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 June 30, 2016, the Company had a working capital deficit of $432,545 and an accumulated
deficit of $2,448,537. 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 June 30, 2016 and December
31, 2016, the Company had cash and cash equivalents of $193,882 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.
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 June 30, 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 and six months ended June 30, 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 June 30, 2016 and 2015:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Convertible notes payable
|
|
|
7,418,968
|
|
|
|
-
|
|
Warrants
|
|
|
4,955,000
|
|
|
|
4,275,000
|
|
Totals
|
|
|
12,373,968
|
|
|
|
4,275,000
|
|
Subsequent events
The Company has evaluated
events that occurred subsequent to June 30, 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.
In April 2016, the Company executed a non-recourse
loan and security agreement with Infinite Distribution Inc. (“Infinite”) and paid Infinite gross proceeds of $150,000.
The note accrues interest at 6% per annum maturing on April 18, 2020.
Note 5 – Property and Equipment
Property and equipment consisted of the following
at June 30, 2016 and December 31, 2015:
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Lives
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
5 years
|
|
$
|
29,608
|
|
|
$
|
23,044
|
|
Office equipment
|
|
7 years
|
|
|
7,254
|
|
|
|
3,724
|
|
Leasehold improvements
|
|
5 years
|
|
|
19,335
|
|
|
|
1,585
|
|
Less: accumulated depreciation
|
|
|
|
|
(12,053
|
)
|
|
|
(7,535
|
)
|
Property and equipment, net
|
|
|
|
$
|
44,144
|
|
|
$
|
20,818
|
|
Depreciation expense for the six months ended
June 30, 2016 and 2015 was $4,518 and $424, 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, 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 six months ended June 30, 2016, the Company made principal
and interest payments of $175,000 and $71,250, respectively. The outstanding balance due under the note was $775,000 and $950,000
as of June 30, 2016 and December 31, 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 six months ended June 30, 2016, the
Company entered into an agreement for the issuance of convertible notes to third party lenders for aggregate proceeds of $637,000.
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.
As of June 30, 2016 and December 31, 2015, the
total outstanding balance of the above convertible notes, net of debt discount, was $949,781 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 $582,219 and $961,237 as of June 30, 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 June 30, 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
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
609,559
|
|
|
$
|
609,559
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
356,862
|
|
|
|
356,862
|
|
June 30, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
966,421
|
|
|
$
|
966,421
|
|
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 June 30, 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
|
|
|
(80,390
|
)
|
|
|
(121,25
|
)
|
|
|
(201,415
|
)
|
Issuance of derivative warrant liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Included in debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance – June 30, 2016
|
|
$
|
356,862
|
|
|
$
|
609,559
|
|
|
$
|
966,421
|
|
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:
|
|
June 30,
2016
|
|
Risk free interest rate
|
|
|
0.52
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
111% - 114
|
%
|
Remaining term
|
|
|
1.35 – 2.19 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 June 30, 2016
and 2015, the Company marked the derivative feature of the warrants to fair value and recorded a gain (loss) of $117,379 and ($175,557),
respectively, relating to the change in fair value.
During the six months ended June 30, 2016, the
Company marked the derivative feature of the warrants to fair value and recorded a gain (loss) of $201,415 and ($175,557), 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 June 30, 2016 and December 31, 2015, there
were 44,641,612 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 June 30, 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 – June 30, 2016
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
Exercisable – June 30, 2015
|
|
|
4,955,000
|
|
|
$
|
0.40
|
|
As of June 30, 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 $50,000 of the $50,000 cash flow note and as of June 30, 2016, the balance of the cash flow note
is $0, 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.
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 $101,347 and $7,847 for
the six months ended June 30, 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)
|
|
$
|
66,612
|
|
2017
|
|
|
135,954
|
|
2018
|
|
|
140,774
|
|
2019
|
|
|
145,834
|
|
2020
|
|
|
151,141
|
|
2021
|
|
|
63,915
|
|
|
|
$
|
704,230
|
|
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 June 30, 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 June 30, 2016 and 2015:
|
|
Three Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,689,282
|
|
|
$
|
325,051
|
|
Gross profit
|
|
$
|
352,094
|
|
|
$
|
60,140
|
|
Selling, general and administrative expenses
|
|
$
|
(802,007
|
)
|
|
$
|
(408,481
|
)
|
Other expense
|
|
$
|
(151,865
|
)
|
|
$
|
(175,557
|
)
|
Net loss
|
|
$
|
(601,778
|
)
|
|
$
|
(523,898
|
)
|
Net
Sales
Net sales
increased to $1,689,282 during the three months ended June 30, 2016, from $325,051 for the three months ended June 30, 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 $352,094 for the three months ended June 30, 2016 and $60,140 for the three months ended June 30, 2015. 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 June 30, 2016 and 2015 were $802,007 and $408,481, respectively.
Selling, general and administrative expenses consisted primarily of professional fees related to operating as a public company
and payroll expenses from the operations of OneLove and Hygrow.
Other
expense
Other
expense for the three months ended June 30, 2016 and 2015 was $151,865 and $175,557, respectively. Other expenses for the three
months ended June 30, 2016 consisted primarily of the change in fair value of the derivative liabilities of $117,379 offset by
interest expense of $56,239, $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. Oher expenses for the three months ended June 30, 2015 consisted
of the change in fair value of the derivative liabilities of ($175,557).
Net
Loss
As a result
of the foregoing factors, the net loss for the three months ended June 30, 2016 and 2015 was $601,778 and $523,898, respectively.
The following
table sets forth the summary statements of operations for the six months ended June 30, 2016 and 2015:
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
3,042,906
|
|
|
$
|
325,051
|
|
Gross profit
|
|
$
|
861,356
|
|
|
$
|
60,140
|
|
Selling, general and administrative expenses
|
|
$
|
(1,369,671
|
)
|
|
$
|
(850,390
|
)
|
Other expense
|
|
$
|
(325,374
|
)
|
|
$
|
(175,557
|
)
|
Net loss
|
|
$
|
(833,689
|
)
|
|
$
|
(965,807
|
)
|
Net
Sales
Net sales
increased to $1,353,624 during the six months ended June 30, 2016, from $325,051 for the six months ended June 30, 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 $861,356 for the six months ended June 30, 2016 and $60,140 for the six months ended June 30, 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 six months ended June 30, 2016 and 2015 were $1,369,671 and $850,390, respectively.
Selling, general and administrative expenses consisted primarily of professional fees related to operating as a public company
and payroll expenses from the operations of OneLove and Hygrow.
Other
expense
Other
expense for the six months ended June 30, 2016 and 2015 was $325,374 and $175,557, respectively. Other expenses for the six months
ended June 30, 2016 consisted primarily of the change in fair value of the derivative liabilities of $201,415 offset by interest
expense of $102,579, $379,018 and $49,632 from the interest expense, accretion of debt discount and amortization of debt issuance
costs related to the convertible notes, respectively. Oher expenses for the six months ended June 30, 2015 consisted of the change
in fair value of the derivative liabilities of ($175,557).
Net
Loss
As a result
of the foregoing factors, the net loss for the six months ended June 30, 2016 and 2015 was $833,689 and $965,807, respectively.
Liquidity
and Capital Resources
The following
table summarizes total current assets, liabilities and working capital at June 30, 2016 compared to December 31, 2015:
|
|
Period Ended
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31, 2015
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,514,363
|
|
|
$
|
1,701,236
|
|
|
$
|
(186,873
|
)
|
Current Liabilities
|
|
$
|
1,946,908
|
|
|
$
|
1,075,351
|
|
|
$
|
871,557
|
|
Working Capital
|
|
$
|
(432,545
|
)
|
|
$
|
625,885
|
|
|
$
|
(1,058,430
|
)
|
As of
June 30, 2016, we had working capital deficit of ($432,545) as compared to working capital of $625,885 as of December 31, 2015,
a decrease of $1,058,430. 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 balances due from convertible notes.
Net
Cash
Net cash
used in operating activities for the six months ended June 30, 2016 was $864,937 compared to $543,775 used in operations for the
six months ended June 30, 2015. This change is primarily attributable to the net loss for the current period offset by the change
in accounts payable and accrued expenses of $70,539 and the accretion of debt discount and debt issuance costs of $379,018 and
$49,632, respectively. These increases were offset by changes in accounts receivable, inventory and the change in fair value of
the derivative liability of $39,588, $291,981 and $201,415, respectively.
Net cash
used in investing activities for the six months ended June 30, 2016 was $21,314 for machinery and equipment purchased during the
period. In addition, the Company loaned $150,000 to a third party. Net cash used in investing activities for the six months ended
June 30, 2015 was $1,039 for machinery and equipment purchased during the period. In addition, the Company paid $200,039 for the
acquisition of OneLove.
Net cash
provided by financing activities during the six months ended June 30, 2016 and 2015 was $422,000 and $405,000, respectively. These
amounts during the current period represent repayments of $215,000 on outstanding notes payable offset by proceeds of $637,000
from the issuance of convertible notes payable. During the prior comparative period, the Company received gross proceeds of $405,000
from issuance of common stock.
Liquidity
At June
30, 2016, the Company had a cash balance of $193,882 and for the six months ended June 30, 2016, the Company had a net loss of
$833,689. 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.
During the six months ended June 30,
2016, the Company entered into an agreement for the issuance of convertible notes to third party lenders for aggregate proceeds
of $637,000 (the “Notes”). 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.
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
June 30, 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.