
|
December 31, 2018
|
|
|
|
|
|
Equipment
|
5
|
$42,500
|
|
$ -
|
Less: accumulated depreciation
|
|
$(1,500)
|
|
-
|
|
|
$41,000
|
|
$ -
|
Depreciation expense was $1,500 for the three and six months ended June 30, 2019.
NOTE 5 Intangibles
During the period from inception to December 31, 2018, the Company acquired certain provisional patents and other rights for common stock in the Company for a value of $7,683. The Company has impaired the value of these patents due to not being able to determine the value of the items acquired.
NOTE 6 Note Payable
The Companys debt consists of the following:
| |
|
June 30, 2019
|
Note payable, 9% interest, interest and principal due December 6, 2019, unsecured
|
$50,000
|
|
|
Total due
|
50,000
|
Current Portion
|
50,000
|
Long-term portion
|
$ -
|
15
HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
NOTE 7 Capital Changes
Common Stock
On December 31, 2018 we entered into a Share Exchange Agreement (the Agreement) with High Sierra Technologies, Inc., a Nevada corporation (High Sierra) and all of the shareholders of High Sierra, pursuant to which we acquired 100% of the issued and outstanding shares of common stock of High Sierra (the Share Exchange or Acquisition). The Acquisition of High Sierra was consummated on the same date, and High Sierra is now a wholly-owned subsidiary of the Company. As consideration for the Share Exchange, we issued a total of 15,433,025 shares of our common stock to the High Sierra shareholders.
The Company issued 15,433,025 shares of its common stock at $.001 per share for a total of $25,083 during the period ended December 31, 2018 of which $12,250 was paid for in cash, $7,683 was paid by the contribution of certain intangibles, $5,150 was for services.
The Company issued 100,000 shares of its common stock for consulting services on May 26, 2019 valued at $100,000, which was the fair market value of the stock.
The Company issued 100,000 shares of its common stock for product (seeds) on May 26, 2019 valued at $100,000, which was the fair market value of the stock.
Offering of Securities
The Company filed an S-1 Registration Statement on June 10, 2019. The Company is offering a maximum of 3,500,000 shares of our common stock, and (ii) the resale by certain Selling Stockholders of High Sierra of up to 2,500,500 shares of common stock held by Selling Stockholders of High Sierra.
The Company is offering these securities at a price of $2.50 per share and would result in gross proceeds to the Company of $8,750,000.
NOTE 8 Contingencies and Commitments and Legal Matters Agreement and Plan of Merger
Management of the Company has conducted a diligent search and concluded that there were no commitments, contingencies, or legal matters pending at the balance sheet dates, other than what has been disclosed below.
The Company on May 13, 2019 entered into an Agricultural Lease for approximately 200 acres in Northern Nevada to plant its Hemp Grow for 2019.
The term of the lease is for five years commencing May 18, 2019 through May 17, 2024.
There are no minimum fixed monthly payments due on this lease, but an annual participation bonus in an amount equal to fifteen percent of the gross crop yield from the leasehold properties. The Gross Crop Yield is defined by the actual amount received from the crop harvest less all expenses derived from the growing, processing and sale of the crop harvested from the Property.
The Company is solely responsible for all crop care, labor, irrigation, insurance, taxes, repairs and maintenance of the crop, equipment and other costs of planting, raising and harvesting of crops. The Company is responsible for all other miscellaneous cost to grow and take it to market.
Due to the lease payments being variable, the Company has not recorded a right of use asset or lease liability on the balance sheet and will recognize the variable lease payments in the period when the obligation for those payments has occurred in accordance with ASC 842,
Leases
.
16
HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2019 and December 31, 2018
NOTE 9 Subsequent Events
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2019 through the date these financial statements were issued and has determined that it does not have any material subsequent events to disclose in these financial statement other than the events described immediately below.
On July 10, 2019, the Company borrowed $50,000 from Or Crown Auto and entered into an unsecured promissory note which bears interest at nine percent (9.0%) per annum and is due six (6) months later.
On July 17, 2019 the Company borrowed $2,500 from our current President and director, Vincent C. Lombardi, and entered into an unsecured promissory note which bears interest at nine percent (9.0%) per annum and is due six (6) months later.
On July 30, 2019, the Company borrowed $50,000 from Biored, N.V., a Belgian corporation, and entered into an unsecured promissory note which bears interest at nine percent (9.0%) per annum and is due six (6) months later. The Company may seek additional loans from third parties in the near future on the same or similar terms.
On July 31, 2019, the Company borrowed $50,000 from Leland A. and Terri L. Martineau and entered into an unsecured promissory note which bears interest at nine percent (9.0%) per annum and is due six (6) months later. The promissory note to the Martineaus also contains an assignment of a 3.0% interest in the Gross Crop Yield from the Companys 2019 hemp crop in McDermitt, Nevada.
On July 30, 2019, the Company purchased a windrower for $56,500 from Campbell Tractor & Implement in Nampa, Idaho. This will be used in the harvesting of the industrial hemp crops. The Company also has purchased a combine from USA Hemp Company in Molalla, Oregon on July 18, 2019 to be used in the harvesting of industrial hemp. These equipment items have been fully paid for by the Company except for a payment of $37,500 which is due to be made on the combine in a few weeks when it is delivered.
On August 8, 2019, the Company borrowed $50,000 from Michael Vardakis, and entered into an unsecured promissory note which bears interest at nine percent (9.0%) per annum and is due six (6) months later.
17
Item 2.
Managements Discussions and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Statements made in this Quarterly Report which are not purely historical are forward-looking statements with respect to the goals, plan objectives, intentions, expectations, financial condition, results of operations, future performance and our business, including, without limitation, (i) our ability to raise capital, and (ii) statements preceded by, followed by or that include the words may, would, could, should, expects, projects, anticipates, believes, estimates, plans, intends, targets or similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following, general economic or industry conditions, nationally and/or in the communities in which we may conduct business, changes in the interest rate environment, legislation or regulatory requirements, conditions of the securities markets, our ability to raise capital, changes in accounting principles, policies or guidelines, financial or political instability, acts of war or terrorism, other economic, competitive, governmental, regulatory and technical factors affecting our current or potential business and related matters.
Accordingly, results actually achieved may differ materially from expected results in these statements. Forward-looking statements speak only as of the date they are made. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Plan of Operation
Our plan of operation for the next 12 months is to: (i) market the licensing of the Companys technology in states in the U.S. where cannabis and/or hemp has been legalized for medicinal and/or recreational use, and in the Canadian provinces; and (ii) grow industrial hemp on a 200 acre parcel of undeveloped land located in McDermitt, Nevada which is leased to us, and to harvest and process the industrial hemp; and (iii) seek to raise additional equity funding. During the next 12 months, our cash requirements include expenses to market our technology; lease payments, and related farming expenses for planting, harvesting, processing and marketing industrial hemp; the payment of our SEC reporting filing expenses, including associated legal and accounting fees; and costs incidental to maintaining our good standing as a corporation in our state of organization. We anticipate that we will need to raise additional equity funds to successfully operate our industrial hemp farming operation. We have no commitments to raise any additional funds at the present time, other than the S-1 filed on June 10, 2019 and we can offer no assurances that we will be able to raise additional funds on terms acceptable to the Company.
Results of Operations Three Months Ended June 30, 2019
We have generated no revenues since inception. We hope to start earning revenues during the present fiscal year ending December 31, 2019. We added a $230,000 investment in growing crops during the three months ended June 30, 2019. General and administrative expenses were $274,999 for the three months ended June 30, 2019. We had a net loss of $276,795 for the three months ended June 30. 2019. Approximately $142,400 was incurred for consulting services, approximately $26,900 was incurred for agronomics, approximately $17,600 was incurred for casual labor, approximately $16,400 was incurred for rent, and approximately $54,200 was incurred for legal, accounting fees and similar fees related to the acquisition of the Companys High Sierra Technologies, Inc. subsidiary and for the preparation and filing of reports with the SEC under the Exchange Act.
Results of Operations Six Months Ended June 30, 2019
We have generated no revenues since inception. We hope to start earning revenues during the present fiscal year ending December 31, 2019. We added a $230,000 investment in growing crops during the six months ended June 30, 2019. General and administrative expenses were $331,828 for the six months ended June 30, 2019. We had a net loss of $333,624 for the six months ended June 30. 2019. Approximately $142,400 was incurred for consulting services, approximately $26,900 was incurred for agronomics, approximately $17,600 was incurred for casual labor, approximately $16,400 was incurred for rent, and approximately $102,400 was incurred for legal and accounting fees related to the acquisition of the Companys High Sierra Technologies, Inc. subsidiary and for the preparation and filing of reports with the SEC under the Exchange Act, and for legal expenses associated with the prosecution of patent applications.
Liquidity and Capital Resources
We had $8,432 in cash, $230,000 investment in growing crops and $218,227 in current liabilities as of June 30, 2019. See our Plan of Operation above for information about our cash requirements for the next 12 months.
18
The cash flows from operating activities consisted of the following: During the six months ended June 30, 2019, we had an increase in accounts payable and accrued expenses of $142,803, we invested $230,000 in growing crops, we issued common stock for services of $100,000 and we issued common stock for product (hemp seed) of $100,000. We also had depreciation of $1,500. When this is all subtracted from our net loss of $333,624, it results in net cash used in operating activities of $219,321.
As reflected in the unaudited consolidated financial statements for the six months ended June 30, 2019, the Company has incurred current period losses and has had negative cash flows from operating activities. The Company also incurred losses in prior periods. Our currently available cash resources as of August 19, 2019 should allow us to conduct operations for at least the next six months. We intend to fund future operations for the next 12 months through cash on hand, and through raising funds from debt and/or equity offerings. Currently, we cannot provide assurance that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital needs are identified and if we are not successful in obtaining the required financing, we may be forced to curtail our existing or planned future operations. We believe our plans will enable us to continue our current operations for at least the next twelve months. However, those plans are dependent upon obtaining additional capital until cash flows from operations generated are sufficient to fund operations.