UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the quarterly period ended: August 31, 2020
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the transition period from: _____________ to _____________   Commission File Number:  333-234048

 

MJ Harvest, Inc.

 (Exact name of registrant as specified in its charter)

NEVADA		82-3400471
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation)		Identification No.)

9205 W. Russell Road, Suite 240, Las Vegas, Nevada 89139

(Address of Principal Executive Office) (Zip Code)

(954) 519-3115

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

———————

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered.
None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐			Accelerated filer	☐
Non-accelerated filer	☐			Smaller reporting company	☒
Emerging growth company	☒

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No 

 

The number of shares of the issuer's Common Stock outstanding as of October 15, 2020, is 22,892,874.

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

Attached after signature page.

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Certain statements in this Report constitute “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such a differences include, among others, uncertainties relating to general economic and business conditions; industry trends; changes in demand for our products and services; uncertainties relating to customer plans and commitments and the timing of orders received from customers; announcements or changes in our pricing policies or that of our competitors; unanticipated delays in the development, market acceptance or installation of our products and services; changes in government regulations; availability of management and other key personnel; availability, terms and deployment of capital; relationships with third-party equipment suppliers; and worldwide political stability and economic growth. The words “believe,” “expect,” “anticipate,” “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

 

Results of Operations

 

Three Months Ended August 31, 2020 compared with the Three Months Ended August 31, 2019

 

The narrative comparison of results of operations for the three-month periods ended August 31, 2020 and 2019, is based on the following table.

 

		Three Months Ended
		A				B				B-A
		August 31, 2019				August 31, 2020				Change
REVENUE		$	20,960			$	106,046			$	85,086
COST OF REVENUE			12,444				92,549				80,105
Cost of revenue as a % of total revenue			59	%			87	%			28	%
Gross Profit			8,516				13,497				4,981
Gross profit as a % of revenue			41	%			13	%			-28	%
OPERATING EXPENSES
Officer and director compensation			150,000				130,000				(20,000	)
General and administrative			34,856				18,819				(16,037	)
Professional fees and contract services			104,959				95,682				(9,277	)
Total operating expenses			289,815				244,501				(45,314	)
NET LOSS FROM OPERATIONS			(281,299	)			(231,004	)			50,295

 

 

Revenues increased substantially a result of additional product sales attributable to the acquisition of assets from Elevated Ag Solutions, Inc. (“Elevated”) at the start of our fiscal fourth quarter ending May 31, 2020. While the Elevated acquisition increased our revenue flow, the margins on these transactions were small and we saw a corresponding increase in cost of sales. The net effect of the added business was a small increase in the dollar amount of our gross profit, but a 28% decrease in the gross profit as a percentage of revenue. Following the end of our first quarter ending August 31, 2020, management reviewed the Elevated acquisition, business recorded to date, and the prospects for future success from this line of business. Management also reviewed the representations made by Elevated at the time of the acquisition, and the manner in which the transactions were carried out in the Quarters ending May 31, 2020 and August 31, 2020.

 

Based on this review and evaluation, management has concluded that the Elevated business was not what was represented at the time of the acquisition, was not likely to ever operate profitably without significant revisions to operating methods and changes in personnel, and was likely to create significant business questions and concerns should it be continued. Accordingly, management has elected to cease doing the business acquired from Elevated and we have tendered all of the domain names and intangible assets acquired back to Elevated. The Company and Elevated are currently discussing an unwinding agreement, including taking steps to cancel some or all of the shares issued by the Company to Elevated for the acquisition, return by the Company of domains and intangible assets to Elevated, release of the covenant not to compete, assignment of an exclusive distributorship obtained by the Company after the acquisition over to Elevated, and mutual releases of any further obligations by each party to the other. An initial offer of settlement from the Company to Elevated was rejected by Elevated and it is uncertain if a settlement agreement can be reached. The Company is evaluating its options should settlement not be possible. Additional information including write off or impairment of the intangible assets will be reported when the settlement is finalized.

 

As a result of the discontinuation of the Elevated business, revenues and cost of revenues in future periods will be significantly reduced, and gross profit as a percentage of revenue is likely to increase. The overall effect on continuing operations, however, is not likely to be significant. Depending on the resolution reached, the Company also report a one time loss on discontinued operations, but the amount of the loss, if any, cannot be determined at this time.

 

Total operating expenses decreased in the current period due to reductions in officer and director compensation, general and administrative expenses, and professional fees and contract services. Officer and director compensation decreased due to elimination of a catch-up payment that management authorized in the quarter ended August 31, 2019 that did not reoccur in the current period. General and administrative expenses and professional fees and contract services decreased in 2020 compared to 2019 due to tightened spending controls, shifting more of the general and administrative costs to contractors and contracted officers, and a reduction in professional fees for intellectual property matters following issuance of patents in October of 2019.

 

Net loss from operations decreased in 2020 compared 2019 and reflects management’s efforts to tighten operational controls as we focus on building the business through acquisitions anticipated in the coming periods.

 

Liquidity and Capital Resources

 

Cash flow used in operating activities for the three-month period ended August 31, 2020 was $90,811 compared to $126,585 in the comparable period 2019. During the period, our total cash decreased by $24,811. Cash to fund the negative cash flow from operations was derived primarily from proceeds of advances from related parties totaling $66,000.

 

The Company continues to make progress in growing sales of its existing product line, but the business is not yet sufficient to support our current operating structure. We added the Elevated product line in hopes that this would begin to address this issue, but as noted above, we are now in the process of discontinuing the Elevated business. We continue to seek out potential acquisition candidates and distributorships and hope to see continuing growth in sales in the coming periods. The Company is currently reliant on funding through advances from related parties, but no assurances can be given that such funding will continue to be available in future periods.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business.  We incurred net losses from operations of $231,004 and $281,299 for the three-month periods ended August 31, 2020 and 2019, respectively, and had an accumulated deficit of $4,413,398 as of August 31, 2020.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The Company may seek to raise money for working capital purposes through a public offering of its equity capital or through a private placement of equity capital or convertible debt.  It will be important for the Company to succeed in its efforts to raise capital in this manner to further its business plan in an aggressive manner.  Raising additional capital may cause dilution to current shareholders.

 

COVID-19

 

In March 2020, COVID-19 was declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention. Its rapid spread around the world and throughout the United States prompted many countries, including the United States, to institute restrictions on travel, public gatherings and certain business operations. These restrictions significantly disrupted economic activity in the United States and Worldwide. To date, the disruption did not materially impact the Company’s financial statements. However, if the severity of the economic disruptions increase as the duration of the COVID-19 pandemic continues, the negative financial impact due to reduced demand could be significantly greater in future periods than in the first quarter.

 

The effects of the continued outbreak of COVID-19 and related government responses could also include extended disruptions to supply chains and capital markets, reduced labor availability and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts to the Company, including our ability to operate our facilities. To date, there have been no material adverse impacts to the Registrants’ operations due to COVID-19.

 

In addition, the economic disruptions caused by COVID-19 could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill. Management evaluated these impairment considerations and determined that no such impairments occurred through the date of this report.

 

Off Balance Sheet Arrangements

 

None

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not required.

 

Item 4. Controls and Procedures.

 

Conclusions of Management Regarding Effectiveness of Disclosure Controls and Procedures

 

At the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) and Rule 15d – 15(e) under the Exchange Act). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective as it was determined that there were material weaknesses affecting our disclosure controls and procedures.

 

Management of the Company believes that these material weaknesses are due primarily to the small size of the company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As the Company grows, management expects to increase the number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes during the quarter ended August 31, 2020 in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

We are not a party to any material legal proceedings, and, to the best of our knowledge, no such legal proceedings have been threatened against us.

 

Item 1A.  Risk Factors

 

Not required.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the three months ended August 31, 2020, the board of directors did not issue any shares of common stock. The Board did authorize issuance of an aggregate of 647,857 shares of unregistered common shares to three non-related parties (122,857 shares) and four related parties that were officers and/or directors (525,000 shares) in exchange for services rendered to the Company.  The shares to be issued are valued at $0.20 per share which was the closing price of the common stock in the OTCQB market on the date the shares became issuable (September 1, 2020).  The shares, when issued will be exempt from the registration requirements of Section 5 of the Securities Act of 1933 pursuant to Section 4(2) of the Act since the recipients of the shares are persons closely associated with the Company and the issuance of the shares will not involve any public offering.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

 

Not applicable.

 

Item 5.  Other Information.

 

None.

 

 

Item 6.  Exhibits. 

 

The following documents are included as exhibits to this report:

 

(a) Exhibits

 

Exhibit Number

SEC Reference Number

Title of Document

3.1*	3	Articles of Incorporation of MJ Harvest, Inc.
3.2*	3	Amended Bylaws of MJ Harvest, Inc.
10.1*	10	Independent Contractor Agreement with Patrick Bilton effective January 1, 2019
10.2*	10	Independent Contractor Agreement with Brad Herr effective January 1, 2019
10.3*	10	Securities Purchase Agreement by and between MJ Harvest, Inc. (fka EM Energy, Inc). and Original Ventures, Inc. dated November 7, 2017
10.4*	10	Securities Purchase Agreement by and between MJ Harvest, Inc. and Original Ventures, Inc. dated December 7, 2018
31.1	31	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CEO)
31.2	31	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (CFO)
32.1	32	Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
32.2	32	Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (CFO)

 

*

Incorporated by reference to Exhibits 3.1, 3.2, 10.1, 10.2, 10.3, and 10.4 of the Company's Registration Statement on Form S-1 which was declared effective on January 9, 2020.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MJ Harvest, Inc. 

Date:  October 19, 2020  

By: /s/ Patrick Bilton

Patrick Bilton, Principal Executive Officer

By:  /s/ Brad E. Herr

Brad E. Herr, Chief Financial Officer and Principal Financial Officer

 

MJ Harvest, Inc.

 

Contents

 

	Page
FINANCIAL STATEMENTS – (Unaudited):
Consolidated balance sheets	2
Consolidated statements of operations	3
Consolidated statements of changes in stockholders’ deficit	4
Consolidated statements of cash flows	5
Notes to consolidated financial statements	6 - 14

 

MJ HARVEST, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)

 

							August 31,		May 31,
							2020		2020
			ASSETS
	CURRENT ASSETS:
		Cash and cash equivalents			$		7,532	$	32,343
		Accounts receivable					24,140		19,216
		Vendor deposits					-		20,000
		Inventory					28,470		32,840
			Total current assets				60,142		104,399
	NON-CURRENT ASSETS:
		Fixed assets, net					14,619		15,879
		Finite-lived intangible assets, net					448,959		465,834
		Indefinite-lived intangible assets, net					25,000		25,000
			Total non-current assets				488,578		506,713
			Total Assets		$		548,720	$	611,112
			LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
	Accounts payable and other current liabilities				$		70,902	$	97,861
LONG-TERM LIABILITIES:
	Common stock payable						229,571		100,000
	Advances from related parties						895,982		829,982
			Total long-term liabilities				1,125,553		929,982
			Total Liabilities				1,196,455		1,027,843
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS’ DEFICIT:
	Preferred stock, par value $0.0001, 5,000,000 shares authorized,
		no shares issued and outstanding					-		-
	Common stock, $0.0001 par value per share, 50,000,000 shares
		authorized, 22,892,874 and 22,892,874 issued and
		outstanding, respectively					2,289		2,289
	Additional paid-in capital						3,763,374		3,763,374
	Accumulated deficit						(4,413,398)		(4,182,394)
		Stockholder's equity before non-controlling interest   Total stockholders' deficit					(647,735)		(416,731)
			Total Liabilities and Stockholders' Deficit		$		548,720	$	611,112

 

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

 

 

MJ HARVEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

 

						Three months ended
						August 31,		August 31,
						2020		2019
REVENUE					$	106,046	$	20,960
COST OF REVENUE						92,549		12,444
		Gross profit				13,497		8,516
OPERATING EXPENSES:
	Officer and director compensation					130,000		150,000
	General and administrative					18,819		34,856
	Professional fees and contract services					95,682		104,959
		Total operating expenses				244,501		289,815
NET LOSS FROM OPERATIONS					$	(231,004)	$	(281,299)
NET LOSS PER COMMON SHARE - Basic and diluted					$	(0.01)	$	(0.01)
	WEIGHTED AVERAGE NUMBER OF COMMON
		SHARES OUTSTANDING - Basic and diluted				22,892,874		18,777,924

 

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

 

 

 

MJ HARVEST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(unaudited)
FOR THE THREE MONTH PERIODS ENDED AUGUST 31, 2020 AND 2019

 

							Additional
			Common Stock				Paid-In		Accumulated
			Shares		Amount		Capital		Deficit		Total
	BALANCES, May 31, 2019		18,758,739	$	1,876	$	1,784,486	$	(2,218,719)	$	(432,357)
	Shares issued for compensation		353,000		35		88,215		-		88,250
	Net loss for the three months ended August 31, 2019		-		-		-		(281,299)		(281,299)
	BALANCES, August 31, 2019		19,111,739	$	1,911	$	1,872,701	$	(2,500,018)	$	(625,406)
	BALANCES, May 31, 2020		22,892,874	$	2,289	$	3,763,374	$	(4,182,394)	$	(416,731)
	Net loss for the three months ended August 31, 2020		-		-		-		(231,004)		(231,004)
	BALANCES, August 31, 2020		22,892,874	$	2,289	$	3,763,374	$	(4,413,398)	$	(647,735)

 

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

 

MJ HARVEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
			Three months ended
			August 31,		August 31,
			2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(231,004)	$	(281,299)
Adjustments to reconcile net loss to net cash
used in operating activities:
	Depreciation and amortization		18,135		1,260
	Share based compensation to be issued		129,571		152,625
Changes in operating assets and liabilities:
	Accounts receivable		(4,924)		(3,521)
	Vendor deposits		20,000		480
	Inventory		4,370		2,642
	Accounts payable and other current liabilities		(26,959)		1,228
	NET CASH (USED IN) OPERATING ACTIVITIES		(90,811)		(126,585)
CASH FLOWS FROM FINANCING ACTIVITIES
	Proceeds from advances by related parties		66,000		124,959
	NET CASH PROVIDED BY FINANCING ACTIVITIES		66,000		124,959
NET CHANGE IN CASH AND CASH EQUIVALENTS			(24,811)		(1,626)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			32,343		13,592
CASH AND CASH EQUIVALENTS END OF PERIOD		$	7,532	$	11,966
Non-cash financing and investing activities:
	Shares issued for common stock payable	$	-	$	88,250

 

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

 

 

 

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

MJ Harvest, Inc. (the “Company”), develops, acquires, and distributes agricultural and horticultural tools and implements for sale primarily to growers and operators in the hemp and cannabis retail industry. In 2017, the Company acquired a 51% interest in G4 Products LLC, (“G4”) which owns the intellectual property for a manual debudder product line marketed under the Original 420 Brand as the Debudder Bucket Lid and Edge. The Company organized AgroExports LLC (“Agro”) to serve as the domestic and international distribution arm for sales of agricultural and horticultural tools and implements, and also created www.procannagro.com for online sales of its products.

 

In September 2018, the Company changed its name to MJ Harvest, Inc. The articles of incorporation with the State of Nevada were amended and restated to reflect the name change with an effective date of September 18, 2018.

 

On December 7, 2018, the Company acquired the remaining 51% of G4, making it a wholly owned subsidiary. On April 10, 2019, the Company formed AgroExports.CA ULC (“Agro Canada”), a wholly owned Canadian subsidiary in order to facilitate online payments from sales in Canada. Sales in Canada are currently serviced through a fulfillment center in Toronto.

 

On April 8, 2020, the Company finalized acquisition from Elevated Ag Solutions, Inc. (“Elevated”) of several domain names, a non-compete agreement, and customer relationships and began selling a broad range of products, including soils and soil enhancements, through www.weedfarmsupply.com. The Elevated business is operated through Agro. See Note 8 – Subsequent Events.

 

Basis of Presentation and Consolidation

 

The Company’s fiscal year-end is May 31. The unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included. Operating results for the three-month period ended August 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2021.

 

For further information refer to the financial statements and footnotes thereto in the Company’s audited financial statements for the year ended May 31, 2020 in the Form 10-K as filed with the Securities and Exchange Commission.

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries Agro, G4, and Agro Canada. All subsidiaries were wholly owned in the periods presented. All intercompany transactions have been eliminated.

 

Going Concern

 

The Company has an accumulated deficit of $4,413,398 which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.

 

FS-6

 

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, Continued:

 

 

The intangible assets owned by G4, consisting of patents and other intangible assets relating to the Debudder Products, serve as a building block for the Company’s efforts to grow revenues. In the year ended 2020, the Company generated operating revenue from the Debudder Products but the level of revenue from the current product line has not been sufficient to support profitable operations to date.

 

On March 8, 2020, the Company closed on the acquisition of several domain names, including www.weedfarmsupply.com, and entered into distribution agreements for a range of soil and soil additive products. With this acquisition, the Company added soil products to its www.procannagro,com website and assumed operations of the new web site, www.weedfarmsupply.com. The Company distributed the soil products during the current quarter at a loss and has elected to discontinue operations of the soil distribution business in the quarter ending November 30, 2020. See Note 8 – Subsequent Events. The Company continues to seek other products to expand its product lines and build its distribution business, and is also pursuing merger and acquisition opportunities.

 

Additional acquisitions and business opportunities are under consideration, but the Company has not reached agreement with any other acquisition candidates or business opportunities. Management intends to finance operating costs over the next twelve months with advances from directors and/or a private placement or public offering of common stock. The accompanying financial statements do not include any adjustments that might be required should the Company be unable to continue as a going concern.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Share based compensation, impairment of long-lived assets, amortization of intangible assets, and income taxes are subject to estimates. Actual results could differ from those estimates.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform with the current period presentation.

 

New Accounting Standards

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement. The update modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Adoption of this update as of June 1, 2020 did not have a material impact on the Company’s consolidated financial statements.

 

 

FS-7

 

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, Continued:

 

In November 2018, the FASB issued ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 Revenue from Contracts with Customers, which clarifies when transactions between participants in a collaborative arrangement are within the scope of Topic 606. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements. 

 

Nonemployee compensation: In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation, Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 expands the scope of Accounting Standards Codification (ASC) 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company adopted the new standard on June 1, 2019 and the impact of this update had no material effect on its consolidated financial statements and related disclosures.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Revenue Recognition

 

The Company recognizes revenue from the sale of products and services in accordance with Accounting Standards Codification (“ASC”) 606,” Revenue Recognition.” The Company operates as one reportable segment.

 

The Company generates revenue based on sales of products and revenue is recognized when the Company satisfies its performance obligation by shipping products to our customers. Our products consist of agricultural tools and implements, soils, and soil additives used primarily in growing and harvesting hemp and marijuana. Shipments terms are FOB origination, so revenue is recognized when the product is delivered to the shipper by our fulfillment centers or, in the case of drop shipments of distributed products, when the products are shipped from the manufacturer. At the time the products are delivered to the shipper, no other performance obligations remain. Revenue is recognized in an amount that reflects the consideration that is received in exchange for the products shipped.

 

The Company accounts for shipping and handling activities as a fulfillment cost and include fees received for shipping and handling as part of the transaction price. Provision for sales incentives, discounts, and returns and allowances, if applicable, are accounted for as reductions of revenue in the period the related sales are recorded. Sales incentives, discounts and returns and allowances were not material in the periods presented in the accompanying consolidated financial statements. The Company had no warranty costs associated with the sales of its products in the periods presented in the accompanying consolidated statements of operations and no provision for warranty expenses has been included.

 

Inventory

 

Inventory consists of purchased products and are stated at the lower of cost or net realizable value, with cost being determined using the average cost method. Allowances for obsolete inventory are recognized when the inventory is determined to be unsalable through the normal course of business. Inventory consists of our debudder products in 5-gallon bucket lid and edge models. The Company does not presently stock soil products and has no inventory on hand of these products.

 

FS-8

 

 

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, Continued:

 

Intangible Assets

 

Intangible assets are accounted for in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC 350”). Intangible asset amounts represent the acquisition date fair values of identifiable intangible assets acquired. The Company’s finite-lived intangible assets consist of patents, a non-compete agreement, and customer relationships. The Company’s indefinite-lived intangible assets consist of acquired domain names.

 

Finite-lived intangible assets are amortized over their useful lives, which are currently ten years for patents, two years for the non-compete agreement, and ten years for customer relationships. The carrying amounts of finite-lived intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate that the Company may be unable to recover the asset’s carrying amount.

 

When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an intangible asset is determined to have an indefinite life. Indefinite life intangible assets are not amortized but tested for impairment annually or more frequently when indicators of impairment exist.

Determination of acquisition date fair values and intangible asset impairment tests require judgment. Significant judgments required to estimate the fair value of intangible assets include determining the appropriate valuation method, identifying market prices for similar type items, estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates.

 

Net Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, potentially dilutive common stock equivalents, if any, are not considered, as their effect would be anti-dilutive. During the periods ended August 31, 2020 and May 31, 2020, the Company had no common stock equivalents outstanding.

 

Share-Based Payments

 

All transactions in which goods or services are received for the issuance of shares of the Company’s common stock are accounted for based on the fair value of the common stock issued and recognized when the board of directors authorizes the issuance.

 

FS-9

 

 

NOTE 2 – FIXED ASSETS

 

Fixed assets consisted of the following at August 31, 2020 and May 31, 2020:

 

		August 31,				May 31,
Property & Equipment		2020				2020
Equipment - production molds		$	25,109			$	25,109
Less: Accumulated amortization			(10,490	)			(9,230	)
Net Equipment		$	14,619			$	15,879

 

Depreciation expense for the three-months ended August 31, 2020 and 2019 was $1,260 and $1,260, respectively.

 

NOTE 3 - INTANGIBLE ASSETS

 

The Company’s intangible assets consist of both finite and indefinite lived assets. Finite-lived assets include patent rights acquired in the acquisition of G4, a non-compete agreement, and customer relationships acquired in the Elevated transaction. The Company’s sole indefinite lived asset are five domain names acquired in the Elevated transaction. Both acquisitions are described below. At August 31, 2020 and May 31, 2020, intangibles assets are:

 

		August 31,				May 31,
Intangibles		2020				2020
Finite lived intangibles
Patents		$	250,000			$	250,000
Less: Impairment of patents			(100,000	)			(100,000	)
			150,000				150,000
Less: accumulated amortization			(12,916	)			(12,916	)
Patents, net			137,084				137,084
Non-compete agreement			157,000				157,000
Less: Impairment of non-compete			(107,000	)			(107,000	)
			50,000				50,000
Less: accumulated amortization			(6,900	)			—
Non-compete agreement, net			43,100				50,000
Customer relationships			826,000				826,000
Less: Impairment of relationships			(551,000	)			(551,000	)
			275,000				275,000
Less: accumulated amortization			(6,225	)			—
Customer relationships, net			268,775				275,000
Total finite lived intangibles			448,959				462,084
Indefinite lived intangibles
Domain names			25,000				25,000
Total intangibles		$	473,959			$	487,084

 

Amortization of intangibles for each of the next five years is:
2021			$       67,500
2022			$       67,700
2023			$       42,600
2024			$       42,600
2025			$       42,600

  

Amortization expense for the three-months ended August 31, 2020 and 2019 was $16,875 and $-0-, respectively. The patents are amortized over their useful lives of ten years. The intangible non-compete agreement and customer relationships are being amortized over their estimated useful lives of two years and ten years, respectively, commencing June 1, 2020. See Note 8 – Subsequent Events regarding changes in the status of the intangible assets acquired from Elevated.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

At August 31, 2020 and May 31, 2020, the Company had advances from related parties totaling $895,982 and $829,982 respectively. These amounts are classified as long-term liabilities as it is anticipated they will be settled with shares of the Company’s common stock. These amounts consisted of the following:

 

		Additions During the						Related Party
		Year Ended May 31, 2020						Advances at
		Advances		Expenses		Total		May 31, 2020
Related Parties
Patrick Bilton, Chief Executive Officer and Director		$   277,959		$              -		$    277,959		$           726,414
David Tobias, Director		5,000		-		5,000		80,553
Jerry Cornwell, Director		6,500		819		7,319		23,015
Total for related parties		$   289,459		$           819		$    290,278		$           829,982
		Additions During the						Related Party
		Three Months Ended August 31, 2020						Advances at
		Advances		Expenses		Total		August 31, 2020
Related Parties
Patrick Bilton, Chief Executive Officer and Director		$     65,000		$              -		$      65,000		$           791,414
David Tobias, Director		-		-		-		80,553
Jerry Cornwell, Director		1,000		-		1,000		24,015
Brad Herr, Chief Financial Officer		-		-		-		-
Total for related parties		$     66,000		$              -		$      66,000		$           895,982

 

Included in common stock payable at August 31, 2020 and May 31, 2020, are amount due to related parties of $105,000 and $-0-, respectively. These related party amounts at August 31, 2020 consisted of the following: Patrick Bilton, CEO and Director - $70,000; Brad Herr, CFO - $15,000; David Tobias, Director - $10,000; and Jerry Cornwell, Director - $10,000.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

The agreement for the acquisition of G4 included earn-out provisions that provide for the seller to “earn-out” additional compensation dependent upon product sales. The earn-out provisions are applicable to sales of G4’s products for calendar years 2018-2020. The earn-out compensation due is based upon a calculation of sales of G4’s products less the Company’s original investment in G4. To date, no earn out compensation has been earned by the prior owner of G4. In order for earnout compensation to be due in calendar year 2020, total sales of the debudder products would need to exceed $344,000. Total sales of debudder products from January 1, 2020 through August 31, 2020 were approximately $65,000 and are not expected to exceed $175,000 for the calendar year. If any earnout is due based on sales in calendar year 2020, the earnout will be paid in common stock of the Company in accordance with the agreement.

 

The G4 acquisition agreement also contained provisions for additional consideration of $100,000, payable in shares of the Company’s common stock, when the related patent become issued. On October 8, 2019 the patents were issued by the USPTO to G4 and the Company recorded $100,000 as stock payable. The amount was also added to intangible assets – patents (see Note 3). The Company expects to issue shares to satisfy the stock payable balance during the year ending May 31, 2021.

 

FS-11

 

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES, Continued:

 

In connection with the acquisition of the domain names, non-compete and customer relationships referred to as the Elevated acquisition, the Company agreed to adjust one half of the shares of common stock issued to Elevated (700,000) if the trading price of the Company’s common stock drops below an average of $0.25 per share during the thirty days ended January 9, 2021. Pursuant to the acquisition agreement, the initial value of the 700,000 shares was based on $0.25 per share or $175,000. If the average price is below $0.25, the Company will issue an incremental number of shares to bring the same value of the shares originally issued which was $175,000.

 

As part of the Elevated acquisition, the Company agreed to provide Elevated with additional “earn-out” compensation dependent upon gross margin dollars received from Weed Farm Supply product sales in 2020 and 2021. The earn-out compensation due is based upon a sliding scale with a minimum of $100,000 due in 2020 if gross margin dollars equal at least $125,000 and a maximum of $400,000 due if gross margin dollars equal at least $500,000. For 2021, the minimum earn-out compensation will be $125,000 if gross margin dollars equal at least $250,000 and maximum earn-out compensation will be $500,000 if gross margin dollars exceed $1,000,000. To August 31, 2020 in calendar year 2020, gross margin dollars generated from Weed Farm Supply product sales are less than $25,000. Gross margin dollars from Weed Farm Supply product sales are not expected to exceed $50,000 for calendar year 2020. If any earnout is due based on gross margin dollars in calendar years 2020 and 2021, the earn-out will be paid in common stock of the Company in accordance with the agreement. See Note 8 – Subsequent Events regarding changes in the status of the Elevated transaction.

 

NOTE 6 – SHARE CAPITAL

 

In the three-month period ended August 31, 2020, no shares were issued as compensation for services rendered during the period. The Company had an aggregate of $229,571 of common stock payable as of August 31, 2020 which is comprised of the following:

 

	Three months ended August 31, 2020
											Shares Issuable at August 31, 2020
											Issuances Related to Prior Period Activity			Current Period Services			Total
											Shares	Value		Shares	Value		Shares	Value
Related Parties
Patrick Bilton											-	$           -		350,000	$     70,000		350,000	$     70,000
David Tobias											-	-		50,000	10,000		50,000	10,000
Jerry Cornwell											-	-		50,000	10,000		50,000	10,000
Brad Herr											-	-		75,000	15,000		75,000	15,000
Total for related parties											-	$           -		525,000	$   105,000		525,000	$   105,000
Unrelated Parties											400,000	$ 100,000		122,857	$     24,571		522,857	$   129,571
Aggregate Totals											400,000	$ 100,000		647,857	$   129,571		1,047,857	$   234,571

 

In the three-month period ended August 31, 2019, shares were issued and issuable for common stock payable and services in the amounts set forth in the following table.

 

FS-12

 

NOTE 6 – SHARE CAPITAL, Continued:

 

	Three months ended August 31, 2019
	Shares issued in the Period for:										Shares Issuable at August 31, 2019
	Common Stock Payable			Services				Total			Services in Prior Period			Current Period Services			Total
	Shares	Value		Shares	Value			Shares	Value		Shares	Value		Shares	Value		Shares	Value
Related Parties
Patrick Bilton	160,000	$ 40,000		13,333	$   3,333			173,333	$ 43,333		80,000	$   20,000		286,667	$   71,667		366,667	$   91,667
David Tobias	-	-		13,334	3,334			13,334	3,334		-	-		46,666	11,667		46,666	11,667
Jerry Cornwell	-	-		13,334	3,333			13,334	3,333		-	-		46,666	11,666		46,666	11,666
Brad Herr	40,000	10,000		-	-			40,000	10,000		20,000	5,000		60,000	15,000		80,000	20,000
Total for related parties	200,000	$ 50,000		40,001	10,000			240,001	$ 60,000		100,000	$   25,000		439,999	$ 110,000		539,999	$ 135,000
Unrelated Parties	112,999	$ 28,250		-	$         -			112,999	$ 28,250		95,501	$   23,875		130,500	$   32,625		226,001	$   56,500
Aggregate Totals	312,999	$ 78,250		40,001	$ 10,000			353,000	$ 88,250		195,501	$   48,875		570,499	$ 142,625		766,000	$ 191,500

 

 

NOTE 7 – REVENUE

 

The Company product revenue is generated though sales of its debudder products and, since April 2020, soil products offered through the Weed Farm Supply division. The Company’s customers, to which trade credit terms are extended, consist almost exclusively of domestic companies. The following table sets out product sales for the three-months ended August 31, 2020 and 2019.

 

		Three-months ended August 31,
		2020		2019
Debudder Products		$             30,829		$             20,960
Soil Products		75,217		-
Total revenue		$           106,046		$             20,960

  

All sales were domestic except for $550 in the three-months ended August 31, 2020 which were international.

 

Sales of product to significant customers were as follows for the three month periods ended August 31, 2020 and 2019:

 

		Three-months ended August 31,
Customer Concentrations		2020		2019
Debudder sales
Customer A		$             14,030		$                   -
Customer B		14,400		-
Customer C				14,750
Soil sales
Customer D		44,197		-
Totals		$             72,627		$             14,750
% of Total Revenues		53%		70%

FS-13

 

 

 

NOTE 7 – REVENUE, Continued:

 

As of August 31, 2020 and 2019, there were $24,140 and $9,875, respectively, of accounts receivable from the Company’s primary customers.

 

Pursuant to the agreement for the acquisition of the Elevated assets (Note 3), the Company is obligated to pay Elevated a percentage of monthly gross profit earned on the sale of products included in the Elevated asset acquisition. The percentage payable is based on a sliding scale. During the three-month period ended August 31, 2020, a total of $66,242 was recognized as cost of sales under this agreement. During the three-month ended August 21, 2020, no amounts were earned by Elevated pursuant to this agreement. See Note 8 – Subsequent Events.

 

NOTE 8 – SUBSEQUENT EVENTS

 

As previously disclosed, the Company acquired certain assets consisting of domain names, a covenant not to compete, and other intangible assets from Elevated. The acquisition closed on April 8, 2020 and since the closing, the Company has been pursuing sales and distribution of soil products through the acquired website, weedfarmsupply.com. In late September 2020, management reviewed the progress of the weedfarmsupply.com business generated to date and the prospects for future success. Management also reviewed the representations made by Elevated at the time of the acquisition, and the manner in which the transactions were carried out in the Quarters ending May 31, 2020 and August 31, 2020. Based on this review and evaluation, management has concluded that the weedfarmsupply.com business acquired was not what was represented at the time of the acquisition, was not likely to ever operate profitably without significant revisions to operating methods and changes in personnel, and was likely to create significant business questions and concerns should it be continued. Accordingly, management has elected to cease doing the weedfarmsupply.com business and the Company has tendered all of the domain names and intangible assets acquired back to Elevated effective October 15, 2020. The Company and Elevated are currently discussing resolution of the matter, including taking steps to cancel some or all of the shares issued by the Company to Elevated for the acquisition, return by the Company of domains and intangible assets to Elevated, release of the covenant not to compete, assignment of an exclusive distributorship obtained by the Company after the acquisition over to Elevated, and mutual releases of any further obligations by each party to the other. An initial offer of settlement from the Company to Elevated was rejected by Elevated and it is uncertain if a settlement agreement can be reached. The Company is evaluating its options should settlement not be possible. There is a possibility that the Company will recognize a write off or an impairment of the intangible assets, which have a total balance of $336,875 at August 31, 2020, in the three month period ending November 30, 2020.

FS-14