Note
2 — Going Concern and Management’s Plan
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2016, the Company had a
working capital of $290,315 and an accumulated deficit of $1,846,759. The Company has a history net losses since inception. The
Company believes that it has sufficient cash to fund its operations. However, there is no assurance that the Company’s
projections and estimates are accurate. In the event that the Company does not receive anticipated proceeds operations and
financings, it is possible that the Company would not have sufficient resources to continue as a going concern for the next year.
In order to mitigate these risks, the Company is actively managing and controlling the Company’s cash outflows. These matters raise
substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
The
Company’s primary sources of operating funds since inception have been private equity, and debt and equity financings. The
Company intends to raise additional capital through private debt and equity investors. The Company needs to raise additional capital
in order to be able to accomplish its business plan objectives. The Company is continuing its efforts to secure additional funds
through debt or equity instruments. Management believes that it will be successful in obtaining additional financing based on
its history of raising funds; however, no assurance can be provided that the Company will be able to do so. There is no assurance
that any funds it raises will be sufficient to enable the Company to attain profitable operations or continue as a going concern.
To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to
extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no
assurance that such a plan will be successful.
Note
3 — Summary of Significant Accounting Policies
Basis
of presentation
The
Company’s condensed 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”).
The
unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal
recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the
results of its operations for the periods presented. This report should be read in conjunction with the Company’s financial
statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2015 filed with the Securities
and Exchange Commission (the “
SEC
”) on March 30, 2016. The Company assumes that the users of the interim financial
information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy
of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which
would substantially duplicate the disclosure contained in the Company’s Form 10-K for the year ended December 31, 2015 has
been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire
year ending December 31, 2016 or any other period.
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.
Principles
of Consolidation
The
accompanying condensed 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.
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 March 31, 2016 and December 31, 2016, the Company had cash and cash equivalents of $411,170 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.
Inventory
Inventory
is stated at lower of cost or market using the first-in, first-out (FIFO) valuation method. Inventory was comprised of finished
goods at March 31, 2016 and December 31, 2015.
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.
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.
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.
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 Accounting
Standards Codification. 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 Accounting Standards Codification (“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.
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 three months ended March 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 March 31, 2016 and 2015:
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
Convertible notes payable
|
|
|
6,622,718
|
|
|
|
-
|
|
Warrants
|
|
|
4,955,000
|
|
|
|
3,850,000
|
|
Totals
|
|
|
11,577,718
|
|
|
|
3,850,000
|
|
Subsequent
events
The
Company has evaluated events that occurred subsequent to March 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 Company
has reviewed the applicable ASU and has not, at the current time, quantified the effects of this pronouncement.
In
January 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01,
Recognition
and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 requires equity investments to be measured at fair
value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without
readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates 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; requires public business entities to
use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires 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; requires separate presentation of financial assets and financial liabilities
by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements
and clarifies 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. ASU 2016-01 is effective for financial statements
issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently
evaluating the impact that ASU 2016-01 will have on its consolidated financial statements.
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.
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.
Note
5 — Property and Equipment
Property
and equipment consisted of the following at March 31, 2016 and December 31, 2015:
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Lives
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
5 years
|
|
$
|
29,608
|
|
|
$
|
23,044
|
|
Office equipment
|
|
7 years
|
|
|
3,724
|
|
|
|
3,724
|
|
Leasehold improvements
|
|
5 years
|
|
|
16,335
|
|
|
|
1,585
|
|
Less: accumulated depreciation
|
|
|
|
|
(9,226
|
)
|
|
|
(7,535
|
)
|
Property and equipment, net
|
|
|
|
$
|
40,441
|
|
|
$
|
20,818
|
|
Depreciation
expense for the year ended March 31, 2016 and 2015 was $1,691 and $0, 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.
Debt
Offering (B)
Effective
December 7, 2015, Grow Solutions Holdings, Inc. (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.
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 2,167,933 shares of common stock to the creditor 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.
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 $771,728 and $961,237
as of March 31, 2016 and December 31, 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 March 31,
2016, 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
March 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
673,402
|
|
|
$
|
673,402
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
410,398
|
|
|
|
410,398
|
|
March 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,083,800
|
|
|
$
|
1,083,800
|
|
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 March 31, 2016.
|
|
Warrant
Liability
|
|
|
Embedded
Conversion
Feature
|
|
|
Total
|
|
Balance - December 31, 2015
|
|
$
|
437,252
|
|
|
$
|
730,584
|
|
|
$
|
1,167,836
|
|
Change in fair value of derivative liability
|
|
|
(26,854
|
)
|
|
|
(57,182
|
)
|
|
|
(84,036
|
)
|
Issuance of derivative warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Included in debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance – March 31, 2016
|
|
$
|
410,398
|
|
|
$
|
673,402
|
|
|
$
|
1,083,800
|
|
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:
|
|
March 31,
2016
|
|
Risk free interest rate
|
|
|
0.66
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
114% - 116
|
%
|
Remaining term
|
|
|
1.60 - 2.44 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 warrants’ expected term.
Remaining
term: The Company’s remaining term is based on the remaining contractual maturity of the warrants.
During
the three months ended March 31, 2016, the Company marked the derivative feature of the warrants to fair value and recorded a
gain of $84,036 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.
As
of March 31, 2016 and December 31, 2015, there were 46,484,545 and 46,389,545 shares of our common stock issued and outstanding,
respectively.
Warrants
The
following is a summary of the Company’s warrant activity during the period from December 31, 2015 to March 31, 2016:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – December 31, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Exercisable – December 31, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Granted
|
|
|
-
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – March 31, 2016
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Exercisable – March 31, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
As
of March 31, 2016 and December 31, 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 has paid $30,000 of the $50,000 cash flow note and as of
March 31, 2016, the balance of the cash flow note is $20,000, 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 requires 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.
The
Company assumed the Hygrow leases for the storefront properties in Boulder, Colorado and Pueblo, Colorado. The leases are on a
month to month basis with monthly payments of $3,500 and $800, respectively.
Rent
expense totaled $40,541 and $0 for the three months ended March 31, 2016 and 2015, respectively.
Future
minimum lease payments under these non-cancelable operating leases are approximately as follows:
Year Ending December 31,
|
|
|
|
2016 (remainder of year)
|
|
$
|
5,000
|
|
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 March 31, 2016.
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. The Management of the Company determined that there were no reportable subsequent
events, other than those mentioned elsewhere within this filing, to be disclosed.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly
report on Form 10-Q and other reports filed by Grow Solutions Holdings, Inc. (the “Company”) from time to time with
the SEC contain or may contain forward-looking statements and information that are (collectively, the “Filings”) based
upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made
by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are
only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,”
“estimate,” “expect,” “future,” “intend,” “plan,” or the negative
of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking
statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s
Amended Registration Statement on Form S-1 filed with the SEC on April 5, 2016, relating to the Company’s industry, the
Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities
laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements
to actual results.
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments
and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments
and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities
as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.
Our financial statements would be affected to the extent there are material differences between these estimates and actual results.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment in selecting any available alternative
would not produce a materially different result. The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this report.
Overview
We
intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain
key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting
principles affect our financial statements.
Business
Overview
Grow
Solutions Holdings, Inc. is a corporation incorporated under the laws of the State of Nevada (the “Company”). The
focus of the Company is to provide comprehensive services within the legal cannabis industry to those growing, processing and
dispensing legal cannabis and legal cannabis related products.
The
Merger
Effective
April 28, 2015, the Company entered into an Acquisition Agreement and Plan of Merger (the “Grow Solutions Agreement”)
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 Grow Solutions Agreement, 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.
The
Grow Solutions Agreement and related transaction documents are included as exhibits to the Current Report on Form 8-K filed with
the U.S. Securities and Exchange Commission on February 19, 2015 and is hereby incorporated by reference. All references to the
Grow Solutions Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by
the text of such exhibits.
Results
of Operations
The
following table sets forth the summary statements of operations for the three months ended March 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,353,624
|
|
|
$
|
-
|
|
Gross profit
|
|
$
|
509,262
|
|
|
$
|
-
|
|
Selling, general and administrative expenses
|
|
$
|
(567,664
|
)
|
|
$
|
(363,566
|
)
|
Other expense
|
|
$
|
(173,509
|
)
|
|
$
|
-
|
|
Net loss
|
|
$
|
(231,911
|
)
|
|
$
|
(363,566
|
)
|
Net
Sales
Net
sales increased to $1,353,624 during the three months ended March 31, 2016, from $0 for the three months ended March 31, 2015.
The increase in net sales is primarily related to the Company executing on their expansion strategy and completing the acquisitions
of OneLove in May 2015 and Hygrow in September 2015.
Gross
Profit
The
gross profit was $509,262 for the three months ended March 31, 2016 and $0 for the three months ended March 31, 2016. This increase
is due to the acquisitions of OneLove in May 2015 and Hygrow in September 2015.
Selling,
general and administrative expenses
Selling,
general and administrative expenses for the three months ended March 31, 2016 and the three months ended March 31, 2015 were $569,664
and $363,566, respectively. Selling, general and administrative expenses consisted primarily of professional fees and payroll
expenses during the three months ended March 31, 2016 due to the operations of OneLove and Hygrow.
Other
expense
Other
expense for the three months ended March 31, 2016 and for the three months ended March 31, 2015 was $173,509 and $0, respectively.
Other expenses for the three months ended March 31, 2016 consisted primarily of the change in fair value of the derivative liabilities
of $84,036 offset by interest expense of $46,340, $189,509 and $24,816 from the interest expense, accretion of debt discount and
amortization of debt issuance costs related to the convertible notes, respectively.
Net
Loss
As
a result of the foregoing factors, the net loss for the three months ended March 31, 2016 and 2015 was $231,911 and $363,566,
respectively.
Liquidity
and Capital Resources
The
following table summarizes total current assets, liabilities and working capital at March 31, 2016 compared to December 31, 2015:
|
|
Period Ended
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,589,328
|
|
|
$
|
1,701,236
|
|
|
$
|
(111,908
|
)
|
Current Liabilities
|
|
$
|
1,299,013
|
|
|
$
|
1,075,351
|
|
|
$
|
223,662
|
|
Working Capital
|
|
$
|
290,315
|
|
|
$
|
625,885
|
|
|
$
|
(335,570
|
)
|
As
of March 31, 2016, we had working capital of $290,315 as compared to working capital of $625,885 as of December 31, 2015, a decrease
of $335,570. The decrease in working capital is primarily attributable to decreases in cash. These changes were offset by increases
in accounts payable and accrued expenses and a balance due from a convertible note.
Net
Cash
Net
cash used in operating activities for the three months ended March 31, 2016 was $(362,179) compared to $15,800 provided by operations
for the three months ended March 31, 2015. This change is primarily attributable to the net loss for the current period offset
by accretion of debt discount and debt issuance costs, and accounts payable and accrued expenses of $189,509, $24,816 and $, respectively.
These increases were offset by changes in accounts receivable, inventory and the change in fair value of the derivative liability
of $57,758, $255,643 and $84,036, respectively.
Net
cash used in investing activities for the three months ended March 31, 2016 was $21,314 for machinery and equipment purchased
during the period.
Net
cash used by financing activities during the three months ended March 31, 2016 and 2015 was $20,000 and $320,000. These amounts
represent repayments of outstanding notes payable during each period and proceeds from issuance of common stock.
Liquidity
At
March 31, 2016, the Company had a cash balance of $411,170 and for the three months ended March 31, 2016, the Company had a net
loss of $231,911. The Company believes it has sufficient cash on hand to meet its operating needs through the next 12 months.
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 indoor and outdoor gardening supply 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.
Additionally,
on the same date, the Company entered into a two year employment agreement (with three consecutive two year renewal options) with
Michael Leago (“Leago”), a former managing member of OneLove (the “Employment Agreement”). Under the terms
of the Employment Agreement, Leago serves as the Retail Grow Store Division Head and receives $65,000 per year, payable monthly
on the first Monday of each month. Additionally, each fiscal quarter of 2015, upon the Company recording on its financial statements
$40,000 in US GAAP gross pretax profits (the “Gross Pretax Profits”) from sales of the Retail Store Division of the
Company (the “Pretax Threshold”), the Company shall pay to Leago a cash payment equal to 15% of the Company’s
Gross Pretax Profits generated above the Pretax Threshold, but in any event not to exceed $150,000 of bonus for the 2015 calendar
year paid to Leago.
The
OneLove Agreement and related transaction documents are included as exhibits to the Quarterly Report on Form 10-Q filed with the
U.S. Securities and Exchange Commission on May 20, 2015 and are hereby incorporated by reference. All references to the OneLove
Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by the text of such
exhibits.
Joint
Marketing Agreement
On
June 29, 2015, the Company and Jasper Group Holdings, Inc. (“Jasper”), entered into a Joint Marketing Agreement (the
“Joint Marketing Agreement”) whereby Jasper shall 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. 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.
Debt
and Equity Financing
On
September 2, 2015 (the “Effective Date”), Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”),
entered into a Securities Purchase Agreement (the “SPA”) to issue and sell a Convertible Promissory Note (the “Note”
and together with the SPA, the “Transaction Documents”) to an institutional investor (the “Investor”),
in the principal amount of $120,000 (the “Principal Amount”). Pursuant to the Transaction Documents, on or about September
3, 2015 the Company received $120,000 in funding from the Investor (the “Closing Date”). The Company’s issuance
of the securities to the Investor pursuant to the SPA are exempt from registration requirements of the Securities Act of 1933,
as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation
D promulgated under the Securities Act.
The
Note shall mature on June 2, 2016 (the “Maturity Date”) and shall accrue interest at an annual rate equal to 12%.
The Principal Amount and interest shall be paid on the Maturity Date (or sooner as provided in the Note), in cash or, in shares
of the Company’s common stock, par value $0.001 per share (the “Common Stock”). In accordance with the terms
of the Note, the Investor shall be entitled to convert a portion or all of the Principal Amount and interest due and outstanding
under the Note into shares of Common Stock equal to 48% of the average of the lowest three (3) trading prices during the twenty
(20) trading day period ending on the latest complete trading day prior to the conversion date.
Additionally,
on September 8, 2015, the Company sold 425,000 units, at a purchase price of $0.20 per unit to one investor (the “Subscription”).
Each unit consisting of one share of the Company’s common stock, and one common stock purchase warrant. The warrants are
exercisable at $0.40 per warrant into a share of the Company’s common stock and have a maturity of three years. The aggregate
gross proceeds from the Subscription was $85,000.
Hygrow
Asset Purchase
Effective
September 23, 2015 (the “Closing Date”), Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”)
entered into an Asset Purchase Agreement (the “APA”) by and among One Love Garden Supply LLC, a Colorado limited liability
company and a wholly owned subsidiary of the Company (“Buyer”), and D&B Industries, LLC, a Colorado limited liability
company doing business as Hygrow (“Seller”). On the Closing Date, the Buyer purchased and the Seller sold all of the
assets, rights, properties, and business of the Seller including certain debts of the Seller (the “Assets”). Under
the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Buyer on the Closing Date,
Buyer issued to Seller three hundred thousand (300,000) shares of common stock of the Company and a payment from Buyer to Seller
in the amount of $5,200 in cash (the “Consideration”). Following the Closing Date, the Assets were acquired by the
Buyer and the Company’s management assumed control of the management of the Seller with the former managing members of the
Seller resigning from the Seller upon closing of the APA. All references to the APA do not purport to be complete and are qualified
in their entirety by the text of such exhibits.
Credit
Agreement
Effective
December 7, 2015, Grow Solutions Holdings, Inc. (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.
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, 2015, 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 shares reported by Bloomberg.
As
additional security, the Company pledged its ownership interests in the Subsidiaries, pursuant to a Stock Pledge and Escrow Agreement
entered into as of December 7, 2015 (the “Pledge Agreement”).
The
above descriptions of the Credit Agreement, Revolving Note, Security Agreements and Pledge Agreement do not purport to be complete
and are qualified in their entirety by the full text of the documents themselves, filed in a Current Report on Form 8-K with the
U.S. Securities and Exchange Commission on December 23, 2015, as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5, respectively.
Off-Balance
Sheet Arrangements
As
of March 31, 2016, the Company had no off-balance sheet arrangements.
Critical
Accounting Policies
We
believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s
Discussion and Analysis of Financial Condition and Results of Operation.”
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period.
The
Company’s significant accounting estimates and assumptions affecting the financial statements were the valuation allowance
for deferred tax assets and estimates and assumptions used in valuation of equity instruments. Those significant accounting estimates
or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions,
and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable 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.
Management
regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates.
Income
Taxes
We
comply with section 740 of the FASB Accounting Standards Codification for income taxes, which requires an asset and liability
approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based
on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
Stock
Based Compensation
All
stock-based payments to employees, non-employee consultants, and to nonemployee directors for their services as directors, including
any grants of restricted stock and stock options, are measured at fair value on the grant date and recognized in the statements
of operations as compensation or other expense over the relevant service period. Stock-based payments to nonemployees are recognized
as an expense over the period of performance. Such payments are measured at fair value at the earlier of the date a performance
commitment is reached or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable
the measurement date is the date the award is issued.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.