UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 19, 2014
4TH GRADE FILMS, INC.
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(Exact name of registrant as specified in its charter)
Utah 000-52825 20-8980078
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1350 Independence St., Suite 300
Lakewood, CO 80125
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(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (303) 736-2442
1338 S. Foothill Drive, #163
Salt Lake City, Utah 841008
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(Former name or former address if changed since last report)
Check appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below)
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-14(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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Forward-Looking Statements
This report contains or incorporates by reference forward-looking
statements, concerning our financial condition, results of operations and
business. These statements include, among others:
o statements concerning the benefits that we expect will result from the
business activities that we contemplate; and
o statements of our expectations, beliefs, future plans and strategies,
anticipated developments and other matters that are not historical facts.
You can find many of these statements by looking for words such as
"believes", "expects", "anticipates", "estimates" or similar expressions used in
this report.
These forward-looking statements are subject to numerous assumptions,
risks and uncertainties that may cause our actual results to be materially
different from any future results expressed or implied in those statements.
Because the statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied. We caution you not to put
undue reliance on these statements, which speak only as of the date of this
report.
To the extent, the information contained in this report, changes in any
material respect, we will amend this report.
Item 1.01 Entry into a Material Definitive Agreement.
See Item 2.01 of this report.
Item 2.01 Completion of Acquisition or Disposition of Assets
On August 19, 2014, pursuant to an Agreement to Exchange Securities (the
"Agreement"), 4th Grade Films, Inc. (the "Company") acquired approximately 90%
of the outstanding common stock of Strainwise, Inc., a Colorado corporation
("Strainwise"), in exchange for 23,124,184 shares of the Company's common stock.
In connection with the acquisition:
o the Company caused 1,038,000 shares of its outstanding common stock to
be cancelled;
o Shawn Phillips was appointed a director and the Chief Executive
Officer of the Company;
o Erin Phillips was appointed a director and the President, and
Principal Financial and Accounting Officer of the Company;
o David Modica was appointed a director and Manager of Quality Control
and a director of the Company;
o Shane Thueson, Nicholl Doolin and John Winchester, resigned as
officers and directors of the Company;
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o the Company agreed to negotiate in good faith for the sale of its
pre-Agreement business and assets to Shane Thueson; and
The resignations and elections of the new officers were effective on the
closing the Agreement; and the resignations and elections of the new directors
will be effective on the 10th day from the mailing of the Company's Schedule
14f-1 Information Statement to its shareholders, or August 30, 2014.
The Company, at a later date, will effect a short form merger under the
Utah Revised Business Corporation Act (the "Utah Act") whereby Strainwise will
be merged with and into the Company on a share for share basis, and the Company
will assume all outstanding warrants of Strainwise and issue like warrants of
the Company
As a result of the acquisition, Strainwise is a majority owned subsidiary
of the Company and the former principal shareholder of Strainwise owns
approximately 95% of the Company's outstanding shares of common stock, excluding
shares to be issued under the short form merger or shares underlying Strainwise
warrants. The completion of the short form merger will result in 26,864,884
outstanding shares of the Company's common stock, warrants to acquire 1,070,350
shares of the Company's common stock, and warrants to acquire 500,000 shares of
the Company's common stock. The warrants for the 1,070,350 shares are
exercisable at any time prior to January 31, 2019_at a price of $5.00 per share.
The warrants for the 500,000 shares are exercisable at any time prior to January
31, 2019 at a price of $0.10 per share.
In addition to the foregoing, the Agreement contained customary
representations and warranties and conditions to which each party's obligations
were subject, among other terms and provisions.
A copy of the Agreement is filed herewith as an Exhibit and incorporated
herein by reference in Item 9.01.
Unless otherwise indicated, all references to the Company include the
operations of Strainwise.
Business
As a result of the acquisition of Strainwise, the Company provides
services to the regulated marijuana industry.
Presently, cannabis production and sales are largely the domain of
"mom-and-pop" operations that are not as large as they could be since marijuana
remains illegal under federal law and banks and credit card companies are
prohibited from processing marijuana business transactions according to
applicable federal rules and regulations. However, working within state
guidelines, entrepreneurs are moving forward with ambitious cannabis business
strategies. Management believes the current group of retail and cannabis
production companies see potential for increased sales and profits, especially
if they can transition these mom-and-pop operations to mid-sized businesses, and
subsequently transition the mid-sized businesses to larger, national brands.
Shawn Phillips, the founder of Strainwise, owns seven recreational
marijuana retail stores, one medical marijuana store, and three sophisticated
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and efficient product cultivation ("grow") facilities, which collectively
contain approximately 80,000 square feet of growing space (the "Affiliated
Entities"). The eight retail stores have been in operation as medical marijuana,
and subsequently, retail marijuana outlets, for between one and three years.
As a result of the ownership and operation of their own retail marijuana
stores and growing facilities, Shawn Phillips, and his wife Erin, are aware that
the operators of many of the potential client stores need the services the
Company plans to provide. Such services are presently beyond the reach (both
financially and operationally) for a large majority of retail owners. The
mom-and-pop owners do not have sufficient economies of scale, nor the level of
management sophistication and background to enable them to fully leverage their
business opportunity within the marijuana industry.
The branding and fulfillment services that the Company currently provides
are presently provided under Master Service Agreements, which are summarized
below, and copies of which are filed herewith as Exhibits and incorporated
herein in Item 9.01:
o Branding, Marketing and Administrative Consulting Services: Customers may
contract with us to use the Strainwise name, logo and affinity images in
their retail store locations. A monthly fee permits our branding customer
to use the Strainwise brand at one specific location. In addition, we will
assist operators in marketing and managing their businesses, setting up new
retail locations and general business planning and execution at an hourly
rate. This includes services to establish an efficient, predictable
production process, as well as, nutrient recipes for consistent and
appealing marijuana strains.
o Accounting and Financial Services: For a monthly fee, we provide our
customers with a fully implemented general ledger system, with an industry
centric chart of accounts, which enables management to readily monitor and
manage all facets of a marijuana medical dispensary, retail store and grow
facility. We provide bookkeeping, accounts payable processing, cash
management, general ledger processing, financial statement preparation,
state and municipal sales tax filings, and state and federal income tax
compilation and filings on behalf of the Company and the Captive Stores on
an ongoing basis.
o Compliance Services: The rules, regulations and state laws governing the
production, distribution and retail sale of marijuana can be complex, many
times obtuse, and may prove cumbersome with which to comply. Thus,
customers may contract with us to implement a compliance process, based
upon the number and type of licenses and permits for their specific
business. We provide this service on both an hourly rate and stipulated
monthly fee.
o Nutrient Supplier: The Company presently is one of the larger, single
purchasers of nutrients and other cultivation supplies for the sole purpose
of growing marijuana. As a result, we are able to make bulk purchases with
price breaks, based upon volume. We serve as a sole source nutrient
purchasing agent and distributor with pricing based upon our bulk
purchasing power.
o Lending: We will provide loans to individuals and businesses in the
cannabis industry. However, Colorado State law does not allow entities
operating under a cannabis license to pledge the assets or the license of
the cannabis operation for any type of general borrowing activity. Thus,
our lending will be on an unsecured basis, with reliance on a personal
guarantee of the borrower.
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o Lease of Grow Facilities and Equipment: We lease grow equipment and
facilities on a turn-key basis to customers in the cannabis industry. We
will also enter into sale lease backs of grow lights, tenant improvements
and other grow equipment.
The Company presently provides these branding and fulfillment services to
the eight retail marijuana outlets and one grow facility owned by Shawn
Phillips. The Company plans to make these services available to independent
retail stores and grow facilities in the regulated cannabis industry throughout
the United States.
The Company does not directly grow marijuana plants, produce marijuana
infused products, sell marijuana plants and/or sell marijuana infused products
of any nature.
Operating Leases
On March 7, 2014, we leased a grow facility containing approximately
26,700 square feet ("Custer Lease") for a term of five years commencing on April
1, 2014. Lease payments are scheduled to be $29,200 per month for the first 12
months of the lease, and then are scheduled to be $27,500 per month for the
subsequent 12 months, $28,325 per month for the subsequent 12 months, $29,170
per month for the subsequent 12 months and $30,035 per month for the final 12
months of the lease. Under the terms of the Custer Lease, we paid a security
deposit of $29,200. The lessor will provide all of the tenant improvements that
will enable the continuous cultivation of marijuana plants under 459 grow
lights.
On April 1, 2014, we leased a grow facility containing approximately
65,000 square feet ("51st Ave Lease") for a term of five years and nine months.
The terms of the 51st Ave Lease stipulate the payment of $15,000 per month,
prorated if necessary, until such time that the lessor is able to deliver a
Certificate of Occupancy, which is scheduled to occur on August 1, 2014.
Thereafter, lease payments are scheduled to be $176,456 per month for the first
six months of the lease, and then will be $221,833 per month for the subsequent
24 months, $231,917 per month for the next 12 months, $242,000 per month for the
next 12 months and $247,041 per month for the final 12 months of the lease.
Under the terms of the 51st Ave Lease, we are obligated to pay a security
deposit of $150,000, one-third of which was paid upon the execution of the 51st
Ave Lease, the second third of which is due and payable after the first harvest
or by October 1, 2014, and the final third of which is due and payable after the
second harvest or by December 1, 2014. The lessor will provide all of the tenant
improvements that will enable the continuous cultivation of marijuana plants
under 1,680 grow lights.
On April 22, 2014, we leased a grow facility containing approximately
38,000 square feet ("Nome Lease") for a term of seven years. The lease payments
are scheduled to be $44,570 per month for the first 12 months of the lease, and
then are scheduled to be $46,151 per month for the subsequent 12 months, $47,743
per month for the subsequent 12 months, $49,334 per month for the subsequent 12
months, $50,925 per month for the subsequent 12 months, $52,517 per month for
the subsequent 12 months and $54,108 for the final 12 months of the lease. Under
the terms of the Nome lease, we paid a security deposit of $133,679. The lessor
will provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under 800 grow lights.
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On June 10, 2014, we leased a grow facility containing approximately
113,000 square feet ("32nd Ave Lease") for a term of five years and nine months
which will not become effective until the proper Licenses are awarded, which are
expected to be awarded September 1, 2014. The terms of the 32nd Ave Lease
stipulate the payment of $25,000 per month, prorated if necessary, until such
time that the lessor is able to deliver a Certificate of Occupancy, which is due
to occur on September 1, 2014. Thereafter, lease payments are scheduled to be
$282,500 per month for the first 16 months of the lease, and then are scheduled
to be $301,333 per month for the subsequent 12 months, $320,167 per month for
the subsequent 12 months and $329,583 per month for the final 12 months of the
lease. Under the terms of the 32nd Ave. Lease, we are obligated to pay a
security deposit of $250,000, $150,000 of which was paid upon the execution of
the lease, and $100,000 of which will be due upon obtaining the Certificate of
Occupancy. The lessor will provide all of the tenant improvements that will
enable the continuous cultivation of marijuana plants under 1,936 grow lights.
We have the option to renew the leases described above at the end of their
terms at mutually agreed upon rates. There are no options to purchase the
properties underlying these leases.
We will sublease the grow facilities described above to the Affiliated
Entities for their grow operations.
Copies of these leases are filed as Exhibits hereto and incorporated
herein by reference in Item 9.01.
Master Service Agreements
We provide branding and fulfillment services to eight retail marijuana
stores and one cultivation and growing facility owned by Mr. Phillips.
Pursuant to the terms of these agreements, the marijuana stores and grow
facility collectively pay us $81,500 each month for branding, marketing,
administration, accounting and compliance services. We also supply nutrients to
the one grow facility at a 90% mark-up to our cost for the nutrients.
Our agreements with the marijuana outlets and grow facility expire on
December 31, 2023.
Market Conditions
In Colorado (with 5.1 million residents), the 2013 medical marijuana
market, with approximately 500 licensed dispensaries and 110,000 legal medical
users, is believed to be approximately $200,000,000.
In January 2014, the market was expanded in Colorado to allow adult use,
including adult visitors from other states, of marijuana for recreational
purposes. Voters in Washington State recently approved a ballot measure to
legalize cannabis for adult use. Many experts predict that other states will
follow Colorado and Washington in enacting legislation or approving ballot
measures that expand the permitted use of cannabis.
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While projections vary widely, many believe that, as a result of the
legalization of recreational marijuana in 2014, the Colorado medical and
recreational market combined will reach $600,000,000 (according to Colorado
State University).
One study of the marijuana industry predicts that by 2018, it will be a
$10 billion industry, according to the January 8, 2014, article in the
Huffington Post. These numbers may be conservative when one considers that the
alcohol and tobacco industries are both $300 billion plus industries.
Government Regulation
Marijuana is a Schedule-I controlled substance and is illegal under
federal law. Even in those states in which the use of marijuana has been
legalized, its use remains a violation of federal law.
As of July 31, 2014, 21 states and the District of Columbia allow their
citizens to use Medical Marijuana. Additionally, voters in the states of
Colorado and Washington approved ballot measures last November to legalize
cannabis for adult use. The state laws are in conflict with the federal
Controlled Substances Act, which makes marijuana use and possession illegal on a
national level. The Obama administration has effectively stated that it is not
an efficient use of resources to direct federal law enforcement agencies to
prosecute those lawfully abiding by state-designated laws allowing the use and
distribution of medical marijuana. However, there is no guarantee that the
administration will not change its stated policy regarding the low-priority
enforcement of such federal laws. Additionally, any new administration that
follows could change this policy and decide to enforce the federal laws
strongly. Any such change in the federal government's enforcement of such
current federal laws could cause significant financial damage to the Company and
its shareholders. While the Company does not intend to harvest, distribute or
sell cannabis, the Company may be irreparably harmed by a change in enforcement
by the federal or state governments or the enactment of new and more restrictive
laws.
General
The Company's offices are located at 1350 Independence Street, Suite 300,
Lakewood, CO 80215. The Company leases its offices from an entity controlled by
Erin Phillips, the President and a director of the Company. The lease is for a
31 month period, commencing in January 2014 for 6,176 square feet at a annual
rate of $64,848 for the first 12 months, $67,936 for the subsequent 12 months
and $41,431 for the subsequent seven months, payable monthly, through October
31, 2016. As of July 31, 2014, the Company had 10 full time employees and one
part time employee.
RISK FACTORS
This section of the report discloses all material risks known to us. We do
not make, nor have we authorized any other person to make, any representation
about the future market value of our common stock. In addition to the other
information contained in this report, the following factors should be considered
carefully in evaluating an investment in our securities. If any of the risks
discussed below materialize, our current and intended business could fail and
our common stock could decline in value or become worthless.
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Risks about our Business
We have a limited operating history and may never be profitable. Since we
recently commenced operations under our new business plan, it is difficult for
potential investors to evaluate our business. We will need to raise additional
capital in order to fund our operations. There can be no assurance that we will
be profitable or that our shares will have any value.
There is substantial doubt about our ability to continue as a going
concern. Our financial statements have been prepared on a going concern basis,
which assumes that we will be able to realize our assets and discharge our
liabilities in the normal course of business for the foreseeable future. We
incurred a loss since inception $(119,100) resulting in an accumulated deficit
of $(119,000) as of April 30, 2014, and further losses are anticipated in the
development of our business.
Our ability to continue as a going concern is dependent upon our becoming
profitable in the future and/or obtaining the necessary financing to meet our
obligations and repay our liabilities arising from normal business operations
when they come due. There is no guarantee that we will be successful in
achieving these objectives.
All of our current agreements to provide our services are with Affiliated
Entities, can be terminated on 30 days' notice and were not negotiated at arm's
length. Since all of our agreements to provide services are with Affiliated
Entities and were not negotiated at arm's length, there is no assurance that
others engaged in the marijuana industry will view the terms and conditions of
our agreements and services as reasonable or fair, which could substantially
inhibit our ability to fulfill our business model and grow. Further,
disagreements that may arise among our Affiliated Parties could result in the
termination of our current agreements, which could cause our business to fail.
Our failure to obtain capital may significantly restrict our proposed
operations. We need capital to operate and fund our business plan. We do not
know what the terms of any future capital raising may be; however, any future
sale of our equity securities will dilute the ownership of existing stockholders
and could be at prices substantially below the price of our shares of common
stock in any pubic market that may exist for such shares. The failure of us to
obtain such capital as required may result in the slower implementation of our
business plan or our inability to continue our business.
Our business is dependent on laws pertaining to the marijuana industry.
Continued development of the marijuana industry is dependent upon continued
legislative authorization of marijuana at the state level. Any number of factors
could slow or halt progress in this area. Further, progress, while encouraging,
is not assured. While there may be ample public support for legislative action,
numerous factors impact the legislative process. Any one of these factors could
slow or halt the lawful public use of marijuana, which would negatively impact
our proposed business.
As of July 31, 2014, 21 states and the District of Columbia allow their
citizens to use Medical Marijuana. Additionally, voters in the states of
Colorado and Washington approved ballot measures last November to legalize
cannabis for adult use. The state laws are in conflict with the federal
Controlled Substances Act, which makes marijuana use and possession illegal on a
national level. The Obama administration has effectively stated that it is not
an efficient use of resources to direct law federal law enforcement agencies to
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prosecute those lawfully abiding by state-designated laws allowing the use and
distribution of medical marijuana. However, there is no guarantee that the
administration will not change its stated policy regarding the low-priority
enforcement of such federal laws. Additionally, any new administration that
follows could change this policy and decide to enforce the federal laws
strongly. Any such change in the federal government's enforcement of current
federal laws or the enactment of new or more restrictive laws could cause
significant financial damage to us and our shareholders.
Further, and while we do not intend to harvest, distribute or sell
cannabis, by leasing facilities to growers of marijuana, we could be deemed to
be participating in marijuana cultivation, which remains illegal under federal
law, and may expose us to potential criminal liability, with the additional risk
that our properties could be subject to civil forfeiture proceedings.
The marijuana industry faces strong opposition. It is believed by many
that large well-funded businesses may have a strong economic opposition to the
marijuana industry. We believe that the pharmaceutical industry clearly does not
want to cede control of any product that could generate significant revenue. For
example, medical marijuana will likely adversely impact the existing market for
the current "marijuana pill" sold by mainstream pharmaceutical companies.
Further, the Medical Marijuana industry could face a material threat from the
pharmaceutical industry, should marijuana displace other drugs or encroach upon
the pharmaceutical industry's products. The pharmaceutical industry is well
funded with a strong and experienced lobby that eclipses the funding of the
Medical Marijuana movement. Any inroads the pharmaceutical industry could make
in halting or impeding the marijuana industry could have a detrimental impact on
our proposed business.
Marijuana remains illegal under Federal law. Marijuana is a Schedule-I
controlled substance and is illegal under federal law. Even in those states in
which the use of marijuana has been legalized, its use remains a violation of
federal law. Since federal law criminalizing the use of marijuana preempts state
laws that legalize its use, strict enforcement of federal law regarding
marijuana would likely result in our inability to proceed with our business plan
and could cause us to cease our business.
Laws and regulations affecting the marijuana industry are constantly
changing, which could detrimentally affect our proposed operations. Local, state
and federal marijuana laws and regulations are broad in scope and subject to
evolving interpretations, which could require us to incur substantial costs
associated with compliance or alter our business plan. In addition, violations
of these laws, or allegations of such violations, could disrupt our business and
result in a material adverse effect on our operations. In addition, it is
possible that regulations may be enacted in the future that will be directly
applicable to our proposed business. We cannot predict the nature of any future
laws, regulations, interpretations or applications, nor can we determine what
effect additional governmental regulations or administrative policies and
procedures, when and if promulgated, could have on our business.
Potential competitors could duplicate our business model. There are
limited aspects of our business which are protected by patents, copyrights,
trademarks or trade names. As a result, potential competitors could duplicate
our business model with little effort.
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We are dependent on our management and the loss of any of our officers
could harm our business. Our future success depends largely upon the experience,
skill, and contacts of our officers. The loss of the services of these officers
may have a material adverse effect upon our business.
Risks about our Common Stock
Disclosure requirements pertaining to penny stocks may reduce the level of
trading activity in the market for our common stock and investors may find it
difficult to sell their shares. Trading of our common stock will be subject to
Rule 15g-9 of the Securities and Exchange Commission, which rule imposes certain
requirements on broker/dealers who sell securities subject to the rule to
persons other than established customers and "accredited investors." For
transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the
purchaser's written agreement to the transaction prior to sale. The Securities
and Exchange Commission also has rules that regulate broker/dealer practices in
connection with transactions in "penny stocks". Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system). The penny
stock rules require a broker/dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the Securities and Exchange Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker/dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker/dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation.
There is no established public market for our common stock, and any market
that may develop could be volatile. There is currently no established public
market for our common stock, and no assurance can be given that any established
public market for our shares will commence, or if one does commence, that it
will continue, in any respect. Interest in our common stock may not lead to a
liquid trading market, and the market price of our common stock may be volatile.
The following may result in short-term or long-term negative pressure on the
trading price of our shares, among other factors:
o Conditions and publicity regarding the life settlement market and
related regulations generally;
o Price and volume fluctuations in the stock market at large, which do
not relate to our operating performance; and
o Comments by securities analysts or government officials, including
those with regard to the viability or profitability of the life
settlement industry generally or with regard to our ability to meet
market expectations.
The stock market has from time to time experienced extreme price and
volume fluctuations that are unrelated to the operating performance of
particular companies.
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We are an "emerging growth company," subject to less stringent reporting
and regulatory requirements of other publicly-held companies, and this status
may have an adverse effect on our ability to attract interest in our common
stock. We are an "emerging growth company" as defined in the Jumpstart Our
Business Startups Act of 2012, or "JOBS Act." As long as we remain an "emerging
growth company," we may take advantage of certain exemptions from various
reporting and regulatory requirements that are applicable to other public
companies that are not an "emerging growth company." We cannot predict if
investors will find our common stock less attractive if we choose to rely on
these exemptions. If some investors find our common stock less attractive as a
result of any choices to reduce future disclosure, there may be a less active
trading market for our common stock and our stock price may be more volatile.
Our Management, who are husband and wife, own approximately 94.7% of our
outstanding common stock and could elect all of our directors who in turn elect
all of our officers. This percentage of stock ownership is significant in that
it could carry any vote on any matter requiring stockholder approval, including
the subsequent election of directors, who in turn elect all officers. As a
result, these persons effectively control the Company, regardless of the vote of
other stockholders. As a result, other stockholders may not have an effective
voice in our affairs. See the caption "Security Ownership of Certain Beneficial
Owners and Management", below. This percentage does not include shares
underlying outstanding options or warrants that can be exercised within 60 days.
Future sales of our common stock could adversely affect our stock price
and our ability to raise capital in the future, resulting in our inability to
raise required funding for our operations. Future sales of substantial amounts
of our common stock could harm any market that develops in our common stock.
This also could harm our ability to raise capital in the future. Of the
1,307,000 shares of our common stock that are freely tradable, 300,000 of such
shares are subject to Lock-Up/Leak-Out Agreements, and no public resale of any
of these securities can be made until on or after 90 days from the filing of
this report (the "Lock-Up Period"); thereafter, each of holder of these shares
of common stock can publicly sell 1/6th of his, her or its respective holdings
during each of the next six consecutive months, in "broker's transactions" and
in compliance with the "manner of sale" requirements of Securities and Exchange
Commission Rule 144, all on a non-cumulative basis, meaning that if no common
stock was sold during any such monthly period while common stock was qualified
to be sold, such shares of common stock cannot be sold in the next successive
monthly period (the "Leak-Out Period"). Notwithstanding the foregoing, the
Company can waive these requirements, pro rata, if it determines in good faith
that these agreements may have an adverse affect on any public market for our
common stock that exists at the time of any such determination. Any sales of
substantial amounts of our common stock in the public market, or the perception
that those sales might occur, could harm the market price, if any, of our common
stock. See the captions "Market Price of Common Stock and Related Matters" and
"Security Ownership of Certain Beneficial Owners and Management" below. Further,
certain stockholders have registration rights under which we will be required to
register their shares for resale with the Securities and Exchange Commission;
these shares or any registered securities we may register can also have an
adverse effect on any market for our common stock.
We will not solicit the approval of our stockholders for the issuance of
authorized but unissued shares of our common stock unless this approval is
deemed advisable by our Board of Directors or is required by applicable law,
regulation or any applicable stock exchange listing requirements. The issuance
of any additional shares of our common stock could dilute the value of our
outstanding shares of common stock.
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MARKET PRICE OF COMMON STOCK AND RELATED MATTERS.
Market Price
Although there has never been any public market for the common stock of
Strainwise, the Company's common stock is quoted on the OTC Bulletin Board under
the trading symbol "FHGR". There is no "established trading market" for the
Company's common stock, and there has been very limited public trading of such
common stock to the date of this report.
The resale of "restricted securities" and shares that may be registered
for resale could have a substantial adverse effect on any market for our common
stock. See the heading "Risks about our Common Stock" under the caption Risk
Factors above.
With the exception of the 23,124,184 shares issued in connection with the
acquisition of Strainwise all outstanding shares of our common stock have
satisfied the resale requirements of Securities and Exchange Commission Rule
144. See the summary of Rule 144 below.
Rule 144
The following is a summary of the current requirements of Rule 144:
Non-Affiliate (and has not
Affiliate or Person Selling been an Affiliate During the
on Behalf of an Affiliate Prior Three Months)
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Restricted During six-month holding During six-month holding period - no
Securities of period - no resales under Rule resales under Rule 144 permitted
Reporting Issuers 144 Permitted.
After six-month holding period After six-month holding period but before
- may resell in accordance one year - unlimited public resales under
with all Rule 144 requirements Rule 144 except that the current public
including: information requirement still applies.
o Current public information, After one-year holding period -
o Volume limitations, unlimited public resales under
o Manner of sale requirements Rule 144; need not comply with
for equity securities, and any other Rule 144 requirements.
o Filing of Form 144.
12
Restricted During one-year holding period - During one-year holding period -
Securities of no resales under Rule 144 no resales under Rule 144
Non-Reporting permitted. permitted.
Issuers
After one-year holding period After one-year holding period -
- may resell in accordance unlimited public resales under
with all Rule 144 requirements Rule 144; need not comply with
including: any other Rule 144 requirements.
o Current public information,
o Volume limitations,
o Manner of sale requirements
for equity securities, and
o Filing of Form 144.
Dividends
Holders of the Company's common stock are entitled to receive dividends as
may be declared by the Board of Directors. The Company's Board of Directors is
not restricted from paying any dividends but is not obligated to declare a
dividend. No cash dividends have ever been declared and it is not anticipated
that cash dividends will ever be paid. The Company currently intends to retain
any future earnings to finance future growth. Any future determination to pay
dividends will be at the discretion of the board of directors and will depend on
the Company's financial condition, results of operations, capital requirements
and other factors the board of directors considers relevant.
The Company's Articles of Incorporation authorize the Board of Directors
to issue up to 5,000,000 shares of preferred stock. The provisions in the
Articles of Incorporation relating to the preferred stock allow directors to
issue preferred stock with multiple votes per share and dividend rights, which
would have priority over any dividends paid with respect to the holders of
common stock. The issuance of preferred stock with these rights may make the
removal of management difficult even if the removal would be considered
beneficial to shareholders generally, and will have the effect of limiting
shareholder participation in certain transactions such as mergers or tender
offers if these transactions are not favored by management.
Number of Stockholders
As of the date of this report, and giving effect to the acquisition of
Strainwise, the Company had approximately 66 shareholders of record and
24,431,184 outstanding shares of common stock.
We do not have any securities authorized for issuance under any equity
compensation plans.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the financial
statements of Strainwise included as part of this report.
On August 19, 2014 the Company acquired approximately 90% of the
outstanding shares of Strainwise in exchange for 23,124,184 shares of the
Company's common stock.
Although, from a legal standpoint, the Company acquired Strainwise on
August 19, 2014, for financial reporting purposes the acquisition of Strainwise
constituted a recapitalization, and the acquisition will be accounted for
similar to a reverse merger, whereby Strainwise was deemed to have acquired the
Company.
Strainwise was incorporated in Colorado as a limited liability company on
June 8, 2012, and converted to a Colorado corporation on January 16, 2014.
However, Strainwise did not begin operations until January 1, 2014, when
it began providing branding and fulfillment services to five grow facilities and
eight retail stores (seven of which sell recreational and medical marijuana to
the public and one of which only sells medical marijuana to the public)
(collectively the "Affiliated Entities") owned by Shawn Phillips, an officer and
director of the Company. As a result, comparison of Strainwise's operating
results for the year ended January 31, 2014, and the three months ended May 31,
2014, would not be meaningful.
Since January 1, 2014, Strainwise has been providing branding and
fulfillments services to the marijuana retail stores and grow facilities owned
by Mr. Phillips. As of July 31, 2014 Strainwise was not providing services to
any other entities.
Strainwise's operating expenses, as a % of revenue, for the year ended
January 31, 2014, were 89%. Strainwise's operating expenses, as a percentage of
revenue, for the three months ended April 30, 2014, were 107%. The increase in
expenses vs. revenue during the three months ended April 30, 2014 was the result
of increased compensation expenses, increased occupancy costs for new grow
facilities, and interest expense.
The Company's estimated capital requirements for the twelve months ending
July 31, 2015 are as follows: (i) approximately $750,000 for lease payments and
operational costs to develop a 65,000 square foot grow facility located in the
metro Denver area, (ii) approximately $300,000 to $500,000 for additional
equipment such as grow lights, electrical upgrades, generators and air
conditioning and (iii) approximately $2,181,500 for payments on our four
operating leases.
When the grow facility is completed, the Company will lease the facility
to affiliated dispensaries.
As of April 30, 2014, the Company's operating expenses, excluding payments
required for its operating leases, were approximately $153,000 per month.
14
Between March 15, 2014 and July 31, 2014 Strainwise sold 2,140,700 units,
at a price of $1.00 per unit, to a group of private investors. Each unit
consisted of one share of Strainwise's common stock and one warrant. Every two
warrants entitle the holder to purchase one share of Strainwise's common stock
at a price of $5.00 per share at any time prior to January 31, 2019. When the
Company acquires the remaining shares of Strainwise pursuant to the short form
merger, the Company will exchange its warrants for the outstanding Strainwise
warrants. The warrants to be issued by the Company will have the same terms as
the Strainwise warrants.
On March 20, 2014 the Company borrowed $850,000 from an unrelated third
party. The loan bears interest at 25% per year, payable monthly, and matures on
September 21, 2014. On July 16, 2014, the terms of the loan were amended such
that $200,000 of the loan was converted into 293,000 shares of the Company's
common stock and the Company agreed to pay the remaining balance of the loan
($325,000), plus accrued interest and a prepayment penalty of $11,250, prior to
July 29, 2014. The $850,000 loan was used (i) to secure approximately $217,800
of deposits for the future rental and/or purchase of grow facilities to lease to
growers in the industry, (ii) to acquire approximately $175,000 of cultivation
equipment (iii) to make approximately $63,500 of tenant improvements to grow
facilities under lease, (iv) to make a $25,000 deposit for the purchase of 4th
Grade Films, Inc. for reverse merger purposes, (v) to pay approximately $373,000
of principal and interest to the note holder, and (vi) to cover certain
miscellaneous costs of the Company.
As of April 30, 2014, the Company had borrowed $499,500 from Shawn
Phillips. The loan from Mr. Phillips does not bear interest, is not secured, and
is due on demand. The amount borrowed from Mr. Phillips was used primarily for
the following: (i) approximately $241,000 for payroll, (ii) approximately
$99,500 for nutrient purchases, (iii) approximately $82,000 for occupancy costs
and (iv) approximately $34,300 for general and administrative expenses.
Contractual Obligations
The future minimum payments under the terms of the Company's material
contractual obligations are shown below.
Year Ending January 31,
------------------------------------------
Description 2015 2016 2017 2018 2019 Thereafter
----------- ------------------------------------------------------------ ----------
Operating leases $2,181,500 $7,276,000 $7,317,700 $7,476,700 $7,231,800 $8,123,400
The Company will need to raise enough capital to fund its operations until
it is able to earn a profit. The Company does not know what the terms of any
future capital raising may be but any future sales of the Company's equity
securities will dilute the ownership of existing stockholders and could be at
prices below the market price of the Company's common stock. The inability of
the Company to obtain the capital which it requires may result in the failure of
the Company. The Company does not have any commitments from any person to
provide the Company with capital.
15
Trends
The factors that will most significantly affect the Company's future
operating results, liquidity and capital resources will be:
o Government regulation of the marijuana industry;
o Revision of Federal banking regulations for the marijuana industry;
and
o Legalization of recreational marijuana in states other than Colorado
and Washington.
Other than the foregoing, the Company does not know of any trends, events
or uncertainties that have had, or are reasonably expected to have, a material
impact on:
o revenues or expenses;
o any material increase or decrease in liquidity; or
o expected sources and uses of cash.
Critical Accounting Policies and New Accounting Pronouncements
See Notes 1 and 8 to the financial statements included as part of this
report, for a description of the Company's critical accounting policies and the
potential impact of the adoption of any new accounting pronouncements.
MANAGEMENT
Name Age Position
Shawn Phillips 42 Chief Executive Officer and a Director
Erin Phillips 37 President, Chief Financial and Accounting
Officer and a Director
David Modica 37 Manager of Quality Control and a Director
Shawn and Erin Phillips are husband and wife.
The following is a brief summary of the background of each officer and
director including their principal occupation during the five preceding years.
All directors will serve until their successors are elected and qualified or
until they are removed.
Shawn Phillips is one of the early pioneers in the marijuana industry in
Colorado and is one of the founders of Strainwise. Currently, Shawn owns and
holds all of the licenses issued by the State of Colorado for the eight
marijuana stores (the "Captive Stores"). In concert with his spouse, Erin
Phillips, he has been instrumental in the management of the operations of these
stores since the date they were either purchased as an existing retail store or
initially opened for medical marijuana sales beginning in 2010. In addition,
Shawn oversees the growing facilities which supply the various strains of
product to the Captive Stores and other retail operations in Colorado. Prior to
2010 Mr. Phillips was the owner/operator of RLO Realty, a residential and
16
commercial real estate firm (2008-2010), an account executive with Stewart Title
Company (2007-2008) and the owner/operator of Legacy Funding, a residential
mortgage company (2001-2007). Mr. Phillips holds a B.S in Accounting from
Colorado State University, and using his accounting education and experience,
his established reliable point-of-sale accounting procedures and financial
controls for these stores and the multiple production facilities. Mr. Phillips
filed a personal bankruptcy petition in September 2009 and received a discharge
in January 2010.
Erin Phillips has over 17 years of operational and management experience.
Erin is one of the early pioneers in the marijuana industry in Colorado and is
one of the founders of Strainwise. In concert with her spouse, Shawn Phillips,
she has been instrumental in the management of the operations of the eight
Captive Stores since the date they were either purchased as an existing retail
store, or initially opened for medical marijuana sales beginning in 2010. Erin
is responsible for managing the marketing, advertising and promotions at the
Captive Stores, and is responsible for establishing and expanding the brand
recognition of the Strainwise name and logo throughout the Company's target
markets. Prior to establishing Strainwise, Erin spent 13 years in the mortgage
industry as a business owner, audit and funding supervisor, title company
closer, mortgage loan processer, and loan originator. Ms. Phillips filed a
personal bankruptcy petition in May 2009 and received a discharge in August
2009.
David Modica has been the Quality Control Manager and a director of
Strainwise since 2013. In this capacity, he works with the managers of the
cultivation and grow facilities owned by Shawn Phillips to maintain the quality
of the proprietary strains and marijuana products grown in these facilities.
Upon initially joining Strainwise, he was tasked with converting the
point-of-sale systems used by the Captive Stores to a more advanced system which
can better track all categories of inventory. Prior to joining Strainwise, he
was the owner and operator of a residential rental company (2005 to 2013), a web
developer for Design Factory International (2003 to 2005), and a web
developer/designer for Eastridge Technology (2001 to 2003). Mr. Modica obtained
his B.A. from the University of North Carolina at Chapel Hill in 2000, with a
degree in Journalism and Mass Communications.
Shawn Phillips, Erin Phillips and David Modica are not independent as that
term is defined in Section 803 of the NYSE MKT Company Guide.
We do not have a financial expert as that term is defined by the
Securities and Exchange Commission.
Our Board of Directors does not have standing audit, nominating or
compensation committees, committees performing similar functions, or charters
for such committees. Instead, the functions that might be delegated to such
committees are carried out by our Board of Directors, to the extent required.
Our Board of Directors believes that the cost of associated with such
committees, has not been justified under our current circumstances.
Given our lack of operations to date, our Board of Directors believes that
its current members have sufficient knowledge and experience to fulfill the
duties and obligations of an audit committee. None of the current Board members
is an "audit committee financial expert" within the meaning of the rules and
regulations of the Securities and Exchange Commission. The Board has determined
that each of its members is able to read and understand fundamental financial
statements and has substantial business experience that results in that member's
financial sophistication.
17
Our Board of Directors does not currently have a policy for the
qualification, identification, evaluation, or consideration of board candidates
and does not think that such a policy is necessary at this time, because it
believes that, given the limited scope of our operations, a specific nominating
policy would be premature and of little assistance until our operations are at a
more advanced level. Currently the entire Board decides on nominees.
Our Board of Directors does not have any defined policy or procedural
requirements for shareholders to submit recommendations or nominations for
directors. We do not have any restrictions on shareholder nominations under its
articles of incorporation or bylaws. The only restrictions are those applicable
generally under Utah law and the federal proxy rules. The Board will consider
suggestions from individual shareholders, subject to an evaluation of the
person's merits. Shareholders may communicate nominee suggestions directly to
the Board, accompanied by biographical details and a statement of support for
the nominees. The suggested nominee must also provide a statement of consent to
being considered for nomination. There are no formal criteria for nominees.
Our Board of Directors does not have a "leadership structure" since each
board member is free to introduce any resolution at any meeting of our directors
and is entitled to one vote at any meeting.
Holders of our common stock may send written communications to our entire
board of directors, or to one or more board members, by addressing the
communication to "the Board of Directors" or to one or more directors,
specifying the director or directors by name, and sending the communication to
our offices in Lakewood, Colorado. Communications addressed to the Board of
Directors as whole will be delivered to each board member. Communications
addressed to a specific director (or directors) will be delivered to the
director (or directors) specified.
Security holder communications not sent to the Board of Directors as a
whole or to specified board members will be relayed to board members.
The following shows the amounts the Company expects to pay to its officers
during the twelve months ending July 31, 2015 and the amount of time these
persons expect to devote to the Company.
Projected % of time to be devoted
Name Compensation to the Company's business
Shawn Phillips $160,000 85%
Erin Phillips $180,000 90%
David Modica $72,000 95%
During the period from inception (June 8, 2012) through April 30, 2014
Strainwise paid the following compensation to its officers:
Name Salary Bonus Options Total
----- ------ ----- ------- -----
Shawn Phillips $ -- $ -- $ -- $ --
-- -- -- --
18
Name Salary Bonus Options Total
----- ------ ----- ------- -----
Erin Phillips $22,500 $ -- $ -- $22,500
-- -- -- --
David Modica $ 9,000 -- -- $ 9,000
The Company's directors serve until the next annual meeting of the
Company's shareholders and until their successors have been duly elected and
qualified. The Company's officers serve at the discretion of the Company's
directors. The Company does not compensate any person for acting as a director.
The Company's current officers and directors were elected to their positions on
August 19, 2014.
Non-Compete
Both Shawn and Erin Phillips have entered into non-compete agreements
wherein they agreed that during their employment and for a period of five (5)
years after termination of their relationship with Strainwise, without the
express written consent of Strainwise, they shall not, directly or indirectly
(i) employ, solicit for employment, or recommend for employment any person
employed by the Company; (ii) contact or solicit any person or business which
was a client of the Company at any time within twelve (12) months before the
termination of the employment with Strainwise in connection with any matters
similar in nature or related to any business conducted between or contemplated
by the Company and such client at any time during their employment with
Strainwise; (iii) engage in any present or contemplated business activity that
is or may be competitive with the Company (or any part thereof) in the State of
Colorado or any other state of the United States of America where the Company
(or any part thereof) conducts its business. For purposes of their non-compete
agreements, Shawn and Erin Phillips agreed that to engage in a business in
competition with the business of the Company, or a "competitive business" shall
mean: (i) to be employed by, (ii) own an interest in, (iii) be a consultant to,
(iv) be a partner in (v) or otherwise participate in any business or venture
which offers or sells to businesses or persons, cannabis related products or
services which are the same as or similar to those which are, at the then
applicable time, being offered and sold by the Company (or any part thereof).
Non-Disclosure
Both Shawn and Erin Phillips have entered into non-disclosure agreements
wherein they agreed not, directly or indirectly, to use, make available, sell,
disclose or otherwise communicate to any third party, other than in their
assigned duties and for the benefit of the Company, any of the confidential
information of Strainwise, either during or after their relationship with
Strainwise. They agreed not to publish, disclose or otherwise disseminate such
information without prior written approval of an executive officer (other than
themselves) of Strainwise. They acknowledged that they are aware that the
unauthorized disclosure of Confidential Information of Strainwise may be highly
prejudicial to its interests, an invasion of privacy, and an improper disclosure
of trade secrets.
Proprietary and confidential information shall include, but not be limited
to:
1) methods, processes and/or technologies for the growing, cultivation
and production of cannabis and marijuana plants and products;
19
2) cannabis business processes, procedures and strategies;
3) retail and medical cannabis store operations;
4) cannabis branding and fulfillment services;
5) forecasts, unpublished financial information, budgets, projections,
customer lists, and client identities, characteristics and agreements;
6) software, processes, trade secrets, computer programs, electronic
codes, inventions, innovations, discoveries, improvements, data,
know-how, and formats;
7) business, marketing, and strategic plans;
8) information about costs, profits, markets, sales, contracts and lists
of clients and referral sources;
9) employee personnel files and compensation information;
10) customer lists and names of customer contact personnel; and
11) customer terms, information, payments and data.
Exchange Option and Mandatory Exchange
Shawn and Erin Phillips have granted an option to the Company that
entitles the Company to acquire the Captive Stores now owned and that may become
owned by Mr. or Mrs. Phillips in the future ("Exchange Option"). The Exchange
Option may be exercised by the Company anytime within a six month period from
the date that laws or regulations permit the Company to own all or a part of the
Captive Stores.
Upon the exercise of the Exchange Option, the Phillips will be obligated
to exchange the Captive Stores (or such percentage interest in the Captive Store
that the Company can legally acquire) for shares of the Company's common stock
(the "Exchange Shares").
The number of the Exchange Shares to be issued to the Phillips will be
determined by the following formula:
5 x A x B
---------
C
Where:
A = the combined EBITDA of the Captive Stores for the immediately
preceding twelve (12) month period from the date the Exchange Option
is exercised.
20
B = The percentage in the Captive Stores that can be acquired by the
Company.
C = the average closing price on the Pink Sheets, OTC Bulletin Board,
NASDAQ, or NYSE/MKT for the ninety (90) days preceding the date the
Exchange Option is exercised;
Combined EBITDA will be determined using generally accepted accounting
principles, consistently applied.
Notwithstanding the above, the number of Exchange Shares will be reduced,
if necessary, such that, following the issuance of the Exchange Shares, the
total number of shares of the Company's common stock owned by the Phillips,
together with any shares issuable upon the exercise of any option or warrants
held by the Phillips, or any shares issuable upon the conversion of any
securities owned by the Phillips, will not exceed 85% of the Company's
outstanding shares of common stock.
Any advances to the Phillips and/or accounts receivable from the Phillips,
or any distributions to them in excess of the capital account of any Captive
Store at the time of the completion of the exchange, will (i) be personally
guaranteed by both Shawn and Erin Phillips, (ii) will be payable 36 months from
the date of the completion of the exchange, and (iii) will bear interest, to be
adjusted monthly, at the LIBOR rate plus 3%.
If the Exchange Option is exercised, the following is an example of the
number of Exchange Shares to be issued to the Phillips, assuming the Company can
legally acquire a 50% interest in the Captive Stores:
o Combined EBITDA for the immediately preceding twelve (12) month period
- $80,000,000;
o Fifty percent of the combined EBITDA - $80,000,000 X 50% =
$40,000,000;
o Combined EBITDA multiplied by 5 times - 40,000,000 X 5 = 200,000,000;
o Average market price for the preceding ninety (90) day period - $20;
and
o Number of Exchange Shares to be issues to Phillips - 10,000,000
In the event the Captive Stores are not owned equally by Erin and Shawn
Phillips:
o the Exchange Shares to be issued to Erin Phillips will be based upon
the percentage of the combined EBITDA of the Captive Stores owed by
Erin Phillips; and
o the Exchange Shares to be issued to Shawn Phillips will be based upon
the percentage of the combined EBITDA of the Captive Stores owed by
Shawn Phillips
The Exchange Shares will be "restricted shares", as that term is defined in
Rule 144 of the Securities Exchange Commission. At the option of the holder of
the Exchange Shares, the Exchange Shares will be included in the first
registration statement filed by the Company with the Securities and Exchange
21
Commission following the exercise of the Exchange Option, excluding any
registration statement on Form S-4, S-8, or any other inapplicable form (the
"piggy-back" registration rights). Notwithstanding the above, the underwriter of
any public offering conducted by the Company may limit the Exchange Shares which
may be sold due to market conditions.
No shareholder of the Company will be granted piggyback registration
rights superior to those of the Exchange Shares. The Company will pay all
registration expenses (exclusive of underwriting discounts and commissions and
special counsel to the Phillips). The registration rights may be transferred
provided that the Company (i) is given prior written notice; (ii) the transfer
is in connection with a transfer of not less than 1,000,000 shares of the
Company's common stock; and (iii) the transfer is to no more than three persons.
Principal Shareholders
The following table shows the ownership, as of the date of this report, of
those persons owning beneficially 5% or more of the Company's common stock and
the number and percentage of outstanding shares owned by each of the Company's
directors and officers and by all officers and directors as a group. Unless
otherwise indicated, each owner has sole voting and investment power over their
shares of common stock.
Name Shares Owned % of Outstanding Shares
---- ------------ -----------------------
Shawn Phillips - -
Erin Phillips 23,124,184 94.7%
David Modica 11,500 Nil
All officers and directors
as a group (three persons) 23,135,684 94.7%
Item 3.02. Unregistered Sale of Equity Securities.
In connection with the issuance of the 23,124,184 shares described in Item
2.01 of this report, the Company relied upon the exemption provided by Section
4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"). The
person who acquired these shares was a "sophisticated investor" and was provided
full information regarding the Company's business and operations. There was no
general solicitation in connection with the offer or sale of these securities.
The person who acquired these shares acquired them for her own account. The
certificate representing these shares bears a restricted legend providing that
they cannot be sold except pursuant to an effective registration statement or an
exemption from registration under the Securities Act. No commission was paid to
any person in connection with the offer or sale of these shares.
In January, 2014 Strainwise issued warrants to an unaffiliated person for
services rendered. The warrants allow the holder to purchase up to 500,000
shares of Strainwise's common stock at a price of $0.10 per share at any time
prior to January 31, 2019. When the Company acquires the remaining shares of
Strainwise pursuant to the short form merger, the Company will exchange its
warrants for these Strainwise warrants. The warrants to be issued by the Company
will have the same terms as the Strainwise warrants.
22
Between March 15, 2014 and July 31, 2014 Strainwise sold 2,140,7000 units,
at a price of $1.00 per unit, to a group of private investors. Each unit
consisted of one share of Strainwise's common stock and one warrant. Every two
warrants entitle the holder to purchase one share of Strainwise's common stock
at a price of $5.00 per share at any time prior to January 31, 2019. When the
Company acquires the remaining shares of Strainwise pursuant to the short form
merger, the Company will exchange its warrants for the outstanding Strainwise
warrants. The warrants to be issued by the Company will have the same terms as
the Strainwise warrants.
In July, 2014 Strainwise issued 293,000 shares of its common stock to one
person as a result of the conversion of a note in the principal amount of
$200,000.
Strainwise relied upon the exemption provided by Section 4(a)(2) of the
Securities Act of 1933, as amended (the "Securities Act") in connection with
sale and issuance of these securities. The persons who acquired these securities
were "sophisticated investors" and were provided full information regarding the
business and operations of Strainwise. There was no general solicitation in
connection with the offer or sale of these securities. The persons who acquired
these securities acquired them for their own accounts. The certificates
representing the shares of common stock and warrants will bear a restricted
legend providing that they cannot be sold except pursuant to an effective
registration statement or an exemption from registration under the Securities
Act. No commission was paid to any person in connection with the sale or
issuance of these securities.
Item 4.01. Change in Registrant's Certifying Accountant
Mantyla McReynolds, LLC:
(i) On August 19, 2014, we formally informed Mantyla McReynolds, LLC
("Mantyla McReynolds") of their dismissal as our independent registered
public accounting firm.
(ii) The reports of Mantyla McReynolds on our financial statements as
of and for the fiscal years ended June 30, 2013, and 2012, contained no
adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles, except for a
"going concern" modification. Mantyla McReynolds was engaged by us as our
independent registered public accounting firm at or about our inception on
April 25, 2007, and audited our financial statements for the fiscal years
ended June 30, 2007, through June 30, 2013.
(iii) Our Board of Directors participated in and approved the decision
to change our independent registered public accounting firm.
(iv) During the fiscal years ended June 30, 2013, and 2012, there were
no disagreements with Mantyla McReynolds on any matter of accounting
principles or practices, financial statement disclosure or auditing scope
or procedure, which disagreements, if not resolved to the satisfaction of
Mantyla McReynolds, would have caused Mantyla McReynolds to make reference
to the subject matter of the disagreements in connection with their
reports.
23
Further, there were no "reportable events," as described in Item 304(a)(1)(v)
of Regulation S-K of the Securities and Exchange Act of 1934, as amended.
(v) We have provided Mantyla McReynolds with a copy of the disclosure
provided under this Item of this Current Report and have requested that
Mantyla McReynolds furnish us with a letter addressed to the Securities and
Exchange Commission stating whether or not they agreed with the foregoing
statements, a copy of which is filed herewith as Exhibit 16.1 and
referenced in Item 9.01.
(1) On August 19, 2014, we engaged BF Borgers CPA, PC ("BF Borgers")
as our new independent registered public accounting firm to audit
our financial statements for the fiscal year ended June 30, 2014.
During the fiscal year ended June 30, 2014, and through August
19, 2014, we had not consulted with BF Borgers regarding any of
the following:
(i) The application of accounting principles to a specific
transaction, either completed or proposed;
(ii) The type of audit opinion that might be rendered on our
consolidated financial statements, and none of the following was provided
to us: (a) a written report, or (b) oral advice that BF Borgers concluded
was an important factor considered by us in reaching a decision as to
accounting, auditing or financial reporting issue; or (iii) any matter that
was the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K.
Item 5.01. Change in Control of Registrant.
See Item 2.01 of this report.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of
Certain Officers.
See Item 2.01 of this report.
Item 9.01. Financial Statements and Exhibits.
No. Description
---
10.1 Agreement to Exchange Securities with Strainwise, Inc.
10.2 Custer Lease
10.3 51st Ave. Lease
10.4 Nome Lease
10.5 32nd Ave. Lease
10.6 Form of Master Service Agreement, together with schedule required by
Instruction 2 to Item 601(a) of Regulation S-K.
16 Letter regarding change in certifying accountant
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 20, 2014
4TH GRADE FILMS, INC.
By: /s/ Shawn Phillips
--------------------------------
Shawn Phillips, Chief Executive Officer
25
STRAINWISE, INC.
FINANCIAL STATEMENTS
For the Year ended January 31, 2014 and 2013
(AUDITED)
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Strainwise, Inc.:
We have audited the accompanying balance sheets of Strainwise, Inc. ("the
Company") as of January 31, 2014 and 2013 and the related statement of
operations, changes in members' equity (deficit) and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the financial position of Strainwise, Inc., as of January 31,
2014 and 2013 and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles in the
United States of America.
The company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ B F Borgers CPA PC
B F Borgers CPA PC
Denver, CO
August 14, 2014
27
STRAINWISE, INC.
CONDENSED BALANCE SHEETS
(AUDITED)
January 31, January 31,
2014 2013
-------------- ------------
ASSETS
Current assets:
Cash $ 100 $ 100
Prepaid expense 10,000 -
------------- ---------
Total current assets 10,100 100
Office equipment and furnishings 10,500 -
Trademark, net amortization of $61 and $0 at
January 31,
2014 and 2013, respectively 10,949 -
------------- ---------
Total assets $ 31,549 $ 100
============= =========
LIABILITIES
Current liabilities:
Due to affiliated entities and related
parties $ 50,203 $ -
------------- ---------
Total current liabilities 50,203 -
Deferred rent 3,273 -
------------- ---------
53,476 -
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, no par value, 100,000,000
shares authorized, 20,430,000 issued
and outstanding - -
Additional Paid in Capital 48,292 100
(Deficit) Retained Earnings (70,219) -
-------------- ---------
Total stockholder's equity (21,927) 100
------------- ---------
Total liabilities and stockholders' deficit $ 31,549 $ 100
============= =========
See accompanying notes.
28
STRAINWISE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(AUDITED)
Period
(Inception
of June 8,
Year Ended 2012) ended
January 31, January 31,
2014 2013
------------- ------------
Revenues from affiliated entities and
related parties $ 104,378 -
Operating costs and expenses:
Nutrient purchases 18,094 -
Compensation 60,560 -
Rent and other occupancy 5,404 -
General and administrative 9,753 -
------------ --------
Total operating costs and expenses 93,811 -
------------ --------
Income from operations
10,567 -
Other costs and expenses
Financing costs 20,000 -
General and Administrative Costs 60,725 -
Amortization 61 -
------------ --------
Loss before taxes on income (70,219) -
Provision for taxes on income - -
------------ --------
Net loss $ (70,219) -
============ ========
Basic loss per common share $ (0.082) -
============ ========
Fully diluted loss per common share $ (0.052) -
============ ========
Basic weighted average number of shares
outstanding 851,250 -
============ ========
Fully diluted weighted average number of
shares outstanding 1,351,250
============ ========
See accompanying notes.
29
STRAINWISE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(AUDITED)
Period
(Inception
of June 8, 2012
Year Ended ended)
January 31, January 31,
2014 31, 2013
----------- -------------
Cash flows from operating activities:
Net (loss) $(70,219) $ -
Changes in current assets and liabilities:
Increase in amounts due to affiliates 50,203 -
Deferred rent 3,273
Stock-based compensation 48,192
Increase in prepaid expenses (10,000) -
--------- -----------
Net cash used in operating activities 21,499 -
Cash flows from investing activities:
Purchases of office equipment and furnishings (10,500) -
Establishment of trade mark (10,949) -
--------- -----------
Net cash flows from investing activities (21,449) -
Cash flows from financing activities:
Contribution of capital for common stock - 100
--------- -----------
Net cash flows from financing activities
- 100
--------- -----------
Net cash flows
- 100
Cash and Cash equivalents, beginning of period 100 -
--------- -----------
Cash and Cash equivalents, end of period $ 100 $ 100
========= ===========
Supplemental cash flow disclosures:
Cash paid for interest $ - $ -
========= ===========
Cash paid for income taxes $ - $ -
========= ===========
See accompanying notes.
30
STRAINWISE, INC.
STATEMENT OF CHANGES IN CONDENSED STOCKHOLDERS' DEFICIENCY
For the Period from June 8, 2012 (date of inception) to January 31, 2014
(Audited)
Common Stock Additional Deficit
------------------- Capital in Excess Accumulated in
Shares Amount of Par Value Development Stage Total
------ ------ ----------------- ----------------- -----
Balance, June 8, 2012,
Inception
Membership interest
issued for cash - $ - $ 100 $ - $ 100
Net loss - - - - -
---------- ------- ------- -------- --------
Balance, January 31,
2013 - - 100 - 100
Conversion of common
shares for membership
interest 20,430,000 - - - -
Stock-based compensation - - 48,192 - 48,192
Net loss - - - (70,219) (70,219)
---------- ------- ------- -------- --------
Balance, January 31,
2014 20,430,000 $ - $ 48,292 $(70,219) (21,927)
========== ======= ======== ======== ========
See accompanying notes.
31
STRAINWISE, INC.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business - STRAINWISE, INC. (identified in these
footnotes as "we" "us" or the "Company") provides branding and fulfillment
services to entities in the cannabis retail and production industry. The Company
was incorporated in the state of Colorado as a limited liability company on June
8, 2012, and subsequently converted to a Colorado corporation on January 16,
2014.
The Company provides sophisticated fulfillment and branding services and
solutions to (i) one grow facility and eight retail stores (seven of which sell
recreational and medical marijuana to the public and one of which only sells
medical marijuana to the public) owned by an officer and director of the Company
("Affiliated Entities"), and (ii) makes such services available to independent
retail stores and grow facilities in the regulated cannabis industry throughout
the United States.
The branding and fulfillment services that we currently provide are summarized,
as follows:
o Branding, Marketing and Administrative Consulting Services: Customers may
contract with us to use the Strainwise name, logo and affinity images in
their retail store locations. A monthly fee permits our branding customer
to use the Strainwise brand at one specific location. In addition, we will
assist operators in marketing and managing their businesses, setting up new
retail locations and general business planning and execution at an hourly
rate. This includes services to establish an efficient, predictable
production process, as well as, nutrient recipes for consistent and
appealing marijuana strains.
o Accounting and Financial Services: For a monthly fee, we provide our
customers with a fully implemented general ledger system, with an industry
centric chart of accounts, which enables management to readily monitor and
manage all facets of a marijuana medical dispensary, retail store and grow
facility. We provide bookkeeping, accounts payable processing, cash
management, general ledger processing, financial statement preparation,
state and municipal sales tax filings, and state and federal income tax
compilation and filings on behalf of the Company and the Captive Stores on
an ongoing basis.
o Compliance Services: The rules, regulations and state laws governing the
production, distribution and retail sale of marijuana can be complex, and
may prove cumbersome with which to comply. Thus, customers may contract
with us to implement a compliance process, based upon the number and type
of licenses and permits for their specific business. We provide this
service on both an hourly rate and stipulated monthly fee.
o Nutrient Supplier: The Company presently is a bulk purchaser of nutrients
and other cultivation supplies for the sole purpose of growing marijuana.
As a result, we are able to make bulk purchases with price breaks, based
upon volume. We serve as a sole source nutrient purchasing agent and
distributor with pricing based upon our bulk purchasing power.
o Lending: We will provide loans to individuals and businesses in the
cannabis industry. However, Colorado State law does not allow entities
operating under a cannabis license to pledge the assets or the license of
the cannabis operation for any type of general borrowing activity. Thus,
our lending will be on an unsecured basis, with reliance on a personal
guarantee of the borrower.
o Lease of Grow Facilities and Equipment: We lease grow equipment and
facilities on a turn-key basis to customers in the cannabis industry. We
will also enter into sale lease backs of grow lights, tenant improvements
and other grow equipment.
32
We do not directly grow marijuana plants, produce marijuana infused products,
sell marijuana plants and or sell marijuana infused products of any nature.
Share exchange - As more fully described in Note 9 herein, on August __, 2014,
we entered into an Agreement to Exchange Securities ("Share Agreement") with 4th
Grade Films, Inc. ("FHGR"), pursuant to which FHGR acquired approximately 90 %
of the outstanding shares of Strainwise in exchange for 23,124,184 shares of
FHGR's common stock. FHGR is a publicly-traded company, incorporated in Utah,
with its common stock currently quoted on the OTC Bulletin Board. It is
contemplated that the Exchange will qualify as a tax-free reorganization under
the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director of
FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse acquisitions
whereby the financial statements subsequent to the date of the transaction will
be presented as a continuation of the Company. Under reverse acquisition
accounting, the Company (subsidiary) is treated as the accounting parent
(acquirer) and FHGR (parent) is treated as the accounting Subsidiary (acquiree).
Following the Share Exchange , FHGR has 24,431,184 outstanding shares of common
stock, with the current shareholders of FHGR owning 1,307,000 of the
post-closing shares.
Basis of presentation - The accounting and reporting policies of the Company
conform to U.S. generally accepted accounting principles.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of the statement of cash flows, we
consider all cash in banks, money market funds, and certificates of deposit with
a maturity of less than three months to be cash equivalents.
Prepaid expenses - The amount of prepaid expenses as of January 31, 2014 and
January 31, 2013 is $10,000 and $0, respectively. Prepaid expenses at January
31, 2014 is comprised of a retainer paid to our legal counsel.
Fair value of financial instruments and derivative financial instruments - The
carrying amounts of cash and current liabilities approximate fair value because
of the short maturity of these items. These fair value estimates are subjective
in nature and involve uncertainties and matters of significant judgment, and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates. We do not hold or issue financial
instruments for trading purposes, nor do we utilize derivative instruments in
the management of our foreign exchange, commodity price or interest rate market
risks.
The FASB Codification clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. It also
requires disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets and liabilities
must be grouped, based on significant levels of inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
33
Level 2: Quoted prices in active markets for similar assets and liabilities
and inputs that are observable for the asset or liability.
Level 3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions.
The determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
Office equipment - Office equipment is recorded at cost and is depreciated under
straight line methods over each item's estimated useful life. We review our
office equipment for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations.
Major improvements are capitalized. Upon retirement, sale or other disposition
of office equipment, the cost and accumulated depreciation are eliminated from
the accounts and any gain or loss is included in operations.
Office equipment, net of accumulated amortization and depreciation are comprised
of the following:
January 31, January 31,
2014 2013
------------ -----------
Office equipment:
Office furniture and fixtures $ 10,500 $ -
Accumulated amortization and depreciation - -
---------- -------
$ 10,500 $ -
========== =========
There was no depreciation charged to operations for the year ended January 2014
and 2013 in that the office equipment was not placed into service until the last
few days of January 2014.
Income taxes - The Company accounts for income taxes pursuant to ASC 740. Under
ASC 740 deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Long-Lived Assets - In accordance with ASC 350, the Company regularly reviews
the carrying value of intangible and other long-lived assets for the existence
of facts or circumstances, both internally and externally, that suggest
impairment. If impairment testing indicates a lack of recoverability, an
impairment loss is recognized by the Company if the carrying amount of a
long-lived asset exceeds its fair value.
Trademarks - Trademarks are stated at cost and are amortized using the
straight-line method over fifteen years. Accumulated amortization was $100 and
$0 at January 31, 2014 and 2013, respectively.
Intangible assets subject to amortization consist of the following at January
31, 2014:
Gross
Carrying Accumulated
Amount Amortization Net
-------- ------------- ---------------
Trademarks $ 11,010 $ 61 $ 10,949
======== ==== ========
34
Deferred Rent - The Company recognizes rent expense from operating leases on the
straight-line basis. Differences between the expense recognized and actual
payments are recorded as deferred rent.
Revenue recognition - Revenue is recognized on an accrual basis as earned under
contract terms. Specifically, revenue from product sales is recognized
subsequent to a customer ordering a service or product at an agreed upon fee or
price, delivery has occurred, and collectability is reasonably assured.
Comprehensive Income (Loss) - Comprehensive income is defined as all changes in
stockholders' equity (deficit), exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss, changes
in certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries and unrealized
gains (losses) on available-for-sale securities. From our Inception there have
been no differences between our comprehensive loss and net loss.
Net income per share of common stock - We have adopted applicable FASB
Codification regarding Earnings per Share, which require presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. In the accompanying financial statements, basic
earnings per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Note 2 - Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the period ended January 31, 2014,
the Company has had limited operations. As of January 31, 2014, the Company has
not become profitable. In view of these matters, the Company's ability to
continue as a going concern is dependent upon the Company's ability to begin
operations and to achieve a level of profitability. The Company intends to
continue financing its future development activities and its working capital
needs largely from the sale of public equity securities with some additional
funding from other traditional financing sources, including term notes until
such time that funds provided by operations are sufficient to fund working
capital requirements. The financial statements of the Company do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note 3 - Related Party Transactions:
Substantially all of our revenues to date have been derived from Master Service
Agreements with eight retail marijuana stores and one cultivation and growing
facility that are majority owned by our Chief Executive Officer, who is also the
husband or our majority shareholder and our President. Pursuant to the terms of
these Master Service Agreements, the marijuana stores and grow facility pay us
monthly fees for branding, marketing, administration, accounting and compliance
services. We also supply nutrients to the one grow facility at a 90% mark-up to
our cost for the nutrients.
Related party revenue was $104,378 and $0.00, respectively, for the years ended
January 31, 2014 and 2013. As of January 31, 2014 and 2013, we had accounts
receivable from affiliated entities of $70,000 and $0, respectively. As of
January 31, 2013 and 2014, we had accounts payable to affiliated entities of
$120,203 and $0, respectively.
Although our agreements with the marijuana outlets and grow facility expire on
December 31, 2023, all terms and contracts related to this revenue are
determined by related parties and these terms can change at any time.
35
Note 4 - Operating Leases:
The Company rents office space for its corporate needs from an affiliated
Company. The affiliate entered into a 31 month lease agreement in January 1,
2014 to lease 6,176 square feet for an annual rate of $64,848 for the first
twelve months, and $67,936 for the subsequent 12 months, and $41,431 for the
subsequent 7 months paid monthly, through October 31, 2016. See Note 9 for a
full explanation of operating leases that went into effect after the balance
sheet date, but before issuance.
Note 5 - Issuance of shares:
The Company was originally organized as a limited liability company on June 8,
2012 with $100 of membership equity. On January 16, 2014, the Company converted
to a corporation and issued a total of 20,430,000 shares in exchange for the one
hundred percent of the membership interests owned by the majority shareholder
and President of the Company. As of January 31, 2014 there were a total of
20,430,000 shares of common stock issued and outstanding.
Note 6 - Income Taxes:
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company adopted the provisions of ASC 740, "Income Taxes" on April 1, 2007.
FASB ASC 740 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the
financial statements. Tax positions must meet a "more-likely-than-not"
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods.
The components of the income tax provision are as follows:
Year Ended January 31,
------------------------
2014 2013
----------- --------
Income tax expense (benefit):
Current:
Federal $ (11,742) $ -
State (3,251) -
--------- -------
Deferred income tax expense (benefit): (14,993) -
Valuation allowance 14,993 -
--------- -------
Provision $ - $ -
========= =======
Note 7 - New accounting pronouncements:
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. The Company has reviewed the recently issued
pronouncements. During this review the Company decided to early adopt ASU
2014-10 which eliminates the definition of a development stage entity,
eliminates the development stage presentation and disclosure requirements under
ASC 915, and amends provisions of existing variable interest entity guidance
under ASC 810.
Note 8 - Equity:
Approved Warrants - In January 2014, the Company issued stock-based compensation
to a consultant in the form of warrants to purchase 500,000 shares of the
Company's common stock, at a price of $0.10 per share, at any time prior to
January 31, 2019. The Board of Directors determined the exercise price and terms
of the warrant.
36
The Black-Scholes option-pricing model was used to estimate the warrant fair
values. This option-pricing model requires a number of assumptions, of which the
most significant are, expected stock price volatility, the expected pre-vesting
forfeiture rate and the expected warrant term (the amount of time from the grant
date until the warrants are exercised or expire). Expected volatility was
estimated utilizing a weighted average of comparable published volatilities
based on industry comparables. Expected pre-vesting forfeitures were based upon
management's best estimates. The expected warrant term was based on the term of
the warrant. The fair value of the warrants granted during the year ended
January 31, 2014 was estimated, as of the grant date, using the Black-Scholes
option pricing model, with the following assumptions:
Expected volatility 187%
Risk-free interest rate .25%
Expected dividends -
Expected terms (in years 5
Share price at date of issuance $0.10
The warrants outstanding and activity as of and for the year ended January 31,
2014:
Weighted Remaining
Average Contractual
Exercise Term (in
Shares Price years)
---------- -------- ---------
Outstanding at January 31, 2013 $ - -
Granted 500,000 $ 0.10 5
Exercised - $ - -
Forfeited - $ - -
Outstanding at January 31,
2014 500,000 $ 0.10 5
--------- -------- -------
Exercisable at January 31,
2014 500,000 $ 0.10 5
-------- -------- -------
The weighted average fair value of warrants granted at January 31, 2014 was
$0.10. The exercise price of the warrants granted at January 31, 2014 equaled
the estimated fair market value of the stock at the time of grant which was
$0.10. No warrants were exercised during the current fiscal year. Accordingly,
the Company did not realize any tax deductions related to the intrinsic value of
exercised warrants.
In accordance with EITF 96-18 ' Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services', the total amount of share-based compensation expense
recorded at January 31, 2014 of $48,192 will be fully recorded in the current
year since no future services are required for the consultant to exercise the
warrants.
Note 9 - Subsequent events:
Share Exchange - On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange") with 4th Grade Films, Inc. ("FHGR"), pursuant to
which FHGR will acquire approximately 90 % of the outstanding shares of
Strainwise in exchange for 23,124,184 shares of FHGR's common stock. FHGR is a
publicly-traded company, incorporated in Utah, with its common stock currently
quoted on the OTC Bulletin Board. It is contemplated that the Exchange will
qualify as a tax-free reorganization under the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director
37
of FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse acquisitions
whereby the financial statements subsequent to the date of the transaction will
be presented as a continuation of the Company. Under reverse acquisition
accounting, the Company (subsidiary) is treated as the accounting parent
(acquirer) and FGHR (parent) is treated as the accounting subsidiary (acquiree).
As a result of the Share Exchange, FGHR has 24,431,184 outstanding shares of
common stock, with the current shareholders of FGHR owning 1,307,000 of the
post-closing shares.
Operating Leases - We entered into a lease agreement on March 7, 2014 to lease a
grow facility of approximately 26,700 square feet ("Custer Lease") for a term of
five years commencing on April 1, 2014. Lease payments are scheduled to be
$29,200 per month for the first twelve months of the lease, and then are
scheduled to be $27,500 per month for the subsequent 12 months, $28,325 per
month for the subsequent 12 months, $29,170 per month for the subsequent 12
months and $30,035 per month for the final 12 months of the lease. Under the
terms of the Custer Lease, we are obligated to pay a security deposit of $29,200
which was due and paid upon the execution of the Custer Lease. We have the
option to renew the Custer Lease at the end of the term of the lease at a
mutually agreed upon rate per square foot; there is no option to purchase the
property underlying the Custer Lease. The Lessor will provide all of the tenant
improvements that will enable the continuous cultivation of marijuana plants
under approximately 460 grow lights. We will lease this grow facility to the
affiliated entities on a long term basis.
We entered into a lease agreement on April 1, 2014 to lease a grow facility of
approximately 65,000 square feet ("51st Ave Lease") for a term of five years and
nine months. The terms of the 51st Ave Lease stipulates the payment of $15,000
per month, prorated if necessary, until such time that the Lessor is able to
deliver a Certificate of Occupancy, which is scheduled to occur on August 1,
2014. Thereafter, lease payments are scheduled to be $176,456 per month for the
first six months of the lease, and then are scheduled to be $221,833 per month
for the subsequent 24 months, $231,917 per month for the subsequent 12 months,
$242,000 per month for the subsequent 12 months and $247,041 per month for the
final 12 months of the lease. Under the terms of the 51st Ave Lease, we are
obligated to pay a security deposit of $150,000 one third of which was due and
paid upon the execution of the 51st Ave Lease, the second third is due and
payable after the first harvest or by October 1, 2014, and the final third is
due and payable after the second harvest or by December 1, 2014.We have the
option to renew the 51st Ave Lease at the end of the term of the lease at a
mutually agreed upon rate per square foot; there is no option to purchase the
property underlying the 51st Avenue Lease. The Lessor will provide all of the
tenant improvements that will enable the continuous cultivation of marijuana
plants under approximately 1,940 grow lights. We will lease this grow facility
to the affiliated entities on a long term basis.
We entered into a lease agreement on April 22, 2014 to lease a grow facility of
approximately 38,000 square feet ("Nome Lease") for a term of seven years. The
lease payments are scheduled to be $44,570 per month for the first twelve months
of the lease, and then are scheduled to be $46,151 per month for the subsequent
12 months, $47,743 per month for the subsequent 12 months, $49,334 per month for
the subsequent 12 months and $50,925 per month for the subsequent 12 months,
$52,517 per month for the subsequent 12 months, and $54,108 for the final 12
38
months of the lease. Under the terms of the Nome Lease, we are obligated to pay
a security deposit of $133,679 one half of which was due and paid upon the
execution of the Nome Lease, the final half was due and payable 30 days after
the commencement date. We have the option to renew the Nome Lease at the end of
the term of the lease at a mutually agreed upon rate per square foot; there is
no option to purchase the property underlying the Nome Lease. The Lessor will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 920 grow lights. We will
lease this grow facility to the affiliated entities on a long term basis.
We entered into a lease agreement on June 10, 2014 to lease a grow facility of
approximately 113,000 square feet ("32nd Ave Lease") for a term of five years
and nine months which will not become effective until the proper Licenses are
awarded, expected to be September 1, 2014. The terms of the 32nd Ave Lease
stipulates the payment of $25,000 per month, prorated if necessary, until such
time that the Lessor is able to deliver a Certificate of Occupancy, which is
scheduled to occur on September 01, 2014. Thereafter, lease payments are
scheduled to be $282,500 per month for the first Sixteen months of the lease,
and then are scheduled to be $301,333 per month for the subsequent 12 months,
$320,167 per month for the subsequent 12 months, and $329,583 per month for the
final 12 months of the lease. Under the terms of the 32nd Ave Lease, we are
obligated to pay a security deposit of $250,000, $150,000 of which was due and
paid upon the execution of the 32nd Ave Lease, and $100,000 due upon obtaining
the Certificate of Occupancy. We have the option to renew the 32nd Ave Lease at
the end of the term of the lease at a mutually agreed upon rate per square foot;
there is no option to purchase the property underlying the 32nd Ave Lease. The
Lessor will provide all of the tenant improvements that will enable the
continuous cultivation of marijuana plants under approximately 3,000 grow
lights. We will lease this grow facility to the affiliated entities on a long
term basis.
Future minimum payments for these leases are:
For the Year
Ended January 31, Amount
2015 $2,181,500
2016 $7,276,000
2017 $7,317,700
2018 $7,476,700
2019 $8,123,000
Convertible Note Payable - The Company issued $850,000 in a convertible note on
March 20, 2014 (the "Note"). The Note has an interest rate of 25%, payable
monthly, and matures on September 21, 2014. The outstanding principal balance of
the Note, plus any accrued but unpaid interest on the Note, is convertible at
any time on or before the maturity date at $1 per common share. The convertible
note is personally guaranteed by our majority shareholder and by an officer and
director of the Company.
On July 16, 2014, the terms of the Note were amended ("Amendment") wherein the
holder of the Note elected to convert $200,000 of the principal of the Note into
293,000 of our common shares of stock at a price of $.6825 per share. As a
component of the Amendment, we in turn elected to prepay the remaining principal
balance of the Note, after the scheduled payment of the principal and accrued
interest due the holder on July 24, 2014 and to pay a prepayment penalty of
$11,250. The difference in the premium of the per share price of $0.6825 per the
Amendment and the $1 per share per the Note, plus the amount of the prepayment
penalty will be charged to interest expense ratably over the term of the
Amendment.
Private Offering - Through a private offering of our common stock at $1 per
share, we have collected $2,140,700 as of the date of the issuance of the
financial statements, July 31, 2014. Coupled with the 293,000 common shares
issued in connection with the conversion of the convertible note described
above, 22,863,700 shares of common stock would be outstanding upon the
completion of our stock offering. As part of the private offering, we sold
warrants which entitle the holders to purchase up to 1,070,350 shares of our
common stock. The warrants can be exercised at any time prior to January 31,
2019 at a price of $5.00 per share.
39
STRAINWISE, INC.
INTERIM FINANCIAL STATEMENTS
For the three month period ended April 30, 2014
(UNAUDITED)
40
STRAINWISE, INC.
CONDENSED BALANCE SHEETS
(Unaudited) (Audited
April 30, January 31,
2014 2014
----------- -----------
ASSETS
Current assets:
Cash in trust account $ 317,579 $ 100
Prepaid expenses and other assets 84,200 10,000
--------- --------
Total current assets 401,779 10,100
Tenant improvements and office equipment,
net of accumulated amortization and
depreciation of $22,667 and $0 at April
30 and January 31, 2014, respectively 246,079 10,500
Prepaid expenses and other assets 296,187 -
Trademark, net of accumulated amortization of
$244 and $61, at April 30 and January 31,
2014, respectively 10,766 10,949
--------- --------
Total assets $ 954,811 $ 31,549
========= ========
LIABILITIES AND STOCKHOLERS' (DEFICIT)
LIABILITIES
Current liabilities:
Due to affiliated entities $ 171,320 $ 50,203
Accrued interest payable 8,051 -
--------- --------
Total current liabilities 179,371 50,203
Convertible note payable, net of unamortized
discount of $29,634 790,366 -
Deferred rent 13,133 3,273
--------- --------
Total liabilities 982,870 53,476
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, no par value, 100,000,000 shares
authorized, 20,430,000 issued and outstanding - -
Additional Paid in Capital 48,292 48,292
Share subscriptions receivable 941,200 -
Subscriptions to common stock (941,200)
(Deficit) Retained Earnings (76,351) (70,219)
--------- --------
Total stockholder's equity (28,059) (21,927)
--------- --------
Total liabilities and stockholder's deficit $ 954,811 $ 31,549
========= ========
See accompanying notes.
41
STRAINWISE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months
Ended Ended
April 30, April 30,
2014 2013
------------- ------------
Revenues from affiliated entities $ 536,209 $ -
Operating costs and expenses:
Nutrient purchases 99,496 -
Compensation 241,711 -
Rent and other occupancy 78,046 -
General and administrative 34,187 -
--------- ---------
Total operating costs and
expenses 453,440 -
--------- ---------
Income from operations 82,769 -
Other costs and expenses
Interest expense 39,718 -
Professional, legal and consulting
fees 26,323 -
Depreciation and amortization
expense 22,860 -
--------- ---------
Loss before taxes on income (6,132) $ -
Provision for taxes on income - -
--------- ---------
Net loss $ (6,132) $ -
========= =========
Basic loss per common share $(0.00030) $ -
========= =========
Fully diluted loss per common share $(0.00029) -
========= =========
Weighted average number of shares
outstanding 20,430,000 -
========== =========
Fully diluted weighted average number
of shares outstanding 20,930,000 -
========== =========
See accompanying notes.
42
STRAINWISE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Three Months
Ended Ended
April 30, April 30,
2014 2013
------------- ------------
Cash flows from operating activities:
Net (loss) $ (6,132) $ -
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 22,860 -
Unamortized discount on debt (29,635) -
Changes in current assets and liabilities:
Increase in amounts due affiliates 121,118 -
Increase in prepaid expenses and other
assets (393,248) -
Decrease in trademark 183 -
Increase in accrued expenses and deferred
rent 17,912 -
-------- --------
Net cash used in operating activities (266,942) -
Cash flows from investing activities:
Investment in tenant improvements and
office equipment (235,579) -
-------- --------
Net cash flow from investing activities (235,579) -
Cash flows from financing activities:
Proceeds from common stock subscriptions - 100
Proceeds from convertible note payable,
inclusive of discount of $45,000 895,000 -
Payments on convertible notes payable (75,000) -
-------- --------
Net cash flows from financing activities 820,000 100
-------- --------
Net cash flows 317,479 100
Cash and equivalent, beginning of period 100 -
-------- --------
Cash and equivalent, end of period $317,579 $ 100
======== ========
Supplemental cash flow disclosures:
Cash paid for interest $ 26,587 $ -
======== ========
Cash paid for income taxes $ - $ -
======== ========
See accompanying notes.
43
STRAINWISE, INC.
STATEMENT OF CHANGES IN CONDENSED STOCKHOLDERS' DEFICIENCY For the
Period from June 8, 2012 (date of inception) to April 30, 2014
(UNAUDITED)
Additional Deficit
Common Stock Capital Accumulated
----------------- In Excess in Development
Shares Amount of Par Value Stage Total
------ ------ ------------ -------------- -----
Balance, June 8, 2012,
inception - $ - $ - $ - $ -
Membership interest issued
for cash - - 100 - 100
Net loss - - - - -
---------- ------ ------ ------- --------
Balance, January 31, 2013 - - 100 - 100
Conversion of common shares
for membership interest 20,430,000 - - - -
Stock-based compensation - - 48,192 - 48,192
Net loss for the period - - - (70,219) (70,219)
---------- ------ ------ ------- --------
Balance, January 31, 2014 20,430,000 - 48,292 (70,219) $(21,927)
Subscriptions to common
stock 941,200 - 941,200 - 941,200
Share subscriptions
receivable - - (941,200) - (941,200)
Net loss - - - (6,132) (6,132)
---------- ------ -------- -------- ----------
Balance, April 30, 2014 21,371,200 $ - $ 48,292 $(76,351) $(28,059)
========== ====== ======== ======== ==========
See accompanying notes.
44
STRAINWISE, INC.
Notes to the Unaudited Financial Statements
April 30, 2014
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business - STRAINWISE, INC. (identified in these
footnotes as "we" "us" or the "Company") provides branding and fulfillment
services to entities in the cannabis retail and production industry. The Company
was incorporated in the state of Colorado as a limited liability company on June
8, 2012, and subsequently converted to a Colorado corporation on January 16,
2014.
The Company provides sophisticated fulfillment and branding services and
solutions to (i) one grow facility and eight retail stores (seven of which sell
recreational and medical marijuana to the public and one of which only sells
medical marijuana to the public) owned by an officer and director of the Company
("Affiliated Entities") and (ii) makes such services available to independent
retail stores and grow facilities in the regulated cannabis industry throughout
the United States.
The branding and fulfillment services that we currently provide are summarized,
as follows:
o Branding, Marketing and Administrative Consulting Services: Customers may
contract with us to use the Strainwise name, logo and affinity images in
their retail store locations. A monthly fee permits our branding customer
to use the Strainwise brand at one specific location. In addition, we will
assist operators in marketing and managing their businesses, setting up new
retail locations and general business planning and execution at an hourly
rate. This includes services to establish an efficient, predictable
production process, as well as, nutrient recipes for consistent and
appealing marijuana strains.
o Accounting and Financial Services: For a monthly fee, we provide our
customers with a fully implemented general ledger system, with an industry
centric chart of accounts, which enables management to readily monitor and
manage all facets of a marijuana medical dispensary, retail store and grow
facility. We provide bookkeeping, accounts payable processing, cash
management, general ledger processing, financial statement preparation,
state and municipal sales tax filings, and state and federal income tax
compilation and filings on behalf of the Company and the Captive Stores on
an ongoing basis.
o Compliance Services: The rules, regulations and state laws governing the
production, distribution and retail sale of marijuana can be complex, and
may prove cumbersome with which to comply. Thus, customers may contract
with us to implement a compliance process, based upon the number and type
of licenses and permits for their specific business. We provide this
service on both an hourly rate and stipulated monthly fee.
o Nutrient Supplier: The Company presently is a bulk purchaser of nutrients
and other cultivation supplies for the sole purpose of growing marijuana.
As a result, we are able to make bulk purchases with price breaks, based
upon volume. We serve as a sole source nutrient purchasing agent and
distributor with pricing based upon our bulk purchasing power.
o Lending: We will provide loans to individuals and businesses in the
cannabis industry. However, Colorado State law does not allow entities
operating under a cannabis license to pledge the assets or the license of
the cannabis operation for any type of general borrowing activity. Thus,
our lending will be on an unsecured basis, with reliance on a personal
guarantee of the borrower.
45
o Lease of Grow Facilities and Equipment: We lease grow equipment and
facilities on a turn-key basis to customers in the cannabis industry. We
will also enter into sale lease backs of grow lights, tenant improvements
and other grow equipment.
We do not directly grow marijuana plants, produce marijuana infused products,
sell marijuana plants and or sell marijuana infused products of any nature.
Share exchange - On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange") with 4th Grade Films, Inc. ("FHGR"), pursuant to
which FHGR will acquire approximately 90 % of the outstanding shares of
Strainwise in exchange for 23,124,184 shares of FHGR's common stock. FHGR is a
publicly-traded company, incorporated in Utah, with its common stock currently
quoted on the OTC Bulletin Board. It is contemplated that the Exchange will
qualify as a tax-free reorganization under the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director of
FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse
acquisitions whereby the financial statements subsequent to the date of the
transaction will be presented as a continuation of the Company. Under reverse
acquisition accounting, the Company (subsidiary) is treated as the accounting
parent (acquirer) and FGHR (parent) is treated as the accounting Subsidiary
(acquiree). If the Share Exchange is completed, FGHR will have 24,431,184
outstanding shares of common stock, with the current shareholders of FGHR
owning 1,307,000 of the post-closing shares.
Basis of presentation - The accounting and reporting policies of the Company
conform to U.S. generally accepted accounting principles.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of the statement of cash flows, we
consider all cash in banks, money market funds, and certificates of deposit with
a maturity of less than three months to be cash equivalents. During 2014, the
Company entered into an agreement with our Chief Executive Officer to hold all
of our cash funds in his personal bank account in trust for the Company. Because
of current banking regulations, marijuana centric entities are not afforded
normal banking privileges, and thus, we were not able to obtain a corporate bank
account at a federally charted bank until well into the end of the second
quarter of operations in 2014. Under the terms of our trust agreement with our
Chief Executive Officer, he agreed to hold our cash in his personal bank account
and to make payments of our funds only for our business purposes and to allow
daily access to the bank account for ongoing oversight of his fiduciary
responsibility to the Company. Additionally, the trust agreement required that
the Chief Executive Officer make copies available of all transactions applicable
to our operations to our accounting staff on a weekly, or as requested basis. At
April 30, 2014 and January 31, 2014 there were cash deposits in the personal
bank account of the Chief Executive Officer held in trust for us in the amount
of $317,579 and $0, respectively.
Prepaid expenses and other assets - The Company pays rent in advance of the
rental period. The Company records the carrying amount as of the balance sheet
date of rental payments made in advance of the rental period; such amounts are
charged against earnings within one year. The Company also capitalizes any
prepaid expenses related to the reverse merger.
46
The amount of prepaid expenses and other assets as of April 30, 2014 and January
31, 2014 is $380,387 and $10,000, respectively.
Current prepaid expenses and other assets are comprised of the following:
April 30, January 31,
2014 2014
-------- ----------
Prepaid reverse merger fees $ 35,000 $ -
Prepaid rent 29,200 -
Rent deposits 20,000 10,000
----------- --------
$ 84,200 $ 10,000
=========== ========
Noncurrent prepaid expenses and other assets are comprised of the following:
April 30, January 31,
2014 2014
-------- ----------
Prepaid rent $ 54,108 $ -
Security deposits 242,079 -
--------- -------
$ 296,187 $ -
========= =======
Fair value of financial instruments and derivative financial instruments - The
carrying amounts of cash and current liabilities approximate fair value because
of the short maturity of these items. These fair value estimates are subjective
in nature and involve uncertainties and matters of significant judgment, and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates. We do not hold or issue financial
instruments for trading purposes, nor do we utilize derivative instruments in
the management of our foreign exchange, commodity price or interest rate market
risks.
The FASB Codification clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. It also
requires disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets and liabilities
must be grouped, based on significant levels of inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities and
inputs that are observable for the asset or liability.
Level 3: Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions.
The determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
Tenant improvements and office equipment - Tenant improvements are recorded at
cost and are amortized over the term of the applicable lease period. Office
equipment is recorded at cost and is depreciated under straight line methods
over each item's estimated useful life. We review our tenant improvements and
office equipment for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations.
47
Major improvements are capitalized. Upon retirement, sale or other disposition
of property and equipment, the cost and accumulated depreciation are eliminated
from the accounts and any gain or loss is included in operations.
Tenant improvements and office equipment, net of accumulated amortization and
depreciation are comprised of the following:
April 30, January 31,
2014 2014
-------- ----------
Tenant improvements:
Upgrades of HVAC systems $ 181,000 $ -
Upgrades of electrical generators and power
equipment 42,590 -
Office equipment:
Computer equipment 3,777 -
Office furniture and fixtures 16,389 10,500
Machinery 25,000 -
---------- -------
268,756 10,500
Accumulated amortization and depreciation (22,667) -
---------- -------
$ 246,079 $10,500
========== =======
Tenant improvements are amortized over the term of the lease, and office
equipment is depreciated over its useful lives, which has been deemed by
management to be three years. Amortization and depreciation expense for the
three months ended April 30, 3014 and April 30, 2013 was $22,700 and $0,
respectively.
Income taxes - The Company accounts for income taxes pursuant to ASC 740. Under
ASC 740 deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Long-Lived Assets - In accordance with ASC 350, the Company regularly reviews
the carrying value of intangible and other long-lived assets for the existence
of facts or circumstances, both internally and externally, that suggest
impairment. If impairment testing indicates a lack of recoverability, an
impairment loss is recognized by the Company if the carrying amount of a
long-lived asset exceeds its fair value.
Trademarks - Trademarks and other intangible assets are stated at cost and are
amortized using the straight-line method over fifteen years. Accumulated
amortization was $244 and $0 at April 30, 2014 and 2013, respectively and
consisted of the following at April 30, 2014:
Gross
Carrying Accumulated
Amount Amortization Net
------------- ------------ ------
Trademarks $11,010 $244 $10,766
======= ==== =======
Deferred Rent - The Company recognizes rent expense from operating leases on the
straight-line basis. Differences between the expense recognized and actual
payments are recorded as deferred rent.
48
Revenue recognition - Revenue is recognized on an accrual basis as earned under
contract terms. Specifically, revenue from product sales is recognized
subsequent to a customer ordering a service or product at an agreed upon fee or
price, delivery has occurred, and collectability is reasonably assured.
Comprehensive Income (Loss) - Comprehensive income is defined as all changes in
stockholders' equity (deficit), exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss, changes
in certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries and unrealized
gains (losses) on available-for-sale securities. From our Inception there have
been no differences between our comprehensive loss and net loss.
Net income per share of common stock - We have adopted applicable FASB
Codification regarding Earnings per Share, which require presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. In the accompanying financial statements, basic
earnings per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Note 2 - Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the period ended April 30, 2014,
the Company has had limited operations. As of April 30, 2014, the Company has
not become profitable. In view of these matters, the Company's ability to
continue as a going concern is dependent upon the Company's ability to begin
operations and to achieve a level of profitability. The Company intends to
continue financing its future development activities and its working capital
needs largely from the sale of public equity securities with some additional
funding from other traditional financing sources, including term notes until
such time that funds provided by operations are sufficient to fund working
capital requirements. The financial statements of the Company do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note 3 - Related Party Transactions:
Substantially all of our revenues to date have been derived from Master Service
Agreements with eight retail marijuana stores and one cultivation and growing
facility that are majority owned by our Chief Executive Officer, who is also the
husband or our majority shareholder and our President. Pursuant to the terms of
these Master Service Agreements, the marijuana stores and grow facility pay us
monthly fees for branding, marketing, administration, accounting and compliance
services. We also supply nutrients to the one grow facility at a 90% mark-up to
our cost for the nutrients.
Related party revenue was $104,378 and $0.00, respectively, for the years ended
January 31, 2014 and 2013. As of January 31, 2014 and 2013, we had accounts
receivable from affiliated entities of $70,000 and $0, respectively. As of
January 31, 2013 and 2014, we had accounts payable to affiliated entities of
$120,203 and $0, respectively.
Although our agreements with the marijuana outlets and grow facility expire on
December 31, 2023, all terms and contracts related to this revenue are
determined by related parties and these terms can change at any time.
Note 4 - Operating Leases:
The Company entered into a lease agreement with an affiliate for our corporate
office needs. The lease is for a 31 month period, commenced in January 2014 for
6,176 square feet at an annual rate of $64,848 for the first twelve months,
$67,936 for the subsequent 12 months, and $41,431 for the subsequent 7 months
paid monthly, through October 31, 2016.
49
We entered into a lease agreement on March 7, 2014 to lease a grow facility of
approximately 26,700 square feet ("Custer Lease") for a term of five years
commencing on April 1, 2014. Lease payments are scheduled to be $29,200 per
month for the first twelve months of the lease, and then are scheduled to be
$27,500 per month for the subsequent 12 months, $28,325 per month for the
subsequent 12 months, $29,170 per month for the subsequent 12 months and $30,035
per month for the final 12 months of the lease. Under the terms of the Custer
Lease, we are obligated to pay a security deposit of $29,200 which was due and
paid upon the execution of the Custer Lease. We have the option to renew the
Custer Lease at the end of the term of the lease at a mutually agreed upon rate
per square foot; there is no option to purchase the property underlying the
Custer Lease. The Lessor will provide all of the tenant improvements that will
enable the continuous cultivation of marijuana plants under approximately 460
grow lights. We will lease this grow facility to the affiliated entities on a
long term basis.
We entered into a lease agreement on April 1, 2014 to lease a grow facility of
approximately 65,000 square feet ("51st Ave Lease") for a term of five years and
nine months. The terms of the 51st Ave Lease stipulates the payment of $15,000
per month, prorated if necessary, until such time that the Lessor is able to
deliver a Certificate of Occupancy, which is scheduled to occur on August 1,
2014. Thereafter, lease payments are scheduled to be $176,456 per month for the
first six months of the lease, and then are scheduled to be $221,833 per month
for the subsequent 24 months, $231,917 per month for the subsequent 12 months,
$242,000 per month for the subsequent 12 months and $247,041 per month for the
final 12 months of the lease. Under the terms of the 51st Ave Lease, we are
obligated to pay a security deposit of $150,000 one third of which was due and
paid upon the execution of the 51st Ave Lease, the second third is due and
payable after the first harvest or by October 1, 2014, and the final third is
due and payable after the second harvest or by December 1, 2014. We have the
option to renew the 51st Ave Lease at the end of the term of the lease at a
mutually agreed upon rate per square foot; there is no option to purchase the
property underlying the 51st Avenue Lease. The Lessor will provide all of the
tenant improvements that will enable the continuous cultivation of marijuana
plants under approximately 1,940 grow lights. We will lease this grow facility
to the affiliated entities on a long term basis.
We entered into a lease agreement on April 22, 2014 to lease a grow facility of
approximately 38,000 square feet ("Nome Lease") for a term of seven years. The
lease payments are scheduled to be $44,570 per month for the first twelve months
of the lease, and then are scheduled to be $46,151 per month for the subsequent
12 months, $47,743 per month for the subsequent 12 months, $49,334 per month for
the subsequent 12 months and $50,925 per month for the subsequent 12 months,
$52,517 per month for the subsequent 12 months, and $54,108 for the final 12
months of the lease. Under the terms of the Nome Lease, we are obligated to pay
a security deposit of $133,679 one half of which was due and paid upon the
execution of the Nome Lease, the final half was due and payable 30 days after
the commencement date. We have the option to renew the Nome Lease at the end of
the term of the lease at a mutually agreed upon rate per square foot; there is
no option to purchase the property underlying the Nome Lease. The Lessor will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 920 grow lights. We will
lease this grow facility to the affiliated entities on a long term basis.
Future minimum payments for these leases are:
For the Period
Ending April 30, Amount
2015 $2,550,987
2016 $3,608,905
2017 $3,637,249
2018 $3,746,079
2019 $3,855,572
Note 5 - Issuance of Shares:
The Company was originally organized as a limited liability company on June 8,
2012 with $100 of membership equity. On January 16, 2014, the Company converted
to a corporation and issued a total of 20,340,000 shares in exchange for the one
hundred percent of the membership interests owned by the majority shareholder
and President of the Company. As of April 30, 2014, there were a total of
20,340,000 shares of common stock issued and outstanding. Through a private
offering of our common stock at $1 per share, we have collected $941,200
50
from subscribers as for April 30, 2014 for 941,200 shares. The total shares of
common stock that would be issued and outstanding upon the completion of our
stock offering and the issuance of shares to the current subscribers, the total
amount of our common shares issued and outstanding would be 21,281,200 shares.
Note 6 - Income Taxes:
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company adopted the provisions of ASC 740, "Income Taxes" on April 1, 2007.
FASB ASC 740 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the
financial statements. Tax positions must meet a "more-likely-than-not"
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods. The components of the income tax
provision are as follows:
Three Months Ended April 30,
----------------------------
2014 2013
------ ------
Income tax expense (benefit):
Current:
Federal $ 13,205 $ -
State (3,536) -
--------- --------
Deferred income tax expense (benefit): 9,670
Valuation allowance (9,670) -
--------- --------
Provision $ - $ -
========= ========
We have a net operating loss carryforward for financial statement reporting
purposes of $76,351 from the year ended January 31, 2014
Note 7 - Convertible Note Payable:
Notes payable consist of the following:
(Unaudited) (Audited)
April 30, 2014 January 31, 2014
Convertible notes payable, with interest
due monthly at 25% per annum, maturing
September 21, 2014: $850,000 --
Discount 45,000 --
--------- ------
$895,000 --
Less Payment (75,000) --
Less Unamortized Discount (29,635) --
--------- ------
Balance: $ 790,365 --
========= ======
The unamortized discount on the convertible note at April 30, 2014 was
calculated as follows:
Discount $45,000
Less Amortization through 4/17/14,
using an imputed rate of 22.9% (10,286)
Less Amortization from 4/18 to 4/30,
using an imputed rate of 26.1% (5,080)
-------
Unamortized Premium: $29,634
=======
51
The Company issued a note for $850,000 in a convertible note on March 20, 2014
(the "Note"). The Note has an interest rate of 25%, payable monthly, and matures
on September 21, 2014. The outstanding principal balance of the Note, plus any
accrued but unpaid interest on the Note, is convertible at any time on or before
the maturity date at $1 per common share. The convertible note is personally
guaranteed by our majority shareholder and by an officer and director of the
Company.
On July 16, 2014, the terms of the Note were amended ("Amendment") wherein the
holder of the Note elected to convert $200,000 of the principal of the Note into
293,000 of our common shares of stock at a price of $.6825 per share. As a
component of the Amendment, we in turn elected to prepay the remaining principal
balance of the Note, after the scheduled payment of the principal and accrued
interest due the holder on July 24, 2014 and to pay a prepayment penalty of
$11,250. The difference in the premium of the per share price of $0.6825 per
share per the Amendment and the $1 per share per the Note, plus the amount of
the prepayment penalty will be charged to interest expense in the month the
transaction occurred.
Note 8 - New accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting.
The Company elected to adopt ASU 2014-10, Development Stage Entities:
Elimination of Certain Financial Reporting Requirements, Including an Amendment
to Variable Interest Entities Guidance in Topic 810, Consolidation. The adoption
of this ASU allows the company to remove the inception to date information and
all references to development stage. We do not expect the adoption of recently
issued accounting pronouncements to have a significant impact on our results of
operations, financial position or cash flow.
Note 9 - Subsequent Events:
Share Exchange - On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange") with 4th Grade Films, Inc. ("FHGR"), pursuant to
which FHGR will acquire approximately 90 % of the outstanding shares of
Strainwise in exchange for 23,124,184 shares of FHGR's common stock. FHGR is a
publicly-traded company, incorporated in Utah, with its common stock currently
quoted on the OTC Bulletin Board. It is contemplated that the Exchange will
qualify as a tax-free reorganization under the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director of
FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse acquisitions
whereby the financial statements subsequent to the date of the transaction will
be presented as a continuation of the Company. Under reverse acquisition
accounting, the Company (subsidiary) is treated as the accounting parent
(acquirer) and FGHR (parent) is treated as the accounting Subsidiary (acquiree).
If the Share Exchange is completed, FGHR will have 24,431,184 outstanding shares
of common stock, with the current shareholders of FGHR owning 1,307,000 of the
post-closing shares.
Operating Lease - We entered into a lease agreement on June 10, 2014 to lease a
grow facility of approximately 113,000 square feet ("32nd Ave Lease") for a term
of five years and nine months which will not become effective until the proper
Licenses are awarded, expected to be September 1, 2014. The terms of the 32nd
Ave Lease stipulates the payment of $25,000 per month, prorated if necessary,
until such time that the Lessor is able to deliver a Certificate of Occupancy,
which is scheduled to occur on September 01, 2014. Thereafter, lease payments
are scheduled to be $282,500 per month for the first Sixteen months of the
lease, and then are scheduled to be $301,333 per month for the subsequent 12
months, $320,167 per month for the subsequent 12 months, and $329,583 per month
for the final 12 months of the lease. Under the terms of the 32nd Ave Lease, we
52
are obligated to pay a security deposit of $250,000, $150,000 of which was due
and paid upon the execution of the 32nd Ave Lease, and $100,000 due upon
obtaining the Certificate of Occupancy. We have the option to renew the 32nd Ave
Lease at the end of the term of the lease at a mutually agreed upon rate per
square foot; there is no option to purchase the property underlying the 32nd Ave
Lease. The Lessor will provide all of the tenant improvements that will enable
the continuous cultivation of marijuana plants under approximately 3,000 grow
lights. We will lease this grow facility to the affiliated entities on a long
term basis.
Private Stock Offering - Through a private offering of our common stock at $1
per share, we have collected $941,200 from subscribers as for April 30, 2014 for
941,200 shares, and we have collected an additional $1,199,500 from May 1, 2014
through, July 31, 2014. Thus, total subscriptions to common stock through the
private offering is 2,140,700 shares. Coupled with the 293,000 common shares
issued in connection with the conversion of the convertible note described
above, upon the completion of our stock offering and the issuance of shares to
the current subscribers we would have 22,863,700 outstanding shares of common
stock. As part of the private offering, we sold warrants which entitle the
holders to purchase up to 1,070,350 shares of our common stock. The warrants can
be exercised at any time prior to January 31, 2019 at a price of $5.00 per
share.
53
STRAINWISE, INC.
PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
54
STRAINWISE, INC.
Condensed Pro Forma Balance Sheets
(Unaudited)
Pro Forma Combined InformationThe following unaudited pro forma condensed
combined balance sheet as of April 30, 2014 is based on (i) the historical
balance sheet of Strainwise, Inc. as of April 30, 2014 and (ii) the historical
balance sheet of 4th Grade Films, Inc as of March 31, 2014.
Strainwise, 4th Grade Strainwise, Inc.
Inc. Films, Inc. Notes Adjustments Pro Forma
---------- ---------- ------ ----------- -----------------
ASSETS
Current assets:
Cash in trust account $ 317,579 $ 32 (3) (32) $317,579
Prepaid expenses and
other assets 84,200 - 84,200
--------- ------- ------- ------- --------
Total current assets 401,779 32 401,779
Tenant improvements and
office equipment, net of
accumulated amortization
and depreciation of $22,667 246,079 - 246,079
Prepaid expenses and other
other assets 296,187 296,187
Trademark, net of
accumulated amortization
of $244 10,766 - 10,766
--------- ------- ------- ------- --------
Total $954,811 $32 $954,811
========= ======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Due to affiliated entities $171,320 $ - $171,320
Payable to Shareholder - 26,961 (3) (26,961) -
Accrued interest payable 8,051 1,500 (3) (1,500) 8,051
--------- ------- ------- ------- --------
Total current liabilities 179,371 28,461 179,371
Convertible note payable,
net of unamortized
discount of $29,634 790,366 - 790,366
Note payable to shareholder - 106,072 (3) (106,072) -
Deferred rent 13,133 - 13,133
--------- ------- --------
Total liabilities 982,870 134,533 982,870
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, no par value,
100,000,000 shares
authorized, 23,124,184
issued and outstanding - 23,450 (1) (23,450) -
Additional Paid in Capital 48,292 123,762 (1) (123,762) 48,292
Share subscriptions receivable 941,200 - 941,200
Subscriptions to common stock (941,200) - (941,200)
(Deficit) Retained Earnings (76,351) (281,713) (2) 281,713 (76,351)
--------- ------- ------- ------- --------
Total stockholder's equity (28,059) (134,501) (28,059)
--------- ------- --------
Total $954,811 $ 32 $954,811
========= ======== ========
See accompanying notes.
55
STRAINWISE, INC.
Condensed Pro Forma Statements of Operations
(Unaudited)
The following unaudited pro forma condensed combined statement of operations and
comprehensive loss for the three months ended April 30, 2014 is based on (i) the
historical results of operations of Strainwise, Inc. for the three months ended
April 30, 2014, and (ii) the historical results of operations of 4th Grade
Films, Inc. for the three months ended March 31, 2014.
Strainwise, 4th Grade Strainwise, Inc.
Inc. Films, Inc. Notes Adjustments Pro Forma
---------- ---------- ------ ----------- -----------------
Revenues from affiliated entities $536,209 $ - $536,209
Operating costs and expenses
Nutrient purchases 99,496 - 99,496
Compensation 241,711 241,711
Rent and other occupancy 78,046 225 (2) 225 78,046
General and administrative 34,187 34,187
--------- -------- --------
Total operating costs 453,440 225 453,440
--------- -------- --------
Income from operations 82,769 225 82,769
Other Costs and Expenses
Interest Expense 39,718 (2,545) (2) 2,545 (39,718)
Professional, legal and
consulting fees 26,323 (2,400) (2) 2.400 (26,323)
Amortization and depreciation 22,860 - (22,860)
--------- -------- --------
Loss before taxes on income (6,132) (5,170) (6,132)
Provision for taxes on income - - -
--------- -------- --------
Net loss $ (6,132) (5,170) $(6,132)
========= ======== ========
See accompanying notes.
56
STRAINWISE, INC.
Pro Forma Summary and Adjustments to the
Balance Sheet and Statements of Operations
(Unaudited)
Summary
The unaudited pro forma condensed consolidated balance sheet and statement of
operations reflects amounts as if the transaction had occurred on March 31,
2014.
As a result of this business combination, 4th Grade Films, Inc. ("Strainwise")
became a wholly owned subsidiary of the Company.
The information presented in the unaudited pro forma combined financial
statements does not purport to represent what the financial position or results
of operations would have been had the acquisition occurred as of April 30, 2014,
nor is it indicative of future financial position or results of operations. You
should not rely on this information as being indicative of the historical
results that would have been achieved had the companies always been combined, or
the future result that the combined company will experience after the Exchange
Transaction is consummated.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes is reasonable under the circumstances. The
unaudited pro forma financial statements should be read in conjunction with the
accompanying notes and assumptions and the historical financial statements of
the Company and Strainwise.
The accompanying pro forma financial statements include the balance sheet as of
April 30, 2014 and the statement operations for the three months then ended.
These financial statements reflect the acquisition by 4th Grade Films, Inc
("FHGR") of Strainwise, Inc. ("Strainwise").
On August 19, 2014, Strainwise entered into an agreement to exchange securities
with FHGR, whereby a shareholder of Strainwise received 23,124,874 shares of the
common stock of FHGR in exchange for approximately 90% of the outstanding shares
of Strainwise. As part of this agreement, Strainwise paid $134,700 of FHGR's
liabilities and purchased 1,038,000 shares of FHGR's common stock for $120,300
from two shareholders of FHGR. The 1,038,000 shares were returned to treasury
and cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related distribution agreements, and all pre-production and other
rights to the film, to a former officer and director of FHGR in consideration
for the assumption by a shareholder of FHGR of all liabilities of FHGR (net of
the $134,700 paid by Strainwise) which were outstanding immediately prior to the
closing of the transaction.
The transaction was accounted for as a reverse acquisition whereby Strainwise
was consider to be the accounting acquirer.
Pro forma adjustments:
1. To reflect the issuance of 23,124,184 shares of no par value common
stock of Strainwise in exchange for approximately 94.7% of FHGR and
the cancellation of 1,038,000 shares of FHGR.
2. To reclassify the current period loss and to reclassify the
accumulated deficit of FHGR.
3. To reflect the payment of FHGR's liabilities in the amount of
$134,700.
57