NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(UNAUDITED)
NOTE 1 - ORGANIZATION
BUSINESS
Cabinet Grow, Inc. (the “Company”
or “CG-NV”) began operations in California in 2008, doing business as Universal Hydro (“Hydro”). Prior
to April 2014, the Company was a sole proprietorship owned by its’ current chief operating officer and stockholder. On April
28, 2014, the Company registered with the Secretary of State of California as Cabinet Grow, Inc. (“CG-CA”), and all
of the business, assets and liabilities of Hydro were assigned to CG-CA. On May 14, 2014, the Company filed Articles of Incorporation
with the Nevada Secretary of State. On May 15, 2014, CG-CA merged with CG-NV, with CG-NV being the surviving entity.
The Company’s common stock is quoted
on the OTC Market Group, Inc.’s OTCQB Marketplace under the symbol “CBNT.”
The Company
is a manufacturer and distributor of cabinet-based horticultural systems. The Company’s design and production of hydroponic
and soil grow cabinets makes the process of growing in a self-contained cabinet automated and simplified. The Company’s mission
is
to make hydroponic and soil growing simpler, more efficient and a better value than other
products found on the market. Substantially all of the Company’s sales are to individuals in the United States via the Company’s
website.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial
statements have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present
the financial position, results of operations and cash flows for the stated periods have been made. Except as described below,
these adjustments consist only of normal and recurring adjustments. Certain information and note disclosures normally included
in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been condensed or omitted. These condensed financial statements should be read
in conjunction with the Company’s financial statements and notes thereto included in the Company’s annual report for
the year ended December 31, 2014 on Form 10-K. Interim results of operations for the three and nine months ended September 30,
2015 are not necessarily indicative of future results for the full year. Certain amounts from the 2014 period have been reclassified
to conform to the presentation used in the current period.
EMERGING GROWTH COMPANY
We qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 107 of the JOBS
Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards.
As an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
USE OF ESTIMATES
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments
with an original term of three months or less to be cash equivalents.
INVENTORY
Inventory is valued at the lower of cost or
market value. Cost is determined using the first in first out (FIFO) method. Provision for potentially obsolete or slow moving
inventory is made based on management analysis or inventory levels and future sales forecasts. Inventory of $49,336 and $48,761
as of September 30, 2015 and December 31, 2014, respectively, was comprised of raw materials.
PROPERTY AND EQUIPMENT
Property and equipment are stated
at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives of the assets. The estimated
useful lives of property and equipment are as follows:
Manufacturing equipment
|
10 years
|
Office equipment and furniture
|
7 years
|
Computer hardware and software
|
3 years
|
The Company's property and equipment consisted of the following
at September 30, 2015 and December 31, 2014:
|
|
September 30,
2015
|
|
December 31, 2014
|
Furniture and Equipment
|
|
$
|
29,614
|
|
|
$
|
26,937
|
|
Manufacturing equipment
|
|
|
7,396
|
|
|
|
7,396
|
|
Software
|
|
|
15,830
|
|
|
|
15,830
|
|
Leasehold improvements
|
|
|
34,849
|
|
|
|
33,503
|
|
Accumulated depreciation
|
|
|
(34,744
|
)
|
|
|
(13,026
|
)
|
Balance
|
|
$
|
52,945
|
|
|
$
|
70,640
|
|
Depreciation expense of $21,718 and $4,072
was recorded for the nine months ended September 30, 2015 and 2014, respectively.
REVENUE RECOGNITION
The Company recognizes revenue in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605, “Revenue
Recognition.” ASC 605 requires that the following four basic criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue during the period in which the product is shipped.
SHIPPING AND HANDLING
Shipping and handling costs billed to customers
are recorded in sales. Shipping costs incurred by the Company are recorded in cost of sales. For the three and nine months ended
September 30, 2015 and 2014, the shipping costs were as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Freight costs billed to customers
|
|
$
|
18,842
|
|
|
$
|
12,389
|
|
|
$
|
53,636
|
|
|
$
|
49,555
|
|
Company’s shipping costs
|
|
$
|
17,148
|
|
|
$
|
19,065
|
|
|
$
|
45,954
|
|
|
$
|
54,570
|
|
RESEARCH AND DEVELOPMENT
Expenditures for research and development
are charged to expense as incurred. For the three and nine months ended September 30, 2015 and 2014, the costs were as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Research and development costs
|
|
$
|
5,529
|
|
|
$
|
9,267
|
|
|
$
|
22,667
|
|
|
$
|
25,339
|
|
ADVERTISING
The Company records advertising costs as incurred.
For the three and nine months ended September 30, 2015 and 2014, advertising expense was as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Advertising costs
|
|
$
|
92,010
|
|
|
$
|
59,253
|
|
|
$
|
256,247
|
|
|
$
|
119,885
|
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist
primarily of cash, accounts receivable, accounts payable and accrued expenses, note payable and convertible debt. The carrying
amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate
market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would
realize in a current market exchange or from future earnings or cash flows.
INCOME TAXES
Prior to May 2014,
the Company was organized as a sole proprietorship and was not subject to income taxes. Rather, the Company’s sole stockholder
was subject to income taxes on the Company’s taxable activity. In May 2014, the Company became subject to income taxes and
will be subject to Federal and State income taxes as a corporation.
The Company accounts for income taxes in accordance
with ASC 740-10, “Income Taxes.” Deferred tax assets and liabilities are recognized to reflect the estimated future
tax effects, calculated at the tax rate expected to be in effect at the time of realization. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Interest
and penalties are classified as a component of interest and other expenses. To date, the Company has not been assessed, nor paid,
any interest or penalties.
Uncertain tax positions
are measured and recorded by establishing a threshold for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the
effective date may be recognized or continue to be recognized.
EARNINGS (LOSS) PER SHARE
The Company reports earnings (loss) per share
in accordance with ASC 260, "Earnings per Share." Basic earnings per share is computed by dividing net income by the
weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing
net income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities
outstanding during the period. For the nine months ended September 30, 2014 and 2015, 14,287,500 shares of common stock underlying
convertible debt and warrants have been excluded from the computation of diluted earnings per share.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued
by the FASB and the SEC did not have, or are not believed by management to have, a material impact on the Company's present or
future consolidated financial statements.
NOTE 3 – SALES CONCENTRATION AND CONCENTRATION
OF CREDIT RISK
CASH
Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash. The Company maintains cash balances at one financial
institution, which is insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such
accounts.
PURCHASES
During the nine months ended September 30,
2015 and 2014, the Company made significant purchases from three suppliers as follows:
Supplier
|
|
Purchase
%
Nine months ended
September 30,
2014
|
|
Purchase %
Nine months ended
September 30,
2015
|
|
Accounts Payable
Balance as of
September 30,
2015
|
|
A
|
|
|
|
21.7
|
%
|
|
|
30.7
|
%
|
|
$
|
3,925
|
|
|
B
|
|
|
|
18.1
|
%
|
|
|
19.4
|
%
|
|
$
|
15,491
|
|
|
C
|
|
|
|
16.2
|
%
|
|
|
18.3
|
%
|
|
$
|
—
|
|
NOTE 4 – CONVERTIBLE NOTES PAYABLE
In May and June 2014 (the “May and June
2014 Notes”), the Company issued 3 convertible promissory notes, each in the amount of $22,000. The Company received proceeds
of $60,000 in the aggregate. Each of the May and June 2014 Notes matured on the six month anniversary of its issuance date, carried
interest at 10% and contained a 9.1% original issue discount (“OID”). The OID was amortized over the earlier of the
conversion of the note or the maturity date. The holders of the note can convert the notes into shares of common stock at any time
from the date of issuance to maturity at $0.20 per share. In December 2014, the Company received conversion notices from the holders
of the May and June 2014 Notes and accordingly, recorded the conversion of $66,000 of principal and $4,177 of accrued and unpaid
interest of the three convertible promissory notes and 352,242 shares of common stock to be issued at a conversion price of $0.20
per share. The shares were issued in January 2015.
On June 3, 2014, the Board authorized the Company
to enter into a Securities Purchase Agreement (“SPA”) with Chicago Venture Partners, L.P. (“CVP”). Pursuant
to the SPA, the Company agreed to issue to CVP a Secured Convertible Promissory Note in the principal amount of $1,657,500 (the
“Note”).
On June 6, 2014, the Company executed the SPA
with CVP, for the sale of the Company Note in the principal amount of up to $1,657,500 (which includes CVP’s legal expenses
in the amount of $7,500 and a $150,000 OID) for $1,500,000, consisting of $500,000 paid in cash on June 11, 2014 (the “Closing
Date”), two $250,000 secured promissory notes and two $250,000 promissory notes (the “Investor Notes”), aggregating
$1,000,000, bearing interest at the rate of 10% per annum. The Investor Notes are due 30 months from the Closing Date and may be
prepaid, without penalty. Advances received, OID charged and deferred financing costs incurred to CVP are as follows:
Date
|
|
Funded
Amount
|
|
OID
|
|
Other
|
|
Convertible
Note Issued
|
|
6/11/14
|
|
$
|
500,000
|
|
|
$
|
50,000
|
|
|
$
|
7,500
|
|
|
$
|
557,500
|
|
|
10/15/14
|
|
|
62,500
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
68,750
|
|
|
11/17/14
|
|
|
62,500
|
|
|
|
6,250
|
|
|
|
—
|
|
|
|
68,750
|
|
|
12/19/14
|
|
|
35,000
|
|
|
|
3,500
|
|
|
|
—
|
|
|
|
38,500
|
|
Balances 12/31/14
|
|
|
660,000
|
|
|
|
60,000
|
|
|
|
7,500
|
|
|
|
733,500
|
|
|
3/18/15
|
|
|
65,000
|
|
|
|
6,500
|
|
|
|
—
|
|
|
|
71,500
|
|
|
4/14/15
|
|
|
22,500
|
|
|
|
2,250
|
|
|
|
—
|
|
|
|
24,750
|
|
|
4/23/15
|
|
|
25,500
|
|
|
|
2,550
|
|
|
|
—
|
|
|
|
28,050
|
|
|
5/20/15
|
|
|
30,000
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
33,000
|
|
|
6/22/15
|
|
|
20,000
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
22,000
|
|
|
7/17/15
|
|
|
45,000
|
|
|
|
4,500
|
|
|
|
—
|
|
|
|
49,500
|
|
|
9/21/15
|
|
|
25,000
|
|
|
|
2,500
|
|
|
|
7,500
|
|
|
|
35,000
|
|
|
Balances 9/30/15
|
|
|
$
|
893,000
|
|
|
$
|
89,300
|
|
|
$
|
15,000
|
|
|
$
|
997,300
|
|
The Company has also not recorded the $607,000
remaining unfunded balance of the Investor Notes issued by CVP to the Company.
The Note bears interest at the rate of 10%
per annum. All interest and principal must be repaid on the date that is 30 months after the Closing Date. The Note may be converted
at the option of the holder, on the date that is six months from the Trading Date (defined in the Purchase Agreement as the date
on which the Common Stock is first trading on an Eligible Market, but in any event the Company shall cause its Common Stock to
be trading on an Eligible Market within nine months of the Closing Date of June 11, 2014) or at any time thereafter at a conversion
price of $0.1976. The conversion price is equal to $6,500,000 divided by 33,000,000 (the amount of fully diluted shares of Common
Stock of the Company on the date the Company filed its’ Registration Statement). If the holder funds $1,500,000 and elects
to convert the Note into Common Stock, the number of shares issuable upon conversion will be 8,287,500. In the event the Company
elects to prepay all or any portion of the Company Note, the Company is required to pay to CVP an amount in cash equal to 125%
multiplied by the sum of all principal, interest and any other amounts owing. On July 16, 2015, CVP converted $50,000 of accrued
and unpaid interest under the Company Note into 253,846 shares of common stock. The Company also reduced derivative liabilities
for the fair value of the conversion of $70,658 and reclassified the amount to additional paid in capital.
Initially the Company determined that
the conversion feature of the convertible note did not meet the criteria of an embedded derivative and therefore the conversion
feature was not bi-furcated and accounted for as a derivative because the Company was a private company, there was no quoted price
and no active market for the Company’s common stock.
Since the convertible note included an embedded
conversion feature that did not qualify to be bi-furcated as a derivative, management evaluated this feature to determine whether
it meets the definition of a beneficial conversion feature (“BCF”) within the scope of ASC 470-20, “Debt with
Conversion and Other Options”, and determined that a BCF existed. During the nine months ended September 30, 2015, and
prior to the Company becoming a public company received $163,000 in new fundings and recorded a note discount of $179,300 (including
$16,300 of OID), to be amortized to interest expense over the life of the loan. The Company became trading as a public company
on July 13, 2015, and on that date the Company determined the conversion feature of the Note represented an embedded derivative
since the Note was convertible into a variable number of shares upon conversion. Accordingly, on July 13, 2015, the Note was not
considered to be conventional debt under ASC 815 and the embedded conversion feature was bifurcated from the debt host and accounted
for as a derivative liability. Accordingly, the fair value of the derivative instruments for the fundings of the Note that occurred
prior to July 13, 2015, were recorded as a liability on July 13, 2015, on the consolidated balance sheet with the corresponding
amount recorded as a discount to the Note. Such discount is being amortized from the date of issuance to the maturity date of
the Note. The change in the fair value of the liability for derivative contracts are recorded in other income or expenses in the
consolidated statements of operations at the end of each quarter, with the offset to the derivative liability on the balance sheet.
The embedded feature included in the Note resulted in an initial debt discount of $233,500, an initial derivative liability expense
of $1,241,340 and initial derivative liability of $1,474,800.
Additionally, from July 13, 2015, through
September 30, 2015, the Company received $70,000 in new fundings and increased the Company Note by $84,500 including $7,000 of
OID and $7,500 of legal costs. The Company recorded an initial discount against the new fundings in the amount of $84,500 to be
amortized into interest expense over the term of the Note.
The Company also issued a five year warrant
to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three lowest closing bid prices
in the 20 trading days immediately after becoming public (the “Market Price”). Since the Company was not public
and could not determine the Market Price, based on the current discounted cash flow valuation, the Company initially
estimated that CVP can purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share. As of September
30, 2015, based on the Market Price, the Company estimated the number of shares that CVP can purchase to be 1,636,362.
Accounting Standard
Codification “ASC” 815 –
Derivatives and Hedging
, which provides guidance on determining what types
of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for
the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These
requirements can affect the accounting for warrants issued by the Company. As the detachable warrants issued with the Note do
not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices
in the future, we have concluded that the warrants are not indexed to the Company’s stock and are to be treated as derivative
liabilities.
The warrants were valued using the Black-Scholes
option pricing model. In order to calculate the fair value of the warrants, certain assumptions were made regarding components
of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility, expected dividend
yield, and expected life. Changes to the assumptions could cause significant adjustments to valuation. Since the Company was not
public, an estimated a volatility factor utilizing an average of comparable published volatilities of peer companies was utilized.
The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of
similar maturity. The warrants associated with the Note were initially valued and recorded a derivative liability of $577,100
using the Black-Scholes valuation methodology and the Company also recorded an initial derivative liability expense of $77,100
and a discount to the Note of $500,000.
On December 31, 2014,
the Company revalued the warrant at $581,373 using the Black- Scholes option pricing model and recorded an additional derivative
liability expense of $4,273 for the year ended December 31, 2014. On September 30, 2015, the Company revalued the warrant at $605,238
using the Black- Scholes option pricing model and recorded derivative liability expense of $23,865 for the nine months ended September
30, 2015 and increased the derivative liability on the balance sheet as of September 30, 2015.
A summary of the derivative liability balance as of September
30, 2015 is as follows:
Beginning Balance
|
|
$
|
581,373
|
|
Initial Derivative Liability
|
|
|
1,768,997
|
|
Fair Value Change
|
|
|
(60,604
|
)
|
Reduction for conversions
|
|
|
(246,448
|
)
|
Ending Balance
|
|
$
|
2,043,318
|
|
Derivative liabilities were valued using
the Black-Scholes option using the following assumptions:
|
|
December 31, 2014
|
|
September 30, 2015
|
Expected dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
189
|
%
|
|
|
133% - 166
|
%
|
Expected term
|
|
|
4.5 years
|
|
|
|
1.1 - 3.7 years
|
|
Risk free interest
|
|
|
1.29
|
%
|
|
|
0.33% - 1.15
|
%
|
Derivative liability
|
|
$
|
581,373
|
|
|
$
|
2,043,318
|
|
The Company amortized $182,368 and $463,637
of the Note discount to interest expense for the three and nine months ending September 30, 2015, respectively, and the carrying
amount of the Company Note as of September 30, 2015, was $587,615, net of unamortized discounts of $409,685, and as of December
31, 2014, was $357,478, net of the unamortized discount of $376,022.
A summary of the convertible note payable balance as of September
30, 2015 and December 31, 2014 is as follows:
|
|
2015
|
|
2014
|
Beginning balance
|
|
$
|
733,500
|
|
|
$
|
-0-
|
|
Convertible notes-newly issued
|
|
|
263,800
|
|
|
|
799,500
|
|
Conversion of convertible notes
|
|
|
—
|
|
|
|
(66,000
|
)
|
Unamortized discount
|
|
|
(409,685
|
)
|
|
|
(376,022
|
)
|
Total
|
|
$
|
587,615
|
|
|
$
|
357,478
|
|
As security for the Note, the Company’s
CEO and COO each pledged to CVP their 50 shares of Class A Preferred Stock (see Note 8). The pledge immediately expires upon the
shares of common stock of the Company being publicly traded and listed or designated for quotation on any of The New York Stock
Exchange, NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board,
the OTCQX, or the OTCQB.
On September 10, 2015, the Company entered
into a forbearance and standstill agreement (the “Forbearance and Standstill Agreement”) with CVP and Matt Lee and
Sam May, pursuant to which CVP agreed to refrain and forbear temporarily from exercising and enforcing remedies under the Note.
Pursuant to the terms of the Note, the Company
was required to deliver the Installment Amount (as defined in the Note) on or before each Installment Date (as defined in the Note)
until the Note was repaid. The Company failed to deliver the Installment Amount in June 2015, July 2015 and August 2015 (each,
a “Breach” and collectively, the “Breaches”). Each such Breach would constitute a separate event of default
pursuant to the terms of the Note if so declared by the Lender.
Pursuant to the terms of the Forbearance and
Standstill Agreement, CVP agreed to refrain and forbear from exercising and enforcing its remedies with respect to the Breaches
until the earliest occurrence of (a) any breach of the Forbearance and Standstill Agreement, or (b) any event of default after
the effective date of the Forbearance and Standstill Agreement other than the Breaches. Assuming that no additional events of default
occur under the Note and no breaches of the Forbearance and Standstill Agreement occur, CVP agreed, for a period of 90 days from
September 10, 2015 (the “Standstill Period”), that it will not seek to convert any portion of the outstanding balance
of the Note without the Company’s prior written consent, nor will the Company be required to deliver any Installment Amount
to CVP during the Standstill Period.
In addition, CVP agreed that for a period of
180 days following September 10, 2015 (the “Modified Conversion Period”), CVP’s conversion price shall be equal
to $0.40 per share, and that during the Modified Conversion Period, CVP will not made any conversions without the Company’s
prior written consent. Also, any conversion amount applicable to any CVP conversion made during the Modified Conversion Period
will automatically be applied toward and reduce the next Installment Amount due and payable to CVP. Upon conclusion of the Modified
Conversion Period, CVP’s conversion rights set forth in the Note shall revert to the terms and conditions set forth in Note.
Pursuant to the terms of the Forbearance and
Standstill Agreement, the next Installment Date will be the date that is 90 days from the date of the Forbearance and Standstill
Agreement and each subsequent Installment Date will be on the same day of each month thereafter until the Note’s maturity
date. In addition, the Installment Amount due on the next three Installment Dates shall be equal to $50,000.
The Company agreed that so long as the Note
remains outstanding and the warrant issued to CVP in connection with the Note is not fully exercised or expired pursuant to its
terms, the Company will not (i) issue any new shares of Class A preferred stock, (ii) issue any debt, (iii) issue other securities
that have redemption rights, rights of first refusal, preemptive rights or similar rights not associated with the Company’s
common stock, or (iv) consummate any transaction pursuant to Section 3(a)(9) or 3(a)(10) of the Securities Act of 1933, as amended,
equity line of credit or financing arrangement or other transaction that involves issuing securities convertible into Company common
stock with a conversion price that varies with the market price of the common stock, without CVP’s prior written consent.
CVP granted to the Company the right to repurchase
the Note, the Warrant and the other transaction documents for $978,500 within 90 days of September 10, 2015. CVP also agreed to
pay to the Company $5,000, which payment will constitute a partial payment of the Investor Notes. The Company agreed to pay CVP
$7,500, which shall be added to and included as part of the outstanding balance of the Note.
The Company issued three convertible promissory
notes in August 2015 (the “August 2015 Notes”) in the amounts of $86,250, $11,500 and $46,000, respectively.
The Company received proceeds of $75,000, $10,000 and $40,000. The August 2015 Notes mature on the six month anniversary of its
issuance date, carries interest at 10% and contained a 10% original issue discount (“OID”). The Company recorded
the OID of $18,750 as a discount to the Note, to be amortized to interest expense over the life of the Note. Each of the holders
of the August 2015 Notes can convert the note into shares of common stock at any time from the date of issuance to maturity at
$0.20 per share. Accordingly, the Company received a conversion notice from each holder of the August 2015 Notes and issued in
the aggregate 718,750 shares of restricted common stock. The company valued and recorded an initial derivative liability of
$168,930 using the Black Scholes valuation methodology of which $125,000 was recorded as a discount to the August Notes and the
remaining $43,930 was recorded as expense. Upon conversion of the August Notes the Company reclassified $168,930 of the derivative
liability to additional paid in capital.
On September 30, 2015, (the “September
2015 Note”) the Company issued a convertible promissory note in the amount of $5,750. The Company received proceeds of $5,750.
The September 2015 Note matures on the six month anniversary of its issuance date, carries interest at 10% and contained a 10%
original issue discount (“OID”). The holder of the September 2015 Note can convert the note into shares of common
stock at any time from the date of issuance to maturity at $0.20 per share. On September 30, 2015, the Company received a conversion
notice from the holder of the September 2015 Note to convert the note amount into 28,750 shares of restricted common stock. As
of September 30, 2015, the Company recorded the 28,750 shares of common stock as common stock to be issued. The shares were certificated
on October 27, 2015. The company valued and recorded an initial derivative liability of $6,877 using the Black Scholes valuation
methodology of which $5,750 was recorded as a discount to the September Note and the remaining $1,127 was recoded as expense.
Upon conversion of the September Note the Company reclassified $6,877 of the derivative liability to additional paid in capital.
NOTE 5 – NOTE PAYABLE, STOCKHOLDER
For the nine months ended September 30, 2015
and the year ended December 31, 2014, a stockholder and officer loaned the Company various amounts for Company expenses. Included
in the advances and repayments that follow is the activity from several credit cards that are in the name of the stockholder, but
were used for Company purposes. The terms of the note include an interest rate of 15% per annum. Interest expense of $245 and $703
was recorded for the three and nine months ended September 30, 2015, respectively, and $229 and $669 for the three and nine months
ended September 30, 2014, respectively. The activity for the nine months ended September 30, 201, is as follows:
|
|
Nine months ended
September 30, 2015
|
Beginning balance
|
|
$
|
6,168
|
|
Advances
|
|
|
6,314
|
|
Ending balance
|
|
$
|
12,482
|
|
NOTE 6 – RELATED PARTY TRANSACTIONS
On May 14, 2014, effective as of May 1, 2014,
the Board authorized the Company to engage the services of Venture Equity, LLC (“Venture Equity”). Mr. Barry Hollander,
the sole member of Venture Equity, was also named the Company’s Chief Financial Officer. Mr. Hollander was responsible for
the preparation of the financial statements, a registration statement, overseeing the “going public” process, the continuing
reporting responsibilities upon becoming a public company and other corporate matters. The Company has agreed to compensate Venture
Equity $5,000 per month and issued 1,500,000 shares of the Company’s common stock, 750,000 shares of common stock immediately
vested and 750,000 shares of common stock vested on November 15, 2014. The Company recorded an expense of $75,000, included in
salaries and management fees for the nine months ended September 30, 2014, for the vested shares ($0.10 per share), based upon
the Company’s internal valuation on a discounted cash flow basis.
The 750,000 shares that vested on November
15, 2014 have been recorded as deferred equity compensation on the balance sheet, at an initial value of $75,000 ($0.10 per share)
and were amortized monthly from the date of issuance to their vesting date. Accordingly, the Company has expensed $37,500 and $56,250
included in salaries and management fees for the three and nine months ended September 30, 2014. The balance was amortized monthly
through November 15, 2014.
On May 11, 2015, the Board approved increases
to the salaries of each of the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)
and Chief Operating Officer (“COO”) from $5,000 per month to $8,000 per month. The increases will only be paid when
and if the cash flow of the Company is sufficient.
For the three and nine months ended September
30, 2015 and 2014, the Company recorded expenses to its officers the following amounts:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
|
CEO
|
|
|
$
|
24,000
|
|
|
$
|
14,500
|
|
|
$
|
60,000
|
|
|
$
|
38,500
|
|
|
COO
|
|
|
|
24,000
|
|
|
|
14,500
|
|
|
|
60,000
|
|
|
|
38,500
|
|
|
CFO
|
|
|
|
24,000
|
|
|
|
14,500
|
|
|
|
60,000
|
|
|
|
24,500
|
|
|
Total
|
|
|
$
|
72,000
|
|
|
$
|
43,500
|
|
|
$
|
180,000
|
|
|
$
|
101,500
|
|
As of September 30, 2015, the Company owed
$12,557 to the CEO, $20,750 to the COO and $16,250 to the CFO, for accrued and unpaid fees. As of December 31, 2014, the Company
owed $4,500 to each the CEO and COO and $2,500 to the CFO. Accordingly $49,557 and $11,500 is included in accounts payable and
accrued liabilities, stockholders, on the September 30, 2015 and December 31, 2014 balance sheets presented herein, respectively.
The Company’s
COO loaned the Company various amounts for Company expenses. Included in the advances and repayments is the activity from several
credit cards that are in the name of the stockholder but were used for Company purposes (see Note 5
). The Company recorded interest expense of $245 and $228 for the three months ended September
30, 2015 and 2014, respectively and $703 and $669 for the nine months ended September 30, 2015 and 2014, respectively. As of September
30, 2015 and December 31, 2014, the COO was owed accrued interest of $3,355 and $2,652, respectively, which is included in accounts
payable and accrued liabilities, stockholders, on the balance sheets presented herein.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
Beginning January 1, 2011, the Company (through
its COO) leased approximately 1,850 square feet of office and manufacturing space in an industrial complex in Irvine California.
The initial lease term expired July 31, 2012. Since that date through July 2014, the Company leased the property on a month to
month basis at a cost of $2,138 per month. Effective August 1, 2014, the Company moved into a 4,427 square foot facility under
a new lease agreement, in the same industrial complex. The Company entered into a 26 month lease, pursuant to which (i) there
is no base rent for the first two months, (ii) beginning October 1, 2014, the monthly lease is $4,870 plus common area maintenance
charges of $354, and (iii) beginning October 1, 2015, the monthly rent increases to $5,091. The Company is straight lining the
24 month costs over the 26 month term of the lease.
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
Rent Expense:
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
Rent allocated to cost of goods sold
|
|
$
|
5,616
|
|
|
$
|
4,653
|
|
|
$
|
16,902
|
|
|
$
|
9,904
|
|
Rent allocated to SG&A
|
|
|
8,502
|
|
|
|
6,980
|
|
|
|
25,431
|
|
|
|
14,855
|
|
Total rent expense
|
|
$
|
14,118
|
|
|
$
|
11,633
|
|
|
$
|
42,333
|
|
|
$
|
24,759
|
|
Effective April 15, 2015, the Company entered
into a two month Investor Relations Consulting Agreement (the “Agreement”) with Hayden IR (“Hayden”). Pursuant
to the Agreement, on April 15, 2015, the Company issued 12,500 shares of common stock and 12,500 additional shares of common stock
were issued on May 15, 2015. The Company valued the shares at $0.40 per share and has included $10,000 in stock compensation expense
for the nine months ended September 30, 2015.
On August 3, 2015, the Board of Directors of
the Company authorized the engagement of Hayden effective August 1, 2015 (the “Effective Date”), for a twelve month
period. Pursuant to the Agreement, the Company has agreed to, include among other matters, the issuance of 100,000 restricted shares
of common stock to vest over the term of the Agreement as follows, 25,000 upon execution of the Agreement 50,000 shares on the
90
th
day from the Effective Date and 25,000 shares on the 180
th
day from the Effective Date of the Agreement,
subject to the Agreement being in effect as of each applicable vesting date. Hayden shall not have registration rights, and the
shares may be sold subject to Rule 144. The Company valued the shares at $0.20 per share and has included $5,000 in stock compensation
expense for the vested shares for the three and nine months ended September 30, 2015. The remaining shares are included in deferred
stock compensation on the September 30, 2015, balance presented herein and will be expensed on their respective vesting dates.
Additionally Hayden will be compensated $6,000 per month, which can be paid at the Company’s discretion in cash, or by the
issuance of 10,000 shares of restricted common stock and $2,000 cash. Accordingly, the Company recorded 20,000 shares of common
stock to be issued as of September 30, 2015 and has included $8,000 in stock compensation expense for the three and nine months
ended September 30, 2015. The shares were certificated on October 27, 2015.
On July 21, 2015, the Company entered into
a Consulting Agreement (the “Consulting Agreement”) with BMA Securities, LLC (the “Consultant”). Pursuant
to the Consulting Agreement, the Consultant, on a non-exclusive basis, will provide consulting services to the Company as a financial
advisor for a six month period. The Consulting Agreement automatically renews for successive six month periods unless terminated
by either party 60 days prior to the end of the initial successive term. Pursuant to the Consulting Agreement, the Company issued
350,000 shares of restricted common stock on July 16, 2015 for the initial six month term. The Company valued the shares at $0.40
per share (based on the most recent sale price of the Company’s common stock)
and
recorded $140,000 of stock compensation expense for the nine months ended September 30, 2015.
NOTE 8 – STOCKHOLDERS’ EQUITY
COMMON STOCK
The Company’s Registration Statement
on Form S-1 with the SEC became effective on December 22, 2014. During the nine months ended September 30, 2015, the Company sold
502,000 shares of common stock and received $200,800.
On April 1, 2015, the Company agreed to issue
75,000 shares of common stock to a consultant. The Company valued the shares at $0.40 per share (based on the most recent sale
price of the Company’s common stock). Accordingly, $30,000 is included in stock compensation expense for the nine months
ended September 30, 2015.
On April 15, 2015 and May 15, 2015, the Company
issued 12,500 shares of stock to Hayden (See Note 7).
On July 16, 2015, CVP converted $50,000 of
accrued and unpaid interest under the Company Note into 253,846 shares of common stock.
On July 21, 2015, the Company issued 350,000
shares of restricted common stock to BMA (see Note 7). The Company valued the shares at $0.40 per share (See Note 7).
On July 21, 2015, 17,500 shares of common
stock were issued equal in value to an aggregate of $7,000 per month to two employees as part of their compensation. Accordingly,
$7,000 is included in stock compensation expense for the three and nine months ended September 30, 2015, respectively.
On July 24, 2015, the board of directors of
the Company approved the granting of 1,323,500 shares of restricted common stock to employees, including 750,000 shares awarded
to the Company’s CFO. The Company valued the shares at $0.40 per share (based on the most recent sale price of
the Company’s common stock)
and has included $529,400
in stock compensation expense for the three and nine months ended September 30, 2015. The board of directors also approved
the issuance of common stock equal in value to an aggregate of $7,000 (amended to $6,000) per month to two employees as part of
their compensation.
On August 4, 26, and 28, 2015, the Company
issued 431,250, 57,500 and 230,000, respectively, of restricted shares of common stock upon the conversion from the holders of
the August 2015 Notes. The shares were issued at $0.20 per share.
On August 4, 2015, the Company issued 100,000
restricted shares of common stock to Hayden. The Company valued the shares at $0.40 per share (based on the most recent
sale price of the Company’s common stock) and has included $40,000 in stock compensation expense for the three
and nine months ended September 30, 2015.
COMMON STOCK TO BE ISSUED
As of September 30, 2015, the Company had recorded
95,000 shares of common to be issued as follows:
28,750 shares issued on October 27, 2015, upon
the conversion of the September 2015 Note;
20,000 shares issued on October 27, 2015 to
Hayden;
18,750 shares issued on October 27, 2015 to
an employee;
27,500 shares issued on October 27, 2015 to
an employee
CLASS A PREFERRED STOCK
On June 3, 2014, the Company’s Board
of Directors adopted and approved the Class A Preferred Stock Certificate of Designation, establishing the terms, conditions and
relative rights of the Class A Preferred Stock, including that the holders of the Class A Preferred Stock (the “Class A Holders”)
shall have limited voting rights and powers compared to the voting rights and powers of holders of Common Stock and other series
of Preferred Stock. The Class A Holders shall be entitled to notice of any shareholders meeting in accordance with the Bylaws of
the Corporation, and shall be entitled to vote, but only with respect to the following matters (collectively, the “Class
A Voting Matters”): (i) the appointment and/or removal of any member of the Company’s board of directors, (ii) any
matter related to or transaction (or series of transactions) pursuant to which the Company would sell or license all or substantially
all of its assets or the stockholders of the Company would sell all or substantially all of their shares of the Company’s
stock or where the Company would merge with or into any other entity, (iii) causing the Company to register its Common Stock for
trading pursuant to the Securities Exchange Act of 1934, as amended, including by filing a Registration Statement on Form S-1 with
the Securities Exchange Commission and filing and obtaining FINRA approval of a Form 15c2-11, and (iv) with respect to any matter
involving a transaction whereby the Company will become part of or merge into an existing public company. For so
long as Class A Preferred Stock is issued and outstanding, the holders of Class A Preferred Stock shall vote together as
a single class with the holders of the Corporation’s Common Stock and the holders of any other class or series of shares
entitled to vote with the Common Stock, with the holders of Class A Preferred Stock being entitled to fifty-one percent (51%) of
the total votes on
only Class A Preferred Voting Matters regardless of the actual
number of shares of Class A Preferred Stock then outstanding, and the holders of Common Stock and any other shares entitled to
vote being entitled to their proportional share of the remaining 49% of the total votes based on their respective voting power
for any Class A Preferred Voting Matter. The Board also approved the issuance of 50 shares each of the Class A Preferred Stock
to the Company’s Chief Executive Officer and Chief Operating Officer. The issued shares of the Class A Preferred Stock were
valued at $428,000 based primarily on management’s estimate of the fair value of the control features embedded in the Class
A preferred stock, and are included in salaries and management fees for the nine months ended September 30, 2014.
EQUITY COMPENSATION PLAN
On May 11, 2015, the Company’s Board
of Directors adopted the 2015 Equity Compensation Plan (the “Plan”). Persons eligible to participate in the Plan include
Employees (as defined in the Plan), officers and directors of the Company.
Term
The Plan became effective upon its adoption
by the Board. Options and stock awards may be granted immediately thereafter; provided, that no option may be exercised and no
stock award may be granted under the Plan until it is approved by the stockholders of the Company, within 12 months after the date
of adoption by the Board. The Plan shall continue in effect for a term of 10 years from the date of the Plan’s adoption by
the Board unless terminated earlier as provided in the Plan.
Administration
The Plan will be administered by the Board
or a committee designated by the Board (the “Committee”). The Committee may grant options and stock awards under the
Plan.
Maximum Shares Available
The maximum aggregate number of shares that
may be issued under the Plan through awards is 5,000,000 shares.
Adjustments
The maximum aggregate number of shares that
may be issued under the Plan, the number and kind of shares covered by each outstanding award, and the price per share (but not
the total price) subject to each outstanding award shall be proportionally adjusted to prevent dilution or enlargement of rights
under the Plan for any change in the outstanding common stock subject to the Plan, or subject to any award, resulting from any
stock splits, combination or exchange of shares, consolidation, spin-off or recapitalization of shares or any capital adjustment
or transaction similar to the foregoing or any distribution to holders of common stock other than regular cash dividends.
Awards
Options
The Committee may grant options to purchase
shares of common stock under the Plan from time to time in the discretion of the Administrator or automatically upon the occurrence
of specified events, including the achievement of performance goals, and for the satisfaction of an event or condition within the
control of the grantee or within the control of others.
The per share exercise price of an option shall
be determined by the Committee, provided, however that (i) the exercise price of an incentive stock option granted to a non-10%
stockholder shall be no less than 100% of the fair market value of the Company’s common stock on the grant date, (ii) the
exercise price of an incentive stock option granted to a 10% stockholder shall be no less than 110% of the fair market value of
the Company’s common stock on the grant date, and (iii) the exercise price of a nonstatutory stock option shall be no less
than 100% of the fair market value of the Company’s common stock on the grant date.
Only employees may be granted incentive stock
options. Notwithstanding the designation “incentive stock option” in an option agreement, if the aggregate fair market
value of the shares with respect to which incentive stock options are exercisable for the first time by the grantee during any
calendar year (under all plans of the Company) exceeds $100,000, then the portion of such options that exceeds $100,000 shall be
treated as nonstatutory stock options.
Restricted Stock
The Committee may grant stock awards pursuant
to a stock award agreement that shall contain provisions regarding (i) the number of shares subject to such stock award or a formula
for determining such number; (ii) the purchase price, if any, of the shares, and the means of payment for the shares; (iii) the
performance criteria, if any, and level of achievement versus these criteria that shall determine the number of shares granted,
issued, retained, or vested, as applicable; (iv) such terms and conditions on the grant, issuance, vesting, or forfeiture of the
shares, as applicable, as may be determined from time to time by the Committee; (v) restrictions on the transferability of the
stock award; and (vi) such further terms and conditions in each case not inconsistent with the Plan as may be determined from time
to time by the Committee.
Unless otherwise provided by the Committee,
the grantee shall have the rights equivalent to those of a stockholder and shall be a stockholder only after shares are issued
(as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) to the
grantee. Unless otherwise provided by the Committee, a grantee holding stock units shall be entitled to receive dividend payments
as if he or she were an actual stockholder.
On July 24, 2015, the board of directors of
the Company approved the granting of 1,323,500 shares of restricted common stock, including 750,000 shares awarded to the Company’s
CFO and approved the issuance of 75,000 shares to a consultant. The board of directors also approved the issuance of common stock
equal in value to an aggregate of $7,000 (amended to $6,000) per month to two employees as part of their compensation.
WARRANTS
The Company issued a five year warrant (which
expires on June 30, 2019) to CVP to purchase the number of shares equal to $420,000 divided by 70% of the average of the three
lowest closing bid prices in the 20 trading days immediately preceding the applicable conversion (the “Market Price”).
Since the Company was not public and could not determine the Market Price, based on the current discounted cash flow valuation,
the Company initially estimated that CVP can purchase 6,000,000 shares of common stock, with an exercise price of $0.20 per share.
As of September 30, 2015, based on the Market Price, the Company estimated the number of shares that CVP can purchase to be 1,636,362.
NOTE 9 – GOING CONCERN
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As of September 30, 2015 the Company had an accumulated deficit
of $5,239,472 and working capital deficit of $2,265,686. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Management’s
Plans
The Company maintains daily operations and
capital needs through the receipts of sales of product and from the proceeds received from the issuance of convertible promissory
notes.
Management is developing a plan of action to
eliminate the Company’s convertible notes payable that include conversion rights that may convert at a discount to the market
price of our common stock. Management plans to become cash flow positive from operations by the end of this fiscal year, therefore
eliminating any future cash burn.
Part of management’s plans include increases
in unit sales of our cabinets. As part of that initiative, in July 2015 the Company introduced our newest version of our Medicab.
The unit is more efficient and lower priced than its predecessor.
Retailers in our wholesale program are able
to purchase our products for resale. While the Company’s entire product line is available the program and product was designed
to allow for the retailer to carry a basic cabinet and work with their customer to custom design a cabinet that fits their needs.
We are also working on introducing additional
product extensions, new products, and subscription based service offerings. We plan to introduce a higher level of automation options
as well as expand the offering of scalable packages and accessories. We have developed several innovative product enhancements
that we are considering incorporating to our line of products and we may seek to apply for intellectual property protection. An
increasing emphasis will be placed on supplies such as nutrients and grow medium which are consumed by system users with each grow
cycle and represent a captive recurring revenue opportunity. We are introducing an automated contact and reorder system for our
customer base to help grow this revenue stream. We are planning to expand our current line of LEDs for uses in cabinets and also
as a standalone offering for larger scale growers. We also plan to offer and expand our premium support services and education.
Support and education can be packaged as a monthly subscription service offering live support, advanced training, and even an auto
resupply of nutrients and grow media.
Additionally, management’s plans include
the establishment and development of wholly-owned separate stand-alone subsidiaries. There will be a separate subsidiary for technology
companies, media companies, manufacturing companies and intellectual property companies. The Company also plans to acquire cannabis
brands that are compatible with our risk guidelines, that have an operating history and that are cash-flow positive.
NOTE 10 – SUBSEQUENT EVENTS
On October 27, 2015, the 95,000 shares of common
stock that were recorded as shares to be issued on the September 30, 2015 balance sheet were certificated.
On October 20, 2015, the Company received $10,000
related to the $20,000 note receivable recorded in conjunction with the August 2015 Notes (see Note 4). The Company also received
a Notice of Conversion and on October 27, 2015, issued 57,500 shares of common stock in settlement of $11,500 of principal and
interest.
On October 27, 2015, the Company issued 10,000
shares of common stock to Hayden for services rendered.
On November 2, 2015, the Company received a
term sheet for the issuance of a $50,000 convertible preferred note in exchange for $50,000. Pursuant to the terms of the Standstill
and Forbearance Agreement with CVP, CVP had to consent to any additional debt financing proposals that the Company received. On
November 5, 2015, CVP notified the Company that they did not consent and would not consent to any debt transaction that had conversion
mechanics that vary with the market price of the Company’s common stock. In addition CVP advised the Company that they would
longer be financing the operations of the Company. Subsequently, the Company has laid off all non-executive employee and has ceased
all marketing efforts including the closing of the Company’s merchant account.