UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Amendment No. 1
STRAINWISE, INC
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(Exact name of registrant as specified in its charter)
Utah
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(State or other jurisdiction of incorporation or organization)
1389
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(Primary Standard Industrial Classification Code Number)
20-8980078
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(I.R.S. Employer Identification Number)
1350 Independence St., Suite 300
Lakewood, CO 80215
(303) 736-2442
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Shawn Phillips
1350 Independence St., Suite 300
Lakewood, CO 80215
(303) 736-2442
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(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
William T. Hart, Esq.
Hart & Hart, LLC
1624 Washington St.
Denver, CO 80203
(303) 839-0061
As soon as practicable after the effective date of this Registration Statement
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(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
1
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Per Offering Registration
Registered Registered Share (1) Price Fee
---------- ---------- ----------- ----------- ---------------
Common stock (2)
Total 4,130,050 $2.50 $10,325,125 $1,330
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(1) Offering price computed in accordance with Rule 457 (c).
(2) Shares of common stock offered by selling shareholders.
Pursuant to Rule 416, this Registration Statement includes such
indeterminate number of additional securities as may be required for issuance as
a result of any stock dividends, stock splits or similar transactions.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of l933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
STRAINWISE, INC.
Common Stock
By means of this prospectus a number of our shareholders are offering to
sell up to 2,517,700 shares of our common stock, as well as up to 1,612,350
shares of our common stock issuable upon the exercise of outstanding warrants.
Our common stock is traded on the OTC Bulletin Board under the symbol
"FHGR". On October 31, 2014, the closing price of our common stock was $1.55.
The shares owned by selling shareholders may be sold in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then current market price, or in negotiated transactions.
We will not receive any proceeds from the sale of the common stock by the
selling stockholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
These securities are speculative and involve a high degree of risk. For a
description of certain important factors that should be considered by
prospective investors, see "risk factors" beginning on page 5 of this
prospectus.
The date of this prospectus is ___________, 2014.
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PROSPECTUS SUMMARY
We provide the following services to the eight retail marijuana outlets and
six marijuana cultivation and growing facility owned by our Chief Executive
Officer:
o Branding, marketing, administrative and consulting;
o Accounting and financial;
o Compliance.
In addition to the foregoing, we plan to:
o provide nutrients and other cultivation supplies to licensed marijuana
growers;
o provide loans to individuals and business involved in the marijuana
industry; and
o lease equipment and facilities to licensed marijuana growers.
We plan to make these services available to retail stores and cultivation
and growing facilities in the regulated marijuana industry throughout the United
States.
We do not grow marijuana plants, produce marijuana infused products, sell
marijuana plants and/or sell marijuana infused products of any nature.
The Offering
By means of this prospectus a number of our shareholders are offering to
sell up to 2,517,700 shares of our common stock, as well as up to 1,612,350
shares of our common stock issuable upon the exercise of outstanding warrants.
See the section of this prospectus entitled "Selling Shareholders" for
more information.
The purchase of the securities offered by this prospectus involves a high
degree of risk. Risk factors include the lack of any relevant operating history,
losses since we were incorporated, the possible need for us to sell shares of
our common stock to raise capital and our auditors, in their report on our
financial statements for the year ended January 31, 2014 and the period ended
January 31, 2013 expressed substantial doubt as to our ability to continue in
business. See the "Risk Factors" section of this prospectus below for additional
Risk Factors.
As of the date of this prospectus, we had 26,948,884 outstanding shares of
common stock.
Summary Financial Information
January 31, 2014 July 31, 2014
---------------- -------------
$ $
Current Assets 10,100 1,206,276
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Working capital (Deficit) (40,103) 984,584
Total Assets 31,549 2,639,667
Current Liabilities 50,203 221,692
Total Liabilities 53,476 667,008
Stockholders' Equity (Deficit) (21,927) 1,972,659
Year Ended Six Months Ended
January 31, 2014 July 31, 2014
---------------- ----------------
$ $
Revenue 104,738 1,402,741
Operating Costs
and Expenses (174,597) 1,382,427
Other Costs
and Expenses -- (165,614)
---------
Net (Loss) (70,219) (145,614)
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Forward-Looking Statements
This prospectus 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 prospectus.
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
prospectus.
To the extent, the information contained in this prospectus, changes in any
material respect, we will amend this prospectus.
RISK FACTORS
This section 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
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market value of our common stock. In addition to the other information contained
in this registration statement, 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.
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 and through July 31, 2014 of $(215,833), 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, 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 these 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 entities could result in the termination of our current agreements,
which could cause our business to fail.
We are dependent on entities controlled by affiliates for all of our
revenue. As of the date of this prospectus, all of our revenue was derived from
companies controlled by Shawn Phillips and Erin Phillips, two of our officers
and directors. Our business would suffer, and may fail, if Mr. and Mrs. Phillips
were unable to meet their financial commitments to us.
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
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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 October 28, 2014, 20 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
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
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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.
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:
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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.
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 section of this prospectus captioned "Principal
Shareholders". 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, approximately 284,000 of such
shares are subject to Lock-Up/Leak-Out Agreements, and no public resale of any
of these securities can be made until November 19, 2014 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 effect 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 section
of this prospectus captioned "Market Price of Common Stock" and "Principal
9
Shareholders". 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.
MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board under the trading
symbol "FHGR". There has been very limited trading of our common stock since
trading began on August 29, 2014.
With the exception of the 25,641,884 shares issued in connection with the
acquisition of Strainwise Colorado, all outstanding shares of our common stock
have satisfied the resale requirements of Securities and Exchange Commission
Rule 144.
The resale of the shares that we are registering for resale could have a
substantial adverse effect on any market for our common stock. See the "Selling
Shareholders" section of this prospectus for more information.
Holders of our common stock are entitled to receive dividends as may be
declared by the Board of Directors. Our 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. We currently intends to retain any future earnings to finance
future growth. Any future determination to pay dividends will be at the
discretion of our directors and will depend on our financial condition, results
of operations, capital requirements and other factors the board of directors
considers relevant.
Our 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.
As of October 28, 2014, and giving effect to the acquisition of Strainwise
Colorado, we had approximately 138 shareholders of record and 26,948,884
outstanding shares of common stock.
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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 registration statement.
On August 19, 2014 the Company acquired approximately 90% of the
outstanding shares of Strainwise, Inc., a Colorado corporation, in exchange for
23,124,184 shares of the Company's common stock. On September 12, 20014 the
Company acquired the remaining outstanding shares of Strainwise Colorado in
exchange for 2,517,700 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 six 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 six months ended July 31,
2014, would not be meaningful.
As more fully described in the "Business" section of this prospectus, since
January 1, 2014, Strainwise has been providing branding and fulfillments
services to the marijuana retail stores and grow facilities owned by Mr.
Phillips, and has been subleasing space to the grow facilities for their
operations. As of October 28, 2014 Strainwise was not providing services to any
other entities.
The following shows the amounts we received for the branding and
fulfillment services provided pursuant to our Master Service Agreements and
subleasing grow facilities for the periods shown, as well as the amounts we
expect to receive during the twelve months ending October 31, 2015 from these
sources:
Amounts received
Projected revenue
Year Ended Six months ended Twelve months ending
January 31, 2014 July 31, 2014 October
31, 2015
Branding and fulfillment $70,000 $ 480,000 $1,932,000
Nutrient Sales 34,378 361,947 2,736,000
Subleasing -- 560,794 5,960,000
-------- ---------- -----------
Total $104,378 $1,402,741 $10,628,000
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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 six months ended July 31, 2014 were 93% and 99% respectively.
The increase in operating expenses vs. revenue during the three and six months
ended July 31, 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 September 30, 2014, the Company's operating expenses, excluding
payments required for its operating leases, were approximately $153,000 per
month.
Between March 15, 2014 and August 19, 2014, Strainwise Colorado sold
2,224,700 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 Randall Taylor an
unrelated third party. The loan bears interest at 25% per year, payable monthly,
and was scheduled to mature 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 paid the remaining
balance of the loan ($325,000), plus accrued interest and a prepayment penalty
of $11,250, on July 27, 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 pay approximately $373,000
of principal and interest to the note holder, and (v) to pay other miscellaneous
expenses.
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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
----------- ---- ---- ---- ---- ---- ----------
Corporate office
lease $59,900 $67,400 $52,700 $-- $-- $--
Operating
Leases 2,403,000 7,127,400 7,246,900 7,136,200 7,963,200 10,432,500
Tenant Improvement
financing/Nome
Lease 220,100 264,200 264,200 264,200 264,200 44,000
Mortgage 221,000 232,000 232,000 126,000 -- --
---------- ---------- ---------- ---------- ---------- -----------
Total: $2,904,000 $7,691,000 $7,795,800 $7,805,600 $8,280,200 $10,476,500
The Company plans to fund its operations and contractual requirements
through fees received for branding and fulfillment services, sales of nutrients,
subleasing grow facilities and the public or private sale of its securities.
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.
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.
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Critical Accounting Policies and New Accounting Pronouncements
See Notes 1 and 8 to the financial statements included as part of this
registration statement, for a description of the Company's critical accounting
policies and the potential impact of the adoption of any new accounting
pronouncements.
BUSINESS
On August 19, 2014, pursuant to an Agreement to Exchange Securities (the
"Agreement"), we acquired approximately 90% of the outstanding common stock of
Strainwise, Inc., a Colorado corporation ("Strainwise Colorado"), in exchange
for 23,124,184 shares of our common stock.
In connection with the acquisition:
o we caused 1,038,000 shares of our 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; and
o the Company sold its motion picture film business and related assets
to Shane Thueson.
On September 5, 2014 we changed our name to Strainwise, Inc.
On September 12, 2014 we acquired the remaining outstanding shares of
Strainwise Colorado in exchange for the issuance of 2,517,000 shares of our
common stock. In connection with this transaction:
o we issued 1,112,350 Series A warrants to former Strainwise Colorado
shareholders in exchange for a like number of warrants held by the
former Strainwise Colorado shareholders. The Series A warrants we
issued have the same terms as the warrants exchanged by the former
Strainwise Colorado shareholders (exercise price: $5.00 per
share/expiration date: January 31, 2019).
o we issued 500,000 warrants to one non-affiliated person in exchange
for a like number of warrants held by the former Strainwise Colorado
warrant holder. The warrants we issued have the same terms as the
warrants exchanged by the former Strainwise Colorado warrant holder
(exercise price: $0.10 per share/expiration date: January 31, 2019).
Unless otherwise indicated, all references to us include the operations of
Strainwise Colorado.
14
As a result of the acquisition of Strainwise Colorado, we now provide
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 six sophisticated 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 we plan
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.
Master Service Agreements
Our branding and fulfillment services are provided under Master Service
Agreements and are described below:
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
15
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: We presently are 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.
o Lending: We plan to 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 sublease facilities and
grow equipment at our cost, plus a premium of forty percent to persons
in the marijuana industry. We may also enter into sale/lease backs of
grow lights, tenant improvements and other grow equipment.
We presently provide these branding and fulfillment services to the eight
retail marijuana outlets and five grow facilities owned by Shawn Phillips.
Our Master Service agreements expire on December 31, 2023.
Although we plan to make our services available to independent retail
stores and grow facilities in the regulated marijuana industry throughout the
United States, as of the date of this prospectus we were not providing our
branding and fulfillment services to any other persons or entities and we had
not made any loans to any person.
We do not grow marijuana plants, produce marijuana infused products, sell
marijuana plants and/or sell marijuana infused products of any nature.
Operating Leases/Subleasing
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. Under the terms of the lease, we paid a security deposit of $29,200. We
will provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 460 grow lights.
16
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,
commencing on August 17, 2014. Under the terms of the lease, we are obligated to
pay a security deposit of $150,000, one-third of which was paid upon the
execution of the 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 entity which is
leasing this facility us 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, commencing on April
22, 2014. Under the terms of the lease, we paid a security deposit of $133,679.
Although we will provide all of the tenant improvements that will enable the
continuous cultivation of marijuana plants under 800 grow lights, the entity
which is leasing this facility to us agreed to provide financing for up to
$750,000 of tenant improvements at an interest rate of 25%, payable monthly over
60 months. As of October 1, 2014, the $750,000 of tenant improvements had been
completed at the facility and we began paying monthly installments of $22,013 at
that time.
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,
commencing on July 1, 2014. Under the terms of the lease, we paid 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 paid when a certificate of occupancy is issued
(expected in early 2015). The person which is leasing this facility us will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under 1,936 grow lights.
On September 11, 2014, we leased a grow facility containing approximately
20,000 square feet ("Bryant Street Lease") for a term of ten years. We will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under 370_grow lights.
With the exception of the Bryant Street property, there are no options to
purchase the properties underlying these leases. During the term of the Bryant
Street lease we have the option to purchase the property subject to the lease
for $2,400,000.
The future minimum payments under the terms of the Operating Leases are
shown below.
Lease Payments Due During
Year Ending January 31,
Lease 2015 2016 2017 2018 2019 Thereafter
---- ---- ---- ---- ---- ----------
Custer $ 221,200 $ 276,700 $ 309,900 $ 319,200 $ 214,700 $ 60,100
51st Ave. 1,058,700 2,616,600 2,662,000 2,772,900 2,893,900 3,206,500
Nome 445,600 549,100 568,100 587,200 625,400 1,289,100
32nd Ave. 557,500 3,390,000 3,408,900 3,634,900 3,851,400 3,625,400
Bryant Street 120,500 295,000 298,000 332,000 377,800 2,251,400
------- ------- ------- ------- -------
Total $2,403,000 $7,127,400 $7,246,900 $7,136,200 $7,963,200 $10,432,500
========== ========== ========== ========== ========== ===========
None of the persons leasing these facilities to us are affiliated with us
in any way.
We sublease the grow facilities described above to the Affiliated Entities
for their grow operations. Our subleases with the Affiliated Entities expire on
the same date as our leases with the owners of these properties. We charge the
Affiliated Entities 140% of the amount we pay the lessors of these properties.
We believe the amounts we charge the Affiliated Entities are comparable to what
we could charge persons not affiliated with us.
17
Acquisition of Race Street Property
On July 26, 2014 we purchased a 5,000 square foot commercial building for
$600,000. The building, which is located at 5110 Race Street in Denver,
Colorado, houses a retail marijuana dispensary and a small grow facility which
are owned by Shawn Phillips. The retail dispensary (known as "the Sanctuary")
and grow facility are leased to one of the Affiliated Entities. The purchase
price was paid by a loan of $600,000, which is payable in varying amounts from
$11,000 to $36,000 per month, with a final payment of $126,000 due on August 1,
2017. The loan is secured by the building we purchased.
Market Conditions
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 predict that other states will follow
Colorado and Washington in enacting legislation or approving ballot measures
that expand the permitted use of cannabis.
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 $650,000,000 in 2014.
According to an April 11, 2014 article in the Huffington Post, one study of
the marijuana industry predicts that by 2018 retail marijuana sales could be
$7.4 to $8.2 billion.
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.
A Schedule I controlled substance is defined as a substance that has no
currently accepted medical use in the United States, a lack of safety for use
under medical supervision and a high potential for abuse. The Department of
Justice defines Schedule 1 controlled substances as "the most dangerous drugs of
all the drug schedules with potentially severe psychological or physical
dependence." If the federal government decides to enforce the Controlled
Substances Act in Colorado with respect to marijuana, persons that are charged
with distributing, possessing with intent to distribute, or growing marijuana
could be subject to fines and terms of imprisonment, the maximum being life
imprisonment and a $50 million fine.
As of August 31, 2014, 20 states and the District of Columbia allow their
citizens to use Medical Marijuana. Additionally, voters in the states of
18
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
Our offices are located at 1350 Independence Street, Suite 300, Lakewood,
CO 80215. We lease our offices from an entity controlled by Erin Phillips, our
President and one of our directors. The lease is for a 31 month period,
commencing in January 2014 for 6,176 square feet at an 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. Our
lease is on the same terms and conditions as is the lease between the entity
controlled by Ms. Phillips and the owner of the property, who is not affiliated
with us. Consequently, we believe that the terms of our lease are comparable to
terms we would receive directly from unrelated third parties.
As of October 31, 2014, we had 10 full time employees and one part time
employee.
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
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
commercial real estate firm (2008-2010), an account executive with Stewart Title
19
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.
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.
We believe our directors are qualified to act as such for the following
reasons:
Shawn Phillips - experience in marijuana industry
Erin Phillips - experience in marijuana industry
David Modica - experience in marijuana industry and in point-of-sale
technology
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.
20
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.
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.
During the three years ended June 30, 2014 we did not compensate any person
for serving as an officer or director.
The following shows the amounts the Company expects to pay to its officers
during the twelve months ending August 31, 2015 and the amount of time these
persons expect to devote to the Company.
21
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 $ -- $ -- $ -- $ --
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 in
August 2014.
We do not have any securities authorized for issuance under any equity
compensation plans.
Non-Compete Agreements
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).
22
Non-Disclosure Agreements
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;
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 eight marijuana stores (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").
23
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.
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:
24
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
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 prospectus,
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.
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%
The address of each person listed above is 1350 Independence St., Suite 300
Lakewood, CO 80125.
SELLING SHAREHOLDERS
By means of this prospectus
25
o a number of our shareholders are offering to sell up to 2,517,700
shares of our common stock, as well as up to 1,112,350 shares of our
common stock issuable upon the exercise of our Series A warrants, and
o a person holding an option to purchase 500,000 shares of our common
stock is offering to sell the shares issuable upon the exercise of the
option.
The following selling shareholders acquired their shares in connection with
our acquisition of Strainwise Colorado.
Shares
Issuable upon
exercise of Shares to be
Shares Series A Sold in this Ownership
Name of Selling Shareholder Owned Warrants Offering After Offering
--------------------------- ----- -------- -------- --------------
Jeffrey Beatie 2,000 1,000 3,000 --
Brian and Donna Beck 30,000 15,000 45,000 --
Cathy Boring 5,000 2,500 7,500 --
Donald Boring 200,000 100,000 300,000 --
Jeff and Audry Carapella 10,000 5,000 15,000 --
Matt Cinquanta 25,000 12,500 37,500 --
David Clark 10,000 5,000 15,000 --
Rick Clayton 25,000 12,500 37,500 --
Francis Conry 1,000 500 1,500 --
Thomas Cook 20,000 10,000 30,000 --
Paula and Patrick Delaney 4,200 2,100 6,300 --
Matthew Ehrhard 10,000 5,000 15,000 --
Steven Haggerty 50,000 25,000 75,000 --
Henrietta Hubenka 10,000 5,000 15,000 --
Gale James 50,000 25,000 75,000 --
Ronald Kadziel 50,000 25,000 75,000 --
Vivienne Khong 200,000 100,000 300,000 --
Stan Kotzker 75,000 37,500 112,500 --
Vikki and George
Kourkouliotis 10,000 5,000 15,000 --
Sean and Shannon Leonard 20,000 10,000 30,000 --
Naratorn Menzie 25,000 12,500 37,500 --
Michael Novick 20,000 10,000 30,000 --
James and Kelly Oleis 30,000 15,000 45,000 --
David Phillips 55,000 27,500 82,500 --
Mark Shanely 25,000 12,500 37,500 --
Mary Jane Shanely 1,000 500 1,500 --
Alan Simon 50,000 25,000 75,000 --
Timothy Sisto 15,000 7,500 22,500 --
Colleen Snead 1,000 500 1,500 --
Jeff and Judith Stettler 2,000 1,000 3,000 --
Mark Strait 6,000 3,000 9,000 --
26
Shares
Issuable upon
exercise of Shares to be
Shares Series A Sold in this Ownership
Name of Selling Shareholder Owned Warrants Offering After Offering
--------------------------- ----- -------- -------- --------------
Ken Turner, III 10,000 5,000 15,000 --
Violetta Wells 10,000 5,000 15,000 --
Tim Wingard 25,000 12,500 37,500 --
Jason D. Amos 10,000 5,000 15,000 --
Erik Aude 1,000 500 1,500 --
Josh Boren 3,000 2,500 5,500 --
Eric Busch 10,000 5,000 15,000 --
Tadd Busch 22,500 11,250 33,750 --
Judy Camarena 10,000 5,000 15,000 --
Tom Campbell 10,000 5,000 15,000 --
Linda Carhart 7,500 3,750 11,250 --
Dane Casterson 130,000 65,000 195,000 --
Daril Cinquanta 1,000 500 1,500 --
Cosmo Investments 50,000 25,000 75,000 --
Ronald Curtis 5,000 2,500 7,500 --
Brian and Tonya Destarac 1,000 500 1,500 --
Tonya Destarac/Gooch 1,000 500 1,500 --
Cory and Patricia Fisher 5,000 2,500 7,500 --
Don and Betty Fisher 25,000 12,500 37,500 --
Jeffrey Fullerton 25,000 12,500 37,500 --
Brad Goldwater 2,000 1,000 3,000 --
Charles Guyette 275,000 137,500 412,500 --
James and Elzabeth Hannon 50,000 25,000 75,000 --
Margaret Heath 10,000 5,000 15,000 --
Gary and Wanda Hermanson 50,000 25,000 75,000 --
Dave Huggins 50,000 25,000 75,000 --
Kirk Huston 5,000 2,500 7,500 --
Steven James 50,000 25,000 75,000 --
Jennifer Kealy 4,000 2,000 6,000 --
Daniel Liccardi 20,000 10,000 30,000 --
Michael McVay 25,000 12,500 37,500 --
Naratorn Menzie 10,000 5,000 15,000 --
Dominic Mincks 6,000 3,000 9,000 --
David Modica 25,000 12,500 37,500 --
Tricia Morin 40,000 20,000 60,000 --
Nathan Myers 3,000 1,500 4,500 --
Melissa Myrick 5,000 2,500 7,500 --
November First Co. 25,000 12,500 37,500 --
Victoria Palmen 2,000 1,000 3,000 --
Shawnda Peck 10,000 5,000 15,000 --
27
Shares
Issuable upon
exercise of Shares to be
Shares Series A Sold in this Ownership
Name of Selling Shareholder Owned Warrants Offering After Offering
--------------------------- ----- -------- -------- --------------
Albert Silvestri 20,000 10,000 30,000 --
Beverly Smith 12,500 6,250 18,750 --
Sean Stephens 5,000 2,500 7,500 --
Michael Tompeter Trust 50,000 25,000 75,000 --
Ken Turner 10,000 5,000 15,000 --
Malcolm Weiss 1,000 500 1,500 --
Brian Weston 10,000 5,000 15,000 --
Grant Whitus 25,000 12,500 37,500 --
Roderick Wilson 10,000 5,000 15,000 --
----------- --------- --------- -----------
2,224,700 1,112,350 3,337,050 --
Randall Taylor 293,000 -- 293,000
----------- --------- --------- -----------
2,517,700 1,112,350 3,630,050 --
========== ========= ========== ===========
In January, 2014 Strainwise Colorado issued warrants to an unaffiliated
person for services rendered. The warrants allowed the holder to purchase up to
500,000 shares of Strainwise Colorado's common stock at a price of $0.10 per
share at any time prior to January 31, 2019. When we acquired the remaining
shares of Strainwise on September 12, 2014, we exchanged warrants for the
previously issued Strainwise warrants. The warrants we issued have the same
terms as the Strainwise warrants. The person named below is the holder of these
warrants.
Shares
Issuable upon
exercise of Shares to be
Shares Series A Sold in this Ownership
Name of Selling Shareholder Owned Warrants Offering After Offering
--------------------------- ----- -------- -------- --------------
John Walsh 55,408 500,000 500,000 55,408 (1)
(1) Represents less than 1% of our outstanding shares.
The controlling persons of the non-individual selling shareholders named
above are:
Name of Shareholder Controlling Person
------------------- ------------------
Cosmo Investments Trenton Staley
November First Co. Larry Hansen
Michael Trompeter Trust Michael Trumpeter
No selling shareholder has, or had, any material relationship with us, or
our officers or directors. No selling shareholder is, to our knowledge,
affiliated with a securities broker.
28
The shares of common stock owned by the selling shareholders may be offered
and sold by means of this prospectus from time to time as market conditions
permit, in the over-the-counter market, or otherwise, at prices and terms then
prevailing or at prices related to the then-current market price, or in
negotiated transactions.
The shares of common stock may be sold by one or more of the following
methods, without limitation:
o a block trade in which a broker or dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker/dealer.
In competing sales, brokers or dealers engaged by the selling shareholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from selling shareholders in amounts to be
negotiated. As to any particular broker-dealer, this compensation might be in
excess of customary commissions. Neither we nor the selling stockholders can
presently estimate the amount of such compensation. Notwithstanding the above,
no FINRA member will charge commissions that exceed 8% of the total proceeds
from the sale.
The selling shareholders and any broker/dealers who act in connection with
the sale of their securities may be deemed to be "underwriters" within the
meaning of ss.2(11) of the Securities Acts of 1933, and any commissions received
by them and any profit on any resale of the securities as principal might be
deemed to be underwriting discounts and commissions under the Securities Act.
If any selling shareholder enters into an agreement to sell his or her
securities to a broker-dealer as principal, and the broker-dealer is acting as
an underwriter, we will file a post-effective amendment to the registration
statement, of which this prospectus is a part, identifying the broker-dealer,
providing required information concerning the plan of distribution, and
otherwise revising the disclosures in this prospectus as needed. We will also
file the agreement between the selling shareholder and the broker-dealer as an
exhibit to the post-effective amendment to the registration statement.
The selling stockholders may also sell their shares pursuant to Rule 144
under the Securities Act of 1933.
We have advised the selling shareholders that they, and any securities
broker/dealers or others who sell the common stock or warrants on behalf of the
selling shareholders, may be deemed to be statutory underwriters and will be
subject to the prospectus delivery requirements under the Securities Act of
1933. We have also advised each selling shareholder that in the event of a
29
"distribution" of the securities owned by the selling shareholder, the selling
shareholder, any "affiliated purchasers", and any broker/dealer or other person
who participates in the distribution may be subject to Rule 102 of Regulation M
under the Securities Exchange Act of 1934 ("1934 Act") until their participation
in that distribution is completed. Rule 102 makes it unlawful for any person who
is participating in a distribution to bid for or purchase securities of the same
class as is the subject of the distribution. A "distribution" is defined in Rule
102 as an offering of securities "that is distinguished from ordinary trading
transactions by the magnitude of the offering and the presence of special
selling efforts and selling methods". We have also advised the selling
shareholders that Rule 101 of Regulation M under the 1934 Act prohibits any
"stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing
or stabilizing the price of the common stock in connection with this offering.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 50,000,000 shares of common stock. Holders of
common stock are each entitled to cast one vote for each share held of record on
all matters presented to shareholders. Cumulative voting is not allowed; hence,
the holders of a majority of our outstanding shares of common stock can elect
all directors.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board out of funds legally available and, in the event of
liquidation, to share pro rata in any distribution of our assets after payment
of liabilities. Our directors are not obligated to declare a dividend. It is not
anticipated that dividends will be paid in the foreseeable future.
Holders of common stock do not have preemptive rights to subscribe to any
additional shares which may be issued in the future. There are no conversion,
redemption, sinking fund or similar provisions regarding the common stock. All
outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock. Shares of
preferred stock may be issued from time to time in one or more series as may be
determined by the Board of Directors. The voting powers and preferences, the
relative rights of each such series and the qualifications, limitations and
restrictions of each series will be established by the Board of Directors. Our
directors may 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 our 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 transactions such as mergers or tender
offers if these transactions are not favored by management. As of the date of
this prospectus we had not issued any shares of preferred stock.
30
Warrants
On September 12, 2014, we acquired the remaining outstanding shares of
Strainwise Colorado in exchange for the issuance of 2,517,000 shares of our
common stock. In connection with this transaction:
o we issued 1,112,350 Series A warrants to former Strainwise Colorado
shareholders in exchange for a like number of warrants held by the
former Strainwise Colorado shareholders. Each Series A warrant allows
the holder to purchase one share of our common stock. The Series A
warrants we issued have the same terms as the warrants exchanged by
the former Strainwise Colorado shareholders (exercise price: $5.00 per
share/expiration date: January 31, 2019);
o we issued 500,000 warrants to one non-affiliated person in exchange
for a like number of warrants held by the former Strainwise Colorado
warrant holder. Each warrant allows the holder to purchase one share
of our common stock. The warrants we issued have the same terms as the
warrants exchanged by the former Strainwise Colorado warrant holder
(exercise price: $0.10 per share/expiration date: January 31, 2019).
Transfer Agent and Registrar
Our transfer agent is:
Standard Registrar & Transfer Co., Inc.
12528 South 1840 East
Draper, UT 84020
LEGAL PROCEEDINGS
We are not involved in any legal proceedings and we do not know of any
legal proceedings which are threatened or contemplated.
INDEMNIFICATION
Our Bylaws authorize indemnification of a director, officer, employee or
agent against expenses incurred by him in connection with any action, suit, or
proceeding to which he is named a party by reason of his having acted or served
in such capacity, except for liabilities arising from his own misconduct or
negligence in performance of his duty. In addition, even a director, officer,
employee, or agent found liable for misconduct or negligence in the performance
of his duty may obtain such indemnification if, in view of all the circumstances
in the case, a court of competent jurisdiction determines such person is fairly
and reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to our
directors, officers, or controlling persons pursuant to these provisions, we
have been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
31
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (together with all amendments and exhibits) under the
Securities Act of 1933, as amended, with respect to the Securities offered by
this prospectus. This prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information, reference is made to the Registration
Statement which may be read and copied at the Commission's Public Reference
Room.
We are subject to the requirements of the Securities and Exchange Act of
1934 and are required to file reports and other information with the Securities
and Exchange Commission. Copies of any such reports and other information filed
by us can also be read and copied at the Commission's Public Reference Room.
The Public Reference Room is located at 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains an
internet site that contains reports, proxy and information statements, and other
information regarding public companies. The address of the site is
http://www.sec.gov.
32
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY ...........................................
RISK FACTORS .................................................
MARKET FOR OUR COMMON STOCK ..................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.......................
BUSINESS......................................................
MANAGEMENT ...................................................
PRINCIPAL SHAREHOLDERS........................................
SELLING SHAREHOLDERS..........................................
DESCRIPTION OF SECURITIES.....................................
LEGAL PROCEEDINGS.............................................
INDEMNIFICATION ..............................................
AVAILABLE INFORMATION.........................................
FINANCIAL STATEMENTS..........................................
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any of the securities
offered in any jurisdiction to any person to whom it is unlawful to make an
offer by means of this prospectus.
33
FINANCIAL STATEMENTS
FOR THE YEAR ENDED JANUARY 31, 2014 AND
THE PERIOD ENDED JANUARY 31, 2013
(Audited)
34
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
35
STRAINWISE, INC.
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.
36
STRAINWISE, INC.
STATEMENTS OF OPERATIONS
(AUDITED)
Period (Inception
of June 8,
Year Ended 2012) ended
January 31, January 31,
2014 2013
------------- -------------
Revenues from affiliated entities
Branding, marketing and administrative $ 31,500 $ -
Accounting and financial services 21,000 -
Compliance services 17,500 -
Nutrient sales 34,378 -
104,378
Operating costs and expenses
Compensation 60,560 -
Professional, legal and consulting 60,752 -
Financing costs 20,000
Nutrient purchases 18,094
-Rent and other occupancy 5,404 -
General and administrative 9,753 -
Amortization 61 -
------------- -------------
Total operating costs and expenses
154,597 -
------------- -------------
Loss from operations before income taxes 70,219 -
------------- -------------
Provision for taxes on income - -
------------- -------------
Net loss $(70,219) $ -
============= =============
Basic and fully diluted loss per common share $ (0.082) -
============= =============
============= =============
Basic weighted average number of shares
outstanding 851,250 -
============= =============
Fully diluted weighted average number of
shares outstanding 1,351,250
============= =============
See accompanying notes.
37
STRAINWISE, INC.
STATEMENTS OF CASH FLOWS
(AUDITED)
Year Period
(Inception
of June 8,
Ended 2012)
January ended
31, January
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.
38
STRAINWISE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY For the
Period from June 8, 2012 (date of inception) to January 31, 2014
(Audited)
Additional
Common Stock Capital In Deficit
------------------ Excess of Par Accumulated in
Shares Amount 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.
39
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) six 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) 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.
40
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 19, 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.
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.
41
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
======== ====== ========
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. Revenues from affiliated entities is recognized as follows:
o Branding, Marketing and Administrative Services Revenue: Under the
terms of a ten year master service agreement, we allow an affiliated
entity to use the Strainwise brand for both retail and marketing
purposes at one location, plus we provide administrative services to
42
assist the employees of the affiliated entity to operate the business
of that related location. We charge the affiliated entity a monthly
fee of approximately $4,500 a month for the branding, marketing and
administrative services; and, since there are no additional milestone
that need to be met other than actually providing the services, in
accordance with ASC 605, the revenue is recognized on monthly basis in
accordance with the terms of the applicable master service agreement.
o Accounting and Financial Services Revenue: Under the terms of a ten
year master service agreement, we have agreed to provide our
affiliated entities with a fully implemented general ledger system,
coupled with an industry centric chart of accounts, which enables
management to readily monitor and manage all accounting and financial
facets of a marijuana medical dispensary, retail store and/or grow
facility. Under the terms of the master service agreement we have also
agreed to 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. Under the terms of the
master service agreement, we provide the above described accounting
and financial services for a monthly fee of $3,000; and, since there
are no additional milestone that need to be met other than actually
providing the above described service, in accordance with ASC 605, the
revenue is recognized on monthly basis in accordance with the terms of
the applicable master service agreement.
o Compliance Services Revenue : Under the terms of a ten year master
service agreement, we provide the affiliated entities with a
compliance process that includes the preparation and filing of state,
city and municipal applications and renewals of licenses in accordance
with the rules, regulations and state laws governing the production,
distribution and retail sale of marijuana. We provide this service to
our affiliate entities under the terms of a master service agreement
for a monthly fee of $2,500 per month; and, since there are no
additional milestone that need to be met other than actually providing
the above described service, in accordance with ASC 605, the revenue
is recognized on monthly basis in accordance with the terms of the
applicable master service agreement.
Nutrient Sales: Under the terms of a ten year master service agreement, we serve
as a sole source nutrient purchasing agent and distributor for our affiliated
entities, with pricing based upon our bulk purchasing power. We charge the
affiliated entities for nutrients supplied to them at the cost of the nutrients,
plus a premium of ninety percent. Since there are no additional milestone that
need to be met other than actually buying and delivering the above nutrients to
the affiliated entity, in accordance with ASC 605, the revenue is recognized in
the month in which the nutrient is actually delivered to the related entity.
Grow Facilities Revenue: Under the terms of a ten year master service agreement,
we lease grow facilities and equipment for a period equal to the term of the
underlying lease with an independent, third party lessor in an amount equal to
the sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed
operating expenses paid to the lessor each month, (iii) plus the amount of
monthly amortization of tenant improvements, and (iv) plus a premium of forty
percent. Since there are no additional milestones that need to be met other than
actually leasing the facilities and equipment to the respective affiliated
entity, in accordance with ASC 605, the revenue is recognized in the month in
which the lease payments are made by us to the respective independent, third
party lessor.
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.
43
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 andfour 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 six grow facilities 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 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. This lease to the
Company is on the same terms and conditions as is the direct lease between the
affiliate and the independent lessor. Consequently, we believe that the lease
terms to the Company are comparable to lease terms we would receive directly
from third party lessors in our market, because the related party terms mirror
the terms of the direct lease between the independent, third party lessor and
the affiliated entity. 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.
44
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.
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 .25%
rate
Expected dividends -
Expected terms (in 5
years)
Share price at date $0.10
of issuance
The warrants outstanding and activity as of and for the year ended January 31,
2014:
Weighted Remaining
Average Contractual
Exercise Term
Shares Price (in 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, 500,000 $ 0.10 5
2014 --------- -------- ---------
45
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 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
from an unrelated third party 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 reimburse the
lessor for operating expenses applicable to the leased property, and 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. We will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 460 grow lights. We account
for this lease as an operating lease rather than as a capital lease, because the
lease does not transfer ownership to us at the end of the lease, there is no
bargain purchase price for the grow facility as a component of the lease, the
terms of the lease are not less than 75% of th economic life of the grow
facility, and the current present value of the minimum lease payments is less
than 90% of the fair market value of the asset. We will sublease this grow
facility to the affiliated entities for a term of five years in an amount equal
to the sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed
operating expenses paid to the lessor each month, (iii) plus the amount of
monthly amortization of tenant improvements, and (iv) plus a premium of forty
percent. Revenue from the sublease of the Custer grow facility will be
recognized on a monthly basis as the user is charged for the amount of the
sublease
We entered into a lease agreement on April 1, 2014 to lease from an unrelated,
third party 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
46
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 reimburse the
lessor for operating expenses applicable to the leased property, and 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. We will provide all of thetenant
improvements that will enable the continuous cultivation of marijuana plants
under approximately 1,940 grow lights. We account for this lease as an operating
lease rather than as a capital lease, because the lease does not transfer
ownership to us at the end of the lease, there is no bargain purchase price for
the grow facility as a component of the lease, the terms of the lease are not
less than 75% of th economic life of the grow facility, and the current present
value of the minimum lease payments is less than 90% of the fair market value of
the asset. We will sublease this grow facility to the affiliated entities for a
term of five years and nine months in an amount equal to the sum of (i) the
monthly lease payment, (ii) plus the cost of reimbursed operating expenses paid
to the lessor each month, and (iii) plus a premium of forty percent. Revenue
from the sublease of the 51st Avenue grow facility will be recognized on a
monthly basis as the user is charged for the amount of the sublease
We entered into a lease agreement on April 22, 2014 to lease from an unrelated,
third party 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 reimburse the lessor for operating expenses
applicable to the leased property, and 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. We will provide all of the
tenant improvements that will enable the continuous cultivation of marijuana
plants under approximately 920 grow lights. We account for this lease as an
operating lease rather than as a capital lease, because the lease does not
transfer ownership to us at the end of the lease, there is no bargain purchase
price for the grow facility as a component of the lease, the terms of the lease
are not less than 75% of th economic life of the grow facility, and the current
present value of the minimum lease payments is less than 90% of the fair market
value of the asset. We will sublease this grow facility to the affiliated
entities for a term of seven years in an amount equal to the sum of (i) the
monthly lease payment, (ii) plus the cost of reimbursed operating expenses paid
to the lessor each month, (iii) plus the amount of monthly amortization of
tenant improvements, and (iv) plus a premium of forty percent. Revenue from the
sublease of the Nome grow facility will be recognized on a monthly basis as the
user is charged for the amount of the sublease.
We entered into a lease agreement on June 10, 2014 to lease from an unrelated,
third party 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 in early 2015. 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 reimburse the lessor for operating expenses
applicable to the leased property, and 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 account for this
lease as an operating lease rather than as a capital lease, because the lease
does not transfer ownership to us at the end of the lease, there is no bargain
purchase price for the grow facility as a component of the lease, the terms of
the lease are not less than 75% of th economic life of the grow facility, and
the current present value of the minimum lease payments is less than 90% of the
fair market value of the asset. We will sublease this grow facility to the
affiliated entities for a term of five years and nine months in an amount equal
to the sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed
operating expenses paid to the lessor each month, and (iii) plus a premium of
forty percent. Revenue from the sublease of the 32nd Avenue grow facility will
47
be recognized on a monthly basis as the user is charged for the amount of the
sublease.
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.
48
STRAINWISE, INC.
INTERIM FINANCIAL STATEMENTS
For the three and six month periods ended July 31, 2014 and 2013
(UNAUDITED)
49
STRAINWISE, INC.
CONDENSED BALANCE SHEETS
(Unaudited) (Audited)
July 31, January 31,
2014 2014
-------------- ------------
ASSETS
Current assets:
Cash $ 963,285 $ 100
Due from affiliated entities 205,747 -
Prepaid expenses and other assets 91,244 10,000
-------------- ------------
Total current assets 1,206,276 10,100
Commercial operating property 660,000 -
Tenant improvements and office equipment, net
of
accumulated amortization and depreciation
of $59,115
and $0 at July 31, 2014 and January 31,
2014, respectively 412,621 10,500
Prepaid expenses and other assets 296,187 -
Trademark, net of accumulated amortization
of $427
and $61, at July 31, 2014 and January
31, 2014, respectively 10,583 10,949
-------------- ------------
Total assets $ 2,639,667 $ 31,549
============== ============
LIABILITIES AND STOCKHOLERS' EQUITY
LIABILITIES
Current liabilities:
Accounts payable $ 36,692 $ -
Due to affiliated entities - 50,203
Current portion of mortgage payable 155000 -
-------------- ------------
Total current liabilities 191,692 50,203
Mortgage payable 440,000 -
Deferred rent 35,316 3,273
-------------- ------------
Total liabilities 667,008 53,476
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, no par value, 100,000,000 shares
authorized,
22,864,700 and 20,430,000 issued and outstanding
at July 31, 2014 and January 31, 2014,
respectively - -
Additional Paid in Capital 2,188,492 100
Share subscriptions receivable 294,500 -
Subscriptions to common stock (294,500) -
(Deficit) Retained Earnings (215,833) (70,219)
-------------- ------------
Total stockholder's equity 1,972,659 (21,927)
-------------- ------------
Total liabilities and stockholder's deficit $ 2,639,667 $ 31,549
============== ============
See accompanying notes.
50
2014 2013 2014 2013
---- ---- ---- ----
Revenues from affiliated entities
Grow facilities usage fees $560,794 $ - $107,167 $ -
Sale of nutrient supplies $361,947 - $189,042 -
Branding, marketing and $216,000 - $108,000 -
administrative fees
Accounting and financial
services fees $144,000 - $72,000 -
Compliance services fees $120,000 - $60,000 -
----------- -------- ---------- --------
$1,402,741 $536,209
Operating costs and expenses
Compensation $626,690 - $241,711 -
Rent and other occupancy $406,280 - $78,046 -
Nutrient purchases $190,498 - $99,496 -
Depreciation and amortization $59,481 - $22,860 -
General and administrative $58,858 - $34,187 -
Professional, legal and
consulting $40,620 - $26,323 -
----------- -------- ---------- --------
Total operating costs and $1,382,427 - $502,623 -
expenses
----------- -------- ---------- --------
Income from operations $20,314 - $33,586 -
Other costs and expenses
Loss on early extinguishment of ($93,000) - - -
debt
Interest expense ($72,928) - ($39,718) -
----------- -------- ---------- --------
Loss before taxes on income ($145,614) - ($6,132) -
Provision for taxes on income - - - -
----------- -------- ---------- --------
Net loss ($145,614) $ - ($6,132) $ -
Basic and fully diluted loss per
common share $(0.0068 ) $ - ($0.0003) $ -
=========== ======== ========== ========
Basic and fully diluted weighted
average number of shares outstanding $21,470,171 - $20,930,000 -
=========== ======== ========== ========
See accompanying notes.
51
STRAINWISE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Six
months ended months ended
July 31, 2014 July7 31, 2013
------------- --------------
Cash flows from operating activities:
Net (loss) $ (145,614) $ -
Adjustments to reconcile net loss to net
cash used in
operating activities:
Increase in amounts due from (255,949) -
affiliates
Increase in prepaid expenses and other (322,987) -
assets
Depreciation and amortization 59,144 -
Increase in accounts payable 36,845
Increase in deferred rent 31,890 -
Decrease in trademark 366 -
--------------- ------------
Net cash flow used in operating (596,671) -
activities
Cash flows from investing activities:
Investment in commercial operating (660,000)
building
Investment in tenant improvements and (515,344) -
office equipment
--------------- ------------
Net cash flow used in investing (1,175,344) -
activities
Cash flows from financing activities:
Proceeds from common stock subscriptions 1,847,200 100
Common stock issued upon conversion of
convertible 293,000 -
note payable
Proceeds from mortgage 595,000 -
Proceeds from convertible note payable,
inclusive of 895,000 -
discount of $45,000
Payments on convertible notes payable (895,000) -
--------------- ------------
Net cash flows from financing activities 2,735,200 100
--------------- ------------
Net cash flows 963,185 100
Cash and equivalent, beginning of period 100 -
--------------- ------------
Cash and equivalent, end of period $ 963,285 $ 100
=============== ============
Supplemental cash flow disclosures:
Cash paid for interest $ 72,928 $ -
=============== ============
Cash paid for income taxes $ - $ -
=============== ============
See accompanying notes.
52
STRAINWISE, INC.
STATEMENT OF CHANGES IN CONDENSED STOCKHOLDERS' DEFICIENCY For
the Period from June 8, 2012 (date of inception) to July 31, 2014
(UNAUDITED)
Additional
Capital Deficit
In Accumulated
Common Stock Excess in
-------------------- of Par Development
Shares Amount 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)
Shares issued upon the
conversion
of convertible debt 293,000 - 293,000 - 293,000
Shares issued in private
offering 1,847,200 - 1,847,200 - 1,847,200
Subscriptions to common
stock 294,500 - 294,500 - 294,500
Share subscriptions
receivable - - (294,500) - (294,500)
Net loss - - - (145,614) (145,614)
--------- ------- ---------- -------- ----------
Balance, July31, 2014 22,906,200 $ - $2,188,492 (215,833) $1,972,659
========== ====== ========== ======== ==========
See accompanying notes.
53
STRAINWISE, INC.
Notes to the Unaudited Financial Statements
July 31, 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) the six 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) 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.
54
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 10 herein, in July 2014, we
entered into a share exchange agreement ("Share Agreement") with 4th Grade
Films, Inc. ("FHGR"), pursuant to which FHGR will acquire approximately 3.85 %
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.
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).
If the Share Exchange is completed, FHGR will have 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. 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
July 31, 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.
The amount of prepaid expenses and other assets as of July 31, 2014 and 2013 is
$387,431 and $0, respectively.
Current prepaid expenses and other assets are comprised of the following:
January
July 31, 31,
2014 2014
------------ ----------
Prepaid reverse merger fees $ 39,965 $ -
Prepaid rent 29,200 -
Legal retainer 12,079 -
Rent deposits 10,000 10,000
------------ ----------
$ 91,244 $ 10,000
============ ==========
55
Noncurrent prepaid expenses and other assets are comprised of the following:
January
July 31, 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.
Commercial Operating Property - On July 26, 2014 we purchased a commercial
property that was previously leased by one of our affiliates, which we have
leased back to the affiliate. The commercial property consists of land and a
building that contains both a retail store and a grow facility. We have
allocated $440,000 and $220,000 of the purchase price to the cost of land and to
the cost of the improvements to the building, respectively. The cost of the
improvements to the building will be depreciated on a straight line method over
27.5 years, which we believe is the useful life of this asset.
Tenant improvements and office equipment - Tenant improvements are recorded at
cost, and are amortized over the lesser of the economic life of the asset or the
term of the applicable lease period. However, we determined that term of the
leases applicable to our tenant improvements are less than the economic life of
the respective assets that comprise our tenant improvements. 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. 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.
56
Tenant improvements and office equipment, net of accumulated amortization and
depreciation are comprised of the following:
January
July 31, 31,
2014 2014
-------------- -----------
Tenant improvements:
Upgrades of HVAC systems $ 215,646 $ -
Upgrades of electrical generators and power
equipment 143,516 -
Structural improvements 44,050 -
Office equipment:
Computer equipment 19,072 -
Office furniture and fixtures 24,451 10,500
Machinery 25,000 -
-------------- -----------
463,673 10,500
Accumulated amortization and depreciation (59,114) -
-------------- -----------
$ 412,621 $ 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 six
months ended July 31, 2014 and 2013 was $59,411 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 $427 and $0 at July 31, 2014 and 2013, respectively and
consisted of the following at July 31, 2014:
Gross
Carrying
Amount Amortization Net
------------- ------------ -------------
Trademarks $11,010 $427 $ 10,583
============= ============ =============
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. Revenue from affiliated entities is recognized as follows:
o Branding, Marketing and Administrative Services Revenue: Under the
terms of ten year master service agreements, we allow affiliated
entities to use the Strainwise brand for both retail and marketing
purposes at one location, plus we provide administrative services to
assist the employees of the affiliated entities to operate the
business of that related location, Also, under long term master
service agreements, we provide administrative and management services
to assist employees of affiliated entities to operate their grow
facilities. We charge the affiliated entities a monthly fee of
approximately $4,500 a month for the branding, marketing and
administrative services and $4,500 to $20,000 for grow facility
services; and, since there are no additional milestone that need to be
57
met other than actually providing the services, in accordance with ASC
605, the revenue is recognized on monthly basis in accordance with the
terms of the applicable master service agreement.
o Accounting and Financial Services Revenue: Under the terms of a ten
year master service agreement, we have agreed to provide our
affiliated entities with a fully implemented general ledger system,
coupled with an industry centric chart of accounts, which enables
management to readily monitor and manage all accounting and financial
facets of a marijuana medical dispensary, retail store and/or grow
facility. Under the terms of the master service agreement we have also
agreed to 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. Under the terms of the
master service agreement, we provide the above described accounting
and financial services for a monthly fee of $3,000; and, since there
are no additional milestone that need to be met other than actually
providing the above described service, in accordance with ASC 605, the
revenue is recognized on monthly basis in accordance with the terms of
the applicable master service agreement.
o Compliance Services Revenue: Under the terms of a ten year master
service agreement, we provide the affiliated entities with a
compliance process that includes the preparation and filing of state,
city and municipal applications and renewals of licenses in accordance
with the rules, regulations and state laws governing the production,
distribution and retail sale of marijuana. We provide this service to
our affiliate entities under the terms of a master service agreement
for a monthly fee of $2,500 per month; and, since there are no
additional milestone that need to be met other than actually providing
the above described service, in accordance with ASC 605, the revenue
is recognized on monthly basis in accordance with the terms of the
applicable master service agreement.
o Nutrient Sales: Under the terms of a ten year master service
agreement, we serve as a sole source nutrient purchasing agent and
distributor for our affiliated entities, with pricing based upon our
bulk purchasing power. We charge the affiliated entities for nutrients
supplied to them at the cost of the nutrients, plus a premium of
ninety percent. Since there are no additional milestone that need to
be met other than actually buying and delivering the above nutrients
to the affiliated entity, in accordance with ASC 605, the revenue is
recognized in the month in which the nutrient is actually delivered to
the related entity.
o Grow Facilities Revenue: Under the terms of a ten year master service
agreement, we lease grow facilities and equipment for a period equal
to the term of the underlying lease with an independent, third party
lessor in an amount equal to the sum of (i) the monthly lease payment,
(ii) plus the cost of reimbursed operating expenses paid to the lessor
each month, (iii) plus the amount of monthly amortization of tenant
improvements, and (iv) plus a premium of forty percent. Since there
are no additional milestone that need to be met other than actually
leasing the facilities and equipment to the respective affiliated
entity, in accordance with ASC 605, the revenue is recognized in the
month in which the lease payments are made by us to the respective
independent, third party lessor.
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.
58
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 July 31, 2014,
the Company has had limited operations. As of July 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 long term
contracts with a group of entities that are majority owned by our Chief
Executive Officer, who is also the husband of our majority owner and President.
Note that all terms and contracts related to related party revenue are
determined by related parties and these terms can change at any time.
Related party revenue was $1,402,741 and $0, respectively, for the six months
ended July 31, 2014 and 2013. As of July 31, 2014 and 2013, we had accounts
receivable from affiliated entities of $550,000 and $0, respectively. As of July
31, 2014 and 2013, we had accounts payable to affiliated entities of $344,253
and $0, respectively.
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. This lease to the Company is on the same
terms and conditions as is the direct lease between the affiliate and the
independent lessor. Consequently, we believe that the lease terms to the Company
are comparable to lease terms we would receive directly from third party lessors
in our market, because the related party terms mirror the terms of the direct
lease between the independent, third party lessor and the affiliated entity.
We entered into a lease agreement on March 7, 2014 to lease from an unrelated
third party 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 reimburse the lessor for
operating expenses applicable to the leased property, and 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. We are responsible
to provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 460 grow lights. We account
for this lease as an operating lease rather than as a capital lease, because the
lease does not transfer ownership to us at the end of the lease, there is no
bargain purchase price for the grow facility as a component of the lease, the
terms of the lease are not less than 75% of the economic life of the grow
facility, and the current present value of the minimum lease payments is less
than 90% of the fair market value of the asset. We sublease this grow facility
to an affiliated entity under the terms of a Master Service Agreement for a term
of five years in an amount equal to the sum of (i) the monthly lease payment,
(ii) plus the cost of reimbursed operating expenses paid to the lessor each
month, and (iii) plus a premium of forty percent. Revenue from the sublease of
the Custer grow facility is recognized on a monthly basis as the user is charged
for the amount of the sublease
We entered into a lease agreement on April 1, 2014 to lease from an unrelated
third party 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,
59
$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 reimburse the
lessor for operating expenses applicable to the leased property, and 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 account for this lease as an
operating lease rather than as a capital lease, because the lease does not
transfer ownership to us at the end of the lease, there is no bargain purchase
price for the grow facility as a component of the lease, the terms of the lease
are not less than 75% of th economic life of the grow facility, and the current
present value of the minimum lease payments is less than 90% of the fair market
value of the asset. We sublease this grow facility to an affiliated entity under
the terms of a Master Service Agreement for a term of five years and nine months
in an amount equal to the sum of (i) the monthly lease payment, (ii) plus the
cost of reimbursed operating expenses paid to the lessor each month, and (iii)
plus a premium of forty percent. Revenue from the sublease of the 51st Avenue
grow facility is recognized on a monthly basis as the user is charged for the
amount of the sublease
We entered into a lease agreement on April 22, 2014 to lease from an unrelated
third party 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 reimburse the lessor for operating expenses
applicable to the leased property, and 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. We are responsible to provide
all of the tenant improvements that will enable the continuous cultivation of
marijuana plants under approximately 920 grow lights. We account for this lease
as an operating lease rather than as a capital lease, because the lease does not
transfer ownership to us at the end of the lease, there is no bargain purchase
price for the grow facility as a component of the lease, the terms of the lease
are not less than 75% of th economic life of the grow facility, and the current
present value of the minimum lease payments is less than 90% of the fair market
value of the asset. We sublease this grow facility to an affiliated entity under
the terms of a Master Service Agreement for a term of seven years in an amount
equal to the sum of (i) the monthly lease payment, (ii) plus the cost of
reimbursed operating expenses paid to the lessor each month, and (iii) plus a
premium of forty percent. Revenue from the sublease of the Nome grow facility is
recognized on a monthly basis as the user is charged for the amount of the
sublease.
We entered into a lease agreement on June 10, 2014 to lease from an independent
third party a grow facility of approximately 113,000 square feet ("32nd Ave
Lease") for a term of five years. The Lease will not become fully effective
until we are awarded the necessary licenses, and the Lessor is able to deliver a
Certificate of Occupancy, which is presently estimated to occur sometime during
early to mid 2015. 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 Thereafter, lease payments are
scheduled to be $282,500 per month for the first 24 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 reimburse the lessor for operating expenses applicable to the
leased property, and 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 account for this lease as an operating
lease rather than as a capital lease, because the lease does not transfer
ownership to us at the end of the lease, there is no bargain purchase price for
the grow facility as a component of the lease, the terms of the lease are not
less than 75% of th economic life of the grow facility, and the current present
value of the minimum lease payments is less than 90% of the fair market value of
the asset. We will sublease this grow facility to an affiliated entity under the
terms of a Master Service Agreement for a term of five years in an amount equal
to the sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed
operating expenses paid to the lessor each month, and (iii) plus a premium of
forty percent. Revenue from the sublease of the 32nd Avenue grow facility will
be recognized on a monthly basis as the user is charged for the amount of the
sublease.
60
Future minimum payments for these leases are:
For the 12 Months Ending
July 31, Amount
------- ------
2015 $3,489,943
2016 $6,684,521
2017 $7,068,464
2018 $7,426,161
2019 $7,487,900
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 July 31, 2014, there were a total of
22,864,700 shares of common stock issued and outstanding. Through a private
offering of our common stock at $1 per share, we have collected $1,847,000 from
subscribers as for July 31, 2014 for 1,847,000 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 22,947,700 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 July1, 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:
Six Months Ended July 31,
---------------------------
2014 2013
----------- -----------
Income tax expense (benefit):
Current:
Federal $39,016 $ -
State 10,277 -
----------- -----------
Deferred income tax expense (benefit): (49,293) -
Valuation allowance 49,223 -
----------- -----------
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:
The Company issued a convertible note in the amount of $850,000 on March 20,
2014 (the "Note"). This Note was subsequently amended, and the unpaid principal
balance was converted into common stock, as more fully described below. The Note
had an interest rate of 25%, payable monthly, and was scheduled to mature on
61
September 21, 2014. The outstanding principal balance of the Note, plus any
accrued but unpaid interest on the Note, was convertible at any time on or
before the maturity date at $1 per common share. The Note was 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 of $93,000 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 was charged to the loss on the early
extinguishment of debt and interest expense, respectively.
Note 8 - Mortgage Payable
On July 26, 2014 the company entered into a mortgage payable for the purpose of
purchasing a commercial operating property that contains a grow facility and
retail store, which we lease to one of our affiliated entities. The amount of
the mortgage is $595,000, has a three year term, and has an imputed interest
rate of 21.36%. The mortgage is payable in varying amounts from $11,000 to
$36,000 per month, which includes interest at stated amount of $6,000 per month,
with a balloon payment of $126,000 due in the thirty-sixth month of the term. We
account for the mortgage on a straight line basis with an imputed monthly
payment of principal and interests in the amount of $22,528 per month. The
difference between the imputed monthly payment amount and actual payment amounts
is recorded as an increase or decrease to deferred interest expense, at the time
a monthly payment is made. Actual cash payments of principal and interest due
under the terms of the mortgage over the subsequent three year period are, as
follows:
Period ended July 31,
2015 - $221,000
2016 - $232,000
2017 - $232,000
2018 - $126,000
The mortgage is also personally guaranteed by Shawn Phillips, an affiliate of
the Company.
Note 9 - 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 and concluded that there are no new accounting standards are
applicable to the Company. 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. The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial position or cash flow.
Note 10 - 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 acquired approximately 90 % of the outstanding shares of Strainwise,
Inc. a privately held Colorado corporation ("Strainwise Colorado") in exchange
for 23,124,184 shares of FHGR's common stock.
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.
62
On September 12, 2014 FHGR acquired the remaining outstanding shares of
Strainwise Colorado in exchange for the issuance of 2,517,000 shares of FHGR's
common stock.
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, we are treated as the accounting parent (acquirer) and FGHR (parent)
is treated as the accounting subsidiary (acquiree).
Private Stock Offering - Through a private offering of our common stock at $1
per share, we collected $2,141,700 from subscribers as of July 31, 2014 for
2,141,700 shares of our common stock, and we collected an additional $83,000
from August 1, 2014 through the date of the issuance of the financial
statements, September 30, 2014. Thus, total subscriptions to common stock
through the private offering is 2,224,700 shares. Coupled with the 293,000
common shares issued in connection with the conversion of the convertible note
described above, the total number of 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 and the convertible note holder, the total
amount of our common shares issued and outstanding would be 26,984,884 shares.
Operating Lease - We entered into a lease agreement on September 11, 2014 with
an unrelated third party to lease a grow facility of approximately 20,000 square
feet ("Bryant St. Lease") for a term of ten years. During the first 12 months of
the lease, lease payments are scheduled to be $23,984 for the first four months
and 24,531 for the next eight months, and then are scheduled to be $24,647,
$25,140, $31,221, $31,845, $32,483, $33,132, $33,794, $34,470, and $35,160 for
the second through the tenth year of the lease, respectively. We are not
required to provide any security deposits or first and last month's rental
amounts. We have an option to purchase the building for $2,400,000 at any time
during the first 36 months of the lease, provided that we deliver a purchase
option notice to the Lessor prior to the end of the 33rd month of the lease. We
are responsible to provide all of the tenant improvements that will enable the
continuous cultivation of marijuana plants under approximately 370 grow lights.
We account for this lease as an operating lease rather than as a capital lease,
because the lease does not transfer ownership to us at the end of the lease,
there is no bargain purchase price for the grow facility as a component of the
lease, the terms of the lease are not less than 75% of th economic life of the
grow facility, and the current present value of the minimum lease payments is
less than 90% of the fair market value of the asset. We lease this grow facility
to an affiliated entity under the terms of a Master Services Agreement on a long
term basis. Revenue from the sublease of the Bryant Street grow facility is
recognized on a monthly basis as the user is charged for the amount of the
sublease.
Tenant Improvement Financing - Under the terms of the Nome Lease, which was
entered into on April 22, 2014, the Lessor agreed to provide financing for up to
$750,000 of tenant improvements at an interest rate of 25%, payable monthly over
60 months. As of October 1, 2014, the $750,000 of tenant improvements had been
completed at the facility and we began paying monthly installments of $22,013 at
that time.
63
STRAINWISE, INC.
Condensed Pro Forma Balance Sheets
(Unaudited)
Pro Forma Combined Information
The following unaudited pro forma condensed combined balance sheet as of July
31, 2014 is based on (i) the historical balance sheet of Strainwise, Inc. as of
July 31, 2014 and (ii) the historical balance sheet of 4th Grade Films, Inc. as
of June 30, 2014.
4th Strainwise,
Grade Inc.
Strainwise, Films, Pro
Inc. Inc. Notes Adjustments Forma
---------- ---------- ------ ----------- ---------
ASSETS
Current assets:
Cash $963,285 $ 28 (1) (255,028) $
708,285
Due from affiliated
entities 205,747 - 205,747
Prepaid expenses and
other assets 91,244 - 91,244
---------- ---------- ---------
Total current assets 1,206,276 28 1,005,276
Commercial operating 660,000 - 660,000
property
Tenant improvements and
office equipment, net of
accumulated amortization
and depreciation of
$59,115 412,621 - 412,621
Prepaid expenses and 296,187 296,187
other assets -
Trademark, net of
accumulated amortization
of $427 10,583 - 10,583
---------- ---------- ---------
Total $2,639,667 $ 28 $2,384,667
========== ========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Accounts payable $ 36,692 $ - $36,692
Payable to Shareholder - 27,186 (1) (27,186) -
Current portion of 155,000 - 155,000
mortgage payable
Deferred revenue - 1,500 (1) (1,500) -
Income taxes payable - 100 (1) (100) -
---------- ---------- ---------
Total current 191,692 28,786 191,692
liabilities
Mortgage payable - 440,000
440,000
Note payable to - 110,533 (1) (110,533) -
shareholder
Deferred rent 35,316 - 35,316
---------- ---------- ---------
Total 667,008 139,319 667,008
liabilities
STOCKHOLDERS' (DEFICIT)
EQUITY
Common stock, no par
value, 100,000,000 shares
authorized, 26,865,884
issued and outstanding - 23,450 (1) (23,450) -
Additional Paid in Capital 2,188,492 123,762 (1) (378,762) 1,933,492
Share subscriptions 294,500 - 294,500
receivable
Subscriptions to common (294,500) - (294,500)
stock
(Deficit) Retained (215,833) (286,503) (2) 286,503 (215,833)
Earnings
---------- ---------- ---------
Total stockholder's
equity (deficit) 1,972,659 (139,291) (1,717,659)
---------- ---------- ---------
Total $2,639,667 $ 28 $2,384,667
========== ========== =========
See accompanying notes.
64
STRAINWISE, INC.
Condensed Pro Forma Statements of Operations
(Unaudited)
The following unaudited pro forma condensed combined statements of operations
and comprehensive loss for the twelve months ended January 31, 2014 is based on
(i) the historical results of operations of Strainwise, Inc. for the twelve
months ended January 31, 2014, and (ii) the historical results of operations of
4th Grade Films, Inc. for the twelve months December 31, 2013.
4th Strainwise,
Grade Inc.
Strainwise, Films, Pro
Inc. Inc. Notes Adjustments Forma
---------- ---------- ------ ----------- ---------
Revenues from affiliated
entities and related parties
Branding, marketing and
administrative fees $ 70,000 $ - $ 70,000
Sale of nutrient supplies 34,378 34,378
- 2,141 (2) (2,141) -
--------- --------- ----------
104,378 2,141 104,378
Operating costs and expenses
Professional, legal and (2) (18,040)
accounting 60,725 18,040 60,725
Compensation 60,560 - 60,560
Financing costs 20,000 - 20,000
Nutrient purchases 18,094 - 18,094
Impairment of film - 12,200 (2) (12,200) -
Rent and other occupancy 5,404 - 5,404
(2) (1,118)
General and administrative 9,753 1,118 9,753
Amortization 61 - 61
--------- --------- ----------
Total operating costs 174,597 31,358
and expenses 174,597
--------- --------- ----------
Loss from operations (29,217) (70,219)
(70,219)
Interest expense - (8,888) (2) (8,888) -
--------- --------- ----------
Loss before taxes on income (70,219) (38,105) (70,219)
(2) (100)
Provision for taxes on income - (100) -
--------- --------- ----------
Net loss $(70,219) $(38,205) $ (70,219)
========= ========= ==========
Basic and fully diluted loss
per common share $(0.082) $ (0.10) $ (0.082)
========= ========= ==========
Basic and fully diluted 2,345,000
weighted
average number of shares
outstanding 1,351,250 2,345,000 1,351,250
========= ========= ==========
See accompanying notes.
65
STRAINWISE, INC.
Condensed Pro Forma Statements of Operations
(Unaudited)
The following unaudited pro forma condensed combined statement of operations and
comprehensive loss for the six months ended July 31, 2014 is based on (i) the
historical results of operations of Strainwise, Inc. for the six months ended
July 31, 2014, and (ii) the historical results of operations of 4th Grade Films,
Inc. for the six months ended June 30, 2014. ,
4th
Grade Strainwise,
Strainwise Films, Inc.
Inc. 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
(2,545) (2) 2,545
Interest Expense 39,718 (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)
========== ========= ============
Basic and fully diluted
loss per common share $ 0.0068 $ 0.01 $ 0.0068
========== ========= ============
Basic and fully diluted
weighted average number of
shares outstanding 21,470,171 2,345,000 21,470,171
========== ========= ============
See accompanying notes.
66
STRAINWISE, INC.
Pro Forma Summary and Adjustments to the Balance Sheet and Statements
of Operations
(Unaudited)
Summary
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 acquired approximately 90 % of the outstanding shares of Strainwise,
Inc., a privately held Colorado corporation ("Strainwise Colorado") in exchange
for 23,124,184 shares of FHGR's common stock.
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.
On September 12, 2014 FHGR acquired the remaining outstanding shares of
Strainwise Colorado in exchange for the issuance of 2,517,000 shares of FHGR's
common stock.
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, we are treated as the accounting parent (acquirer) and FGHR (parent)
is treated as the accounting subsidiary (acquiree).
The unaudited pro forma condensed consolidated balance sheet and statement of
operations reflects amounts as if the transaction had occurred on February 1,
2013.
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 January 31,
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 our financial statements included
elsewhere in this prospectus.
Pro forma adjustments:
1. To reflect the use of cash from Strainwise of $255,000 for (i) the
payment of $120,300 to two shareholders of FHGR for the purchase and
cancellation of 1,038,000 shares of FHGR, and (ii) the payment of
$134,700 of FHGR's liabilities.
2. Includes the payment of $120,300 to two shareholders for the purchase
and cancellation of 1,038,000 shares of FHGR.
3. To reclassify the current period loss and to reclassify the
accumulated deficit of FHGR.
67
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY ...........................................
RISK FACTORS .................................................
MARKET FOR OUR COMMON STOCK ..................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................
BUSINESS......................................................
MANAGEMENT ...................................................
PRINCIPAL SHAREHOLDERS........................................
SELLING SHAREHOLDERS..........................................
DESCRIPTION OF SECURITIES.....................................
LEGAL PROCEEDINGS.............................................
INDEMNIFICATION ..............................................
AVAILABLE INFORMATION.........................................
FINANCIAL STATEMENTS..........................................
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any of the securities
offered in any jurisdiction to any person to whom it is unlawful to make an
offer by means of this prospectus.
68
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being
registered.
SEC Filing Fee $1,330
Blue Sky Fees and Expenses 2,000
Legal Fees and Expenses 30,000
Accounting Fees and Expenses 5,000
Miscellaneous 1,670
-----
TOTAL $40,000
=======
All expenses other than the SEC filing fee are estimated.
Item 14. Indemnification of Officers and Directors The Utah Revised Business
Corporation Act and our bylaws provide that we may indemnify any and all of our
officers, directors, employees or agents or former officers, directors,
employees or agents, against expenses actually and necessarily incurred by them,
in connection with the defense of any legal proceeding or threatened legal
proceeding, except as to matters in which such persons shall be determined to
not have acted in good faith and in our best interest.
Item 15. Recent Sales of Unregistered Securities.
The following lists all sales of our securities during the past three
years:
On August 29, 2014, we acquired approximately 90% of the outstanding common
stock of Strainwise, Inc., a Colorado corporation ("Strainwise Colorado"), in
exchange for 23,214,184 shares of our common stock.
On September 5, 2014 we acquired the remaining outstanding shares of
Strainwise Colorado in exchange for the issuance of 2,517,000 shares of our
common stock. In connection with this transaction:
o we issued 1,112,350 Series A warrants to former Strainwise Colorado
shareholders in exchange for a like number of warrants held by the
former Strainwise Colorado shareholders. The Series A warrants we
issued have the same terms as the warrants exchanged by the former
Strainwise Colorado shareholders (exercise price: $5.00 per
share/expiration date: January 31, 2019).
o we issued 500,000 warrants to one non-affiliated person in exchange
for a like number of warrants held by the former Strainwise Colorado
warrant holder. The warrants we issued have the same terms as the
1
warrants exchanged by the former Strainwise Colorado warrant holder
(exercise price: $0.10 per share/expiration date: January 31, 2019).
In connection with the issuance of these shares, we relied upon the
exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended
(the "Securities Act"). The persons who acquired these shares and warrants were
sophisticated investors and were provided full information regarding our
business and operations. 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 these
securities 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 offer or sale of these securities.
The following lists all sales of Strainwise, Inc.'s ("Strainwise Colorado")
securities during the past three years.
On January 16, 2014 Strainwise Colorado issued 20,430,000 shares of its
common stock to Erin Phillips in consideration for the assignment to Strainwise
Colorado of all of the outstanding membership interests in Strainwise, LLC.
In January, 2014 Strainwise Colorado issued warrants to an unaffiliated
person for services rendered. The warrants allow the holder to purchase up to
500,000 shares of Strainwise Colorado's common stock at a price of $0.10 per
share at any time prior to January 31, 2019.
In July, 2014 Strainwise Colorado 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.
Between March 15, 2014 and August 19, 2014 Strainwise Colorado sold
2,224,700 units, at a price of $1.00 per unit, to 81 private investors of whom
50 were accredited investors. Each unit consisted of one share of Strainwise
Colorado's common stock and one warrant. Every two warrants entitle the holder
to purchase one share of Strainwise Colorado's common stock at a price of $5.00
per share at any time prior to January 31, 2019.
Strainwise Colorado 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 Colorado. 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.
2
Item 16. Exhibits
The following exhibits are filed with this Registration Statement:
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement to Exchange Securities with Strainwise, Inc. (2)
2.2 Plan of Merger (3)
3.1(a) Articles of Incorporation (1)
3.1(b) Articles of Amendment dated July 21, 2004 (1)
3.1 (c) Amendment to Articles of Incorporation dated September 5, 2014 (3)
3.3 Bylaws (1)
5 Hart & Hart Legal Opinion (3)
10.1 Exchange Option (3)
10.2 Custer Lease (2)
10.3 51st Ave. Lease (2)
10.4 Nome Lease (2)
10.5 32nd Ave. Lease (2)
10.6 Form of Master Service Agreement, together with schedule required by
Instruction 2 to Item 601(a) of Regulation S-K.
10.7 Lock-Up/Leak-Out Agreements, together with schedule required by
Instruction 2 to Item 601(a) of Regulation S-K. (3)
10.8 Non-Disclosure/Non-Compete Agreements (3)
10.9 Bryant Street Lease
10.10 Loan Agreement/Randall Taylor
10.11 Promissory Note, Deed of Trust and Security Agreements - 5110
Race Street Property
21 Subsidiaries (3)
23.1 Consent of Attorneys (3)
23.2 Consent of Accountants
(1) Incorporated by reference to the same exhibit filed with the Company's
amended registration statement on Form 10-SB filed on October 29, 2007.
(2) Incorporated by reference to the same exhibit filed with the Company's 8-K
report filed on August 21, 2014.
3
(3) Filed with initial registration statement.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section l0 (a)(3) of the
Securities Act:
(ii)To reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(1) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of l933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(4) That, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser:
4
(i) If the registrant is relying on Rule 430B:
(A)Each prospectus filed by the registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the date
the filed prospectus was deemed part of and included in the registration
statement; and
(B)Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a)
of the Securities Act of 1933 shall be deemed to be part of and included
in the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating
to the securities in the registration statement to which that prospectus
relates, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date; or
(ii)If the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
The undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
5
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
6
SIGNATURES
Pursuant to the requirements of the Securities Act of l933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Denver, Colorado on the 31st day
of October 2014.
STRAINWISE, INC.
By: /s/ Shawn Phillips
---------------------------------------
Shawn Phillips, Chief Executive Officer
In accordance with the requirements of the Securities Act of l933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Shawn Phillips Chief Executive Officer October 31, 2014
---------------------- and a Director
Shawn Phillips
/s/ Erin Phillips Chief Financial and October 31, 2014
---------------------- Accounting Officer and
Erin Phillips a Director
/s/ David Modica Director October 31, 2014
----------------------
David Modica
STRAINWISE, INC.
FORM S-1
EXHIBITS