NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization and Operations
Grow
Solutions Holdings, Inc. (formerly known as LightTouch Vein & Laser, Inc. and Strachan, Inc.) (the “Company”)
was organized under the laws of the State of Nevada on May 1, 1981. Currently, the Company provides indoor and outdoor gardening
supplies to the rapidly growing garden industry.
The
Merger
Effective
April 28, 2015, the Company entered into an Acquisition Agreement and Plan of Merger (the “the Merger”) with Grow
Solutions, Inc., a Delaware corporation (“Grow Solutions”) and LightTouch Vein & Laser Acquisition Corporation,
a Delaware corporation and a wholly owned subsidiary of the Company (“LightTouch Acquisition”). Under the terms of
the Merger, Grow Solutions merged with LightTouch Acquisition and became a wholly owned subsidiary of the Company. The Grow Solutions’
shareholders and certain creditors of the Company received 44,005,000 shares of the Company’s common stock in exchange for
all of the issued and outstanding shares of Grow Solutions. Following the closing of the Grow Solutions Agreement, Grow Solutions’
business became the primary focus of the Company and Grow Solutions management assumed control of the management of the Company
with the former director of the Company resigning upon closing of the Agreement. Shareholders maintained 1,886,612 shares as part
of the recapitalization.
As
a result of the Merger, the Company discontinued its pre-Merger business. The Merger was accounted for as a “reverse merger,”
and Grow Solutions, was deemed to be the accounting acquirer in the reverse merger. Consequently, the assets and liabilities and
the historical operations that will be reflected in the financial statements prior to the Merger will be those of Grow Solutions
and will be recorded at the historical cost basis and the consolidated financial statements after completion of the Merger will
include the assets and liabilities of Grow Solutions., historical operations of the Company, and operations of the Company and
its subsidiaries from the closing date of the Merger. As a result of the issuance of the shares of the Company’s Common
Stock pursuant to the Merger, a change in control of the Company occurred as of the date of consummation of the Merger. The Merger
is intended to be treated as a tax-free exchange under Section 368(a) of the Internal Revenue Code of 1986, as amended. All historical
share amounts of the accounting acquirer were retrospectively recast to reflect the share exchange.
The
Acquisition
Effective
May 13, 2015 (the “Closing Date”), the Company entered into an Acquisition Agreement and Plan of Merger (the “OneLove
Agreement’) with Grow Solutions Acquisition LLC, a Colorado limited liability company and a wholly owned subsidiary of the
Company (“Grow Solutions Acquisition”), One Love Garden Supply LLC, a Colorado limited liability company (“OneLove”),
and all of the members of OneLove (the “Members”). On the Closing Date, OneLove merged with Grow Solutions Acquisition
and became a wholly owned subsidiary of the Company. Under the terms of the OneLove Agreement, the Members received (i) 1,450,000
shares of the Company’s common stock (the “Equity”), (ii) Two Hundred Thousand Dollars (US$200,000) (the “Cash”),
and (iii) a cash flow promissory note in the aggregate principal amount of $50,000 issued by OneLove in favor of the Members (the
“Cash Flow Note”), whereby each fiscal quarter, upon the Company recording on its financial statements $40,000 in
US GAAP Net Income (“Net Income”) from sales of the Company’s products (the “Net Income Threshold”),
the Company shall pay to the Members 33% of the Company’s Net Income generated above the Net Income Threshold. The aforementioned
obligations owed under the Cash Flow Note shall extinguish upon the earlier of (i) payment(s) by Company in an amount equal to
$50,000 in the aggregate or (ii) May 5, 2016 (collectively, the Cash Flow Note, the Equity, and the Cash, the “Consideration”).
The Consideration provided to the Members was in exchange for all of the issued and outstanding membership interests of OneLove.
Following the Closing Date, OneLove’s business was acquired by the Company and the Company’s management assumed control
of the management of OneLove with the former managing members of OneLove resigning from OneLove upon closing of the OneLove Agreement.
The
Company recorded the purchase of OneLove using the acquisition method of accounting as specified in ASC 805 “Business
Combinations.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers
in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling
interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed
based on their acquisition date fair values. Further, the Company commenced reporting the results of OneLove on a consolidated
basis with those of the Company effective upon the date of the acquisition
The
Company consolidated OneLove as of the effective date of the agreement, and the results of operations of the Company include that
of OneLove. The Company recognized net revenues attributable to OneLove of $2,523,595 and recognized income of $217,144 during
the period May 13, 2015 through December 31, 2015.
The
following table summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase
consideration, and net liabilities to assumed identifiable and unidentifiable intangible assets.
Purchase Consideration:
|
|
|
|
Common stock at fair market value
|
|
$
|
290,000
|
|
Cash paid
|
|
|
200,000
|
|
Cash flow note assumed
|
|
|
50,000
|
|
Current liabilities assumed
|
|
|
226,624
|
|
Total Purchase Consideration
|
|
$
|
766,624
|
|
The
fair value allocation is based on management’s estimates:
Purchase Price Allocation
|
|
|
|
Cash
|
|
$
|
9,961
|
|
Accounts receivable
|
|
$
|
13,363
|
|
Inventory
|
|
$
|
342,458
|
|
Property and equipment
|
|
$
|
932
|
|
Goodwill
|
|
$
|
399,910
|
|
Current liabilities
|
|
$
|
(226,624
|
)
|
As
per the Acquisition agreement, the Company has paid all of the cash flow note and as of December 31, 2016, the balance of the
cash flow note is $0.
Asset
Purchase Agreement
On
September 23, 2015 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “APA”)
by and among OneLove and D&B Industries, LLC, a Colorado limited liability company doing business as Hygrow. On the Closing
Date, the Company purchased all of the assets, rights, properties, and business of Hygrow including certain debts of Hygrow (the
“Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to
the Company on the Closing Date, the Company issued Hygrow three hundred thousand (300,000) shares of common stock of the Company
and a payment to Hygrow in the amount of $5,200 in cash. Following the Closing Date the Company’s management assumed control
of the management of Hygrow with the former managing members of Hygrow resigning upon closing of the APA.
The
Company recorded the purchase of Hygrow using the acquisition method of accounting as specified in ASC 805 “
Business
Combinations
.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers
in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling
interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed
based on their acquisition date fair values. Further, the Company commenced reporting the results of Hygrow on a consolidated
basis with those of the Company effective upon the date of the acquisition.
The
Company consolidated Hygrow as of the effective date of the agreement, and the results of operations of the Company include that
of Hygrow. The Company recognized net revenues attributable to Hygrow of $394,017 and recognized income of $101,213 during
the period September 23, 2015 through December 31, 2015.
The
following table summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase
consideration, and net liabilities to assumed identifiable and unidentifiable intangible assets.
Purchase Consideration:
|
|
|
|
Common stock at fair market value
|
|
$
|
60,000
|
|
Cash paid
|
|
|
5,200
|
|
Current liabilities assumed
|
|
|
47,918
|
|
Total Purchase Consideration
|
|
$
|
113,118
|
|
The
fair value allocation is based on management’s estimates:
Purchase Price Allocation
|
|
|
|
Other assets
|
|
$
|
5,213
|
|
Goodwill
|
|
$
|
107,905
|
|
Current liabilities
|
|
$
|
(47,918
|
)
|
The
Financing
Also
during the period ended December 31, 2015, the Company completed a closing of a private placement offering (the “Offering”)
of 2,705,000 Units, at a purchase price of $0.20 per Unit, each Unit consisting of 1 share of the Company’s common stock,
and 1 stock purchase warrants. The warrants are exercisable at $0.40 per warrant into a share of the Company’s common stock
and have a maturity of 3 years.
The
aggregate gross proceeds from the closing were $541,000 (the Company recorded $332,570 for the fair value of the warrants as a
derivative liability).
Note
2 — Going Concern and Management’s Plan
The
Company has elected to adopt early application of ASU No. 2014-15,
“Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”)
.
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates
continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company had an accumulated deficit at December 31, 2016, a net loss and
net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The
Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may
not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement
its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private
offering, there can be no assurance to that effect. The ability of the Company to continue as a going concern is dependent upon
its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds
by way of a public or private offering.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Note
3 — Summary of Significant Accounting Policies
Basis
of presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission
(“SEC”).
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, One Love Garden
Supply LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Fair
value of financial instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “
Fair Value Measurements and Disclosures
,”
approximates the carrying amounts represented in the balance sheet, primarily due to their short-term nature.
Use
of estimates and assumptions
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(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
|
(1)
|
Fair
value of long–lived assets:
Fair value is generally determined using the asset’s expected future discounted
cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the
newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived
assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to
be some examples of important indicators that may trigger an impairment review: (i) significant under–performance or
losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner
or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes
in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive
pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory
changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon
the occurrence of such events.
|
|
(2)
|
Valuation
allowance for deferred tax assets:
Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be
offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of
the net loss carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the
Company has incurred a loss, (b) general economic conditions, and (c) its ability to raise additional funds to support its
daily operations by way of a public or private offering, among other factors.
|
|
|
|
|
(3)
|
Estimates
and assumptions used in valuation of equity instruments:
Management estimates expected term of share options and similar
instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual
rate of quarterly dividends, and risk-free rate(s) to value share options and similar instruments.
|
|
|
|
|
(4)
|
Estimates
and assumptions used in valuation of derivative liability
: Management utilizes an option pricing model to estimate the
fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value
estimates.
|
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on various assumptions that are believed to be reasonable in relation to the financial statements taken as
a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution
which, at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash
equivalents. As of December 31, 2016 and 2015, the Company had cash and cash equivalents of $195,761 and $814,663, respectively.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits.
The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times,
the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable net of the allowance for doubtful accounts. As of December 31, 2016 and 2015, the allowance
for doubtful accounts was $65,311 and $0, respectively.
Inventories
Inventories
are stated at lower of cost or market using the first-in, first-out (FIFO) valuation method. Inventory was comprised of finished
goods at December 31, 2016 and 2015. As of December 31, 2016 and 2015, the allowance for shrinkage was $60,000 and $0, respectively.
Debt
Discount and Debt Issuance Costs
Debt
discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to
interest expense based on the related debt agreements using the straight-line method. Unamortized discounts are netted against
long-term debt.
Property
and Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the estimated useful lives of the respective assets as follows:
|
|
Estimated Useful
Life (Years)
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
Equipment
|
|
5
|
|
Furniture and fixture
|
|
7
|
|
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the consolidated statements of operations.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is
required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The
Company performs the annual assessment on December 31.
In
accordance with ASC 350–20 “
Goodwill
”, the Company is able to make a qualitative assessment of whether
it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step
goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is
not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
Impairment
of Long-Lived Assets
The
Company assesses the recoverability of its long-lived assets, including property and equipment, when there are indications that
the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the
asset to its estimated undiscounted future cash flows. If an asset’s carrying value exceeds such estimated cash flows
(undiscounted and with interest charges), the Company records an impairment charge for the difference.
Derivative
Liability
The
Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB ASC.
The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet
date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in
fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation
of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then
the related fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB ASC (“Section 815-40-15”) to determine whether an instrument (or an
embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use
a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes an option pricing model to compute the fair value of the derivative and to mark to market the fair value of the
derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense
in the consolidated statements of operations.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to Section 850-10-20 FASB Accounting Standards, the related parties include (a) affiliates of the Company (“Affiliate”
means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405
under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election
of the fair value option under the Fair Value Option Subsection of Section 825–10–15 FASB Accounting Standards, to
be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company and members of their immediate
families; (e) management of the Company and members of their immediate families; (f) other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Pursuant
to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures
shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to
which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the
dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change
in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such
representations can be substantiated.
Commitments
and Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed.
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable
and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has
been shipped to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Equity–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “
Compensation
– Stock Compensation
”. Under fair value recognition provisions, the Company recognizes equity–based
compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over
the requisite service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over a five-year period (vesting on a straight–line basis). The fair
value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value
of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, the
dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is benchmarked against similar companies
in a similar industry over the expected option life and other appropriate factors. Risk–free interest rates are calculated
based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the
Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock
in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the
equity–based compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “
Equity
Based Payments to Non–Employees
”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If
the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Loss
Per Share
Basic
net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number
of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when
losses are reported, which is the case for the year ended December 31, 2016 and 2015 presented in these consolidated financial
statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion
would be anti-dilutive.
The
Company had the following common stock equivalents at December 31, 2016 and 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Convertible notes payable
|
|
|
9,419,858
|
|
|
|
6,622,718
|
|
Options
|
|
|
475,000
|
|
|
|
-
|
|
Warrants
|
|
|
5,121,756
|
|
|
|
4,955,000
|
|
Totals
|
|
|
15,016,614
|
|
|
|
11,577,718
|
|
Income
Taxes
The
Company accounts for income taxes under ASC Topic 740 “
Income Taxes
” (“ASC 740”). ASC 740 requires
the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statement
and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry
forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a
portion of deferred tax assets will not be realized.
ASC
740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecoginition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been
concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements.
Since the Company was incorporated on March 21, 2014, the evaluation was performed for the 2014 and 2015 tax years, which will
be the only periods subject to examination upon filing of appropriate tax returns. The Company believes that its income tax positions
and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its
financial position.
The
Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of
income tax expense. There were no amounts accrued for penalties or interest as of or during the year ended December 31, 2016.
Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations
from its position.
Cash
Flows Reporting
The
Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash
receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions
of each category, and uses the indirect or reconciliation method (the “Indirect Method”) as defined by paragraph 230-10-45-25
of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile
it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and
payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income
that do not affect operating cash receipts and payments
Subsequent
events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company has evaluated events that occurred subsequent to December 31, 2016 and through the date the financial statements
were issued.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers”
. The revenue recognition standard affects all entities that have contracts
with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific
revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition.
In July 2015, the effective date was delayed one year by a vote by the FASB. Public business entities, certain not-for-profit
entities, and certain employee benefit plans would apply the guidance in ASU 2014-09 to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only
as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The standard permits the use of either the retrospective or cumulative effect transition method. The Company has evaluated the
standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In
August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15
“Presentation of Financial Statements—Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”).
In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the
financial statements are issued
(or within
one year after the date that the
financial statements are available to be issued
when applicable). Management’s evaluation
should be based on relevant conditions and events that are known and reasonably knowable at the date that the
financial statements
are issued
(or at the date that the
financial statements are available to be issued
when applicable). Substantial doubt
about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate,
indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the
date that the financial statements are issued (or available to be issued). The term
probable
is used consistently with
its use in Topic 450,
Contingencies
.
When
management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going
concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate
the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is
probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions
or events that raise substantial doubt about the entity’s ability to continue as a going concern.
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial
doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables
users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the
footnotes):
|
a.
|
Principal
conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before
consideration of management’s plans)
|
|
b.
|
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
|
|
c.
|
Management’s
plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
|
If
conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt
is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating
that there is
substantial doubt about the entity’s ability to continue as a going concern
within one year after the
date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information
that enables users of the financial statements to understand all of the following:
|
a.
|
Principal
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
|
|
b.
|
Management’s
evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
|
|
c.
|
Management’s
plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability
to continue as a going concern.
|
The
amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted. The Company has elected to adopt the methodologies prescribed by ASU 2014-15.
The adoption of ASU 2014-15 had no material effect on its financial position or results of operations.
In
March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “
Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The amendments in this ASU
require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for
debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued
for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments
is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective
basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects
of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in
an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition
method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on
the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during
the year ended December 31, 2016.
In
January 2016, the FASB issued the FASB Accounting Standards Update No. 2016-01 “
Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
” (“ASU 2016-01”).
This
Update makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The
new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments
in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.
It also amends certain disclosure requirements associated with the fair value of financial instruments. Some of the major changes
as a result of the ASU 2016-01 are summarized below.
|
●
|
Requires
equity investments (except those accounted for under the equity method of accounting or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income.
|
|
●
|
Simplify
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the
investment at fair value.
|
|
●
|
Eliminate
the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
|
|
●
|
Require
public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes.
|
|
●
|
Require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair
value in accordance with the fair value option for financial instruments.
|
|
●
|
Require
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that
is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
|
|
●
|
Clarify
that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities
in combination with the entity’s other deferred tax assets.
|
For
public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-06,
“Derivatives and Hedging” (Topic 815).
The FASB issued this update to clarify the requirements
for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly
and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to
assess the embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective
for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the
update is permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-09,
“Compensation – Stock Compensation” (Topic 718)
. The FASB issued this update to improve
the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.
Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences;
(b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated
guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years.
Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the FASB issued ASU 2016–10 “
Revenue from Contract with Customers (Topic 606): Identifying Performance
Obligations and Licensing”.
The amendments in this Update do not change the core principle of the guidance in Topic
606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations
and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation
guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether
an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property
(which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over
time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce
the degree of judgment necessary to comply with Topic 606. The Company is currently reviewing the provisions of this ASU to determine
if there will be any impact on our results of operations, cash flows or financial condition.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”
, which narrowly amended the revenue recognition guidance regarding collectability, noncash
consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is
currently evaluating the impact of the new standard.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash
receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for
fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable
to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company
is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than
Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects
for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance
is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements.
Note
4 — Notes Receivable and accrued interest
In
April 2014, the Company signed a letter of intent with Delta Entertainment Group (“Delta”) to enter into a reverse
merger transaction. In exchange for Delta’s exclusivity until the earlier of the execution of a stock exchange agreement
or June 30, 2014, the Company paid Delta $25,000. Delta was to use the $25,000 to become current with its public filings. Since
the stock exchange transaction was not executed by June 30, 2014, the $25,000 that the Company provided to Delta reverted to a
one year note with an interest rate at 8% per annum. The Company determined that since Delta lacked the financial resources to
get current in its public filings, the collectability of the note was doubtful. Accordingly, the Company has not accrued any interest
income on the note and has booked a 100% reserve against the note receivable.
During
the year ended December 31, 2016, the Company executed a non-recourse loan and security agreement with Infinite Distribution Inc.
(“Infinite”) and paid Infinite gross proceeds of $200,000. The note accrues interest at 6% per annum maturing on April
18, 2020. As of December 31, 2016, the outstanding balance of the note including accrued interest was $207,979.
Note
5 – Property and Equipment
Property
and equipment consisted of the following at December 31, 2016 and 2015:
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Lives
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
5 years
|
|
|
$
|
29,608
|
|
|
$
|
23,044
|
|
Office equipment
|
|
7 years
|
|
|
|
7,254
|
|
|
|
3,724
|
|
Software and computer equipment
|
|
3 years
|
|
|
|
44,953
|
|
|
|
-
|
|
Leasehold improvements
|
|
5 years
|
|
|
|
19,335
|
|
|
|
1,585
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(25,778
|
)
|
|
|
(7,535
|
)
|
Property and equipment, net
|
|
|
|
|
$
|
75,372
|
|
|
$
|
20,818
|
|
Depreciation
expense for the year ended December 31, 2016 and 2015 was $18,549 and $2,149, respectively.
Note
6 — Convertible notes
Debt
Offering (A)
On
September 2, 2015, the Company entered into an agreement for the issuance of a convertible note to a third-party lender for $120,000.
The note accrues interest at 12% per annum maturing on July 2, 2016. The notes are convertible into shares of common stock at
a conversion price equal to approximately 58% of the average of the lowest 3 trading prices for the common stock during the 20-day
trading period ending on the latest and complete trading day prior to the conversion. During the year ended December 31, 2016,
the lender elected to convert an aggregate of $135,119 of principal and accrued interest into 1,532,491 shares of common stock.
As of December 31, 2016, the principal and accrued interest on the notes due to the lender was $0.
Debt
Offering (B)
Effective
December 7, 2015, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company, as borrower,
Grow Solutions, Inc. and One Love Garden Supply LLC as joint and several guarantors (such guarantors, collectively, the “Subsidiaries”
and together with the Company, the “Borrowers”) and TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership,
as lender (“TCA”). Pursuant to the Credit Agreement, TCA agreed to loan the Company up to a maximum of $3,000,000
for the Company’s product division, construction and renovation of two stores, and inventory. An initial amount of $950,000
was funded by TCA at the closing of the Credit Agreement. Any increase in the amount extended to the Borrowers shall be
at the discretion of TCA.
The
amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the
repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets
in favor of TCA, as evidenced by a Security Agreement by and between the Company and TCA (the “Company Security Agreement”)
and a first position security interest in substantially all of the Subsidiaries’ assets in favor of TCA, as evidenced by
a Security Agreement by and among the Subsidiaries and TCA (the “Subsidiaries Security Agreement” and, together with
the Company Security Agreement, the “Security Agreements”). The Revolving Note is in the original principal
amount of $950,000, is due and payable, along with interest thereon, on June 7, 2017 (the “Maturity Date”), and bears
interest at the rate of 18% per annum, with the first four months of payments by the Company under the Revolving Note being interest
only. Upon the occurrence of an Event of Default (as defined in the Credit Agreement) the interest rate shall increase to the
Default Rate (as defined in the Credit Agreement). The payments under the Revolving Note are amortized over 18 months. During
the year ended December 31, 2016, the Company made principal and interest payments of $234,427 and $96,202, respectively. The
outstanding balance due under the note was $703,948 and $950,000 as of December 31, 2016 and 2015, respectively.
Only
upon the occurrence of an Event of Default or mutual agreement between TCA and the Company, at the sole option of TCA, TCA may
convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under
the Revolving Note into shares of the Company’s common stock at a conversion price equal to 85% of the lowest daily volume
weighted average price of the Company’s common stock during the five trading days immediately prior to such applicable conversion
date, in each case subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common
stock upon any conversion.
As
further consideration for TCA entering into and structuring the Credit Agreement, the Company shall pay to TCA an advisory fee
by issuing shares of restricted common stock of the Company (the “Advisory Fee Shares”) equal to $325,000 (the “Advisory
Fee”). In the event that the Company pays TCA all of the outstanding obligations due under the Credit Agreement on or before
June 7, 2016, the Advisory Fee shall be reduced to $292,500. Additionally, as long as there is (i) no Event of Default, (ii) no
occurrence of any other event that would cause an Event of Default, and (iii) the Company makes timely Advisory Fee Payments (as
defined below), TCA agrees that it will not sell any Advisory Fee Shares in the Principal Trading Market (as defined in the Credit
Agreement) prior to the Maturity Date, in exchange for monthly cash payments by the Company beginning on July 4, 2016 and ending
on the Maturity Date as set forth in the Credit Agreement, which shall be credited and applied towards the repayment of the Advisory
Fee (the “Advisory Fee Payments”). In the event that TCA shall sell the Advisory Fee Shares, as long as there is no
Event of Default, TCA shall not, during any given calendar week, sell Advisory Fee Shares in excess of 25% of the average weekly
volume of the common stock of the Company on the Principal Trading Market over the immediately preceding calendar week.
The
Company booked the $325,000 as debt discount.
The
Company issued 325,000 shares of common stock to the creditor as compensation for financing costs of $325,000. The issuance of
the 325,000 shares has been recorded at par value with a corresponding decrease to paid-in capital. Upon the sale of the shares
by the creditor, the financing cost liability will be reduced by the amount of the proceeds with a corresponding increase to paid-in
capital. The Company will still be liable for any shortfall from the proceeds realized by the creditor. The ultimate amount to
be recorded in satisfaction of the debt will not exceed the balance of the financing cost recorded.
Debt
Offering (C)
During
the year ended December 31, 2016, the Company entered into an agreement for the issuance of convertible notes to third party lenders
for aggregate proceeds of $1,117,000. The notes accrue interest at 12% per annum maturing two years from issuance. The notes are
convertible into shares of common stock at a conversion price of $0.80.
Debt
Offering (D)
On
December 15, 2016, the Company entered into an agreement for the issuance of a convertible note to a third-party lender for $285,775
with an original issue discount of $37,275. The note accrues interest at 8% per annum maturing on December 15, 2017. The notes
are convertible into shares of common stock at a conversion price equal to approximately 58% of the average of the lowest 3 trading
prices for the common stock during the 20-day trading period ending on the latest and complete trading day prior to the conversion.
Pursuant to the agreement, the Company is required to pay $1,190 As of December 31, 2016, the principal and accrued interest on
the notes due to the lender was $275,065.
As
of December 31, 2016 and 2015, the total outstanding balance of the above convertible notes, net of debt discount, was $1,554,139
and $108,763, respectively.
Derivative
Analysis
Because
the conversion feature included in the convertible note payable has full reset adjustments tied to future issuances of equity
securities by the Company, it is subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard
Codification (“Section 815-40-15”).
Generally
accepted accounting principles require that:
a.
|
Derivative
financial instruments be recorded at their fair value on the date of issuance and then adjusted to fair value at each subsequent
balance sheet date with any change in fair value reported in the statement of operations; and
|
|
|
b.
|
The
classification of derivative financial instruments be reassessed as of each balance sheet date and, if appropriate, be reclassified
as a result of events during the reporting period then ended.
|
Upon
issuance of the note, a debt discount was recorded and any difference in comparison to the face value of the note, representing
the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to interest
expense. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using
the straight-line method which approximates the interest method. The amortization of debt discount is included as a component
of interest expense in the consolidated statements of operations. There was unamortized debt discount of $698,288 and $961,237
as of December 31, 2016 and 2015, respectively.
The
fair value of the embedded conversion feature was estimated using the Black-Scholes option-pricing model. See Note 7 for the estimates
and assumptions used.
Note
7 — Derivative Liabilities
In
connection with the private placement and debt transactions during the period ended December 31, 2015, the Company issued 4,955,000
warrants, to purchase common stock with an exercise price of $0.40 and a three-year term. The Company identified certain put features
embedded in the warrants that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring
the Company to classify the warrants as a derivative liability.
In
connection with the issuance of a convertible note as discussed above in Note 5, the Company evaluated the note agreement to determine
if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain
put features embedded in the convertible note agreement that potentially could result in a net cash settlement in the event of
a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.
Level
3 Financial Liabilities – Derivative convertible note and warrant liabilities
The
following are the major categories of assets and liabilities that were measured at fair value during the year ended December 31,
2016 and 2015, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level
2), and significant unobservable inputs (Level 3):
|
|
Quoted Prices
In Active
Markets for
Identical
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
788,155
|
|
|
$
|
788,155
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
290,450
|
|
|
|
290,450
|
|
December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,068,605
|
|
|
$
|
1,068,605
|
|
|
|
Quoted Prices
In Active
Markets for
Identical
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
730,584
|
|
|
$
|
730,584
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
437,252
|
|
|
|
437,252
|
|
December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,167,836
|
|
|
$
|
1,167,836
|
|
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets
measured at fair value on a recurring basis using significant unobservable inputs during the year ended December 31, 2016.
|
|
Warrant
Liability
|
|
|
Embedded
Conversion
Feature
|
|
|
Total
|
|
Balance – December 31, 2014
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Change in fair value of derivative liability
|
|
|
104,682
|
|
|
|
7,660
|
|
|
|
112,342
|
|
Issuance of derivative liabilities
|
|
|
332,570
|
|
|
|
-
|
|
|
|
332,570
|
|
Included in debt discount
|
|
|
-
|
|
|
|
722,924
|
|
|
|
722,924
|
|
Balance – December 31, 2015
|
|
|
437,252
|
|
|
|
730,584
|
|
|
|
1,167,836
|
|
Change in fair value of derivative liability
|
|
|
(146,802
|
)
|
|
|
253,064
|
|
|
|
106,262
|
|
Conversion of debt to equity
|
|
|
-
|
|
|
|
(492,076
|
)
|
|
|
(492,076
|
)
|
Issuance of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Included in debt discount
|
|
|
-
|
|
|
|
286,583
|
|
|
|
286,583
|
|
Balance – December 31, 2016
|
|
$
|
290,450
|
|
|
$
|
778,155
|
|
|
$
|
1,068,605
|
|
The
fair value of the derivative feature of the convertible notes and warrants on the balance sheet date were calculated using an
option model valued with the following weighted average assumptions:
|
|
December
31,
2016
|
|
December
31,
2015
|
|
Risk free interest
rate
|
|
|
0.21
– 1.03
|
%
|
|
0.49% - 1.06
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected volatility
|
|
|
109%
- 120
|
%
|
|
113%
- 115
|
%
|
Remaining term
|
|
|
0.43
– 1.94 years
|
|
|
0.83
- 3.00 years
|
|
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring
dividends in the near future.
Volatility:
The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s
peer group stock price for a period consistent with the warrant’s expected term.
Remaining
term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
During
the year ended December 31, 2016 and 2015, the Company marked the derivative feature of the warrants to fair value and recorded
a loss of $106,262 and $112,342, respectively, relating to the change in fair value.
Note
8 — Stockholders’ Equity
Preferred
Stock
The
Company is authorized to issue 25,000,000 shares of preferred stock, $.001 par value, with such rights, preferences, variations
and such other designations for each class or series within a class as determined by the Board of Directors. The preferred stock
is not convertible into common stock, does not contain any cumulative voting privileges, and does not have any preemptive rights.
No shares of preferred stock have been issued.
Common
Stock
The
Company is authorized to issue 100,000,000 ordinary shares with a par value of $0.001 per share.
On
August 3, 2015, the Company issued four members of the Board of Directors an aggregate of 600,000 shares of the Company’s
common stock. The issuances were recorded at fair value ($0.20 per share) and the Company recognized $110,000 in stock based compensation
charges.
As
discussed in Note 6, the Company issued 325,000 shares of common stock to TCA as compensation for financing costs of $325,000.
The issuance of the 2,167,933 shares has been recorded at par value with a corresponding decrease to paid-in capital. Upon the
sale of the shares by the creditor, the financing cost liability will be reduced by the amount of the proceeds with a corresponding
increase to paid-in capital. The Company will still be liable for any shortfall from the proceeds realized by the creditor. The
ultimate amount to be recorded in satisfaction of the debt will not exceed the balance of the financing cost recorded. The shares
were issued in January 2016.
Also
during the period ended December 31, 2015, the Company completed a closing of a private placement offering (the “Offering”)
of 2,705,000 Units, at a purchase price of $0.20 per Unit, each Unit consisting of 1 share of the Company’s common stock,
and 1 stock purchase warrants. The warrants are exercisable at $0.40 per warrant into a share of the Company’s common stock
and have a maturity of 3 years.
The
aggregate gross proceeds from the closing were $541,000 (the Company recorded $332,570 for the fair value of the warrants as a
derivative liability see Note 7).
As
a result of the OneLove Acquisition and the Hygrow Acquisition, the Company issued 1,450,000 and 300,000 shares of common stock,
respectively, to consummate the acquisitions.
During
the year ended December 31, 2015, the Company issued 1,500,000 shares of common stock to consultants for services rendered. The
issuances were recorded at fair value and the Company recognized $300,000 in stock based compensation charges.
During
the year ended December 31, 2016, the Company issued 1,985,000 shares of common stock to employees and consultants for services
rendered. The issuances were recorded at fair value and the Company recognized $1,165,450 in stock based compensation charges.
As
of December 31, 2016 and 2015, there were 49,690,303 and 46,389,545 shares of our common stock issued and outstanding, respectively.
Options
During
the year ended December 31, 2016, the Company granted 475,000 options to employees and the board of directors for services provided.
The
fair values of the Company’s options were estimated at the dates of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
Expected term (years)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.35
|
%
|
Volatility
|
|
|
138
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected
term: The Company’s expected term is based on the period the options are expected to remain outstanding. The Company estimated
this amount utilizing the “Simplified Method” in that the Company does not have sufficient historical experience to
provide a reasonable basis to estimate an expected term.
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury Note with a similar term on the date of the grant.
Volatility:
The Company calculates the expected volatility of the stock price based on the corresponding volatility of the Company’s
peer group stock price for a period consistent with the option’s expected term.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid dividends to date and does not anticipate declaring
dividends in the near future.
The
following is a summary of the Company’s option activity during the period from January 1, 2016 to December 31, 2016:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding – January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable – January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
475,000
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – December 31, 2016
|
|
|
475,000
|
|
|
$
|
0.40
|
|
Exercisable – December 31, 2015
|
|
|
475,000
|
|
|
$
|
0.40
|
|
As
of December 31, 2016 and 2015, the total intrinsic value of options outstanding and exercisable was $0.
For
the year ended December 31, 2016 and 2015, the Company recognized an aggregate of $486,865 and $0, respectively, in stock-based
compensation related to stock options which is reflected in the consolidated statements of operations.
Warrants
The
following is a summary of the Company’s warrant activity during the period from January 1, 2015 to December 31, 2016:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – January 1, 2015
|
|
|
2,250,000
|
|
|
$
|
0.40
|
|
Exercisable – January 1, 2015
|
|
|
2,250,000
|
|
|
$
|
0.40
|
|
Granted
|
|
|
2,705,000
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – December 31, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Exercisable – December 31, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Granted
|
|
|
166,756
|
|
|
$
|
0.80
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – December 31, 2016
|
|
|
5,121,756
|
|
|
$
|
0.41
|
|
Exercisable – December 31, 2015
|
|
|
5,121,756
|
|
|
$
|
0.41
|
|
As
of December 31, 2016 and 2015, the total intrinsic value of options outstanding and exercisable was $0.
Note
9 — Related Party Transactions
As
per the Acquisition agreement, fully described in Note 1, the Company paid a $50,000 cash flow note and as of December 31, 2016
and 2015, the balance of the cash flow note is $0 and $40,000, respectively, payable to a related party.
Note
10 — Commitments and Contingencies
Joint
Marketing Agreement with Jasper Group Holdings, Inc.
On
June 29, 2015, the Company and Jasper Group Holdings, Inc. (“Jasper”), entered into a Joint Marketing Agreement (the
“Joint Marketing Agreement”) to provide services related to website creation for a legal cannabis job posting platform.
The website shall include an employee leasing program and allow employers, recruiters and potential employees to communicate through
its platform for a fee. All potential employees will be screened with background checks by independent third parties and provided
the necessary applications and related materials for individuals to become licensed in the legal cannabis industry on a state
by state basis. In accordance with the terms of the Joint Marketing Agreement, Jasper shall invest all funds necessary to form
the website.
Pursuant
to the Joint Marketing Agreement, the Company issued to Jasper 250,000 common shares upon execution, the shares were issued on
July 22, 2015. Additionally, upon the transfer of ownership in the website from Jasper to the Company, the Company shall issue
to Jasper an additional 500,000 shares of common stock of the Company.
Proceeds
derived from the Company’s website shall be divided as follows: (i) the Company shall retain 75% of the gross proceeds less
any sales commissions to third parties collected by the Company for all business that is generated through the website (the “Net
Fees”) and pay to Jasper a commission equal to 25% of the Net Fees with payments due within 15 days of the end of each quarter
(ii) the Company shall grant to Jasper a warrant for the purchase of one share of common stock of the Company, with an exercise
price of $0.75 per share, for every dollar of revenue that the Company earns from the website, up to a maximum of One Million
Dollars ($1,000,000).
The
initial term of the Joint Marketing Agreement shall be for three (3) years and shall automatically renew for additional three-year periods unless terminated by the Company with written notice at least 30 days prior to the expiration of the initial term,
or any subsequent term.
Operating
Lease
The
Company assumed the OneLove lease for storefront property in Colorado, which in November 2012, OneLove extended to an additional
three years to run from May 1, 2013 through April 30, 2016. The lease required base annual rent of $60,000 and the Company’s
pro-rata charges for operating expenses and taxes for the first year, with 3% increments thereafter.
In
June 2016, OneLove executed a new lease agreement for its storefront property in Boulder, Colorado. The lease is for a five-year
period and requires initial base annual rent of $93,600 with 5% increases thereafter. In addition, the Company is responsible
for its pro-rata charges for operating expenses and taxes for $39,624 per year.
The
Company assumed the Hygrow leases for the storefront properties in Denver, Colorado and Pueblo, Colorado. The leases are on a
month to month basis with monthly payments of $3,700 and $800, respectively.
Rent
expense totaled $230,421 and $84,460 for the year ended December 31, 2016 and 2015, respectively.
Future
minimum lease payments under these non-cancelable operating leases are approximately as follows:
Year Ending December 31,
|
|
|
|
2017
|
|
$
|
135,954
|
|
2018
|
|
|
140,774
|
|
2019
|
|
|
145,834
|
|
2020
|
|
|
151,141
|
|
2021
|
|
|
63,915
|
|
|
|
$
|
637,618
|
|
Litigation
In
the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. There are
no such matters as of December 31, 2016.
Note
11 — Income Taxes
As of December 31, 2016 and 2015, the Company
had net operating loss carry forwards of approximately $6,450,000 and $1,691,000 that may be available to reduce future years’
taxable income in varying amounts through 2035. Future tax benefits which may arise as a result of these losses have not been recognized
in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded
a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.
The
provision for Federal income tax consists of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Federal income tax benefit attributable to:
|
|
|
|
|
|
|
Current Operations
|
|
$
|
4,758,000
|
|
|
$
|
1,565,297
|
|
Less: valuation allowance
|
|
|
(4,758,000
|
)
|
|
|
(1,565,297
|
)
|
Net provision for Federal income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
cumulative tax effect at the expected rate of 38.6% of significant items comprising our net deferred tax amount is as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
2,491,653
|
|
|
$
|
653,354
|
|
Less: valuation allowance
|
|
|
(2,491,653
|
)
|
|
|
(653,354
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Due to the change in ownership provisions
of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $6,450,000 for Federal income tax reporting purposes
are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use
in future years.
Note
12 — Subsequent Events
The
Company has evaluated all events that occurred after the balance sheet date through the date when the consolidated financial statements
were issued to determine if they must be reported.
Amendment
of TCA Credit Agreement
On
February 14, 2017, the Company entered into a First Amendment to Credit Agreement (the “Amended Agreement”) by and
between the Company and TCA. Pursuant to the Amended Agreement, the Original Note was severed, split, divided and apportioned
into two separate and distinct replacement notes consisting of (i) First Replacement Note A, evidencing principal indebtedness
of $325,000 which was executed and delivered by the Company as the first purchase tranche paid by the Assignee (as defined below)
to TCA, and (ii) First Replacement Note B evidencing the reduced outstanding balance of principal indebtedness of $876,441.25
(collectively, First Replacement Note A and First Replacement Note B, the “Replacement Notes”). The Replacement Notes
replaced and superseded the Original Note in its entirety by substituting one evidence of debt for another without extinguishing
the indebtedness and obligations evidenced under the Original Note.
Under
the terms and conditions of Replacement Note B, the Company has the right to prepay Replacement Note B evidencing the remaining
outstanding balance of principal indebtedness owed to TCA in full and for cash, at any time prior to the Maturity Date (as defined
therein), with three (3) Business Days (as defined therein) advance written notice to TCA.
Debt
Purchase Agreement
On
February 15, 2017 (the “Effective Date”), the Company entered into a Debt Purchase Agreement (the “Debt Purchase
Agreement”) by and among the Company, TCA, and L2 Capital, LLC, a Kansas limited liability company (the “Assignee”).
Pursuant to the Debt Purchase Agreement, on the Effective Date, TCA sold and assigned to Assignee, TCA’s right, title and
interest in and to the monetary obligations evidenced under Replacement Note A thereby reducing the TCA outstanding principal
indebtedness. Assignee shall subsequently purchase from TCA the remaining debt evidenced by First Replacement Note B in purchase
tranches. The indebtedness underlying the Replacement Notes are evidenced by a newly issued 10% Senior Replacement Convertible
Promissory Note.
Upon
the purchase of all debt under Replacement Note B the Company will have no further obligations to TCA.
Issuance
of 10% Senior Replacement Convertible Promissory Note
On
February 15, 2017, the Company issued a 10% Senior Replacement Convertible Promissory Note (the “L2 Note”) to the
Assignee in the principal amount of $1,201,441.25. The initial principal amount under the L2 Note is $325,000, representing the
first tranche purchased by Assignee under First Replacement Note A and such amounts shall increase in tranches upon the purchase
of such tranches by the Assignee from TCA pursuant to the Debt Purchase Agreement. The maturity date for each tranche shall be
six months from that date of the purchase of that tranche and the Company shall pay interest to the Assignee on the aggregate
unconverted and then outstanding principal amount of the L2 Note at the rate of 10% per annum. The Company may prepay any portion
of the principal amount under the L2 Note and any accrued and unpaid interest in cash equal to the sum of the then outstanding
principal amount under the L2 Note and interest multiplied by 140%.
The
L2 Note is convertible at any time, in whole or in part, at the option of the holder into shares of common stock of the Company
at a conversion price equal to 62.5% of the lowest closing bid price of the common stock in the prior twenty (20) trading days,
which is subject to adjustment for stock dividends, stock splits, combinations or similar events.
Additionally,
the terms under the L2 Note include make-whole rights whereby upon liquidation by the Assignee of the shares converted under the
L2 Note, provided that the Assignee realizes a net amount from such liquidation equal to less than the conversion amount specified
in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company shall issue to the
Assignee additional shares of common stock of the Company equal to: (i) the conversion amount; minus (ii) the Realized Amount;
divided by (iii) the average volume weighted average price of the Company’s common stock during the five (5) business days
immediately prior to the date upon which the Assignee delivers notice to the Company that such additional shares are requested
by the Assignee (the “Make-Whole Shares”). Following the sale of the Make-Whole Shares by the Assignee: (i) in
the event that Assignee receives net proceeds from such sale which, when added to the Realized Amount from the prior relevant
conversion notice, is less than the conversion amount specified in the relevant conversion notice, Assignee shall deliver an additional
make-whole notice to the Company and the Company obligation to issue Make-Whole Shares shall continue until the conversion
amount has been fully satisfied; and (ii) in the event that Assignee received net proceeds from the sale of Make-Whole Shares
in excess of the conversion amount specified in the relevant conversion notice, such excess amount shall be applied to satisfy
any and all amounts owed hereunder in excess of the conversion amount specified in the relevant conversion notice.
Promissory
Note
On
May 25, 2017 (the (“Issuance Date”), the Company, issued a Promissory Note to an investor (the “Lender”)
in the principal amount of $100,000 (the “Note”). The Company received $100,000 in net proceeds from the sale of the
Note. The Note is due on demand 180 days from the Issuance Date (the “Maturity Date”). Payment by the Company to Lender
under the terms of the Note may be made in either cash or common stock of the Company, at the option of the Lender. In the event
the Company repays the Note in common stock, such common stock will be issued at a price equal to the closing price of the Company’s
common stock on the Maturity Date (the “Conversion Price”). The Note bears interest at a rate of fifteen percent (15%)
per annum, to be accrued through the Maturity Date. Interest may be paid in cash or common stock of the Company at the option
of the Lender on the Maturity Date at the Conversion Price. Additionally, the Company will issue the Lender shares of common stock
in an amount equal to thirty three percent (33%) of the outstanding balance of principal and interest under the Note on the Maturity
Date (the “Issuance”). The Issuance of the Company’s common stock to the Lender shall be at the Conversion Price
on the Maturity Date. The Company shall deliver the shares of common stock to the Lender within ten days after the Maturity Date.
Carebourn Capital Debt Refinancing
On July 14, 2017 (the “Effective
Date”), the Company and the Purchaser Agreed to cancel the Purchase Agreement, the Note and the related transaction documents
and refinanced the original loan by the Company’s issuance of a Convertible Promissory Note dated the Effective Date (the
“Note”). The principal amount of the Note is $262,877.42, the Purchase Price is $228,589.06, and the Company received
$50,000 in proceeds from the Purchaser. The Maturity Date of the Note is July 14, 2018.
The Note bears interest at a rate of 8%
per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions
of the Note. The Note is convertible, in whole or in part, at the option of the Purchaser into shares of common stock of the Company
at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which
is subject to adjustment for stock dividends, stock splits, combinations or similar events.
Effective July 24, 2017, in accordance
with the terms and conditions of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,095.32
from the Company’s bank account on each business day, until the amounts due under the Note are satisfied in full. At the
sole discretion of the Purchaser, the Company may prepay in cash any portion of the principal amount of the Note and any accrued
and unpaid interest in accordance with the terms and conditions of the Note.
Ralph Aiello Complaint and Settlement
Agreement
The Company was involved in litigation
against Ralph Aiello (the “Plaintiff” and together with the Company, the “Parties”). On January 19, 2017,
the Plaintiff filed a complaint in the Supreme Court of the State of New York County of Nassau (the “Court”), alleging
claims including breach of contract in connection with certain loans made by Plaintiff to the Company in the amount of $500,000
plus interest (the “Dispute”). On March 15, 2017, the Parties filed a Settlement Agreement (the “Settlement Agreement”)
with the Court whereby the Company agreed to pay the Defendant $550,000 by September 15, 2018. The Company has not made timely
payments in accordance with the Settlement Agreement. The Company acknowledges the debt owed to the Plaintiff and is working with
the Board to establish a payment plan for the Plaintiff and expedite the settlement of the Dispute.
Bronstein Complaint and Settlement
Agreement
The Company was involved in litigation
against Tal Bronstein, Kathleen Bronstein, and Milehigh Wholesale Inc. (the “Plaintiffs” and together with the Company,
the “Parties”). On May 4, 2017, the Plaintiffs filed a complaint in the District Court, City and County of Denver (the
“Court”), alleging claims including breach of contract in connection with the acquisition of Milehigh Wholesale Inc.
and the employment of Mr. Bronstein in connection with such acquisition (the “Dispute”). On or about June 14, 2017,
the Parties entered into a settlement agreement and release of all claims whereby upon payment by the Company of $16,000 to Plaintiffs
by July 14, 2017, Plaintiffs would dismiss with prejudice their claims against the Company and release the Company from any and
all claims, known or unknown, on conditions of such payment. On June 23, 2017, counsel for the Plaintiffs filed with the Court
a Notice of Settlement with respect to the Dispute. On June 27, 2017, the Court ordered that the Parties file a Stipulated Dismissal
within 35 days of the Order (August 1, 2017).
On or about July 10, 2017, the Company
notified the Plaintiffs that it would not be able to pay the $16,000 by July 14, 2017 and renegotiated the Settlement Agreement
and Release of All Claims (the “Agreement”) as follows: (i) on or before July 14, 2017, Company shall deliver to the
office of Plaintiffs’ counsel a Certified check in the amount of $5,000 (ii) on or before August 14, 2017, Company shall
deliver to the office of Plaintiffs’ counsel a certified check in the amount of $13,500 (iii) the parties intend that the
total amount paid from Company to Plaintiffs will be $18,500 (iv) if Company fail to pay the $13,500 by August 14, 2017, they will
pay $100 per day thereafter as an additional penalty payment for each and every day that the $13,500 is not paid until the full
amount of $13,500 is paid, or until August 31, 2017 (v) no later than July 17, 2017, Counsel for the Parties will file an unopposed
Motion to Extend the time by which they have to file the Stipulated Motion to Dismiss to and including August 31, 2017 (vi) if
Company fail to pay the $13,500 by August 31, 2017, they agree that Plaintiffs may then seek a default judgment to enter against
the Company in the amount of $21,700, without decrease for the $5,000 expected to be paid on or before July 14, 2017. Further,
all attorney fees and costs of collection thereafter shall be paid for by Company.
Alessi Complaint and Dismissal
The Company was involved in litigation
against William Alessi (“Alessi”). On February 15, 2017, Alessi filed a complaint in the General Court of Justice,
Superior Court Division, State of North Carolina, County of Mecklenburg (the “Court”), alleging claims including breach
of contract or unjust enrichment and breach of fiduciary duties with respect to allegations by Alessi of a stop order placed on
certain shares allegedly owned by Alessi with the Company’s transfer agent (the “Dispute”). On July 12, 2017,
the Honorable Jeff Hunt presiding over the matter issued an order in favor of the Company dismissing the Alessi’s action
with prejudice due to the Court’s lack of jurisdiction and further stating that the proper forum for all claims in connection
with the Dispute is an American Arbitration Association proceeding.
On December 15, 2016 (the “Issuance
Date”), Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”), entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with an accredited investor (the “Purchaser”) pursuant to which the
Company sold $285,775 in principal amount of an 8% Convertible Promissory Note (the “Note”) for a purchase price of
$248,500 with a 15% original issue discount (“OID”). On December 19, 2016, the Company received $240,000 in net proceeds
from the sale of the Note after deducting fees and expenses (the “Funding Date”). The Note and the shares of common
stock of the Company issuable upon conversion of the Note are collectively referred to herein as the “Securities.”
The Note bears interest at a rate of 8%
per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions
of the Note. The Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of the Purchaser
into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in
the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.
Notwithstanding the foregoing, the minimum conversion price under the Note is $0.20 (the “Floor Price”), provided that,
at any time following 180 days from the Issuance Date, if the closing price of the common stock of the Company is equal to or less
than the Floor Price for two consecutive trading days, the Floor Price will extinguish and be of no further force or effect.
In accordance with the terms and conditions
of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,190 from the Company’s bank account
on each business day, until the amounts due under the Note are satisfied in full. At the sole discretion of the Purchaser, the
Company may prepay in cash any portion of the principal amount of the Note and any accrued and unpaid interest in accordance with
the terms and conditions of the Note.
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