NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
September 30, 2019 AND 2018
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
Overview
Driven Deliveries Inc. (formerly Results-Based
Outsourcing Inc) (the “Company” or “Driven”), formed on July 22, 2013, is engaged in providing delivery
services of legal cannabis products to consumers in California.
On August 29, 2018, Driven Deliveries,
Inc., a Nevada company (“Driven Nevada”), was acquired by Results-Based Outsourcing as part of a reverse merger transaction.
As consideration for the merger, Results-Based Outsourcing issued the equity holders of Driven Nevada an aggregate of 30,000,000
post-split shares of their common. Following the merger, the Company adopted the business plan of Driven Nevada as a delivery company
focused on deliveries for consumers of legal cannabis products, in California. The merger was accounted for as a recapitalization
of the Company, therefore the financial statements as presented in this report include the historical results of Driven Nevada.
In June 2019, the Company completed its
acquisition of Ganjarunner, Inc. and Global Wellness, LLC, which are engaged in the business of providing delivery services of
legal cannabis products to consumers. See Note 4 – Merger Agreement below for more information on the acquisition.
In July 2019, the Company entered into
an Asset Purchase Agreement with Mountain High Recreation, Inc., in which the Company acquired certain assets from Mountain High
Recreation, Inc. See Note 7 – Commitments and Contingencies below for more information on the asset purchase.
Risks and Uncertainties
The Company’s business and operations
are sensitive to general business and economic conditions in the U.S. along with local, state, and federal governmental policy
decisions. A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse conditions
may include: changes in cannabis regulatory environment and competition from larger more well-funded companies. These adverse conditions
could affect the Company’s financial condition and the results of its operations.
NOTE 2 – GOING CONCERN ANALYSIS
Going Concern Analysis
For the nine months ended September 30,
2019, the Company had a net loss of $9,182,210 and working capital deficit of $3,541,787. The Company will require additional capital
in order to continue its operations in the normal course of business. Management has concluded that due to these conditions, there
is substantial doubt about the company’s ability to continue as a going concern. The accompanying consolidated condensed
financial statements have been prepared assuming that the Company will continue as a going concern.
Management’s plans include raising
capital though the sale of debt and/or equity. The Company’s ability to continue as a going concern is dependent upon its
ability to raise capital to implement the business plan, generate sufficient revenues and to control operating expenses. While
we believe in the viability of our strategy to generate sufficient revenue, control costs and the ability to raise additional funds,
there can be no assurances that our strategy will be successful. The Company’s financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the matters discussed herein.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”
for interim financial information. In the opinion of the Company’s management, the accompanying condensed financial statements
reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results
for the interim period ended September 30, 2019. Although management believes that the disclosures in these unaudited condensed
financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures
normally included in financial statements that have been prepared in accordance U.S. GAAP have been condensed or omitted pursuant
to the rules and regulations of the SEC.
The accompanying unaudited condensed financial
statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2018, which
contains the audited financial statements and notes thereto, for the year ended December 31, 2018 included within the Company’s
Form 10-K filed with the SEC on April 15, 2019. The interim results for the three and nine months ended September 30, 2019 are
not necessarily indicative of the results to be expected for the year ended December 31, 2019 or for any future interim periods.
The December 31, 2018 Balance Sheet is derived from the Company’s audited financial statements but does not include all necessary
disclosures for full U.S. GAAP presentation.
Use of estimates
The preparation of financial statements
in conformity with U.S. 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 of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company maintains its cash accounts
at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits
in excess of federally insured limits.
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 September 30, 2019,
the Company did not have any cash equivalents.
Equipment
Equipment is stated at cost less accumulated
depreciation. Cost includes expenditures for vehicles and computer equipment. Maintenance and repairs are charged to expense as
incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations. The cost of equipment is depreciated using the straight-line method
over the estimated useful lives of the related assets which is three years for computer equipment and five years for vehicles.
Depreciation expense was $9,397 and $3,228 for the nine months ended September 30, 2019 and 2018, respectively.
Inventory
Inventory is stated at the lower of cost
or net realizable value. Inventory is determined to be salable based on demand forecast within a specific time horizon. Inventory
in excess of salable amounts and inventory which is considered obsolete. At the point of recognition, a new lower cost basis for
that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in
that new cost basis. Inventory is costed on the FIFO basis.
Intangible Assets
The Company’s intangible assets include
the right to use all trademarks and intellectual property associated with the Mountain High brand and the unallocated excess purchase
price over net liabilities acquired from the acquisition of Ganjarunner, Inc. and Global Wellness, LLC. The Company acquired $3,546,849
in intangible assets from the asset purchase agreement with Mountain High Recreation, Inc. and the unallocated excess
purchase price over net liabilities acquired of $3,014,832 from the acquisition of Ganjarunner, Inc. and Global Wellness,
LLC. There was no impairment recorded to intangible assets as of September 30, 2019. Amortization expense was $113,832 and
$0 for the nine months ended September 30, 2019 and 2018, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation
costs under the provisions of ASC 718, “Compensation—Stock Compensation”, which requires the measurement and
recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to
vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees,
officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also
applied to awards modified, repurchased, or canceled during the periods reported.
Stock-Based Compensation for Non-Employees
The Company accounts for warrants and options
issued to non-employees under ASU 2018-07, Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing
model.
Fair Value Measurements
ASC 820, “Fair Value
Measurements and Disclosure,” 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, not adjusted for transaction costs.
ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1) and the lowest priority to unobservable inputs (Level 3).
The three levels are described below:
Level 1 Inputs
– Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;
Level 2 Inputs
– Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,
either directly or indirectly;
Level 3 Inputs
– Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.
The carrying amount of
the Company’s financial assets and liabilities, such as cash, accounts payable and accrued expenses approximate their fair
value because of the short maturity of those instruments.
Transactions involving
related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless
such representations can be substantiated.
The assets or liability’s
fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair
value measurement. The following table provides a summary of financial instruments that are measured at fair value as of September
30, 2019.
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
(581,437
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(581,437
|
)
|
|
$
|
(581,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below provides
a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2019:
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2019
|
|
Balance, December 31, 2018
|
|
|
-
|
|
Initial recognition of conversion feature
|
|
|
1,102,824
|
|
Change in fair value of derivative liabilities
|
|
|
(521,387
|
)
|
Balance, September 30, 2019
|
|
$
|
581,437
|
|
Derivative Liability
The Company evaluates its options, warrants
or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to
be separately accounted for in accordance with ASC 815-10-05-4 and 815-40-25. 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 condensed 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.
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 pricing model includes subjective
input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent
historical period of time of comparable companies equal to the remaining contractual term of the instrument granted.
Revenue Recognition
As of January 1, 2018, the company adopted
ASC 606. The adoption of ASC 606, Revenue From Contracts With Customers, represents a change in accounting principle that will
more closely align revenue recognition with the delivery of the Company’s services and will provide financial statement readers
with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services.
The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange
for these services. Revenue is recorded gross of taxes related to taxable sales transactions, such as sales tax, use tax, or other
government fees. The Company used the Modified-Retrospective Method when adopting this standard. There was no accounting effect
due to the initial adoption. To achieve this core principle, the Company applies the following five steps:
1) Identify the contract with a customer
A contract with a customer exists when
(i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services
to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii)
the Company determines that collection of substantially all consideration for services that are transferred is probable based on
the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay.
The Company has six contracts with different
customers with the same terms. All of these qualify as contracts since they have been approved by both parties, have identifiable
rights and payment terms regarding the services to be transferred, have commercial substance, and it is probable that the entity
will collect the consideration in exchange for the services.
The Company also sells directly to customers
through their Ganjarunner website. The Company takes customer orders through the website and delivers directly to the customer.
In these sales the Company does not enter into a formal contract but sells directly to the customer as a retailer.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract
are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby
the customer can benefit from the service either on its own or together with other resources that are readily available from third
parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately
identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must
apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract.
If these criteria are not met the promised services are accounted for as a combined performance obligation.
The Company’s performance obligations
are to (1) deliver cannabis in compliance with California law, (2) provide a platform to sell the retailer’s products, and
(3) sell directly to customers through the Ganjarunner website. These items represent performance obligations since they are distinct
services and products and are distinct in the context of the contract.
3) Determine the transaction price
The transaction price is determined based
on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent
the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be
included in the transaction price utilizing either the expected value method or the most likely amount method depending on the
nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment,
it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s
contracts as of September 30, 2019 contained a significant financing component. Determining the transaction price requires significant
judgment, which is discussed by revenue category in further detail below.
The Company provides delivery services
in exchange for a flat fee per delivery and an additional charge per mile. As mandated by the California Bureau of Cannabis
Control, delivery drivers are required to be on the payroll of a licensed retailer. In order to fulfill the performance obligation,
delivery drivers are included on the payroll of the customer, and the Company reimburses the customer for the drivers’ wages
at a premium. The cost of paying the drivers are considered a cost to fulfill a contract for which the Company receives no benefit,
so it is consideration payable to the customer, which is considered in determining the transaction price. In addition, the Company
currently nets the amounts owed by the customers for deliveries with the amounts owed to the customers for drivers’ wages.
As such, the company reduces the delivery fee by the drivers’ wages to determine the transaction price. These elements of
the transaction price are based on variable consideration determined to be constrained and are recognized as of the later of when
the service is rendered or when the Company pays or promises to pay the consideration, which will generally be on a monthly basis.
If the cost of the drivers’ wages exceeds the total fees for delivery, the Company would present a net negative revenue.
For the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018, the Company had net negative
revenue related to delivery of cannabis.
The transaction price of the commissions is
variable consideration as the price is determined to be 10% of a delivered sale from an order generated on the Company’s
online platform. The variable consideration is also constrained as the amount of the consideration is dependent on the cost of
the products purchased; and is further constrained as the company has little history to predict the amount to be recognized. The
transaction price for the commissions will be determined as the company satisfies the performance obligation.
The direct sales made through the Ganjarunner
website do not have a variable consideration and are accounted for as product sales.
4) Allocate the transaction price to performance obligations
in the contract
If the contract contains a single performance
obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services
that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company
must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For
example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct
services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an
allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the
transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service
that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which
the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the
Company estimates the standalone selling price taking into account available information such as market conditions and internally
approved pricing guidelines related to the performance obligations.
The Company will allocate the transaction
price of the delivery fees and to the deliveries that they perform separately for the customer. The transaction price
of the commissions will be allocated per each sale that the Company generates for a retailer that is delivered. There are
no discounts to allocate and there have been no changes in the transaction price to allocate.
For the sales made through the Ganjarunner
website, the transaction price is allocated to the product and the delivery fees associated with the sale.
5) Recognize revenue when or as the Company satisfies
a performance obligation
The Company satisfies performance obligations
either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring
a promised service to a customer.
Both performance obligations are satisfied
at a point in time, and as such revenue will be recognized when the delivery is completed. The revenue will not be recognized for
orders not fulfilled, but the delivery fee is earned even if the delivery is rejected or the person who placed the order is not
present or available at the time of delivery. The consideration payable to the customer for drivers’ wages is recognized
over time based on the inputs to determine the drivers’ wage obligations, but the net transaction price is known and therefore
recognized by the end of each reporting period.
For the sales made through the Ganjarunner
website, the performance obligation is satisfied at a point in time, and as such revenue will be recognized when the delivery is
completed.
Disaggregation of Revenue
The following table depicts the disaggregation
of revenue according to revenue type.
Revenue Type
|
|
Revenue for the three months ended
September 30,
2019
|
|
|
Revenue for the three months ended
September 30,
2018
|
|
|
Revenue for the nine months ended
September 30,
2019
|
|
|
Revenue for the nine months ended
September 30,
2018
|
|
Delivery Income
|
|
$
|
53,496
|
|
|
|
14,088
|
|
|
$
|
87,869
|
|
|
|
27,248
|
|
Dispensary Cost Reimbursements
|
|
|
(36,007
|
)
|
|
|
(48,527
|
)
|
|
|
(99,353
|
)
|
|
|
(79,691
|
)
|
Delivery Income, net
|
|
|
17,489
|
|
|
|
(34,439
|
)
|
|
|
(11,484
|
)
|
|
|
(52,443
|
)
|
Product Sales
|
|
|
1,046,866
|
|
|
|
-
|
|
|
|
1,109,473
|
|
|
|
-
|
|
Commission Income
|
|
|
264
|
|
|
|
4,266
|
|
|
|
293
|
|
|
|
5,242
|
|
Other Revenue
|
|
|
148,044
|
|
|
|
-
|
|
|
|
160,818
|
|
|
|
-
|
|
Total
|
|
$
|
1,212,663
|
|
|
|
(30,173
|
)
|
|
$
|
1,259,070
|
|
|
|
(47,201
|
)
|
Due to this reduction of revenue from the
reimbursement of wages for the delivery couriers, the Company is presenting a net negative delivery income for the three months
ended September 30, 2018 and the nine months ended September 30, 2019 and 2018.
Leases
Under Topic 842, operating
lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting
of office space with remaining lease terms of 11 months to 28 months. Current facility leases include our offices in Las Vegas,
Nevada, Long Beach, California, San Diego, California, Glendale, California, and Sacramento, California. Lease costs were $148,021
for the nine months ended September 30, 2019. There was no sublease rental income for the nine months ended September 30, 2019.
Leases with an
initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed after
the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use
(“ROU”) assets.
Our lease agreements
generally do not provide an implicit borrowing rate, therefore an internal incremental borrowing rate is determined based on information
available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing
rate on December 31, 2018 for all leases that commenced prior to that date.
Lease Costs
|
|
Nine Months
Ended
September 30,
2019
|
|
Components of total lease costs:
|
|
|
|
Operating lease expense
|
|
$
|
148,021
|
|
Total lease costs
|
|
$
|
148,021
|
|
|
|
Three Months
Ended
September 30,
2019
|
|
Components of total lease costs:
|
|
|
|
Operating lease expense
|
|
$
|
51,313
|
|
Total lease costs
|
|
$
|
51,313
|
|
Lease Positions as of September 30,
2019
ROU lease assets and
lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:
|
|
September 30,
2019
|
|
Assets
|
|
|
|
Right of use asset – short term
|
|
$
|
163,424
|
|
Right of use asset – long term
|
|
|
166,322
|
|
Total assets
|
|
$
|
329,746
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease liabilities – short term
|
|
|
173,145
|
|
Operating lease liabilities – long term
|
|
$
|
166,322
|
|
Total lease liability
|
|
$
|
339,467
|
|
Lease Terms and Discount Rate
Weighted average remaining lease term (in years) – operating lease
|
|
|
2.38
|
|
Weighted average discount rate – operating lease
|
|
|
10.91
|
%
|
Cash Flows
|
|
Nine Months
Ended
September 30,
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
ROU amortization
|
|
$
|
57,764
|
|
Cash paydowns of operating liability
|
|
$
|
(53,565
|
)
|
Supplemental non-cash amounts of lease liabilities arising from obtaining
|
|
|
|
|
ROU assets
|
|
$
|
(387,510
|
)
|
Lease Liability
|
|
$
|
393,032
|
|
The future minimum lease payments under
the leases are as follows:
2019 (three months)
|
|
$
|
122,153
|
|
2020
|
|
|
156,916
|
|
2021
|
|
|
44,851
|
|
2022
|
|
|
39,535
|
|
2023
|
|
|
3,303
|
|
Total future minimum lease payments
|
|
|
366,758
|
|
Lease imputed interest
|
|
|
27,291
|
|
Total
|
|
$
|
339,467
|
|
Basic and Diluted Net Loss per Common
Share
Basic loss per common share is computed
by dividing the net loss by the weighted average number of shares of common stock outstanding for each period. Diluted loss per
share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding plus the dilutive
effect of shares issuable through the common stock equivalents. The weighted-average number of common shares outstanding excludes
common stock equivalents because their inclusion would be anti-dilutive. As of September 30, 2019, common stock equivalents are
comprised of 16,643,750 warrants and 9,222,959 options.
Recent Accounting Pronouncements
The FASB issues ASUs to amend the authoritative
literature in ASC. There have been several ASUs to date, that amend the original text of ASC. Management believes that those issued
to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not
expected to have a significant impact our financial statements.
NOTE 4 – MERGER AGREEMENT
On June 21, 2019, the Company, GR Acquisition,
Inc. (“GRA”), a Nevada corporation, Ganjarunner, Inc. (“Ganjarunner”), a California corporation, and Global
Wellness, LLC (“GW”), a California limited liability company, (Ganjarunner and GW are hereafter referred to collectively
as “GR/GW”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which GR/GW
shall merge with and into GRA, with GRA continuing as the surviving entity and wholly-owned subsidiary of the Company (the “Merger”).
The Merger closed on June 24, 2019 (the “Closing Date”). Pursuant to the Merger Agreement, the Company agreed to pay
to GR/GW $450,000, $150,000 of which has already been paid to GR/GW with the remaining $300,000 to be paid in two equal tranches
of $150,000 whereby each tranche is subject to GRA’s achievement of certain milestones. Additionally, the Company shall pay
to GR/GW (i) $350,000 at the earlier to occur of the 6-month anniversary of the Closing Date or upon the Company raising additional
funding of at least $2,000,000 and (ii) $300,000 at the end of the 24-month anniversary of the Closing Date. In addition, as further
consideration, the Company issued to GR/GW’s founders 1,000,000 shares of the Company’s common stock on the Closing
Date and shall make two additional issuances of 2,000,000 shares of common stock on the 12-month and 24-month anniversaries of
the Closing Date, with each respective issuance contingent upon GRA’s achievement of certain milestones as set forth in the
Merger Agreement.
Following the closing of the transaction,
Ganjarunner’s financial statements as of the Closing were consolidated with the Consolidated Financial Statements of the
Company. These amounts are provisional and may be adjusted during the measurement period.
The following presents the unaudited pro-forma
combined results of operations of the Company with the Ganjarunner Business as if the entities were combined on January 1, 2018.
|
|
Nine Months
Ended
|
|
Nine Months
Ended
|
|
|
September 30,
2019
|
|
September 30,
2018
|
Gross Revenue
|
|
$
|
2,856,759
|
|
|
|
1,422,933
|
|
Gross Profit
|
|
$
|
1,468,819
|
|
|
|
660,118
|
|
Net loss
|
|
$
|
(9,162,491
|
)
|
|
|
(774,387
|
)
|
Net loss per share
|
|
$
|
(0.19
|
)
|
|
|
(0.07
|
)
|
Weighted average number of shares outstanding
|
|
|
48,886,493
|
|
|
|
11,018,676
|
|
The unaudited pro-forma results of operations
are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results
that would have been attained had the acquisitions been completed as of January 1, 2018 or to project potential operating results
as of any future date or for any future periods.
The Company consolidated Ganjarunner as
of the closing date of the Merger Agreement, and the results of operations of the Company include that of Ganjarunner.
The following presents the consideration
paid for the acquisition of Ganjarunner and the preliminary purchase price allocation. These amounts are provisional and may be
adjusted during the measurement period.
Purchase Price
|
|
|
|
Cash consideration
|
|
$
|
150,000
|
|
Future cash consideration
|
|
|
903,886
|
|
Stock consideration
|
|
|
500,000
|
|
Future stock consideration
|
|
|
1,194,092
|
|
Total purchase price
|
|
$
|
2,747,978
|
|
|
|
|
|
|
Allocation of purchase price
|
|
|
|
|
Cash
|
|
$
|
123,088
|
|
Inventory
|
|
|
139,017
|
|
Fixed assets, net
|
|
|
18,353
|
|
ROU asset
|
|
|
125,541
|
|
Lease Liability
|
|
|
(126,163
|
)
|
Accounts payable
|
|
|
(546,690
|
)
|
Goodwill and intangible assets
|
|
|
3,014,832
|
|
Total allocation of purchase price
|
|
$
|
2,747,978
|
|
NOTE 5 – NOTES PAYABLE
On November 7, 2017 the Company issued
a promissory note for $75,000 that accrues interest of 6% annually. The promissory note is due on the earlier of January 31, 2018
or in the event of default, as such term is defined in the agreement. The terms of the promissory note provide that the principal
amount of the note is convertible into the same security that is sold and issued in the next Qualified Financing Round completed
by the Company, except that the conversion price shall be at a ten percent (10%) discount to the equity price per share raised
in such Qualified Financing Round. Qualified Financing Round is defined as an equity financing of the Company that is consummated
during the term of the promissory note which results in gross proceeds of not less than $925,000. The note was in default but as
of the date of this report, has been fully paid off.
On February 1, 2018, the Company entered into
a convertible bridge loan agreement providing for a loan in the principal amount of $50,000 to the Company. The loan bears interest
at the rate of 6% annually and is convertible into shares the Company’s common stock at a 10% discount to the equity price
per share that is sold and issued in the next Qualified Financing Round completed by the Company. Qualified Financing Round is
defined as an equity financing of the Company that is consummated during the term of the loan which results in gross proceeds of
not less than $925,000. In connection with the loan, the Company issued to the lender a three-year warrant to purchase 12,500 shares
of common stock of the Company at an exercise price of $0.50 per share. The bridge loan was due on March 31, 2018. In March 2019,
the Company entered into a debt cancellation agreement with the lender pursuant to which the Company agreed to issue to the lender
375,000 shares of the Company’s common stock and a three year warrant to purchase 25,000 shares of the Company’s common
stock at an exercise price of $0.20. The Company recorded a loss on extinguishment of debt of $225 related to the cancellation.
On October 25, 2018, the Company issued
a convertible promissory note in the principal amount of $50,000 which is convertible into shares the Company’s common stock
at a price of $0.20 per share. This note accrues interest of 8% annually and has a maturity date of October 25, 2019. During
the second quarter of 2019, the note was converted into 261,665 shares of the Company’s common stock.
On August 28, 2019, the Company issued a senior
convertible note (“Note”) to M2 Equity Partners (“Holder”), pursuant to which the Holder agreed to advance
the Company $1,000,000 in three equal installments, with the final installment to be advanced on October 30, 2019. The Note matures
on August 28, 2020 and is a senior obligation of the Company. The Note’s principal balance of $1,000,000 bears interest at
a rate of 10% per annum and interest payments are payable on a monthly basis. The funds from this loan will be distributed in three
parts with $333,333 being issued on August 30, 2019, September 30, 2019 and October 30, 2019. As of September
30, 2019, the Company has received $503,333 of the funds. Pursuant to the Note, the Holder has the right to convert all or part
of the Note to shares of common stock or preferred stock of the Company at a price equivalent to a value of $0.50 per share of
common stock on an as-converted basis. As additional consideration, the Company issued to the Holder a three-year warrant to purchase
1,500,000 shares of the Company’s common stock at an exercise price of $0.50. Additionally, in connection with the issuance
of the Note, the Company’s chief financial officer surrendered to the Company 2,500,000 shares of the Company’s common
stock for cancelation. The company also recognized a derivative liability in connection with the note valued at $581,437 as of
September 30, 2019.
In addition, as an
inducement to enter into the Note and to fund each advance thereunder, the Company entered into a security agreement with the Holder
executed concurrently with the Note (the “Security Agreement”). Pursuant to the Security Agreement, the Company granted
the Holder a first priority security interest in certain assets of the Company (the “Collateral”) for the benefit of
the Holder to secure the Company’s obligations under the Note. The occurrence of any event of default under the Note, as
well as the Company’s failure to observe or perform its obligations under the Security Agreement and such failure goes uncured
for five days after receiving notice, constitutes and event of default under the Security Agreement, If an event of default under
the Security Agreement occurs, the Holder is entitled to certain rights, including the right to take possession of the Collateral
and the right to operate the business of the Company using the Collateral. The Security Agreement terminates when all payments
under the Note have been made in full.
NOTE 6 - STOCKHOLDERS’ DEFICIT
Common Stock
The Company is authorized to issue 200,000,000
shares of common stock, par value $0.0001 per share.
During the nine months ended September
30, 2019, the company issued 9,385,000 shares of common stock for cash of $2,633,001, 636,665 shares of common stock for conversion
or cancellation of debt, 1,000,000 shares related to the acquisition of Ganjarunner, 1,960,796 shares related to the Purchase Agreement
(as defined in Note 7) entered into with Mountain High, 5,072,812 shares from the exercise of warrants, and 14,772,616 shares were
cancelled.
Preferred Stock
The Company is authorized to issue 15,000,000
shares of preferred stock, par value $0.0001 per share. The preferred stock may be issued from time to time in one or more series
as the Company’s Board may authorize. None of the preferred stock have been designated and none are issued and outstanding.
Warrants
A summary of warrant issuances are as follows:
|
|
Number
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2018
|
|
|
18,750
|
|
|
$
|
0.50
|
|
|
|
2.85
|
|
Granted
|
|
|
9,112,500
|
|
|
|
0.19
|
|
|
|
3.83
|
|
Outstanding December 31, 2018
|
|
|
9,131,250
|
|
|
|
0.19
|
|
|
|
3.83
|
|
Granted
|
|
|
15,058,000
|
|
|
|
0.39
|
|
|
|
5.72
|
|
Forfeited
|
|
|
(7,545,500
|
)
|
|
|
0.34
|
|
|
|
4.73
|
|
Outstanding September 30, 2019
|
|
|
16,643,750
|
|
|
$
|
0.30
|
|
|
|
5.83
|
|
During the first quarter of 2019, the Company issued warrants
to purchase an aggregate of 1,558,000 shares of common stock of the Company at an exercise price of $0.10 per share. The warrants
may be exercised on a cashless basis and have a term of seven years. The warrants were issued for consulting services.
During the second quarter of 2019, the Company issued warrants
to purchase an aggregate of 2,500,000 shares of common stock of the Company at an exercise price of $0.20 per share. The warrants
may be exercised on a cashless basis and have a term of seven years. The warrants were issued for consulting services.
During the third quarter of 2019, the Company issued warrants
to purchase an aggregate of 11,000,000 shares of common stock of the Company at varying exercise prices of $0.20 and $0.50 per
share. The warrants may be exercised on a cashless basis and have a term of three or seven years. The warrants were issued for
consulting services and in connection with a note.
The company recognized a stock compensation
expense of $4,890,181 and $5,510,766 respectively for the three and nine months ended September 30, 2019, related to warrants.
Options
A summary of options issuances are as follows:
|
|
Number
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Grant Date Fair Value
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
4,854,692
|
|
|
|
0.04
|
|
|
|
3.00
|
|
|
|
0.19
|
|
Outstanding December 31, 2018
|
|
|
4,854,692
|
|
|
|
0.04
|
|
|
|
3.00
|
|
|
|
0.19
|
|
Granted
|
|
|
6,210,022
|
|
|
|
0.24
|
|
|
|
6.52
|
|
|
|
0.30
|
|
Forfeited
|
|
|
(1,841,755
|
)
|
|
|
0.04
|
|
|
|
2.42
|
|
|
|
0.04
|
|
Outstanding September 30, 2019
|
|
|
9,222,959
|
|
|
$
|
0.18
|
|
|
|
4.68
|
|
|
$
|
0.26
|
|
Nonvested Shares
|
|
Shares
|
|
Nonvested at January 1, 2018
|
|
|
-
|
|
Granted
|
|
|
4,854,692
|
|
Vested
|
|
|
(1,213,673
|
)
|
Forfeited
|
|
|
-
|
|
Nonvested at December 31, 2018
|
|
|
3,641,019
|
|
Granted
|
|
|
6,210,022
|
|
Vested
|
|
|
(2,305,128
|
)
|
Forfeited
|
|
|
(1,841,755
|
)
|
Nonvested at September 30, 2019
|
|
|
5,704,158
|
|
During the first quarter of 2019, the Company
issued stock options to purchase an aggregate of 3,922,522 shares of common stock of the Company at an exercise price of $0.10
per share. The options have a term of seven years. The company recognized a stock compensation expense of $245,344 related
to the issuance of these options for the three months ended March 31, 2019.
During the second quarter of 2019, the Company
issued stock options to purchase an aggregate of 1,687,500 shares of common stock of the Company at an exercise price of $0.10
to $0.50 per share. The options have a term of seven years. The company recognized a stock compensation expense of $106,985 related
to the issuance of these options for the three months ended September 30, 2019.
During the third quarter of 2019, the Company
issued stock options to purchase an aggregate of 600,000 shares of common stock of the Company at an exercise price of $0.50 per
share. The options have a term of seven years. The company recognized a stock compensation expense of $118,065 related
to the issuance of these options for the three months ended September 30, 2019.
The company recognized a stock compensation
expense of $118,065 and $470,394 respectively for the three and nine months ended September 30, 2019, related to stock options.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
On May 15, 2018, the Company entered into
a three (3) year lease to rent office space for its principal executive office, with an effective date of June 1, 2018. The lease
provides for monthly rent of $2,800 per month for the first year of the lease, $3,780 per month for the second year and $3,920
per month for the third year. The Company is also required to pay a monthly common area maintenance fee of $420.
On February 1, 2019, the Company entered
into a twelve-month lease for office space in Las Vegas, Nevada. The lease requires a monthly payment of $1,764 and terminates
on February 14, 2020.
The Company assumed a three (3) year lease,
with an effective date of February 5, 2019, from a related party. The Company paid $20,839 upon signing the assignment. The lease
provides for monthly rent of $5,345 per month through June 30, 2019, $5,880 per month through June 30, 2020 and $6,468 per month
through June 30, 2021. The Company is also required to pay a monthly common area maintenance fee of $695.
The Company assumed a five (5) year lease,
with an effective date of June 24, 2019, the acquisition of Ganjarunner. The lease provides for monthly rent of $3,113 per month
through July 31, 2021, $3,206 per month through July 31, 2022 and $3,302 per month through July 31, 2023.
On February 22, 2019, the Company entered
into a consulting agreement for public and media relations services. As part of this agreement the Company will pay $4,000 per
month to the consultant.
On March 7, 2019, the Company entered into
a consulting agreement for business advisory services. Pursuant to the terms of the consulting agreement, the Company agreed to
pay cash compensation of $10,417 per month. The Company also agreed to pay a one-time payment of $5,000 within 5 days of the execution
of the agreement. The Company also agreed to issue the consultant 125,000 options to purchase shares of the Company’s common
stock, which options will vest quarterly over a 3 year period.
On April 1, 2019 the Company entered into
a consulting agreement for business advisory services. As part of this agreement the Company will pay the consultant $20,000 per
month. Additionally, the Company agreed to issue 500,000 warrants to purchase shares of its common stock. These warrants have an
exercise price of $0.20 and a term of 7 years. On July 1, 2019, the agreement was amended. As part of this amendment the Company
will issue a total of 6,000,000 warrants to purchase the Company’s stock. These warrants have a seven year term and an exercise
price of $0.50 per share. On August 27, 2019, the agreement was amended to extend the term of the agreement to March 31, 2020.
Additionally, as part of this amendment the Company will issue of 2,500,000 warrants to purchase the Company’s stock. These
warrants have a three year term and an exercise price of $0.50 per share.
During the second quarter of 2019, the
Company entered into three delivery contractor agreements with retailers. As part of these contracts the Company will offer delivery
services in exchange for a delivery fee from each of these retailers.
During the nine months ended September
30, 2019, the Company entered into ten employment agreements. As part of these agreements the Company will issue options to purchase
an aggregate of 2,287,500 shares of the Company’s common stock. These options vest quarterly over two or three years.
On July 10, 2019 (the “Closing Date”),
the Company and Mountain High Recreation, Inc. (“MH”), a California corporation, entered into an Asset Purchase Agreement
(the “Purchase Agreement”), pursuant to which the Company acquired certain assets from MH as specified in the Purchase
Agreement, which included (i) the option to purchase to MH’s California Cannabis - Retailer Nonstorefront License (ii) the
option to purchase a certain real property lease located at 8 Light Sky Ct, Sacramento, CA 95828 associated with that certain license,
(iii) the right to use all trademarks and intellectual property associated with the MH brand (the “Assets”). The Company
assumed no liabilities of MH. The transactions contemplated by the Purchase Agreement closed on July 10, 2019 (the “Closing”).
Pursuant to the Pursuant Agreement, the Company
agreed to pay to MH the following: $200,000 at Closing, $150,000 on or before December 20, 2019, $150,000 on or before March 31,
2020, $250,000 at the end of the twelfth (12th) month (on a rolling basis) following the Closing Date and $250,000 at the end of
the twenty-fourth (24th) month (on a rolling basis) following the Closing Date. In addition, at the Closing, the Company issued
to MH 1,000,000 shares of its common stock. At the end of the twelfth month (on a rolling basis) from the Closing Date, the Company
agreed to issue to MH warrants to purchase 2,000,000 shares of the Company’s Common Stock with an exercise price equal to
the per share purchase price paid by investors of the Company’s then most recent private placement and exercisable for a
period of three (3) years from the date of issuance (the “2020 Warrants”). At the end of the twenty-fourth month (on
a rolling basis) from the Closing Date, the Company shall issue to MH warrants to purchase 2,000,000 shares of the Company’s
Common Stock with an exercise price equal to the per share purchase price paid by investors of the Company’s then most recent
private placement price, exercisable for a period of three (3) years from the date of issuance (the “2021 Warrants”).
The 2020 Warrants and 2021 Warrants are subject to adjustment, based on the amount of gross revenue the Company recognized in connection
with the Assets. On October 4 2019, the Company amended this agreement (See Note 9).
On September 27, 2019, the Company entered into a settlement agreement
with Chris Boudreau, the Company’s former chief executive officer, pursuant to which the Company agreed to repurchase 12,272,616
shares of the Company’s common stock from Mr. Boudreau at a per share purchase price of approximately $0.12, totaling an
aggregate purchase price of $122,726 (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company
agreed to pay Mr. Boudreau in twelve monthly installments of $10,227 starting October 1, 2019. Additionally, Mr. Boudreau will
also forfeit options to purchase an aggregate of 1,538,910 shares of the Company’s common stock and warrants to purchase
an aggregate of 2,000,000 shares of the Company’s common stock. Mr. Boudreau also forfeited a $23,726 loan to the Company resulting
in a gain on extinguishment of debt.
On September 30, 2019, the Company entered
into a joint venture agreement (the “JV Agreement”) with Budee, Inc., (“Budee’), a privately-held company
involved in the delivery of cannabis-related products, pursuant to which the parties formed a joint venture company, GanjaBudee
Inc., a Nevada Corporation (“GB”), in anticipation of a merger between the parties (the “GanjaBudee Merger’).
GB is a separate and independent entity from either party with its own management team and Board of Directors and is owned 51%
by the Company and 49% by Budee. Pursuant to the JV Agreement, no GanjaBudee Merger will be effective until the final resolution
of certain pending litigation. The term of GB will continue until such GanjaBudee Merger is effective or any definitive agreement
for such GanjaBudee Merger is terminated but in any case will not be for a period of more than sixty months, subject to a mutual
extension agreed to by the parties.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2018,
the Company entered into a loan agreement with the Company’s chief financial officer (“CFO”), Brian Hayek, pursuant
to which Mr. Hayek extended an interest free loan to the Company in the amount of $30,705. As of September 30, 2019, the amount
due on this loan was $3,000.
On January 16, 2019, the Company appointed
Jerrin James as the Company’s chief operating officer (“COO”). Pursuant to the terms of the agreement with Mr.
James, the Company agreed to issue 2,897,522 shares of the Company’s common stock to Mr. James, in the form of stock options
with a vesting period of 25% immediately upon his appointment as COO and the remainder vesting quarterly over three years.
On March 5, 2019, the Company appointed
Adam Berk as a Director to the Company. In connection with his appointment, the Company agreed to issue to Mr. Berk, options to
purchase 450,000 shares of common stock which vest immediately upon grant.
On April 3, 2019, the Company appointed
Christian Schenk as a Director to the Company. In connection with his appointment the Company agreed to issue to Mr. Schenk, warrants
to purchase 1,500,000 shares of common stock which will vest immediately upon grant. The Company also agreed to issue warrants
to purchase 500,000 shares of common stock of the Company after the close of the merger with Ganjarunner (see below for details
on the business combination), and issue warrants to purchase 1,000,000 shares of common stock of the Company after successfully
closing the Company’s pending business arrangement with a cannabis B2B transportation provider or other business as determined
by the Board of Directors.
During the nine months ended September
30, 2019, the Company entered into a loan agreement with the Company’s CFO, Brian Hayek, pursuant to which Mr. Hayek extended
a loan to the Company in the amount of $55,000 with an interest rate of 10%. As of September 30, 2019, the amount due on this loan
was $55,000.
NOTE 9 - SUBSEQUENT EVENTS
Subsequent to the third quarter of 2019,
the Company sold 150,000 shares of common stock at a purchase price of $0.50 per share for an aggregate of $75,000.
On October 4 ,2019, the Company amended the
Asset Purchase Agreement with Mountain High Recreation, Inc. As part of this amendment, the Company will issue 5,000,000
warrants to purchase shares of the Company’s common stock to Mountain High Recreation, Inc. These warrants have a term of
three years and an exercise price of $0.50. These warrants will replace the previously agreed upon share consideration.