The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Description of the Company
Applied BioSciences Corp. (formerly First Fixtures, Inc. and Stony Hill Corp. or the “Company”) was incorporated in the State of Nevada on February 21, 2014 and established a fiscal year end of March 31. Effective October 24, 2016 the Company changed its name from First Fixtures Inc. to Stony Hill Corp and on March 6, 2018, the Company changed its name from Stony Hill Corp. to Applied BioSciences Corp. The Company is focused on multiple areas of the hemp and CBD industry. Specifically, the Company is focused on select investments, branding, real estate, and partnership opportunities in the recreational, health and wellness, nutraceutical, and media industries.
Basis of presentation – Unaudited Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2019, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2018, which are included in the Company’s Report on Form 10-K for such year filed on June 28, 2018.
Going concern
These condensed statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As reflected in the condensed consolidated financial statements, the Company incurred a net loss of $2,407,059 and used $788,863 of cash in operating activities during the nine months ended December 31, 2018. Further, the Company’s independent auditor in their audit report for fiscal year ended March 31, 2018 expressed substantial doubt about the Company’s ability to continue as a going concern. These and other factors raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and income from operations. During the nine months ended December 31, 2018, the Company sold 37,500 shares of its common stock to accredited investors at a price of $2.00 per share for total proceeds of $75,000 and issued convertible notes for total proceeds of $1,444,500 both in private placements to accredited investors. However, the Company will need and is currently working on obtaining additional funds to operate its business through and beyond the date of this Form 10-Q filing. There is no assurance that such funds will be available or at terms acceptable to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions and covenants on its operations, in the case of debt financing or cause substantial dilution for its stockholders in the case of convertible debt and equity financing.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Applied Products LLC, VitaCBD LLC, an 80% owned entity, both Washington limited liability companies and SHL Management LLC, a Nevada limited liability company. Intercompany transactions and balances have been eliminated in consolidation. Management evaluates its investments on an individual basis for purposes of determining whether or not consolidation is appropriate.
Use of Estimates and Assumptions
Preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain 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 period. Among other things, management estimates include the collectability of its accounts receivable, recoverability of inventory, assumptions made in determining impairment of investments and intangible assets, accruals for potential liabilities, and realization of deferred tax assets. These estimates generally involve complex issues and require judgments, involve analysis of historical information and the prediction of future trends, and are subject to change from period to period. Actual amounts could differ significantly from these estimates.
Revenue Recognition
The Company adopted the guidance of ASC 606 on April 1, 2018, Revenue from Contracts with Customers (Topic 606), (ASC 606). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.
The implementation of ASC 606 had no impact on the condensed consolidated financial statements and no cumulative effect adjustment was recognized.
Advertising
The Company expenses advertising costs as incurred. Advertising expense for the three and nine months ended December 31, 2018 amounted to $100,730 and $556,167, respectively, and $165,315 and $229,674 for the three and nine months ended December 31, 2017 and are included in "Sales and Marketing expenses" in the Condensed Consolidated Statements of Operations.
Earnings (Loss) per Share
The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Shares of common stock to be issued are included in weighted average shares calculation from the date of grant. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items.
Investments
Through March 31, 2018, the Company used either the equity method or the cost method of accounting. The Company used the equity method for unconsolidated equity investments in which the Company was considered to have significant influence over the operations of the investee. The Company used the cost method for all other investments. Under the cost method, there is no change to the cost basis unless there is an other-than-temporary decline in value or dividends are received. If the decline is determined to be other-than-temporary, the Company writes down the cost basis of the investment to a new cost basis that represents realizable value.
On April 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Among other things, this new guidance requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. As such, the Company measures its equity investments at their fair value at end of each reporting period.
Investments accounted for under the equity method or cost method of accounting above are included in the caption "Equity investments" on the Condensed Consolidated Balance Sheets.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.
In June 2018, the FASB issued ASU 2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”
The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that the ASU will have on our financial position, results of operations, and disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 3 – INVESTMENT
Equity investments relate to purchases of stock in certain entities with ownership percentages of less than 5%. As of March 31, 2018, these investments were recorded at their cost basis. On April 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, and as such, these investments were recorded at their market value as of December 31, 2018. The investments consist of the following:
|
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
|
(A) Cannabi-Tech Ltd. (Gemma)
|
|
$
|
68,537
|
|
|
$
|
68,237
|
|
|
(B) Hightimes Holdings Corp.
|
|
|
654,763
|
|
|
|
250,000
|
|
|
(C) Precision Cultivation Systems, LLC
|
|
|
50,000
|
|
|
|
50,000
|
|
|
(D) Bailey Venture Partners XII LLC (JUUL)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
$
|
873,300
|
|
|
$
|
468,537
|
|
(A) In November 2016, the Company purchased 29,571 shares of Preferred A stock of Cannabi-Tech Ltd. (“Cannabi”), at a price of $1.69086 per share for total investment of $50,000. In October 2017, the Company purchased 7,309 shares of Preferred A-1 stock of Cannabi at a price of $2.536 per share for total investment of $18,537. As of March 31, 2018, total investment amounted to $68,537, which accounts for less than 5% in Cannabi. Cannabi is a private company incorporated in the State of Israel that provides lab-grade medical cannabis quality control testing systems used to test the quality of medical marijuana flowers. The fair value of the investment at December 31, 2018 approximated its cost basis.
(B) In January 2017, the Company entered in to an agreement to purchase 59,524 shares of Class A common stock at a price of $4.20 per share for total investment of $250,000, which accounts for less than 5% investment in Hightimes Holdings Corp. (“Hightimes”). Hightimes owns Hight Times Magazine and hosts festivals, events and competitions including the High Times Cannabis Cup and multiple e-commerce properties, including HighTimes.com, CannabisCup.com and 420.com. As of September 30, 2018 and December 31, 2018, the Company was able to obtain observable evidence that the investment had a market value of $11.00 per share, or an aggregate value of $654,763. As such, the Company recorded an unrecognized gain from the change in market value of $404,763 during the nine months ended December 31, 2018.
(C) In June 2017, the Company entered in a Subscription Agreement to purchase 0.5% interest in Precision Cultivation Systems, LLC (“Precision”), a Delaware limited liability company, for a purchase price of $50,000. Precision is developing a growth system that capitalizes on a patent-pending cultivation method that utilizes proprietary irrigation and root zone conditioning. As part of the Subscription Agreement, $42,500 of the investment is subject to repayment on a pro-rata basis with other investors who have entered into similar Subscription Agreements. Amounts subject to repayment are solely at the discretion of Precision. The fair value of the investment at December 31, 2018 approximated its cost basis.
(D) In January 2018, the Company paid $100,000 for the purchase of a Membership Interest in Bailey Venture Partners XII LLC (“Bailey”) representing less than 5% interest in Bailey. Along with other funds received from third-party investors, Bailey plans to invest funds received in various strategic investments. The Company recorded this investment at cost and will recognize dividends, if any, when received, and will recognize gains or loss upon either selling the securities or recognize a loss prior to selling the securities if there is evidence that the fair market value of the investment has declined to below the recorded historical cost. The fair value of the investment at December 31, 2018 approximated its cost basis.
In February 2019, the Company received a distribution of approximately $186,000 from Bailey’s investment in JUUL Labs, Inc.
As the Company does not participate in the management of these companies nor has the ability to exercise significant influence over these companies, the Company recorded these investments at cost, and as of April 1, 2018, will adjust the cost basis to market at the end of each reporting period. Dividends, if any, will be recognized when received.
During the three months ended December 31, 2018, the Company paid $550,000 as a deposit towards the acquisition purchase price of Trace Analytics, Inc. (see Note 7), which was reflected as deposit on the acquisition in the accompanying condensed consolidated balance sheet as of the period then ended.
NOTE 4 – CONVERTIBLE NOTE
During the nine months ended December 31, 2018, the Company issued separate Convertible Promissory Notes (“Notes”) having a total principal amount of $1,444,500 to certain accredited holders. All outstanding principal together with interest on these Notes was due and payable on December 31, 2018 and accrued interest ranging from 1% to 8% per month, and 8% per annum. The note holders, at their sole discretion and election, were allowed to convert any part or all of the then outstanding principal and/or interest on these Notes into shares of common stock of the Company at a fixed price per share of $1.00. On December 31, 2018, all holders of the Notes converted the principal portion of their Notes to 1,444,500 shares of the Company’s common stock. The shares had not been issued as of December 31, 2018 and were reflected in “Common stock to be issued” in the condensed consolidated statement of stockholders’ equity during the period then ended.
A portion of the Notes with principal amount aggregating $1,019,500 were issued when the market price of the Company’s common stock was in excess of the $1.00 per share conversion price creating beneficial conversion feature associated with these Notes with an aggregate amount of $437,805 upon issuance dates. As such, the Company recorded $437,805 in additional paid-in capital and debt discount representing the intrinsic value of the beneficial conversion feature at the date of the borrowing against the Notes. The value of the beneficial conversion feature was fully amortized upon conversion of all of the outstanding Notes and reflected as interest expense for the nine months ended December 31, 2018.
NOTE 5 – RELATED PARTY TRANSACTIONS
In view of the Company’s limited operations and resources, none of the Company’s directors and/or officers received any compensation from the Company during the nine months ended December 31, 2018 and 2017.
NOTE 6 – EQUITY
Common Stock to be Issued
On February 23, 2017, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with mCig, Inc., a Nevada corporation (“mCig”) consisting of the issuance of an aggregate of 350,000 shares of common stock. Of the 350,000 shares of common stock consideration, 150,000 shares or $426,000 were not issued as of March 31, 2018 and were included in “Common stock to be issued” in the accompanying condensed consolidated statement of stockholders’ equity. During the nine months ended December 31, 2018, the Company issued 50,000 shares of common stock valued at $100,000 which was previously reflected as “Common stock to be issued” in the condensed consolidated statement of stockholders’ equity.
During the nine months ended December 31, 2018, the Company sold 37,500 shares of common stock, of which 25,000 shares had not been issued as of December 31, 2018 and is reflected in “Common stock to be issued” in the condensed consolidated statement of stockholders’ equity. The shares were sold at a price of $2.00 per share for total proceeds of $75,000 pursuant to a private placement Subscription Agreement with accredited investors. The Subscription Agreement offered up to one million shares of the Company’s common stock at a price per share of $2.00 per share. The Company made this offering solely to accredited investors, as defined under Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended.
Establishment of Advisory Board and Adoption of Charter
On April 28, 2017, the Company established an advisory board (the “Advisory Board”) and approved and adopted a charter (the “Advisory Board Charter”) to govern the Advisory Board. The Advisory Board shall be comprised of one or more directors (“Advisors”), and up to nine independent, non-Board, non-employee members, all of whom shall be appointed and subject to removal by the Board of Directors at any time.
During the nine months ended December 31, 2018, the Company appointed an advisor to the Advisory Board, which entitled him to an annual consulting fee 25,000 shares of the Company’s stock for a term of 6 months, with total fair value of $51,000.
Shares issued to consultants for services
During the nine months ended December 31, 2018, the Company granted an aggregate of 414,815 shares of its common stock to seven (7) consultants as payment for services rendered to the Company and recorded expense of $598,302 based on the fair value of the Company’s common stock at grant dates. Of the 414,815 shares granted, 29,815 shares valued at $61,852 had not been issued as of December 31, 2018 and were reflected in “Common stock to be issued” in the condensed consolidated statement of stockholders’ equity during the period then ended.
Shares issued to officers and directors for compensation
During the nine months ended December 31, 2018, the Company granted an aggregate of 625,000 shares of its common stock to one (1) board member and (2) officers of the Company as payment for services rendered to the Company and recorded expense of $756,250 based on the fair value of the Company’s common stock at grant dates.
NOTE 7 – SUBSEQUENT EVENTS
Acquisition
On January 1, 2019, the Company entered into a Common Stock Purchase Agreement and closed on a purchase of 520,410 shares of common stock of Trace Analytics, Inc., a Washington corporation (“Trace Analytics”), at a purchase price of $2.40 per share, for an aggregate purchase price of $1,250,000, of which $750,000 was payable in cash and $500,000 of which will be paid in shares of common stock of the Company. During the three months ended December, 31, 2018, the Company paid $550,000 towards the acquisition purchase price of Trace Analytics, and which was reflected as deposit on the acquisition of Trace Analytics in the accompanying condensed consolidated balance sheet as of the period then ended. Immediately following the purchase, the Company holds 51% of the issued and outstanding shares of common stock of Trace Analytics. The Company is in the process of analizing the accounting effects of this transaction and historical financial statements of the acquired company and pro forma effects of the acquisition will be provided in a Form 8K/A to be subsequently filed.
On February 6, 2019, the Company issued an aggregate of 250,000 shares of common stock of the Company as payment for the shares of common stock payable to Trace Analytics. 125,000 of such shares were issued directly to Jason Zitzer, and 125,000 of such shares were issued directly to Gordon Fargas, both of whom are affiliates of Trace Analytics.
Trace Analytics is a cannabis testing laboratory and service company located in Spokane, Washington. Some of the services provided by Trace Analytics are:
|
|
·
|
502 compulsory testing for all types of cannabis products;
|
|
|
·
|
Industrial hemp CBD product testing;
|
|
|
·
|
Extensive terpene, residual solvents, and cannabinoid profiles;
|
|
|
·
|
Aflatoxin/Mycotoxin screening;
|
|
|
·
|
Experienced grow consultation, evaluation and related services; and
|
|
|
·
|
Edibles work up, process evaluation and dose distribution guidance.
|
In connection with the Common Stock Purchase Agreement, the Company also entered into a Stockholders’ Agreement (the “Stockholders’ Agreement”), dated January 1, 2019, with Trace Analytics, Jason Zitzer, and Gordon Fargas. Mr. Zitzer and Mr. Fargas are affiliates of Trace Analytics and the only other stockholders of Trace Analytics, in addition to the Company. The Stockholders’ Agreement contains certain transfer restrictions and a right of first refusal which provides that if any party to the Stockholder’s Agreement proposes to transfer its Trace Analytics shares, Trace Analytics shall for a period of 30 days, have a first right of refusal to purchase such shares, followed by a first right of refusal for the remaining shareholders.
In connection with the Common Stock Purchase Agreement, the Company also entered into a Voting Agreement (the “Voting Agreement”), dated January 1, 2019, with Trace Analytics, Jason Zitzer, and Gordon Fargas. The Voting Agreement provides that the parties of the Voting Agreement shall vote their shares of common stock of Trace Analytics to appoint the three of the five members of the board of directors of Trace Analytics as designated by the Company, one member of the board of directors as designated by Mr. Ziter, and one member of the board of directors as designated by Mr. Fargas
Distribution
In February 2019, the Company received a distribution of approximately $186,000 from Bailey's investment in JUUL Labs, Inc.
