MJ Harvest, Inc. - Quarter Report: 2019 November (Form 10-Q)

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 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 November 30, 2019 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 November 30, 2019, the board of directors issued 896,000 unregistered common shares to six unrelated persons and four related parties that were officers and/or directors in exchange for services rendered to the Company.  The shares were valued and issued at $0.25 per share.  The issuance of the shares was 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 were persons closely associated with the Company and the issuance of the shares did 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

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:  January 21, 2020

MJ Harvest, Inc.

Contents

   EM ENERGY, INC.

   CONSOLIDATED BALANCE SHEETS

   EM ENERGY, INC.

   STATEMENTS OF OPERATIONS

   (unaudited)

 EM ENERGY, INC.

 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

 FOR THE THREE MONTHS ENDED AUGUST 31, 2019 AND 2018

   EM ENERGY, INC.

   STATEMENTS OF CASH FLOWS

   (unaudited)

NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

The Company develops, acquires, and distributes agricultural and horticultural tools and implements for sale primarily to growers and operators in the hemp and cannabis space. In 2017, the Company acquired a 51% interest in G4 Products LLC, 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 also organized AgroExports LLC to serve as the international distribution arm for sales of agricultural and horticultural tools and implements, and created www.procannagro.com for online sales of its products.

In September 2018, the Company filed a Notification of Change with FINRA and OTC Markets to obtain approval of a name change to MJ Harvest, Inc. and a change of trading symbol to MJHI. Following approval of the change by FINRA and OTC Markets, the Company filed amended and restated articles of incorporation with the State of Nevada 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 Products LLC, 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 in the Canadian Market. Sales in Canada are currently serviced through a fulfillment center in Toronto.

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 and six-month periods ended November 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2020.

For further information refer to the financial statements and footnotes thereto in the Form S-1 filed with the SEC on October 2, 2019.

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries AgroExports LLC (“Agro”), G4 Products LLC (“G4”), and AgroExports.CA ULC. G4 was a 51% owned subsidiary in 2018 and the Statements of Operations for the three and six-month periods ended November 30, 2018 include the net loss of the non-controlling interest in G4, represented by the non-controlling interest’s proportionate share of its ownership in G4. All intercompany transactions have been eliminated. 

Going Concern

The Company has an accumulated deficit of $2,815,483 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.

In the year ended May 31, 2018, the Company acquired a 51% interest in G4, a controlled subsidiary that owned certain intangible assets and in the year ended May 31, 2019, the Company acquired the remaining 49% of G4 and thereby became the sole owner of the intangible assets. The intangible assets serve as a building block for the Company’s efforts to grow revenues. In the year ended 2019, the Company began generating operating revenue but the level of revenue from the current product line is expected to not be sufficient to support profitable operations in the fiscal year ending May 31, 2020. Additional acquisitions and business opportunities are under consideration but the Company has not reached agreement with any 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

Leases: In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases longer than one year. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted the new standard on June 1, 2019 and as of November 30, 2019, the Company had no leases and the update did not have a material effect on the 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.

Fair Value Measurements

GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).

Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable. The Company has no assets or liabilities subject to fair value measurement on a recurring basis.

Financial Instruments

The carrying amounts of cash and advances from related parties reported on the balance sheets approximate their fair value as of November 30, 2019 and May 31, 2019.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less when acquired to be cash equivalents.

Revenue Recognition

Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company recognizes revenue from the sale of products and services in accordance with ASC 606,”Revenue Recognition”. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

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. 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.

Machinery & Equipment

Machinery and equipment consists of molds used in the manufacturing process and are recorded at cost. Maintenance, repairs, and minor replacements are expensed as incurred. Gains or losses on disposition or retirement of property and equipment are recognized in operating expenses. Depreciation is computed using the straight-line method over the estimated useful lives of the molds which is five years.

Accounting for Acquisitions

We recognize and measure identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations. The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the assets acquired and liabilities assumed based on their respective fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill. Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues; future expected operating expenses; cost of capital; assumed attrition rates; and discount rates.

Intangible Assets

We account for intangible assets in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC 350”). ASC 350 requires that intangible assets with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Application of the intangible asset impairment test requires judgment, including the identification of intangible assets and determining their fair value. Significant judgments required to estimate the fair value of intangible assets include estimating future cash flows, determining appropriate discount rates and other assumptions. If the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based on a fair value discounted cash flow model. 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 and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.

Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense is included as a component of cost of product revenue. For the three and six months ended November 30, 2019, the Company has recognized $1,666 in amortization expense for its intangible assets. The Company’s intangible assets consist primarily of two patents which issued on October 8, 2019. The Patents expire on October 8, 2034 and the Company is amortizing these intangible assets over 180 months commencing in October 2019.

Income taxes

The Company utilizes the liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Additionally, deferred tax assets are evaluated, and a valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. There can be no assurance that the Company’s future operations will produce sufficient earnings so that the deferred tax asset can be fully utilized. The Company currently maintains a full valuation allowance against net deferred tax assets.

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 November 30, 2019 and 2018, the Company had no common stock equivalents outstanding.

Share-Based Payments

The fair value of common shares is determined by the management by considering a number of objective and subjective factors including data from other comparable companies, sales of common shares to unrelated third parties, the fair value of services provided for shares, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. The fair value of the underlying common shares will be determined by management until such time as the shares are listed on an established stock exchange, national market system or other quotation system and the trading volume is sufficient to support a determination that an active market exists. The Company recognizes the fair value of goods or services received in share-based payment transactions based upon the fair value of the goods or services received when the fair value of the goods and services is a more reliable measurement of fair value than the equity instruments issued.

NOTE 2 –ACQUISITIONS OF G4

On November 17, 2017, the Company acquired a controlling 51% interest in G4 Products, LLC (“G4”), a newly formed Nevada limited liability company that owned a provisional patent on a device used in stripping buds from plants (the Product) from Original Ventures, Inc. (“Original Ventures”). On December 7, 2018, the Company acquired the remaining 49% interest in G4 from Original Ventures.

At the time of the second acquisition of the interest in G4, the assets of G4 consisted primarily of a provisional U.S. Patent application and certain other international patent applications. Two of the patents were approved and issued on October 8, 2019.

The acquisition agreement for the initial purchase of 51% of G4 and for the follow-on acquisition of the remaining 49% interest in G4 included certain earnout provisions that are described in Note 4 – Commitments and Contingencies.

NOTE 3 – RELATED PARTY TRANSACTIONS

At November 30, 2019, and May 31, 2019, the Company had advances from related parties totaling $705,663 and $539,704, 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:

·         As of November 30, 2019 and May 31, 2019, the Company owed Mr. Jerry Cornwell, a director, $15,696.

·         As of November 30, 2019 and May 31, 2019, the Company owed David Tobias, a majority shareholder and director, $75,553.

·         As of November 30, 2019 and May 31, 2019, Patrick Bilton, a director and the Company’s Chief Executive Officer, was owed $566,959 and $401,000, respectively, for advances to the Company for operating capital and an additional $47,455 at November 30, 2019 and May 31, 2019, for expenses paid on behalf of the Company. Collectively, Mr. Bilton is owed $614,414 and $448,455, respectively, as of November 30, 2019 and May 31, 2019.

The Company also owed Mr. Cornwell $818 for expenses he paid on behalf of the Company in prior periods. This amount is classified as an account payable at November 30, 2019, and May 31, 2019.

At November 30, 2019 and May 31, 2019, the Company had common stock payable totaling $218,500 and $127,125, respectively. Of these amounts, $90,000 and $75,000, respectively, were payable to related parties. These amounts consisted of the following:

·         The Company had common stock payable to Mr. Cornwell of $5,000 and -0- at November 30, 2019 and May 31, 2019, respectively, for services as a director.

·         The Company also had common stock payable to Mr. Tobias of $5,000 and -0- at November 30, 2019 and May 31, 2019, respectively, for services as a director.

·         The Company also had common stock payable to Mr. Bilton of $65,000 and $60,000 at November 30, 2019 and May 31, 2019, respectively, for services as an officer and director.

·         As of November 30, 2019 and May 31, 2019, the Company had common stock payable to Nexit, Inc, an entity solely owned by Brad Herr, Chief Financial Officer, of $15,000 and $15,000, respectively, for services as an officer of the Company.

NOTE 4 – COMMITMENTS AND CONTINGENCIES

The agreement for the acquisition of G4 from Original Ventures includes earn-out provisions that provide for Original Ventures to “earn-out” additional compensation dependent upon product sales. As of November 30, 2019, and May 31, 2019, no earnout compensation was owed by G4 to Original Ventures. The earn-out provision is applicable to sales of G4’s products for calendar years 2018-2020. The earn-out compensation due Original Ventures is based upon a calculation of sales of G4’s products less the Company’s original investment in G4. If any earnout is due to Original Ventures based on sales in calendar years 2019 and 2020, the earnout will be paid in common stock of the Company in accordance with the agreement.

In addition, an earn-out compensation payment of $100,000, payable in shares of the Company’s common stock, became due to Original Ventures upon the issuance of the non-provisional patent to G4, which occurred on October 8, 2019. This amount is accrued as of November 30, 2019 and is classified as common stock payable. The $100,000 was capitalized as intangible assets at the time of the accrual and immediately impaired based on the impairment analysis performed in the fiscal year ended May 31, 2019.

NOTE 5 – SHARE CAPITAL

The authorized capital of the Company consists of 50,000,000 common shares with a par value of $0.0001 per share, and 5,000,000 preferred shares with a par value of $0.0001 per share.

As of November 30, 2019 and May 31, 2018, there were 20,007,739 and 18,758,739, respectively, of shares of common stock outstanding and there were no preferred shares issued and outstanding.

In the three and six-month periods ended November 30, 2019, shares of common stock were issued to related and non-related parties for services performed. The following table breaks out the issuances by type of transaction and by related and unrelated parties: 

Common stock Payable

The Company had an aggregate of $218,500 of common stock payable as of November 30, 2019. Of this amount, $100,000 relates to amounts due to Original Ventures, Inc upon issuance of patents, and $118,500 was for services rendered in the current period. This will result in the issuance of 874,000 shares of common stock during the year ending May 31, 2020. Of the total, $90,000 was payable to related parties. See Note 3.

In the three and six-month periods ended November 30, 2018 shares of common stock were issued to related and non-related parties for services performed in the year ended May 31, 2019. The following table breaks out the issuances by related and unrelated parties: