Exhibit 99.1

  

  

 

 

 

 

 

 

 

CJK Inc. dba Hana Meds

Financial Statements

December 31, 2019

 

 

 

 

 

 

 

 

5300 N. Central #200 • Phoenix, Arizona 85012

602.776.6300 • 1.888.346.0072 • FAX: 602.279.4537 • WWW.PRICEKONG.COM

 

 

Table of Contents

    

		Page
Independent Auditors’ Report		1
Financial Statements
Statement of Financial Position		3
Statement of Activities		4
Statement of Functional Expenses		5
Statement of Cash Flows		6
Note to Financial Statements		7

 

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors

CJK, Inc. dba Hana Meds

Tempe, Arizona

 

We have audited the accompanying financial statements of CJK, Inc. dba Hana Meds (an Arizona nonprofit organization), which comprise the statement of financial position as of December 31, 2019, and the related statement of activities, functional expenses and cash flows for the year then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

5300 N. Central #200 • Phoenix, Arizona 85012

602.776.6300 • 1.888.346.0072 • FAX: 602.279.4537 • WWW.PRICEKONG.COM

 

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CJK, Inc. dba Hana Meds as of December 31, 2019, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

 

   

Price, Kong & Co., CPA’s, P.A.

Phoenix, Arizona

March 21, 2020

 

 

CJK Inc. dba Hana Meds

Statement of Financial Position

December 31, 2019

 

ASSETS
Current Assets
Cash and cash equivalents		$	258,831
Accounts receivable, net			173,474
Due from related party			2,796,718
Inventory			250,662
Prepaid expenses			8,441
Refundable deposit			27,800
Total Current Assets			3,515,926
Property and equipment, net			108,753
Total Assets		$	3,624,679
LIABILITIES AND NET DEFICIT
Current Liabilities
Accounts payable		$	35,450
Accrued expenses			89,282
Sales tax payable			24,518
Income tax payable			52,209
Management services payable			2,030,508
Due to related party			3,493,346
Total Current Liabilities			5,725,313
Net Deficit
Without restrictions			(2,100,634	)
Total Liabilities and Net Deficit		$	3,624,679

     

The accompanying notes are an integral part of these financial statements.

 

 

CJK Inc. dba Hana Meds

Statement of Activities

For the year ended December 31, 2019

   

Operating Revenue and Gains:
Medicinal sales		$	4,891,300
Other income			1,811
Total Operating Revenue and Gains			4,893,111
Program and Supporting Services Expenses
Cost of medicinal sales			4,563,228
General and administrative			793,595
Total Program and Supporting Services Expenses			5,356,823
Change in Net Assets Before Provisions for Income Taxes			(463,712	)
Income Tax Expense			52,209
Change in Net Assets			(515,921	)
Net Deficit - Beginning of Year			(1,584,713	)
Net Deficit - End of Year		$	(2,100,634	)

   

The accompanying notes are an integral part of these financial statements.

 

 

CJK Inc. dba Hana Meds

Statement of Functional Expenses

For the year ended December 31, 2019

 

		Cost of				General and
		Medicinal Sales				Administrative				Total
Direct materials		$	2,542,198			$	-			$	2,542,198
Labor			1,072,913				200,871				1,273,784
Management fees			401,508				216,197				617,705
Rent			205,061				39,342				244,403
Advertising			-				183,181				183,181
Utilities			132,840				5,291				138,131
Repairs and maintenance			43,183				13,655				56,838
Royalties			-				47,721				47,721
Licensing			34,619				143				34,762
Insurance			22,660				11,118				33,778
Computer and internet			20,224				7,309				27,533
Office expenses			21,404				6,123				27,527
Professional fees			16,935				8,565				25,500
Bad debt expense			-				25,000				25,000
Travel and training			15,008				7,447				22,455
Depreciation			9,195				-				9,195
Other			25,480				21,632				47,112
Total Functional Expenses		$	4,563,228			$	793,595			$	5,356,823

  

The accompanying notes are an integral part of these financial statements.

 

 

CJK Inc. dba Hana Meds

Statement of Cash Flows

For the year ended December 31, 2019

 

Cash Flows from Operating Activities:
Change in net assets		$	(515,921	)
Adjustments to reconcile change in net assets to net cash used for operating activities:
Depreciation expense			9,195
(Increase) decrease in operating assets:
Accounts receivable			(106,383	)
Due from related party			968,149
Inventory			(106,860	)
Prepaid expenses			27
Increase (decrease) in operating liabilities:
Accounts payable			16,033
Sales tax payable			2,243
Income tax payable			52,209
Management service payable			617,705
Due to related party			(633,397	)
Net cash used for operating activities			303,000
Cash Flows from Investing Activities:
Purchase of property and equipment			(99,704	)
Net cash used for investing activities			(99,704	)
Net Change in Cash			203,296
Cash - Beginning of Year			55,535
Cash - End of Year		$	258,831

   

The accompanying notes are an integral part of these financial statements.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 1 – NATURE OF ACTIVITIES

 

CJK Inc. dba Hana Meds (the Organization, we us, our) is an Arizona corporation operating on a not-for-profit basis that was incorporated in April 2012. The Organization’s mission is to function as a full service alternative health and wellness facility that provides medicinal cannabis and natural homeopathic remedies in a compassionate, safe and supportive environment for qualified patients and caregivers. To this end, the Organization operates as a medical marijuana dispensary and medical marijuana cultivation facility and health and wellness center, while at all times complying with the Arizona Medical Marijuana Act, Arizona Revised Statutes (A.R.S.) Title 36, Chapter 28 (the “Act”), and the rules and regulations propagated by the Arizona Department of Health Services (“DHS”) (the “Rules” thereunder).

 

DHS previously divided the State of Arizona into 126 distinct geographical regions known as “Community Health Analysis Areas” (each, a “CHAA”), and pursuant to the Act and the Rules allocated one dispensary registration certificate (“Certificate”) to each CHAA. A Certificate entitles the organization holding it to operate a retail dispensary and medical marijuana cultivation facility, subject to the conditions, restrictions and limitations set forth in the Act and the Rules.

 

The Organization’s operations are dependent on economic and legal conditions which affect the medicinal cannabis and health care industries, and changes in those conditions may affect the Organization’s continuing operations. While the nature of the Organization’s business is considered legalized and approved by the State of Arizona, it is considered to be an illegal activity under Federal law. Accordingly, certain additional risks and uncertainties are prevalent as discussed in the following notes.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting

The preparation of the financial statements in conformity with generally accepted accounting principles within the United States (“U.S. GAAP”) as promulgated by the Financial Accounting Standards Board (“FASB”) 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 period. Accordingly, actual results may differ from those estimates.

 

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP 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 period. Accordingly, actual results may differ from those estimates.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Organization considers all highly liquid instruments with an original maturity of three months or less to be cash and cash equivalents.

 

Accounts Receivable

Accounts receivable are recorded at their net realizable value. The Organization provides for potentially uncollectible accounts receivable by use of the allowance method. The allowance is provided based upon a review of the individual accounts outstanding, prior history of uncollectible accounts, and existing economic conditions. Receivables past due more than 60 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

 

As of January 1, 2019, the total accounts receivable balance was $67,091 and as of December 31, 2019, the net accounts receivable balance was $173,474, which includes an allowance of $25,000.

 

Inventories

Inventories are valued at the lower of cost (first in, first out basis) or market, and consist primarily of cannabis in the form of packaged flower, edibles, accessories, and concentrates. Inventory is required to be purchased from licensed growth facilities at normal market prices, donated from a licensed patient or caregiver of medicinal cannabis, or grown in the Organization’s licensed cultivation facility. For the year ended December 31, 2019, donated inventory totaled $0. The Organization employs the full-absorption costing method to account for inventory.

 

Property and Equipment

Property and equipment are stated at cost and depreciated on the straight-line method over their estimated useful lives, typically two to fifteen years. Donated property and equipment are recorded at their fair value at the date of donation. Such contributions of property are reported as net assets without donor restrictions, unless the donor has restricted the donated asset to a specific purpose. Assets donated with such restrictions are reported as contributions with donor restrictions. There were no donations of property and equipment during December 31, 2019. Property and equipment are reviewed annually for impairment or when events or circumstances indicate their carrying amount may not be recoverable. Repairs that significantly extend the lives of property and equipment are capitalized, while routine repairs and maintenance are expensed when incurred. Upon sale or disposal, the costs and related accumulated depreciation and amortization are removed and any resulting gain or loss is recognized in income.

 

Advertising

The Organization expenses advertising and marketing activities as they are incurred. Advertising and marketing expense was $183,181 for the year ended December 31, 2019.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

Concentrations of Credit Risk

The Organization maintains its cash accounts in various deposit accounts, the balances of which may periodically be in excess of federal insurable limits during the ordinary course of business.

 

Compensated Absences

We believe that any liability for accrued compensated absences is not significant to the financial statements and therefore, there has been no accrual for compensated absences.

 

Functional Allocation of Expenses

The costs of program and supporting services activities have been summarized on a functional basis in the statement of activities. The statement of functional expenses present the natural classification detail of expenses by function. Accordingly, certain costs have been allocated among the program and supporting services benefited.

 

These expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include rent, office expenses, and repairs and maintenance, which are allocated on a square footage basis, as well as professional and legal fees, salaries and wages, and other, which are allocated on the basis of estimates of time and effort.

 

Net Assets (Deficits)

Net assets (deficits), revenue, gains, and losses are classified based on the existence or absence of donor, grantor, or agency-imposed restrictions. Accordingly, net assets (deficits) and changes therein are classified and reported as follows:

 

Net Assets (Deficits) without Restrictions – Net assets available for use in general operations and not subject to donor (or grantor/agency) restrictions.

 

Net Assets with Restrictions – Net assets subject to donor (or certain grantor/agency) imposed restrictions. Some donor-imposed restrictions are temporary in nature, such as those that will be met by the passage of time or other events specified by the donor. Other donor-imposed restrictions are perpetual in nature, where the donor stipulates that resources be maintained in perpetuity. There were no net assets with restrictions as of and for the year ended December 31, 2019.

 

Contributions

The Organization accounts for contributions in accordance with U.S. GAAP, wherein, contributions received are recorded as increases in net assets with donor restrictions and without donor restrictions. Contributions of donated non-cash assets are recorded at their fair values in the period received. Arizona law allows for legal caregivers and qualified patients to make non-cash contributions of inventory; however, no such contributions were recorded on these financial statements.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

 

Contributions – continued

The Organization records net assets with donor restrictions, whose restrictions are satisfied in the same reporting period, as net assets without donor restrictions when received. There were no contributions recognized during the year ended December 31, 2019.

 

Contributions of donated services that create or enhance non-financial assets or that require specialized skills by individuals possessing those skills that would typically need to be purchased if not provided by donation are recorded at their fair values in the period received. No such donated services have been recognized for the year ended December 31, 2019.

 

Functional Allocation of Expenses

The costs of program and supporting services activities have been summarized on a functional basis in the statement of activities. The statement of functional expenses presents the natural classification of detail of expenses by function. Accordingly, certain costs have been allocated among the program and supporting services benefitted.

 

These expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include occupancy, which is allocated on a square footage basis, as well as labor costs, management fees, professional services, office expenses, insurance, travel and other, which are allocated on the basis of estimates of time and effort.

 

Sales Tax and Other Taxes

We collect various taxes from customers and are responsible to remit these amounts to applicable taxing authorities. The Organization’s accounting policy is to exclude these taxes from revenue and cost of sales.

 

Income Taxes

In accordance with the Act, the Organization is a registered non-profit entity under Arizona law, and therefore is not subject to state income tax. Due to the nature of the Organization’s activities under Federal law, the Organization is considered unable to qualify as a tax-exempt organization under Section 501 of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Moreover, pursuant to Section 280E of the Code, the Organization may not be permitted to take tax deductions for certain operating expenses. Because the Organization is not a non-profit entity under Federal law, it is therefore subject to Federal income tax. Furthermore, costs of medicinal sales are the only deductible expenses under Federal case law. Management believes that the guidance under Code Section 280E has been appropriately applied.

 

U.S. GAAP, imposes a threshold for determining when an income tax benefit can be recognized. The threshold imposed for financial statement reporting is generally higher than the threshold imposed for claiming deductions in income tax returns. There is no liability, asset, or provision for income taxes reported by the Organization as a result of applying this threshold.

 

 

CJK Inc. dba Hana Meds 

Notes to Financial Statements

December 31, 2019

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

 

Income Taxes – continued

The Organization adopted the accounting standard for uncertainty in income taxes, 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 this guidance, the Organization 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 taxing authorities, based on the technical merits of the position.

 

The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. As a result of implementation of this guidance, management believes that any uncertainties do not represent a significant liability.

 

In the normal course of business, the Organization is subject to examination by taxing authorities. Generally, the Organization is no longer subject to examinations for income tax returns filed more than three years ago.

 

Adoption of New Accounting Standard

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Organization adopted the new standard effective January 1, 2019, the first day of the Organization’s fiscal year using the modified retrospective approach. The impact of adopting this ASU was not material to the financial statements.

 

Revenue Recognition

The organization derives its revenues primarily from the sale of medicinal marijuana, CBD, and related products. Revenues are recognized when control of these products is transferred to its customers, in an amount that reflects the consideration the Organization expects to be entitled to in exchange for those products.

 

Sales and other taxes the Organization collects concurrent with revenue-producing activities are excluded from revenue. Any shipping and handling fees charged to customers are reported within revenue.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

 

Revenue Recognition – continued

Incidental items that are immaterial in the context of the contract are recognized as expense. The Organization does not have any significant financing components as payment is received at or shortly after the point of sale. Costs incurred to obtain a contract will be expenses as incurred when the amortization period is less than a year.

 

Variable Consideration

The nature of the Organization’s business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns or price concessions.

 

Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.

 

The Organization determined that no reserve was necessary for variable consideration based on its historical experience.

 

Recent Accounting Pronouncements - Leases

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP with lease terms of more than 12 months.

 

Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Organization will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. The standard will be effective for the Organization beginning January 1, 2021, with early adoption permitted. The Organization is continuing to evaluate the new guidance.

 

Subsequent Events

Subsequent events have been evaluated through March 21, 2020, which is the date the financial statements were available to be issued.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 3 – LIQUIDITY AND AVAILABILITY

 

The Organization has approximately $683,000 of financial assets available within one year of the statement of financial position date to meet cash needs for general expenditure, consisting of cash of $ 258,831, accounts receivable, net of $173,474, and inventory of $250,662. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the statement of financial position date. Management has a goal to maintain financial assets, which consist of cash, accounts receivable, and inventory, on hand to meet 30 days of normal operating expenses, which are, on average, approximately $382,000. Management has a policy to structure financial assets to be available as general expenditures, liabilities, and other obligations come due.

 

NOTE 4 – INVENTORIES

 

Components of the Organization’s inventories as of December 31, 2019, consist of the following:

 

Flower		$	179,731
Concentrates			45,287
Edibles			21,686
Accessories			2,118
Topicals			1,840
Total inventory		$	250,662

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment as of December 31, 2019 are summarized as follows:

 

Equipment		$	82,961
Less: Accumulated depreciation			(19,189	)
Net, depreciable property and equipment			63,772
Construction in process			44,981
Net, property and equipment		$	108,753

 

Depreciation expense for the year ended December 31, 2019, totaled $9,195.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

AC Management Group, LLC

The Organization entered into a management agreement with a company that is owned by certain members of the Organization’s Board of Directors. The management agreement calls for the Organization to reimburse all costs incurred. The agreement also calls for the payment of management fees of no less than 15% of revenues. Management fees expensed during 2019 totaled $617,705, a portion of which was allocated to program services. As of December 31, 2019, the amount due to the related party for management fees was $2,030,508.

 

During 2019, the Organization entered into transactions with the management company, wherein the management company owes the Organization $2,796,718 at December 31, 2019.

 

Broken Arrow Herbal Center, Inc.

The Organization occasionally makes sales to and purchases from a related dispensary with common management, officers, and board members. The medicinal sales to and purchases from the related dispensary totaled $775,293 and $1,454,517, for the year ending December 31, 2019. The total due to the related party for the year ended December 31, 2019 is $3,452,783.

 

TC AZ Holdings II, Inc.

The Organization entered into an agreement for royalties with a company that is owned by certain members of the Organization’s Board of Directors. The royalty is calculated on an annual basis and shall be payable no later than 90 days after the end of each calendar year. The total due to the related party for the year ended December 31, 2019 is $40,563.

 

NOTE 7 – OPERATING LEASES

 

The Organization has non-cancelable operating leases on buildings in Kingman and Tempe, Arizona that expire in April 2040 with monthly payments of $4,000 and $12,730, for the Kingman and Tempe buildings, respectively.

 

Future minimum rental payments on the non-cancelable leases are as follows as of December 31,

 

2020		$	200,760
2021			200,760
2022			200,760
2023			200,760
2024			200,760
Thereafter			3,078,320
Total		$	4,082,120

 

The total rental expense for the year ending December 31, 2019 was $244,403, a portion of which has been allocated to cost of medicinal sales.

 

 

CJK Inc. dba Hana Meds

Notes to Financial Statements

December 31, 2019

 

NOTE 8 – CONTINGENCIES

 

Periodically, the Organization may be contingently liable with respect to claims incidental to the ordinary course of its operations. In the opinion of management, and based on management’s consultation with legal counsel, the ultimate outcome of such matters will not have a materially adverse effect on the Organization. Accordingly, no provision has been made in the accompanying financial statements for losses, if any, which might result from the ultimate disposition of these matters should they arise.

 

Because the Organization is considered to be participating in an illegal activity under Federal law, all of the Organization’s assets are at risk of seizure or confiscation by Federal governmental agencies. However, management believes this is unlikely to occur.

 

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