NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS DESCRIPTION
EPHS Holdings, Inc. (the "Company") was incorporated in the State of Nevada on January 28, 1999. The Company's original plan was to build and use technology to mine gold, platinum, precious metals and rare earth metals in situ from seawater and from slurries created from land based ores. The Company was originally known as Quantum Induction Technology, Inc. On November 30, 2011 the Company changed its name to Quantumbit, Inc. and continued to operate under this name until September 25, 2013 when the Company's name was changed to Sertant, Inc. The Company ceased operations in January 2015.
In February 2017, one of the Company's shareholder sued the Company for breach of fiduciary duties of care, loyalty and good faith to the Company's shareholders. In July 2017, the court appointed an exclusive receiver over the Company. In September 2017, the Company entered into an agreement with the shareholder and the receiver to resolve the legal claim by issuing 4,750,000 shares of common stock to the shareholder. In January 2018, the Company's name was changed to EPHS Holdings, Inc.
On December 28, 2017, the Company issued to EPHS, Inc., a Florida corporation, 75,000,000 shares of the Company's common stock for $110,000 which represented approximately 62% of the Company's issued and outstanding shares of common stock.
On February 27, 2018, pursuant to the terms of a Share Exchange Agreement, the Company acquired all of the issued and outstanding shares of common stock of Emerald Plants Health Source, Inc. ("Emerald"), all of Emerald's outstanding debt to shareholders was forgiven, and Emerald became the wholly owned subsidiary of the Company in a reverse merger (the "Merger"). Pursuant to the Merger, all of the issued and outstanding shares of Emerald common stock were converted, at an exchange ratio of 200,000-for-1, into an aggregate of 20,000,000 shares of the Company's common stock, resulting in Emerald becoming a wholly owned subsidiary of the Company. The accompanying financial statements' share information has been retroactively adjusted to reflect the exchange ratio in the Merger.
Under generally accepted accounting principles in the United States ("US GAAP"), because the combined entity will
be dependent on Emerald's senior management, the merger was accounted for as a recapitalization effected by a
share exchange, wherein Emerald is considered the acquirer for accounting and financial reporting purposes. On the Merger dated, the
assets and liabilities of Emerald have been brought forward at their book value and consolidated with EPHS Holdings, Inc.s assets, which comprised of cash and cash equivalents of $58,075 and prepaid expenses and current assets of $5,000 and liabilities which comprises accounts payable of $3,576 (see Note 2 Principles of Consolidation below). No goodwill has been
recognized. Accordingly, the assets and liabilities and the historical operations that are reflected in the consolidated
financial statements are those of Emerald and are recorded at the historical cost basis of Emerald.
On November 6, 2018, the Company executed a Share Exchange Agreement with Merritt Valley Cannabis Corp. (MVC) (the MVC Transaction) and its shareholders (the MVC Shareholders) whereby MVC Shareholders agreed to exchange all of their respective shares in MVC in consideration for 8,100,000 shares of EPHS common stock, with a par value of $0.001 per share (the MVC Transaction). In furtherance of the MVC Transaction, on January 4, 2019, the Company completed the purchase of lands located in Merritt, British Columbia, Canada with the purpose of the cultivation of cannabis. On January 11, 2019, the Company and MVC completed the MVC Transaction.
In January 2017, the FASB issued ASU 2017-01, which changes the definition of a business. The new guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If that threshold is met, the set of assets and activities is not a business. On the acquisition date, MVC only had petty cash in the amount of $14 and land deposit for land purchase in the amount of $410,788. MVC did not commence any operations at the acquisition date. Based on above, the significant asset of MVC on the acquisition date was the land deposit, which was regarded as a single identifiable asset. Therefore, this acquisition was treated as an asset acquisition under ASC 805-50 instead of a business acquisition.
The Company's fiscal year end is December 31.
5
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with US GAAP and pursuant to the accounting and disclosure rules and regulations of the SEC. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company's policy is to present bank balances under cash and cash equivalents, including bank overdrafts when balances fluctuate frequently from being positive to overdrawn and term deposits with a maturity period of three months or less from the date of acquisition. Term deposits that the Company cannot use for current transactions because they are pledged as security are excluded from cash and cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Major additions and improvements are capitalized. Depreciation of furniture, vehicles and equipment is calculated using the diminishing balance method at a rate of 20% per year, and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term (which is 5 years). The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as a gain or loss on sale of equipment.
Foreign Exchange Translation
The functional currency of the subsidiary is the Canadian Dollar ("CAD"). For financial statement purposes, the reporting currency is the United States Dollar ("USD").
For financial reporting purposes, the financial statements are translated into the Company's reporting currency, USD, using the period-end rates of exchange for assets and liabilities, equity is translated at historical exchange rates and average rates of exchange (for the period) are used for revenues and expenses and cash flows.
Adjustments resulting from the translation, if any, are included in accumulated other comprehensive loss in stockholder's equity (deficit).
6
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
Impairment of Long-lived Assets
The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with ASC Topic 360, "Property, Plant and Equipment" ("ASC 360"). The test for impairment is required to be performed by management at least annually. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
The Company has adopted the provisions of ASC 740-10-05 "Accounting for Uncertainty in Income Taxes." The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Sales Tax Receivable
The Company is charged approximately 12% sales taxes on all taxable purchases. The rates are a blend of Federal (Canada) of 5% and Provincial (Quebec) of 7%. The Company is reimbursed for all Federal sales taxes paid to suppliers. The Company has not charged sales taxes on product sold as it has no revenues.
Net Loss Per Share, Basic and Diluted
Basic loss per share is calculated by dividing our net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing our net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. There are no such common share equivalents outstanding as of March 31, 2019.
Related Party Transactions
The Company follows the guidance in ASC 850. The Company discloses related transactions and certain common control relationships. Transactions between related parties are related party transactions even though they may not be given accounting recognition.
Subsequent Event
The Company follows the guidance in SFAS 165 (ASC 855-10-50) for the disclosure of subsequent events. The Company evaluates subsequent events from the date of the balance sheet through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them with the SEC on the EDGAR system.
7
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
Leasing
Effective January 1, 2019 the Company adopted the Financial Accounting Standards Board's ("FASB") Accounting Standards Update No. 2016-02, Leases (Topic 842) which superseded previous lease guidance ASC 840, Leases. Topic 842 is a new lease model that requires a company to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet. The Company adopted the standard using the modified retrospective approach that does not require the restatement of prior year financial statements. The adoption of Topic 842 did not have a material impact on the Companys consolidated income statement or consolidated cash flow statement. The adoption of Topic 842 resulted in the recognition of ROU assets of CAD 173,343 (approximately $129,810 based on the exchange rate of 0.748861 as of March
31, 2019) and corresponding lease liabilities of CAD 173,343 (approximately $129,810 based on the exchange rate of 0.748861 as of March 31, 2019) as of January 1, 2019 for leases classified as operating leases.
The Company adopted the package of practical expedients and transition provisions available for expired or existing contracts, which allowed the Company carryforward its historical assessments of 1) whether contracts are or contain leases, 2) lease classification and 3) initial direct costs. Additionally, for real estate leases, the Company adopted the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. Further, the Company elected the short-term lease exception policy, permitting it exclude the recognition requirements for leases with terms of 12 months or less. See Note 8 for additional information about leases.
Stock-Based Compensation
Share-based awards granted to non-employees are accounted for in accordance with ASC 505-50 Equity-Based Payments
to Non-Employee. All transactions in which services are received in exchange for share-based awards are accounted for
based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably
measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date the
services are completed. The Group re-measure the awards using the then-current fair value at each reporting date until the
measurement date, generally when the services are completed, and awards are vested and attribute the changes in those fair
values over the service period by the straight-line method.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, sales tax receivable, and accounts payable approximate their fair values at March 31, 2019 and December 31, 2018, respectively, principally due to the short-term nature of the above listed items.
Recent Accounting Pronouncements
The Company has reviewed all other FASB issued ASU accounting pronouncements and interpretations thereof that have effective dates during the period reported and in future periods. The Company has carefully considered the new pronouncements that alter the previous US GAAP and do not believe that any new or modified principles will have a material impact on the Company's reported financial position or operations in the near term.
During June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") to simplify the accounting for share- based payments to nonemployees by aligning it with the accounting for share-based payments to employees. ASU No. 2018-07 is effective for the Company for fiscal years beginning after December 31, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company has adopted ASU No. 2018-07, and the adoption of ASU No. 2018-07 did not have a material impact on its financial statements.
8
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
In August 2016, the FASB issued an accounting standard update addressing the classification and presentation of eight specific cash flow issues that currently result in diverse practices. The amendments provide guidance in the presentation and classification of certain cash receipts and cash payments in the statement of cash flows including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. This pronouncement is effective for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, for nonpublic entities. The amendments in this ASU should be applied using a retrospective approach. The Company has carefully considered the new pronouncement and does not believe it has an impact on its financial statements and related disclosures.
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate continuation of the Company as a going concern. However, the Company has no revenues. The Company currently has losses and has not completed its efforts to establish a stabilized source of revenue sufficient to cover operating costs over an extended period of time. Therefore, there is substantial doubt about the Company's ability to continue as a going concern. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund operating expenses. The Company intends to position itself so that it will be able to raise additional funds through the capital markets. In spite of management's efforts, there are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.
NOTE 4 - PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Classification
|
|
2019
|
|
|
2018
|
|
Furniture
|
|
$
|
178,128
|
|
|
$
|
170,341
|
|
Leasehold improvements
|
|
|
292,355
|
|
|
|
203,387
|
|
Total cost of property and equipment
|
|
|
470,483
|
|
|
|
373,728
|
|
Accumulated depreciation
|
|
|
(238,666
|
)
|
|
|
(220,586
|
)
|
Property and equipment, net
|
|
$
|
231,817
|
|
|
$
|
153,142
|
|
The Company had Property and Equipment acquisitions of $88,954 for the three months ended March 31, 2019.
NOTE 5 LAND
On February 7, 2019, the Company, through its wholly owned subsidiary MVC, completed the purchase of lands that are located in Merritt, British Columbia, Canada with the purpose of the cultivation of cannabis. The total consideration was $2,583,022. The land is an indefinite long-lived asset that is assessed for impairment on a periodic basis.
NOTE 6 RELATED PARTY TRANSACTIONS
Amounts due to related parties as of March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Paolo Gervasi
|
|
Shareholder and employee of the Company
|
|
$
|
2,111
|
|
|
$
|
2,068
|
|
Calogero Caruso
|
|
Shareholder and employee of the Company
|
|
|
4,358
|
|
|
|
2,068
|
|
Chris Thompson
|
|
Shareholder and founder of MVC
|
|
|
101,096
|
|
|
|
|
|
Kyle McDiarmid
|
|
Shareholder and founder of MVC
|
|
|
18,884
|
|
|
|
|
|
Stevan Perry
|
|
President of the Company
|
|
|
84,433
|
|
|
|
|
|
|
|
|
|
$
|
210,882
|
|
|
$
|
4,136
|
|
9
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
On February 27, 2018, all loans by Paolo Gervasi and Calogero Caruso were forgiven in exchange for shares of the Company, pursuant to the terms and conditions of the Share Exchange Agreement. During the year ended December 31, 2018, Paolo Gervasi and Calogero Caruso further loaned the Company $2,111 and $4,358, respectively, for working capital purposes. These notes payable were unsecured, non-interest bearing and due on demand.
On January 28, 2019, the Company signed a promissory note with Kyle McDiarmid in the principal amount of $18,884 for land purchase. This note bears no interest and matures on May 31, 2019. As of March 31, 2019, the outstanding principal balance of the note was $18,884.
On January 28, 2019, the Company signed a promissory note with Sean Piekaar in the principal amount of $18,884 for land purchase. This note bears no interest and matures on May 31, 2019. The note was paid in full during the three month ended March 31, 2019.
On January 29, 2019, the Company signed a promissory note with Stevan Perry in the principal amount of $84,433 for land purchase. This note bears monthly interest at 7% over the term from the issuance date through maturity date on April 30, 2019. As of March 31, 2019, the outstanding principal balance of the note was $84,433, with an accrued interest of $11,821. Interest expense was $11,821 for the three months ended March 31, 2019.
On March 6, 2019, the Company signed a promissory note with Chris Thompson in the principal amount of $101,096 for working capital purposes. This note bears interest at 18% per annum over the term from the issuance date through maturity date on September 30, 2019. As of March 31, 2019, the outstanding principal balance of the note was $101,096, with an accrued interest of $1,170. Interest expense was $1,176 for the three months ended March 31, 2019.
NOTE 7 MORTGAGE PAYABLE
On January 8, 2019, the Company entered into a mortgage with Redabe Holdings Inc. for $1,254,342 for land purchase. The mortgage bears interest at 5% per annum with interest only payments commencing on February 1, 2019 until February 1, 2020. Starting March 1, 2020, the Company is obligated to make monthly payment to Redabe Holdings in the amount of approximately $8,278 until January 1, 2024. The loan matures on February 1, 2024, and any remaining principal and interest at the maturity of the loan are due in full.
As of March 31, 2019, the balance on the mortgage payable totaled $1,254,342, with an accrued interest of $6,397. Interest expense was $6,424 for the three months ended March 31, 2019.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Leases
On October 21, 2012, the Company entered into a rental agreement for an office and grow space of 8,387 square feet located in Montreal, Quebec, Canada. The Company renewed the rental agreement on December 1, 2018 with a base gross rent of approximately $6.25 per square foot and security deposit of $6,467. The Company will owe monthly rental payments of approximately $4,389 until the rental agreement terminates on November 30, 2021, which the Company used to establish the Company's ROU assets and lease liabilities.
10
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
As the Company's lease does not provide an implicit rate, the Company's incremental borrowing rate based on the information available at lease commencement date was used to determine the present value of lease payments. Components of lease cost are as follows:
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2019
|
|
Operating lease costs*
|
|
$
|
13,167
|
|
Operating cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
13,167
|
|
|
|
|
*
|
|
Includes right-of-use asset amortization of $10,679.
|
Weighted-average remaining lease term and discount rate for operating leases are as follows:
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2019
|
|
Weighted-average remaining lease term
|
|
|
2.67
|
|
Weighted-average discount rate
|
|
|
12
|
%
|
Maturities of lease liabilities by year for leases are as follows:
|
|
|
|
|
|
|
Amount
|
|
2019*
|
|
$
|
39,333
|
|
2020
|
|
|
52,444
|
|
2021 and beyond
|
|
|
48,074
|
|
Total lease payments
|
|
|
139,850
|
|
Less: imputed interest
|
|
|
(20,673
|
)
|
Present value of lease liabilities
|
|
$
|
119,177
|
|
|
|
|
*
|
|
Excluding the three months ended March 31, 2019
|
As of December 31, 2018, minimum lease payments under non-cancelable leases by period were expected to be as follows:
|
|
|
|
|
Years ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
54,048
|
|
2020
|
|
|
54,048
|
|
2021 and thereafter
|
|
|
49,544
|
|
Total minimum rentals
|
|
$
|
157,640
|
|
Legal Proceedings
The Company is contemplating filing a lawsuit against its two of its shareholders for breach of contract to
recover 20,000,000 shares of the Company
’
s common stock that were previously issued to them, and are currently in
settlement negotiations with said shareholders. While the ultimate result, if any, from the proceeding is presently
indeterminable, in the opinion of management, this matter should not have a material adverse effect on the Company
’
s
consolidated financial statements.
11
EPHS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
NOTE 9 - CAPITAL STOCK
On January 15, 2019, pursuant to the terms of a Share Exchange Agreement, the Company acquired all of the issued and outstanding MVC shares in consideration for issuance of 8,100,000 shares of EPHS common stock, par value $.001 per share.
On February 11, 2019, the Company issued 25,000 shares for cash.
On March 11, 2019, the Company further issued 736,036 shares of common stock for cash.
As of March 31, 2019, the Company had 72,160,628 shares of common stock outstanding.
NOTE 10 - SUBSEQUENT EVENT
There are no other events of a subsequent nature that in management's opinion are reportable as of May 20, 2019.
12
MATTER OF FORWARD-LOOKING STATEMENTS