| Note 1 - Nature of Business and Significant Accounting Policies | 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 are 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 have been 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. Of the $373,725 of cash consideration, $ 273,725 was paid on April 10, 2015 and the remaining $100,000 is to be paid in 10 monthly installments beginning on July 31, 2015 and ending April 30, 2016. As of February 29, 2016, the balanced owed to these sellers is $ 25,002 and is included in current liabilies on the consolidated balance sheet. The following table summarizes the total consideration paid by each major class of consideration, including non-cash consideration paid: Consideration paid: Cash $ 273,725 Note payable, short-term 100,000 3,500,000 Common shares of Kush Bottles, Inc. 2,169,650 Total consideration $ 2,543,375 There was no public market for the Company's common stock and, as such, we evaluated the best evidence to estimate the common stock's fair value. The common stock was valued using the market approach. The market approach bases the valuation measurement on what other similar enterprises or comparable transactions indicate the value to be. From the period of inception to April 10, 2015, the Company had sold 1,471,112 shares of its common stock to accredited investors for cash of $ 912,000 , at a weighted average offering price of $ 0.6199 per share. Accordingly, the Company had valued the price of the common stock issued in conjunction with these transactions at $ 0.6199 per share. The Company considered these transactions preceding the acquisition the best evidence of fair value for the common stock. In the absence of an active market trading its securities, management will continue to monitor transactions in the Company's common stock to ascertain its value under the market approach. The following table summarizes the purchase price allocation, and the estimated fair values of the net assets acquired, liabilities assumed, identifiable intangible assets, and goodwill that resulted from the acquisition of Dank as of April 10, 2015: Cash and cash equivalents $ 73,505 Accounts receivable, net 71,667 Inventory 300,901 Prepaid expenses 9,848 Property and equipment, net 76,767 532,688 Accounts payable 230,600 Customer deposits 72,585 Payroll liabilities 9,889 Notes payable, short-term 52,828 365,902 Goodwill 2,376,589 Total consideration $ 2,543,375 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. The following (a) balance sheets as of February 29, 2016 (unaudited) and August 31, 2015, which have been derived from audited financial statements, and (b) the unaudited interim statements of operations and cash flows of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. GAAP for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended February 29, 2016 are not necessarily indicative of results that may be expected for the year ending August 31, 2016. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended August 31, 2015 included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC) on November 30, 2015. There have been no significant changes to such accounting policies during the six months ended February 29, 2016. Going Concern Matters The accompanying condensed consolidated financial statements were prepared on a going concern basis In order to continue as a going concern, the Company needs to achieve a sustained profitable level of operations or the Company will need, among other things, additional capital resources. Managements plans to continue as a going concern include raising additional capital through increased sales of product and by sale of restricted common shares. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish its revenue targets for profitability or eventually secure other sources of financing and attain profitable operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 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. 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 $ 4,860 and $ 5,080 as of and August 31, 2015, 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 $ 984,920 and $ 662,368 as of February 29, 2016 and August 31, 2015, respectively. 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 29, 2016 February 28, 2015 February 29, 2016 February 28, 2015 Net income (loss) $ 8,618 $ (77,162) $ 24,692 $ (164,555) Weighted average common shares outstanding for basic EPS 46,438,907 40,855,965 46,351,843 41,004,577 Net effect of dilutive options 973,599 - 973,599 - Weighted average common shares outstanding for diluted EPS 47,412,506 40,855,965 47,325,442 41,004,577 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) Potentially dilutive securities, which were not included in the computation of diluted earnings per share because either the effect would have been anti-dilutive or the options exercise prices were greater than the average market price of the common stock, were 973,599 and 0 for the three and six months ended February 29, 2016 and 2015, respectively. 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 six months ended February 29, 2016 and 2015, the Company had no elements of comprehensive income or loss. 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 condensed consolidated statements of operations. 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. 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. 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. Advances from Related Party. Note Payable Vehicle Loan. Line-of-Credit Payable. The Company had no financial assets or liabilities that are measured at fair value on a recurring basis as of February 29, 2016 and August 31, 2015. 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. Reclassification Certain reclassifications have been made in financial statements to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss. Recently Issued Accounting Pronouncements In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805), "Simplifying the Accounting for Measurement Period Adjustments" (ASU 2015-16). This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same periods financial statements, the effect on earnings of charges in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company believes based on recent acquisitions that the impact that the adoption of ASU 2015-16 is likely immaterial. ASU 2015-16 will be effective for the Company in fiscal 2017. In August 2015, the FASB issued ASU No. 2015-15, "InterestImputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit ArrangementsAmendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting" (ASU 2015-15). Specifically, the ASU states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the underlying line of credit (LOC) arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement. Presentation of fees under LOC arrangements had not been specified in earlier guidance issued by the FASB in April, 2015, ASU 2015-03, "InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which changed the presentation of debt issuance costs in financial statements. Under the guidance in ASU 2015-03, debt issuance costs (other than those in LOC arrangements) are presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-15 is effective upon adoption of ASU 2015-03. Early adoption of ASU 2015-03 is allowed for financial statements that have not previously been issued. The guidance is to be applied retrospectively to all prior periods. ASUs 2015-03 and 2015-15 will be effective for the Company beginning in fiscal 2017. The Company is currently evaluating the impact that the combined adoption of ASUs 2015-03 and 2015-15 may have on the Companys Consolidated Financial Statements. In August 2014, the FASB issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) . In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11Simplifying the Measurement of Inventory. The ASU was issued as part of the FASBs simplification initiative and under the ASU; inventory is measured at the lower of cost and net realizable value, which would eliminate the other two options that currently exist for the market: (1) replacement cost and (2) net realizable value less an approximately normal profit margin. This ASU is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. The Company is assessing the impact of the adoption of the ASU on its financial statements. In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance (ASU 2015-03), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015, which means it will be effective for our fiscal year beginning October 1, 2016. Early adoption is permitted. We do not believe that adoption of ASU 2015-03 will have a significant impact on our consolidated financial statements. 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. |
