NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(
UNAUDITED
)
NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Kush Bottles, Inc. (the Company) was incorporated in the state of Nevada on February 26, 2014. The Company specializes in the wholesale distribution of packaging supplies for the cannabis industry. The Companys wholly owned subsidiary Kim International Corporation (KIM), a California corporation, was originally incorporated as Hy Gro Economics Corporation ("Hy Gro") on December 2, 2010. On October 30, 2012, Hy Gro amended its articles of incorporation to reflect a name change to KIM International Corporation (KIM).
Recapitalization
On March 4, 2014, the shareholders of KIM exchanged all 10,000 of their common shares for 32,400,000 common shares of Kush Bottles, Inc. The operations of KIM became the operations of Kush after the share exchange and accordingly the transaction is accounted for as a recapitalization of KIM whereby the historical financial statements of KIM were presented as the historical financial statements of the combined entity.
Subsequent to the share exchange, the members of KIM owned 32,400,000 of shares of Companys common stock, effectively obtaining operational and management control of Kush. Kush had no operations prior to the share exchange. As a result of the recapitalization, KIM was the acquiring entity in accordance with ASC 805, Business Combinations. The accumulated losses of KIM were carried forward after the completion of the share exchange. Operations prior to the share exchange were those of KIM.
All reference to common stock shares and per share amounts were restated to effect the recapitalization which occurred on March 4, 2014.
Acquisition of Dank Bottles, LLC
On April 10, 2015, the Company entered into an equity purchase agreement to acquire all of the issued and outstanding membership interests in Dank Bottles, LLC ("Dank"), a Colorado limited liability company, effectively making Dank a wholly owned subsidiary of the Company. In exchange for the purchased interests, the Company paid cash consideration of $373,725 and issued 3,500,000 shares of common stock to the sellers of Dank.
The acquisition was accounted for using the purchase method of accounting in accordance with ASC 805, Business Combinations. As of April 10, 2015, the assets acquired, including the identifiable intangible assets, and liabilities assumed from Dank were recorded at their respective fair values. Any excess of the purchase price for the acquisition over the net fair value of Dank identified tangible and intangible assets acquired and liabilities assumed were recorded as goodwill. The fair value measurements utilize estimates based on key assumptions of the Acquisition, and historical and current market data.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and related notes include the activity of the Company and its wholly owned subsidiaries KIM and Dank have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Our operating results for the three and six month periods ended February 28, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ended August 31, 2017, or for any other period. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Companys audited consolidated financial statements and accompanying notes for the fiscal year ended August 31, 2016.
7
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to consist of cash on hand and investments having an orginal maturity of 90 days or less that are readily convertible into cash. As of February 28, 2017 and August 31, 2016, the Company had $2,833,159 and $1,027,003, respectively.
Accounts Receivable
Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis, thus trade receivables do not bear interest. Trade accounts receivables are periodically evaluated for collectability based on past credit history and their current financial condition. The Companys allowance for doubtful accounts was $2,000 as of February 28, 2017 and August 31, 2016, respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value using the first-in first out (FIFO) method. The Companys inventory consists of finished goods of $1,910,807 and $1,142,458 as of
February 28, 2017
and August 31, 2016, respectively.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, after the asset is placed in service. Asset lives range from 3 to 7 years. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred.
Fair Value of Financial Instruments
The fair value of certain of our financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, accrued compensation and employee benefits, other accrued liabilities and notes payable, approximate their carrying amounts because of the short-term maturity of these instruments.
Concentration of Risk
Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collateralized. Our policy is to place our cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. The Company generally does not require collateral from its customers, but its credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. The Company maintains allowances for potential credit losses. A significant portion of the Companys revenues are derived from the sales of products to the purveyors of cannabis products and services.
8
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. The Companys management assess goodwill for impairment on an annual basis during the fourth quarter using an August 1 measurement date unless circumstances require a more frequent measurement. When evaluating goodwill for impairment, the Company may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a "step zero" approach. If, based on the review of the qualitative factors, the Company determines it is not more likely than not that the fair value of goodwill is less than its carrying value, it would bypass the two-step impairment test. Events and circumstances the Company considers in performing the "step zero" qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units. If the Company concludes that it is more likely than not that a reporting unit's fair value is less than its carrying amount, it would perform the first step (step one) of the two-step impairment test and calculate the estimated fair value of the goodwill by using discounted cash flow valuation model. These methods require estimates of future revenues, profits, capital expenditures, working capital, and other relevant factors. The Company estimates these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors.
For fiscal 2016, the Company began its assessment with the step zero qualitative analysis because the fair value substantially exceeded the carrying value goodwill. After evaluating and weighing all relevant events and circumstances, the Company concluded that it is not more likely than not that the fair value of goodwill was less its carrying amounts. Consequently, the Company did not perform a step one quantitative analysis in fiscal 2016.
Earnings (Loss) Per Share
The Company computes net loss per share under Accounting Standards Codification subtopic 260-10, "Earnings per Share" (ASC 260-10). Basic net income (loss) per common share is computed by dividing net loss by the weighted average number of shares of common stock. Diluted net loss per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.
Basic earnings per share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net earnings by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potentially dilutive securities outstanding during the period. Stock options are the only potentially dilutive securities; and the number of dilutive options is computed using the treasury stock method.
The following table sets forth the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
February 28,
|
February 29,
|
|
February 28,
|
February 29,
|
|
2017
|
2016
|
|
2017
|
2016
|
Net income (loss)
|
$
3,619
|
$
8,618
|
|
$
(157,216)
|
$
24,692
|
Weighted average common shares outstanding for
|
|
|
|
|
|
basic EPS
|
49,104,742
|
46,438,907
|
|
49,245,364
|
46,351,843
|
Net effect of dilutive options
|
1,435,861
|
973,599
|
|
-
|
973,599
|
Weighted average common shares outstanding for
|
|
|
|
|
|
diluted EPS
|
50,540,603
|
47,412,506
|
|
49,245,364
|
47,325,442
|
Basic earnings (loss) per share
|
$
0.00
|
$
0.00
|
|
$
(0.00)
|
$
0.00
|
Diluted earnings (loss) per share
|
$
0.00
|
$
0.00
|
|
$
(0.00)
|
$
0.00
|
9
Comprehensive Income (loss)
Comprehensive income (loss) is the change in the Companys equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. During the quarters ended February 28, 2017 and 2016, the Company had no elements of comprehensive income or loss.
Revenue Recognition
It is the Companys policy that revenues from product sales is recognized in accordance with ASC 605 "Revenue Recognition". Four basic criteria must be met before revenue can be recognized; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on managements judgments regarding fixed nature in selling prices of the products delivered and the collectability of those amounts. The Company has not implemented any specific rebate programs. Provisions for discounts to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. During the quarters ended February 28, 2017 and 2016, we had provisions for sales discounts of $19,457 and $19,034, respectively. The Company has not established a formal customer incentive program, but considers and accomodates discounts to certain customers on a case by case basis, including by way of example, for volume shipping or for certain new customers with orders over a specific discretionary dollar threshold.
As of February 28, 2017 and August 31, 2016, the Company had a refund allowance of $0. Consistent with ASC 605-15-25-1, the Company considers factors such as historical return of products, estimated remaining shelf life, price changes from competitors, and introductions of competing products in establishing a refund allowance. The Company recognizes revenues as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Warranty Costs
The Company has not had any historical warranty related expenditures from the sales of its products, which if incurred would result in the return of any defective products by customers.
Business Combinations
Accounting for our acquisitions requires the Company to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations and comprehensive income (loss).
Accounting for business combinations requires the Companys management to make significant estimates and assumptions, especially at the acquisition date including its estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. If management cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, the Company will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Although the Company believes the assumptions and estimates it has made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Subsequent to the measurement period, changes in the estimates of such contingencies will affect earnings and could have a material effect on the Companys results of operations and financial position.
10
Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from product sales; (ii) the acquired companys brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined companys product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
In addition, any uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. If applicable, the Company would reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to its preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or the final determination of the tax allowances or contingencys estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect the Companys provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our results of operations and financial position.
Share-based Compensation
The Company account for its stock based award in accordance with Accounting Standards Codification subtopic 718-10, "Compensation", which requires fair value measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including restricted stock awards. The Company estimates the fair value of stock using the stock price on the date of the approval of the award. The fair value is then expensed over the requisite service periods of the awards, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.
Advertising
The Company conducts advertising for the promotion of its services. In accordance with ASC Topic 720-35-25, advertising costs are charged to operations when incurred.
Income Taxes
The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.
The Company applies the provisions of ASC 740, "Accounting for Uncertainty in Income Taxes". The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any material uncertain tax positions on returns that have been filed or that will be filed. The Company did not recognize any interest or penalties for unrecognized tax benefits during the six months ended February 28, 2017 and the fiscal year ended August 31, 2016, nor were any interest or penalties accrued as of February 28, 2017 and August 31, 2016.
Fair Value of Financial Instruments
The Company adopted ASC 820 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under this standard certain assets and liabilities must be measured at fair value, and disclosures are required for items measured at fair value.
11
The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Companys financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Companys cash is based on quoted prices and therefore classified as Level 1.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect managements assumptions about the assumptions that market participants would use in pricing the asset or liability.
Application of Valuation Hierarchy
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Note Payable Vehicle Loan.
The Company assesses the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.
The Company had no financial assets or liabilities that are measured at fair value on a recurring basis as of February 28, 2017 and August 31, 2016.
Segment Information
The Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and allocates resources to the business as a whole.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,
Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on its consolidated financial statements.
In August, 2016, the FASB issued Accounting Standards Update No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
(ASU 2016-15). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230,
Statement of Cash Flows
. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial statements.
12
In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered completed for purposes of applying the transition guidance. The effective date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance previously issued in 2014, which is effective for interim and annual periods beginning on or after December 15, 2017. The Company not yet determined the impact that this new guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The amendments in this update change existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of this standard.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. The amendments in this update revise the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 2 CONCENTRATIONS OF RISK
Supplier Concentrations
The Company purchases inventory from various suppliers and manufacturers. For the six months ended February 28, 2017 and 2016, three vendors accounted for approximately 39% and 50%, respectively, of total inventory purchases.
Customer Concentrations
During the six months ended February 28, 2017 and 2016, one customer represented 9% and 11% of the Company's revenues, respectively.
NOTE 3 RELATED-PARTY TRANSACTIONS
The Company leases its California and Colorado facilities from related parties. During the six months ended February 28, 2017 and 2016, the Company made rent payments of $101,400 and $84,600, respectively, to these related parties.
13
NOTE 4 PROPERTY AND EQUIPMENT
The major classes of fixed assets consist of the following as of February 28, 2017 and August 31, 2016:
|
|
|
|
|
February 28,
|
|
August 31,
|
|
2017
|
|
2016
|
Machinery and equipment
|
$
737,825
|
|
$
147,577
|
Vehicles
|
165,806
|
|
116,592
|
Office Equipment
|
90,112
|
|
71,507
|
Leasehold improvements
|
65,953
|
|
63,323
|
|
1,059,696
|
|
398,999
|
Accumulated Depreciation
|
(198,273)
|
|
(125,402)
|
|
$
861,423
|
|
$
273,597
|
Depreciation expense was $73,096 and $40,832, for the three months ended February 28, 2017 and 2016, respectively.
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
February 28,
|
|
August 31,
|
|
|
2017
|
|
2016
|
Customer deposits
|
|
$
287,628
|
|
$
260,409
|
Accrued compensation
|
|
104,785
|
|
178,769
|
Credit card liabilities
|
|
89,512
|
|
67,813
|
Deferred rent
|
|
28,021
|
|
18,810
|
Sales tax payable
|
|
23,884
|
|
23,300
|
|
|
$
533,830
|
|
$
549,101
|
NOTE 6 STOCKHOLDERS' EQUITY
Preferred Stock
The authorized preferred stock is 10,000,000 shares with a par value of $0.001. As of February 28, 2017 and August 31, 2016, the Company has no shares of preferred stock issued or outstanding.
Common Stock
The authorized common stock is 265,000,000 shares with a par value of $0.001. As of February 28, 2017 and August 31, 2016, 50,143,775 and 48,300,162 shares were issued and outstanding, respectively.
During the six months ended February 28, 2017, the Company sold 1,726,266 shares of its common stock to investors in exchange for cash of $2,939,923.
Share-based Compensation
The Company recorded compensation expense of $262,808 and $12,908 for the six month periods ended February 28, 2017 and 2016, respectively, in connection with the issuance of shares of common stock and options to purchase common stock.
During the six month period ended February 28, 2017, the Company issued 81,790 shares of common stock to consultants in exchange for $93,623 of services rendered and $122,547 of prepaid services, for a total of $216,170. The $122,547 of prepaid services is included in prepaid expenses and other current assets on the condensed consolidated balance sheet as of February 28, 2017.
14
Stock Options
The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of our stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted during the six months ended
February 28, 2017
and 2016:
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
2017
|
|
|
2016
|
Expected term (years)
|
|
|
1-4
|
|
|
|
N/A
|
Expected volatility
|
|
|
60%
|
|
|
|
N/A
|
Weighted-average volatility
|
|
|
60%
|
|
|
|
N/A
|
Risk-free interest rate
|
|
|
0.85%-1.57%
|
|
|
|
N/A
|
Dividend yield
|
|
|
0%
|
|
|
|
N/A
|
Expected forfeiture rate
|
|
|
33%
|
|
|
|
N/A
|
The expected life is computed using the simplified method, which is the average of the vesting term and the contractual term. The expected volatility is based on management's analysis of historical volatility for comparable companies. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the time of the grant. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.
During the six months ended February 28, 2017 and 2016, the Company issued 865,000 and 0 stock options, respectively, pursuant to the Companys 2016 Stock Incentive Plan, which was adopted on February 9, 2016. A summary of the Companys stock option activity during the six month period ended February 28, 2017 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
No. of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
Balance Outstanding, August 31, 2016
|
2,039,000
|
|
$
0.57
|
|
5.67 years
|
|
$
2,283,680
|
Granted
|
865,000
|
|
$
2.08
|
|
9.74 years
|
|
-
|
Exercised
|
(42,500)
|
|
$
1.09
|
|
-
|
|
-
|
Forfeited
|
(140,000)
|
|
$
1.01
|
|
-
|
|
-
|
Balance Outstanding, February 28, 2017
|
2,721,500
|
|
$
1.02
|
|
6.72 years
|
|
$
-
|
Exercisable, February 28, 2017
|
1,300,625
|
|
$
0.33
|
|
3.65 years
|
|
$
-
|
The weighted-average grant-date fair value of options granted during the six months ended
February 28, 2017 and 2016
, was $0.81 and $0, respectively. The weighted-average grant-date fair value of options forfeited during the six months ended
February 28, 2017
was $0.46. The weighted-average grant-date fair value of options forfeited during the six months ended
February 28, 2017
was $0.42.
15
During the six months ended February 28, 2017, the Company issued 25,000 shares of common stock in exchange for $29,000, pursuant to a stock option exercise. In addition, the Company issued 10,557 shares of common stock pursuant to a cashless exercise of 17,500 stock options.
A summary of the status of the Companys non-vested options as of August 31, 2016, and changes during the six month period ended February 28, 2017, is presented below:
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
No. of
|
|
Grant-Date
|
|
Options
|
|
Fair Value
|
Nonvested at August 31, 2016
|
909,000
|
|
$
221,227
|
Granted
|
865,000
|
|
468,845
|
Vested
|
(213,125)
|
|
(169,185)
|
Forfeited
|
(140,000)
|
|
(70,469)
|
Nonvested at February 28, 2017
|
1,420,875
|
|
$
450,418
|
As of February 28, 2017, there was $450,418 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of shares vested during the six month period February 28, 2017 was $169,185. This amount is included in stock compensation expense on the consolidated statements of operations.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Lease
The Companys corporate head-quarters and primary distribution center is located in Santa Ana, California. Effective July 1, 2017, the Companys Santa Ana lease will be terminated and the Company will move its corporate headquarters from Santa Ana, California to Garden Grove, California. The new California facility lease expires on August 1, 2022 and requires escalating monthly payments that range between $24,480 and $28,379. On April 1, 2016, the Company entered into a new sublease agreement for a facility located in Woodinville, Washington. The lease commenced on July 15, 2016 and expires on January 31, 2020, and requires escalating monthly payments that range between $14,985 and $16,022. Effective April 10, 2015, the Company assumed the facility lease in Denver, Colorado, which is the headquarters of operations for its wholly-owned subsidiary, Dank. On September 1, 2016, the Colorado facility lease was amended to include additional office space. The lease runs through March 31, 2020 and requires escalating monthly payments, ranging between $4,800 and $7,300. During the six months ended February 28, 2017 and 2016, the Company recognized $189,338 and $101,203, respectively, of rental expense, related to its office, retail and warehouse space.
Minimum future commitments under non-cancelable operating leases and other obligations were as follows at
February 28, 2017
:
|
|
|
2017
|
|
$
452,180
|
2018
|
|
572,706
|
2019
|
|
570,285
|
2020
|
|
324,405
|
Thereafter
|
|
521,132
|
|
|
$
2,440,708
|
Other Commitments
In the ordinary course of business, the Company may enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms. The Company had no such agreements as of
February 28, 2017
.
16
Litigation
The Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. The Company had no pending legal proceedings or claims as of
February 28, 2017
.
NOTE 8 SUBSEQUENT EVENTS
Subsequent issuance of Common Stock
Subsequent to
February 28, 2017
and through the date of this filing, the Company sold 39,985 shares of its common stock to investors in exchange for cash consideration of $69,974.
17