Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
NOTE 1- Summary of History and Significant Accounting Policies
Nature of Operations
Gulf & Orient Steamship Company, LTD. (Gulf or the Company) was incorporated in the State of Colorado on May 9, 1996. Gulf originally intended to engage in the business of marine transportation.
On December 31, 2018, Gulf entered into a Share Exchange Agreement with High Sierra Technologies, Inc, a Nevada corporation (High Sierra), and all of its shareholders. The shareholders of High Sierra were issued shares of the Gulfs common stock on a one for one share basis in exchange for their shares of High Sierras common stock. High Sierra became a wholly-owned subsidiary of Gulf in the business combination. The Share Exchange was treated as a reverse merger and recapitalization, and as a result, the consolidated financial statements are presented under successor entity reporting, with an inception date of August 6, 2018. Subsequently Gulfs name was changed to High Sierra Technologies, Inc.
High Sierra Technologies, Inc., the wholly-owned subsidiary, 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 subsidiary. The subsidiary 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.
Through its subsidiary, the Company is a start-up that develops patents and other products used in the processing of cannabis, including industrial hemp, and will license 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 was growing industrial hemp on a 200 acre property it leased in McDermitt, Nevada and incurred expenses in relation to this project and the failure of the crop during 2019 (see Note 8).
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company 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 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 financial statements and should be read in conjunction with our audited financial statements for the year ended December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein.
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.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, Compensation - Stock Based Compensation which requires the measurement and recognition of compensation expense based on grant date fair values for all share-based awards made to third parties, employees and directors, including stock options. Effective January 1, 2019, the Company adopted ASU 2018-07, Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
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.
Upon the adoption of ASU 2018-07, the Company measures the fair value of equity instruments for non-employee payment awards on the grant date.
Investment in Growing Crops
The Companys Investment in Growing Crops represented the total cost of the crop inputs in the ground. These were recorded at cost and were to be expensed to cost of goods sold once the crops were harvested and sold.
The crop harvest failed and the Company incurred a $246,914 loss from the preparation, planting and harvesting of the crop during the year ended December 31, 2019.
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, 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 September 30, 2020 and December 31, 2019.
The Company applies the provisions of ASC 360-10, Property, Plant and Equipment, where applicable to all long-lived assets. 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 ASC 360-10. 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.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
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 September 30, 2020 or December 31, 2019, and recorded no impairment losses during the nine months ended September 30, 2020 or 2019.
Revenue Recognition
The Company applies ASC 606, Revenue from Contracts with Customers. Under ASC 606, the Company will recognize 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 as each performance obligation is satisfied.
Advertising
Advertising costs are expensed as incurred. Advertising expenses for the nine months ended September 30, 2020 and 2019 were $0.
Fair Value of Financial Instruments
The Company adopted 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.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
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 ASC 740-10-30, Income Taxes. 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 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 ASC 740-10-25, which 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 ASC 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. ASC 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 ASC 740-10-25.
Loss Per Share
Net loss per common share is computed pursuant to ASC 260-10-45, Earnings Per Share. 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 September 30, 2020 and December 31, 2019.
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.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
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.
NOTE 3 Investment in Growing Crops
Investment in growing crops consisted of the cost of the crop inputs in the ground at December 31, 2019 and were recorded at cost and were expensed to Crop Loss on the statement of operations during the fourth quarter of 2019 since the crop harvest and related farming activities failed. The Company incurred a loss from the crop activities in the amount of $246,914 during the year ended December 31, 2019. The Company is continuing to pursue opportunities in the recreational and industrial cannabis industries.
NOTE 4 Property and Equipment
At September 30, 2020 and December 31, 2019, property and equipment consisted of the following:
|
|
|
| |
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Useful Lives
|
September 30,
2020
|
|
December 31, 2019
|
|
|
|
|
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Equipment
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5
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$ 176,750
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$ 176,750
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Less: accumulated depreciation
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(42,072)
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(15,705)
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|
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$ 134,678
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$ 161,045
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Depreciation expense was $26,367 and $6,250 for the nine months ended September 30, 2020 and 2019, respectively.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
NOTE 5 Notes Payable
The Companys debt consists of the following:
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| |
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September
30, 2020
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December 31, 2019
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Notes payable, 12-14% interest, interest and principal due December 6, 2020 through August 12, 2021, unsecured(1)
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$370,000
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$350,000
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|
|
|
Total due
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370,000
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350,000
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Current Portion
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370,000
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350,000
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Long-term portion
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$ -
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$ -
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(1)
One note for $50,000 includes as an additional return on the debt a 3% interest in the Gross Crop Yield from the Companys hemp crop in McDermitt, NV. No accrual has been made for this interest due to failure of crop and no proceeds received from a Gross Crop Yield. This note was purchased by another note holder and the additional return from a Gross Crop Yield was eliminated.
(2)
All notes that have become due to the date of this report have been extended to a future due date, as per above date ranges.
The Company has incurred an interest expense of $33,539 and $5,184 during the nine months ended September 30, 2020 and 2019. The Company has interest accrued on the above notes in the amount of $29,819 and $10,779 at September 30, 2020 and December 31, 2019.
NOTE 6 Notes Payable-Related Party
The Companys related party debt consists of the following:
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| |
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September
30, 2020
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December 31, 2019
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Notes payable, 12% interest, interest and principal due November 30, 2020 through May 21, 2021, unsecured
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$ 43,306
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$ 34,557
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|
|
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Total due
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43,306
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34,557
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Current Portion
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43,306
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34,557
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Long-term portion
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$ -
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$ -
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(1)
All notes that have become due to the date of this report have been extended to a future due date as per the date range listed above.
During the nine months ended September 30, 2020 and 2019, the Company borrowed $43,306(net of a $10,000 payback on August 30, 2020) and $30,557, respectively, from our current President and director, Vincent C. Lombardi, in order to cover expenses being incurred in connection with the Companys commercial hemp farming activities and general and administrative expenses as detailed below. A repayment of $10,000 on these related party notes was made on August 30, 2020 and none during the nine months ended September 30, 2019.
The Company has incurred an interest expense of $3,602 and $88 during the nine months ended September 30, 2020 and 2019. The Company has interest accrued on the above notes in the amount of $4,299 and $569 at September 30, 2020 and December 31, 2019.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
NOTE 7 Capital Changes
Offering of Securities
We are offering a maximum of 2,000,000 Shares of common stock (Shares) exclusively to accredited investors. There is no minimum number of Shares to be sold pursuant to this offering other than the minimum purchase requirement. The offering price is $1.50 per Share ($3,000,000). This offering became effective February 4, 2020.
Additionally, we are offering up to $1,000,000 in Senior Convertible Secured Promissory Notes exclusively to accredited investors. This offering became effective on October 1, 2020. The Notes will be in a minimum face amount/increment of $10,000 for a term of three (3) years and shall bear interest at a rate at Eight Percent (8%) per annum. The Notes will automatically convert to Common Stock of the Company if an aggregate of $1,000,000 is raised from either offering at a conversion price of $1.50 per share. The Notes also allow for a voluntary conversion at $1.50 per share at any time during the term of the note. Upon conversion of the Notes, the investor will be issued warrants for the purchase of Common Stock in the Company equal to 50% of the value of the investors Note.
These securities have not been registered with the United States Securities and Exchange Commission or with any state securities agency. These securities are being offered pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended pursuant to Rule 506 of Regulation D, and from the registration requirements of the securities laws of the states in which the securities will be offered. The securities are subject to certain restrictions on resale and may be resold only as permitted under applicable federal and state securities laws.
Capital Stock
The Company sold 73,333 shares of common stock, per the offering described above in this note, at $1.50 per share for gross proceeds of $110,001 during the quarter ended September 30, 2020.
NOTE 8 Contingencies and Commitments and Legal Matters Agreement
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.
On May 13, 2019, the Company 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.
No gross crop yields have been achieved by the Company to date, and therefore no lease payments have been made or required under the lease terms. The Hemp Grow farming activities were ceased at the end of 2019 and the leased property is not currently being used by the Company.
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HIGH SIERRA TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
NOTE 9 Subsequent Events
In accordance with ASC 855-10, the Company has analyzed its operations subsequent to September 30, 2020 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.
As of the date of this report, the Company has received $50,000 in the form of three notes from the offering of the Senior Convertible Secured Promissory Notes described above. Subsequent to September 30, 2020, the Company entered into amendments with various noteholders that extended the due dates of the notes payable (see Notes 5 and 6), so that most of the notes become due in January 2021, or later.
Additionally, we are offering up to $1,000,000 in Senior Convertible Secured Promissory Notes exclusively to accredited investors. This offering became effective on October 1, 2020. The Notes will be in a minimum face amount/increment of $10,000 for a term of three (3) years and shall bear interest at a rate at Eight Percent (8%) per annum. The Notes will automatically convert to Common Stock of the Company if an aggregate of $1,000,000 is raised from either offering at a conversion price of $1.50 per share. The Notes also allow for a voluntary conversion at $1.50 per share at any time during the term of the note. Upon conversion of the Notes, the investor will be issued warrants for the purchase of Common Stock in the Company equal to 50% of the value of the investors Note.
On October 14, 2020, we entered into an exclusive Letter Agreement with Artemis Holdings, LLC (Artemis) pursuant to which Artemis is to assist us in maximizing the value of our patents and patents pending for odorless cannabis. Artemis is to provide a detailed market analysis of the patents and to assist with any licensing or sale of the patents. The agreement is for a period of nine months, and then it automatically renews for additional one month periods until either party terminates it. The Company will pay Artemis a fee of $5,000 per month during the term, and a transaction fee of 7.5% of the gross proceeds of any transaction (sale, license, etc.) arranged by Artemis. A copy of the Letter Agreement is attached hereto as Exhibit 10.22.
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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.
Company Business - Intellectual Property
The Companys business is now focused on the business of its wholly-owned subsidiary, High Sierra Technologies, Inc. (High Sierra). High Sierra was incorporated in the State of Nevada in August of 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 High Sierra. High Sierra 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 current Intellectual Property portfolio consists of all of the rights, title and interest that Dr. Lombardi had in certain two Provisional Patent Applications (collectively, the Applications). Assignments of both of these applications, which assign their ownership to High Sierra, have been filed with the United States Patent & Trademark Office. The Applications have since been incorporated into and converted into a single all-encompassing Utility Patent Application which has been filed with numerous governmental agencies in the United States, Canada and multiple other countries as is discussed below (collectively the Utility Patent Applications). For important information concerning the Companys Intellectual Property, please refer to the Companys most recent Annual Report on Form 10-K.
On March 25, 2020, the Company received an International Preliminary Report of Patentability for its Patent Cooperation Treaty Application Number PCT/US2019/014778, CANNABIS PRODUCTS MODIFIED BY REMOVING VOLATILE ORGANIC COMPOUNDS AND ADDING VOLATILE UNSATURATED HYDROCARBONS, in which Claims Numbered 1-84 were characterized as novel and Claims Numbered 1-17, 63-70, 83 and 84 were characterized as inventive steps.
On June 5, 2020, the United States Patent and Trademark Office, by way of an Office Action dated May 29, 2020, notified the Company that Claims Numbered 1-17, 63-70 and 83-84 of Patent Application Number 16/255,157, CANNABIS PRODUCTS MODIFIED BY REMOVING VOLATILE ORGANIC COMPOUNDS AND ADDING VOLATILE UNSATURATED HYDROCARBONS, were now allowed. These are four of the seven main claims in Patent Application Number 16/255,157. In response to this, the Companys outside Patent Counsel, Oliff PLC, has filed an Amendment to Patent Application Number 16/255,157 so that these Claims can be issued a formal Notice of Allowance which would then lead to the issuance of a Utility Patent for these Claims. As a result of this action by our attorneys at Oliff PLC, on June 19, 2020, the United States Patent and Trademark Office issued a formal Notice of Allowance and Fee(s) Due which will allow the Utility Patent to be issued once the fees are paid. This Patent was issued as United States Patent Number 10,737,198 on August 11, 2020. The Companys attorneys at Oliff PLC also are in the process of preparing a Continuation Application for Claims Numbered 18-62 and 71-82 so that the Company can continue to prosecute these Claims separately. This Continuation Application has resulted in the issuance of United States Patent Number 10,835,829 on November 17, 2020.
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On July 23, 2020, the Company received an Issue Notification from the United States Patent and Trademark Office stating that, on August 11, 2020, the United States Patent and Trademark Office will issue United States Patent Number 10,737,198 to the Company as assignee of Application Number 16/255.157, CANNABIS PRODUCTS MODIFIED BY REMOVING VOLATILE ORGANIC COMPOUNDS AND ADDING VOLATILE UNSATURATED HYDROCARBONS, filed by Vincent Lombardi, one of the founders of the Company and its current President and Chief Executive Officer.
The Company intends to continue to actively marketing and licensing its patented technologies in both the cannabis and hemp market spaces as well as pursuing its own uses of its patented technologies in relation to various end user products that can benefit from its patented technologies. In regards to the issuance of United States Patent Numbered 10,737,198 and 10,835,839, Vincent C. Lombardi, President and Chief Executive Officer of the Company, has stated that "we believe the effect of the issuance of Patents Numbered 10,737,198 and 10,835,839 is that it will allow the Company to be able to effectively control the marketplace for low, or no, odor cannabis and hemp products in the United States which will allow the Company to start generating licensing revenue from the technology disclosed in United States Patents Numbered 10,737,198 and 10,835, 839."
The Company has received a First Office Action on its Canadian Patent Application Number 3,031,123,CANNABIS PRODUCTS MODIFIED BY REMOVING VOLATILE ORGANIC COMPOUNDS AND ADDING VOLATILE UNSATURATED HYDROCARBONS,and that its attorneys at Oliff PLC and Aird & McBurney LP in Canada have responded to it. The Company has also recently amended its Canadian Patent Application so that it accurately reflects the claims embodied in United States Patents Numbered 10, 737, 198 and 10,835,839 as well as the Continuation Application Number 17,098/539 filed on November 16, 2020.
The Companys outside Patent Counsel, Oliff PLC has completed the Application to the European Patent Office (EPO) based onPatent Cooperation Treaty Application Number PCT/US2019/014778, CANNABIS PRODUCTS MODIFIED BY REMOVING VOLATILE ORGANIC COMPOUNDS AND ADDING VOLATILE UNSATURATED HYDROCARBONS. It has been filed as European Patent Office Application Number 19743904.5. The Company has also recently amended its EPO Application so that it accurately reflects the claims embodied in United States Patents Numbered 10, 737, 198 and 10,835,839 as well as the Continuation Application Number 17,098/539 filed on November 16, 2020. This EPO Application, as amended, will allow the Company to simultaneously prosecute its PCT Application in a total Hong Kong.
High Sierra is now marketing the licensing of its technology in states in the U.S. where cannabis and/or hemp has been legalized both for medicinal and/or recreational use. It also plans to use a similar marketing strategy in all provinces in Canada which has legalized both the medicinal and recreational uses of cannabis as of October 17, 2018. Hemp has long been legal in Canada. High Sierra is targeting entities that are licensed to produce, process and/or manufacture cannabis and/or hemp related products. High Sierra also believes that its technology will be of interest to tobacco companies in the United States, Canada and other places if those companies choose to enter the cannabis and/or hemp marketplaces as the legalization of cannabis and/or hemp progresses.
On October 14, 2020, we entered into an exclusive Letter Agreement with Artemis Holdings, LLC pursuant to which Artemis Holdings, LLC is to assist us in maximizing the value of our patents and patents pending for odorless cannabis. Artemis is to provide a detailed market analysis of the patents and to assist with any licensing or sale of the patents. The agreement is for a period of nine months, and then it automatically renews for additional one month periods until either party terminates it. The Company will pay Artemis a fee of $5,000 per month during the term, and a transaction fee of 7.5% of the gross proceeds of any transaction (sale, license, etc.) arranged by Artemis. A copy of the Letter Agreement is attached hereto as Exhibit 10.22.
Consulting Agreement
On August 14, 2020, we entered into a non-exclusive Consulting Agreement with Stanley Berk/Steven Leatherman (SBSL Consultants) and Jeff Baclet/Tom Prutzman (Consultants) pursuant to which the SBSL Consultants and other Consultants agreed to review short term and long term business forecasts for the Company, review documents for due diligence purposes, seek out private and public funding for the Company, and seek out potential licensing partners and potential buyers of the Companys intellectual property. They referred the Company to Artemis Holdings, LLC. See above. The term of the Agreement is for six months, and may be canceled by either party. The Company agreed to pay a consulting fee of $7,500 per month (to be deferred until the Company has raised at lest $500,000), and 5.0% of funds raised from any source brought to the Company by the Consultants. The Consultants will also be granted an option to
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purchase 5.0% of the securities sold in such fundraising at the same price, which is exercisable for a period of 5 years. A copy of the Consulting Agreement is attached hereto as Exhibit 10.23.
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) seek to raise additional equity funding so that the Company may pursue the construction and operation of a state of the art / pharmaceutical grade processing facility for the processing of Hemp biomass to be located in Northern Nevada. During the next 12 months, our cash requirements include expenses to market our technology; expenses to construct and operate a state of the art / pharmaceutical grade processing facility for the processing of Hemp biomass to be located in Northern Nevada; the payment of our SEC reporting filing expenses, including associated legal and accounting fees; and costs incident 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 commence and operate a state of the art / pharmaceutical grade processing facility for the processing of Hemp biomass. We have no commitments to raise any additional funds at the present time, and we can offer to assurances that we will be able to raise additional funds on terms acceptable to the Company.
Results of Operations Three Months Ended September 30, 2020 and Three Months Ended September 30, 2019
We have generated no revenues since inception. We hope to start earning revenues during the fiscal year ending December 31, 2021.
General and administrative expenses were $24,330 for the three month period ended September 30, 2020, a decrease of $143,167 from the $167,497 of general and administrative expenses incurred during the three months ended September 30, 2019. Most of the general and administrative expenses in the earlier period were for consulting services and casual labor related to the Companys former farming operations, agronomics, rent, and legal and accounting expenses related to the acquisition of the Companys High Sierra Technologies, Inc. subsidiary and for the prosecution of its patent applications. Most of the general and administrative expenses in the current period were for legal and accounting related to the preparation and filing of the Companys reports with the U.S. Securities and Exchange Commission. We incurred depreciation of $8,789 in the three months ended September 30, 2020, an increase of $4,039 from the $4,750 of depreciation in the three month period ended September 30, 2019. This is due to the fact that some of the Companys depreciable equipment was purchased after September 30, 2019. We incurred interest expense of $12,305 in the three months ended September 30, 2020 compared to $4,888 of interest expense incurred in the three months ended September 30, 2019. We incurred interest expense-related party of $1,394 in the three months ended September 30, 2020 and we incurred interest expenserelated party of $88 in the three months ended September 30, 2019. This is due to the fact that the Company incurred some of its present notes payable and notes payable-related party after September 30, 2019.
We incurred a net loss of $46,818 during the three months ended September 30, 2020, a decrease of $130,405 from the $177,223 net loss incurred during the three months ended September 30, 2019. The Companys decrease in net loss in the current period is largely due to the reduction of administrative expenses, partially offset by the increases in depreciation and interest expenses.
Results of Operations Nine Months Ended September 30, 2020 and Nine Months Ended September 30, 2019
We have generated no revenues since inception. We hope to start earning revenues during the fiscal year ending December 31, 2021.
General and administrative expenses were $43,589 for the nine month period ended September 30, 2020, a decrease of $455,736 from the $499,325 of general and administrative expenses incurred during the nine months ended September 30, 2019. Most of the general and administrative expenses in the earlier period were for consulting services and casual labor related to the Companys former farming operations, agronomics, rent, and legal and accounting expenses related to the acquisition of the Companys High Sierra Technologies, Inc. subsidiary and for the prosecution of its patent applications. Most of the general and administrative expenses in the current period were for legal and accounting related to the preparation and filing of the Companys reports with the U.S. Securities and Exchange Commission. We incurred depreciation of $26,367 in the nine months ended September 30, 2020, an increase of $20,117 from the $6,250 of depreciation in the nine month period ended September 30, 2019. This is due to the fact that most of the Companys depreciable equipment was purchased just prior to, or after, September 30, 2019. We incurred interest expense of $33,539 in the nine months ended September 30, 2020 compared to $5,184 of interest expense incurred in the nine months ended
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September 30, 2019. We incurred interest expense-related party of $3,602 in the nine months ended September 30, 2020 and we incurred interest expenserelated party of $88 in the nine months ended September 30, 2019. This is due to the fact that the Company incurred some of its present notes payable during the nine months ended September 30, 2019 and the balance were incurred after September 30, 2019.
We incurred a net loss of $107,097 during the nine months ended September 30, 2020, a decrease of $403,750 from the $510,847 net loss incurred during the nine months ended September 30. 2019. The Companys decrease in net loss in the current period is largely due to the reduction of administrative expenses, partially offset by the increases in depreciation and interest expenses.
Liquidity and Capital Resources
We had total current assets of $41,845 consisting entirely of cash and $455,037 in total current liabilities as of September 30, 2020. Our total current liabilities consisted of notes payable $370,000, notes payable-related party of $43,306, accounts payable and accrued expenses of $37,432 and accounts payable and accrued expenses-related party of $4,299. We had property, plant and equipment, net of $134,678 as of September 30, 2020. See our Plan of Operation above for information about our cash requirements for the next 12 months.
The cash flows from operating activities consisted of the following: During the nine months ended September 30, 2020, we had a decrease in accounts payable and accrued expenses of $25,112, an increase in accounts payable and accrued expenses-related party of $3,730 and depreciation expense of $26,367. When this is combined with our net loss of $107,097 for the nine months ended September 30, 2020, it results in net cash used in operating activities of $102,112.
During the nine months ended September 30, 2019, we had an increase in accounts payable and accrued expenses of $154,333, 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 $6,250. When this is subtracted from our net loss of $510,847 for the nine months ended September 30, 2019, it results in net cash used in operating activities of $380,264.
In the nine months ended September 30, 2020, we received proceeds from the sale of common stock of $110,001,proceeds from notes payable-related party of $18,749, and proceeds from notes payable of $20,000, and we made a payment on notes payable-related party of $10,000 which resulted in net cash provided by financing activities of $138,750 in the same nine month period. When combined with the $102,112 net cash used in operating activities, it results in a net increase in cash of $36,638 in the nine months ended September 30, 2020.
We received proceeds from notes payable of $355,557 during the nine months ended September 30, 2019 (financing activities), and we spent $176,750 on the purchase of property, plant and equipment (investing activities) in the nine months ended September 30, 2019. When combined with the $380,264 net cash used in operating activities during the nine months ended September 30, 2019, it results in a net decrease in cash during the nine months ended September 30, 2019 of $201,457.
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 to fund operations for the next 12 months. 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
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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.
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 growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company may elect to take advantage of the benefits of this extended transition period in the future.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements of any kind for the nine month period ended September 30, 2020.
Potential Impact of COVID-19
The Company is concerned that the COVID-19 virus may impact the Companys ability to raise additional equity capital due to the uncertainty of the virus effects on the economy and capital markets, which may make potential investors less likely to invest during the pandemic. This may affect the Companys ability to raise equity capital to meet its financial obligations, implement its business plan and continue as a going concern.