UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended April 30, 2015
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission file number: 000-52825
STRAINWISE, INC
--------------------------
(Exact name of registrant as specified in its charter)
Utah 20-8980078
----------------------------- -------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
1350 Independence St., Suite 300
Lakewood, CO 80215
----------------------------------
(Address of principal executive offices, including Zip Code)
(303)736-2442
-------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[x] No[ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
the definitions of "large accelerated filer," "accelerated filer,"
"non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
arger accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 27,147,217 shares of common stock as
of April 30, 2015.
STRAINWISE, INC.
INTERIM FINANCIAL STAEMENTS
For the Three Months Ended April 30, 2015 and 2014
(UNAUDITED)
STRAINWISE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
April 30, January 31,
2015 2015
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 507,310 $ 674,495
Due from affiliated entities, net of collection
allowance reserve of $3,319,182 and $2,375,533 at
April 30 and January 31, 2015, respectively -- --
Prepaid expenses and other assets 2,855 9,512
---------- ---------
Total current assets 510,165 684,007
Commercial operating property, net of accumulated
depreciation of $10,667 and $5,641 at April 30 and
January 31, 2015, respectively 649,333 654,359
Tenant improvements and office equipment, net of
accumulated amortization and depreciation of
$170,395 and $96,574 at April 30 and January 31,
2015, respectively 1,573,889 1,647,710
Prepaid expenses and other assets 396,187 346,187
Trademark, net of accumulated amortization of $976
and $793 at April 30 and January 31, 2015,
respectively 10,034 10,217
---------- ----------
Total assets $3,139,608 $3,342,480
========== ==========
LIABILITIES AND STOCKHOLERS' (DEFICIT) EQUITY
LIABILITIES
Current liabilities:
Accounts payable 98,943 $ 156,416
Accrued interest 26,712 --
Current portion of tenant allowance note and
mortgage payable 370,864 338,489
---------- ---------
Total current liabilities 496,519 494,905
Convertible notes payable 1,800,000 550,000
Note payable for tenant allowances 1,036,960 1,099,690
Mortgage payable 308,129 356,830
Deferred rent and interest payable discount 587,692 416,573
---------- ---------
Total liabilities 4,229,300 2,917,998
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 100,000,000 shares
authorized, 27,147,217 issued and outstanding
at April 30, and January 31, 2015, respectively -- --
Additional paid in capital 2,509,325 2,509,325
Retained (deficit) (3,599,017) (2,084,843)
---------- ----------
Total stockholders' equity (1,089,692) 424,482
---------- ----------
Total liabilities and stockholders' (deficit)
equity $ 3,139,608 $3,342,480
=========== ==========
See accompanying notes.
3
STRAINWISE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
April 30,
----------------------
2015 2014
---- ----
Revenues from affiliated entities
Cultivation facilities usage fees $ 1,223,386 $ 107,167
Fulfillment services fees 270,000 240,000
Sale of nutrient supplies 205,912 189,042
----------- ---------
1,699,298 536,209
Consulting services 2,000 -
----------- ---------
Total revenues 1,701,298 536,209
Operating costs and expenses
Collection reserve for amounts due
from Affiliated Entities 943,649 -
Rents and other occupancy 1,156,406 78,046
Compensation 327,540 241,711
Nutrient purchases 158,394 99,496
Professional, legal and consulting 302,142 26,323
Stock-based compensation - -
Depreciation and amortization 79,031 22,860
General and administrative 68,085 34,187
----------- ---------
Total operating costs and expenses 3,035,247 502,623
----------- ---------
Loss from operations (1,333,949) 33,586
Other costs and expenses
Loss on early extinguishment of debt, - -
Interest expense (180,225) (39,718)
Financing costs - -
----------- ---------
Loss before provision for taxes on income (1,514,174) (6,132)
Provision for taxes on income - -
----------- ---------
Net Loss $(1,514,174) $ (6,132)
=========== ===========
Basic loss per common share $ (0.056) $ (0.003)
=========== ===========
Weighted average number of shares outstanding 27,147,217 20,430,000
=========== ===========
Fully diluted weighted average number of
shares outstanding 29,617,483 20,930,000
=========== ===========
See accompanying notes.
4
STRAINWISE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
----------------------
2015 2014
---- ----
Cash flows from operating activities:
Net (loss) $ 1,514,174) $ (6,132)
Adjustments to reconcile net loss to net cash
used in operating activities:
Increase (decrease) in amounts due to/from
Affiliated Entities (943,648) 121,118
Increase in collection allowance reserve for
amounts due from Affiliated Entities 943,648 -
Increase in accrued interest payable 26,712 -
Increase in prepaid expenses and other assets (43,343) (393,248)
Depreciation and amortization 78,848 22,860
Increase (decrease) in accounts payable (57,473) -
Increase in deferred rent and interest discount 171,119 (11,723)
Decrease in trademark 183 183
---------- ----------
Net cash flow used in operating activities (1,338,128) (266,942)
Cash flows from investing activities:
Investment in tenant improvements and office
equipment - (235,579)
---------- ----------
Net cash flow used in investing activities - (235,579)
Cash flows from financing activities:
Proceeds from convertible notes 1,250,000 -
Payments on tenant allowances note and mortgage (79,057) -
Proceeds from convertible note, including
discount of $45,000 - 895,000
Payments on convertible note - (75,000)
---------- ----------
Net cash flows from financing activities 1,170,943 820,000
---------- ----------
Net cash flows (167,185) 317,479
Cash and equivalent, beginning of period 674,495 100
---------- ----------
Cash and equivalent, end of period $ 507,310 $ 317,579
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 153,513 $ 26,587
========== ==========
Cash paid for income taxes $ - -
========== ==========
See accompanying notes.
5
STRAINWISE, INC.
Notes to the Unaudited Financial Statements
April 30, 2015
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 marketing,
administrative, accounting, financial and compliance services ("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 Services to (i) the two
cultivation facilities and nine retail stores ( five of which sell both
recreational and medical marijuana to the public, three of which only sells
medical marijuana to the public, and one of which only sells recreational
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 cultivation facilities in the regulated cannabis industry
throughout the United States.
The 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
cultivation 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
Affiliated Entities 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.
6
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 Cultivation Facilities and Equipment: We lease cultivation
equipment and facilities on a turn-key basis to customers in the cannabis
industry. We will also enter into a sale-lease-back agreement with our
customers for grow lights, tenant improvements and other cultivation
equipment.
We do not directly grow marijuana plants, produce marijuana infused products,
sell marijuana plants and or sell marijuana infused products of any nature.
Share exchange - , On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange"), pursuant to which we acquired approximately 90%
of the outstanding shares of a privately held Colorado corporation ("Strainwise
Colorado") in exchange for 23,124,184 shares of our common stock.
As part of the Share Exchange, Strainwise Colorado paid $134,700 of our
liabilities and purchased 1,038,000 shares of our common stock for $120,300 from
two of our shareholders. The 1,038,000 shares were returned to treasury and
cancelled. We also agreed to sell our 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 in
consideration for the assumption by one of our shareholders of all of our
liabilities (net of the $134,700 paid by Strainwise Colorado) which were
outstanding immediately prior to the closing of the transaction.
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.
The resulting business combination has been accounted for as a reverse
acquisition and recapitalization, using accounting principles applicable to
reverse acquisitions whereby the financial statements are presented as a
continuation of the Company. Under reverse acquisition accounting, Strainwise
Colorado is treated as the accounting parent (acquirer) and we (parent) are
treated as the accounting Subsidiary (acquiree).
Basis of presentation - The balance sheet as of January 31, 2015, which has been
derived from audited financial statements, and the unaudited condensed financial
statements as of April 30, 2015 and 2014, have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
rules of the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's Form 10-K for the year ended January 31, 2015. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for future quarters or for the full year.
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.
7
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 non-cannabis business purposes
and to allow daily access to the bank account for ongoing oversight of his
fiduciary responsibility to the Company. Additionally, the trust agreement
required that the Chief Executive Officer make copies available of all
transactions applicable to our operations to our accounting staff on a weekly,
or as requested basis. At April 30 and January 31, 2015, respectively, there
were no cash deposits in the personal bank account of the Chief Executive
Officer held in trust for us.
The balance of cash and cash equivalents at April 30, 2015 includes $500,000 of
proceeds received on May 1, 2015 from a convertible note. Since the obligation
was considered to have been legally incurred as of April 30, 2015, the $500,000
was deemed to have been received as of April 30, 2015 and was recognized for
financial statement reporting purposes as cash and cash equivalents at that
date.
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 amount of prepaid expenses and other assets as of April 30 and January 31,
2015 is $399,042 and $355,699, respectively.
April 30, January
2015 31, 2015
---------- --------
Prepaid insurance $ 2,855 $ 9,512
------- -------
$ 2,855 $ 9,512
======= =======
Noncurrent prepaid expenses and other assets are comprised of the following:
April January 31,
30, 2015 2014
--------- -----------
Prepaid rent $ 83,308 $ 83,308
Security deposits 312,879 262,879
--------- ---------
$ 396,187 $ 346,187
========= =========
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.
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:
8
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.
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. All assets and liabilities are
based upon Level 1 inputs.
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 cultivation facility. We have
allocated $220,000 and $440,000 of the purchase price to the cost of land and to
the cost of the improvements to the building, respectively, based upon
management's best estimate and belief. Management's estimate and belief was
based upon consideration of (i) replacement cost, (ii) limited knowledge of
comparable sales, (iii) anticipated future income generation, and (iv) single
use, internally. No intangible asset value was assigned to the existing lease on
the property, because the existing lease was immediately cancelled upon the
completion of the purchase of the commercial property. The cost of the
improvements to the building is being 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. 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.
Tenant improvements and office equipment, net of accumulated amortization and
depreciation are comprised of the following:
April 30, January
2015 31, 2015
------------ -----------
Tenant improvements:
Upgrades of HVAC systems $ 659,586 $ 659.586
Upgrades of electrical generators and power
equipment 468,589 468.589
Structural improvements 468,400 468.400
Fire suppression, alarms and surveillance
systems 59,258 59,258
Office equipment:
Computer equipment 41,200 41,200
Office furniture and fixtures 22,251 22,251
Machinery 25,000 25,000
--------- ----------
1,744,284 1,744,284
9
Accumulated amortization and depreciation (170,395) (96,574)
---------- ----------
$1,573,889 $1,647,710
========== ==========
Tenant improvements are amortized over the term of the lease, and office
equipment is depreciated over its useful lives, which has been deemed by
management to be three years. Amortization and depreciation expense for the
three months and twelve months ended April 30 and January 31, 2015 was $73,821
and $173,972, 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 $976 and $793 at April 30 and January 31, 2015, respectively
and consisted of the following at April 30, 2015:
Gross
Carrying Accumulated
Amount Amortization Net
----------- ------------ ----------
Trademarks $11,010 $ 976 $ 10,034
======= ===== ========
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
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 assist the employees
of the affiliated entity to operate the business of that related location,
Also, under a long term master service agreement, we provide administrative
and management services to assist employees of affiliated entities to
operate their cultivation facilities. We charge the affiliated entity a
monthly fee of approximately $4,500 a month for the branding, marketing and
administrative services and $4,500 to $20,000 for cultivation facility
rent. Since we (i) are the primary obligor, (ii) determine the price, (iii)
perform the service, (iv) have the credit risk, and (v) since there are no
additional milestone that need to be met other than actually providing the
services, in accordance with ASC 605-45-45, the revenue is recognized on
monthly basis in accordance with the terms of the applicable master service
agreement.
10
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 cultivation facility. Under the terms of
the ten year 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 10 year master service agreement, we provide the above
described accounting and financial services for a monthly fee of
$3,000.Since we (i) are the primary obligor, (ii) determine the price,
(iii) perform the service, (iv) have the credit risk, and (v) since there
are no additional milestone that need to be met other than actually
providing the above described service, in accordance with ASC 605-45-45,
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 the ten year master service agreement for a monthly fee
of $2,500 per month. Since we (i) are the primary obligor, (ii) determine
the price, (iii) perform the service, (iv) have the credit risk, and (v)
since there are no additional milestone that need to be met other than
actually providing the above described service, in accordance with ASC
60545-45, 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 that approximates the amount of bulk
purchase discount we receive from our nutrient suppliers. Since we (i) are
the primary obligor, (ii) determine the price, (iii) perform the service,
(iv) have the credit risk, and (v) 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 605-45-45, the
revenue is recognized in the month in which the nutrient is actually
delivered to the related entity.
o Cultivation Facilities Revenue: Under the terms of a ten year master
service agreement, we lease cultivation 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 we (i) are
the primary obligor, (ii) determine the price, (iii) perform the service,
(iv) have the credit risk, and (v) 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
605-45-45, the revenue is recognized in the month in which the lease
payments are made by us to the respective independent, third party lessor.
11
o Sublease of Cultivation Facility. We sublease a cultivation facility to an
unrelated third party. Payments from the subtenant are not included as a
component of revenues, but rather are recognized on a monthly basis, as
reduction of rent and other occupancy costs in the month the sublease
payment is received.
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.
Diluted EPS gives effect to all potential dilutive securities outstanding during
the period including convertible debt, stock options, and warrants, using the
treasury stock method. Diluted EPS excludes all potential dilutive shares if
their effect is anti-dilutive or would reduce net loss per share amounts.
Diluted EPS figures are equal to those of Basic EPS for each period, since the
Company had a net loss for the periods presented.
Note 2 - Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. We have incurred net losses of
$3,599,107 since inception and have not achieved profitable operations, raising
substantial doubt about our ability to continue as a going concern. Our ability
to continue as a going concern is dependent upon our achieving a sustainable
level of profitability. The Company intends to continue financing its future
development activities and its working capital needs largely from the private
sale of our securities, with additional funding from other traditional financing
sources, including convertible 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 and Collection Reserve for Amounts Due from
Affiliated Entities:
Substantially all of our revenues to date have been derived from long term
contracts with the Affiliated 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 between the Company and the Affiliated
Entities are determined by related parties and these terms can change at any
time. Related party revenue was $1,699,298 and $5,765,481, respectively, for the
three months ended April 30, 2015. As of April 30 and January 31, 2015, we had
accounts receivable from affiliated entities of $3,319,182 and $2,375,533,
respectively.
12
The Company made an investment in cultivation facilities that we sublease to our
Affiliated Entities. The cultivation facilities presently produce more product
than can be sold by the medical and recreational dispensaries and stores
operated by the Affiliated Entities. As a result, the Affiliated Entities have
costs in excess of revenue, a negative production variance, that are estimated
to continue until the Affiliated Entities are able to add several new
dispensaries or retail stores that fully utilize the production capacity.
Although the Affiliated Entities have been able to pay us approximately
$4,145,254 of the amounts billed to them through April 30, 2015, including the
payment of $755,649 during the three months ended April 30, 2015, there is no
assurance that they will be able to generate enough positive cash flow to repay
the full amount they presently owe to us. Thus, a reserve in the amount of
$3,319,182 and $2,375,533 at April 30 and January 31, 2015, respectively, has
been recorded to recognize the uncertainty of collecting the full amount
presently owed to us from the Affiliated Entities.
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 January 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 independent
third party a cultivation 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 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 cultivation facility as a component of the lease, the
terms of the lease are less than 75% of the economic life of the cultivation
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 cultivation
facility to an unrelated third party. Collections from the sublease of the
Custer cultivation facility is recognized on a monthly basis, as the user is
charged for the amount of the sublease, as reduction of rent and other occupancy
costs. Under the terms of the sublease to the unrelated third party, the
payments are scheduled to be $20,000 from January 1, 2015 through June 30, 2015,
$51,200 from July 1, 2015 through December 31, 2015, and $35,600 from January 1,
2016 through March 31, 2019
We entered into a lease agreement on April 1, 2014 to lease from an independent
third party a cultivation 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
occurred 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
13
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
in the total amount $150,000, two thirds of which has been paid, with the
remaining $50,000 due 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. 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 cultivation facility as a component of the lease, the terms of the
lease are less than 75% of the economic life of the cultivation 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 cultivation 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 the amount of monthly amortization of tenant
improvements, and (iv) a premium of forty percent. Revenue from the sublease of
the 51st Avenue cultivation 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 independent
third party a cultivation facility of approximately 38,000 square feet ("Nome
Lease") for a term of seven years. We entered into a modification of the Nome
lease on December 1, 2014, wherein the lease was modified to extend the lease
term through April 30, 2025; and, the lease payments were modified to be $88,616
per month for the five months ending April 30 2015, and then are scheduled to be
$90,207, $91,799, $93,390, $94,981, $73,578, $75,169, $76,761, 78,352, and then
$79,943 per month for the final 12 months of the lease. As more fully described
in Note 8 herein, the modification of the lease included the cancellation of the
$750,000 note payable to the lessor for the financing of tenant improvements,
and the extension of an additional $800,000 to be used by us for future tenant
improvements. The amount of tenant improvement financing provided by the lessor
is to be amortized over the extended term of the modified lease as a component
of the monthly lease payments. 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 are responsible
to provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants. 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
cultivation facility as a component of the lease, the terms of the lease are
less than 75% of the economic life of the cultivation 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 cultivation 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, (iii) plus
the amount of monthly amortization of tenant improvements, and (iv) a premium of
forty percent. Revenue from the sublease of the Nome cultivation 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 September 11, 2014 to lease a cultivation
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
14
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 cultivation facility as a component of the lease, the terms of the lease are
less than 75% of the economic life of the cultivation 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 cultivation facility to an affiliated entity
under the terms of a Master Services Agreement on a long term basis 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) a premium of
forty percent. Revenue from the sublease of the Bryant Street cultivation
facility is 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 twelve Months Ending April 30,
--------------------------------------------------------------
2016 2017 2018 2019 2020 Thereafter
------------ ---------- ---------- ---------- ----------- ----------
$4,390,800 $4,545,200 $4,736,000 $4,290,200 $1,270,100 $5,561,600
========== ========== ========== ========== ========== ==========
Note 5 - Issuance of Shares:
Between March and August 2014, by means of a private offering of our common
stock at $1 per share, we sold 2,224,700 shares of our common stock. Coupled
with the 293,000 common shares issued in connection with the conversion of the
convertible note described in Note 7 herein, the Share Exchange described in
Note 1 herein, and the 198,333 shares issued as stock-based compensation
described in Note 8 herein, the total number of shares of common stock issued
and outstanding at April 30, 2015 was 27,147,217 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:
Three Months Ended Year Ended
April 30, January 31,
-------------------- ------------
2015 2014 2015
---- ---- ----
Income tax expense (benefit) Current:
Federal $(579,936) $ 13,205 $(794,474)
State (70,106) (3,536) (96,812)
---------- -------- ---------
Deferred income tax expense benefit (650,042) 9,670 (891,286)
Valuation allowance 650,042 (9,670) 891,682
---------- -------- ---------
Provision $ - $ - $ -
========== ======== =========
15
We have a net operating loss carryforward for financial statement reporting
purposes of $2,090,075 from the year ended January 31, 2015.
Note 7 -Notes Payable:
Notes payable consisted of the following:
April 30, 2015 January 31, 2015
--------------------------------- -------------------------------
Long Long
Current Term Total Current Term Total
------- --------- ---------- --------- --------- -------
Convertible
notes - $1,800,000 $1,800,000 $ - $ 550,000 $ -
Mortgage 180,249 308,129 488,378 170,955 356,830 527,785
Tenant
improvement
loan 190,615 1,036,960 1,227,575 167,534 1,099,690 1,267,224
--------- --------- ---------- --------- ---------- ---------
$ 370,864 $3,145,089 $3,515,953 $ 338,489 $2,006,520 $2,345,00
========= ========== ========== ========= ========== =========
On March 20, 2014, the Company issued a convertible note in the amount of
$850,000 (the "Note") to an individual. 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 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.
On January 31, 2015, the Company issued a three convertible notes totaling up to
$2,500,000, of which $1,800,000 had been received by the Company at April 30,
2015. The convertible notes are being funded by the noteholders in varying
amounts from approximately $250,000 to $550,000 per month. The convertible notes
are unsecured, have an interest rate of 25%, with the interest is payable
monthly. The principal amount of the convertible notes are due twenty-four
months from the date of the funding. At any time prior to the due date of the
convertible notes, the unpaid principal amount of the convertible note, plus any
accrued but unpaid interest, may be converted into common stock of the Company
at a per-share price of $1 per share. The convertible loans are personally
guaranteed by Shawn Phillips, an officer of the Company and affiliate, and Erin
Phillips, the majority shareholder of the Company. Subsequent to April 30, 2015,
the Company has received proceeds of $200,000 from additional fundings of the
convertible notes.
On July 26, 2014 the Company entered into a mortgage payable for the purpose of
purchasing a commercial operating property that contains a cultivation 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 no stated rate of
16
interest. In accordance with ASC 835-30, we imputed an interest rate for the
mortgage payable 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 $22,301 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.
On December 31, 2015, we entered into a modification of the Nome operating lease
agreement ("Nome Lease") which included financing for certain tenant
improvements. The Nome Lease stipulates that the Company retains ownership of
the tenant improvements, so accordingly, the Company recorded a long-lived asset
and a corresponding liability for the amount of tenant improvement financing.
The tenant improvement financing is being amortized over a 60 month period, at
an imputed annual interest rate of 29%. Monthly payments on the tenant financing
is included as a component of the monthly lease payment. The lease is guaranteed
by Shawn Phillips, an officer and affiliate of the Company.
The amount of principal and interest payments on the notes for the five year
period ending April 30, 2020 are, as follows:
April 30,
------------------------------------------------------
2016 2017 2018 2019 2020
----------- ---------- -------- --------- -------
Convertible notes -
interest only $ 493,200 $ 369,900 $ - $ - $ -
Convertible notes -
principal - 1,800,000 - - -
Mortgage 232,000 232,000 184,000 - -
Tenant improvement loan 528,700 528,700 528,700 528,700 -
---------- ---------- -------- --------- -------
$1,235,900 $2,930,600 $712,700 $ 528,700 $ -
========== ========== ======== ========= =======
Note 8 - Stock-Based Compensation
The Company issued 198,333 shares of common stock as compensation to employees
during the year ended January 31, 2015, and recognized $198,333 of expense. The
shares were fully vested upon issuance and were valued at $1.00 per share, the
value on the grant date of January 31, 2015.
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 - Contingencies
In April 2015, the Company advised the lessor of one of our operating leases
that we had elected to abandon the lease and would not be occupying the
premises. The leased premises were originally intended to be subleased to the
Affiliated Entities for use as a cultivation facility. We elected to abandon the
17
lease, because of our belief that the lessor was not acting in good faith, and
had breached major terms of the lease agreement. The lessor filed a lawsuit
against the Company seeking possession of the leased premises and alleging
breach of the lease; but, the lessor has not quantified the amount of any
claimed damages resulting from the alleged breach of the lease agreement. The
Company stipulated to the lessor's demand for possession of the leased property,
but we are vigorously defending the remaining claims in this action. At this
time, we cannot estimate the amount of damages, if any, and accordingly, we have
not recorded any corresponding liability.
Note 11 - Subsequent Events:
Subsequent to April 30, 2015 the Company received proceeds in the amount of
$200,000 from additional fundings of the series of convertible notes described
in Note 7 herein.
On May 12, 2015, a reduction in work force was made at one of the cultivation
facilities operated by our Affiliated Entities. The reduction was made in order
to help decrease the negative production volume variance being caused by the
underutilization of the respective cultivation facility. At present, the
affected cultivation facility has been granted only one medical marijuana
license, which license does not allow for the production of sufficient product
to operate the facility at a profit.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements included as part of this report.
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. Strainwise was organized in Colorado on
June 8, 2012 as a limited liability company, and converted to a Colorado
corporation on January 16, 2014. 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 was accounted for similar to a reverse
merger, whereby Strainwise was deemed to have acquired the Company.
In connection with the acquisition of Strainwise, the Company sold 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 the Company in consideration for the assumption
by a shareholder of the Company of all liabilities of the Company (including the
Company's outstanding liabilities as of June 30, 2014) which were outstanding
immediately prior to the closing of the transaction.
Business
Our branding and fulfillment services are provided under separate 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
18
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 Affiliated Entities 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. The loans will enable borrowers to (if desired)
purchase buildings for their operations, acquire fixtures and equipment,
and/or fund their working capital needs. We plan to obtain the capital
needed to fund the loans through fees received for branding and fulfillment
services, sales of nutrients, subleasing grow facilities and the public or
private sale of our securities.
We presently provide these branding and fulfillment services to the nine retail
marijuana outlets and two grow facilities (the "Affiliated Entities") owned by
Mr. Phillips.
The following shows the monthly fees we receive, and expect in the future to
receive, for providing branding and fulfillment services to the retail outlets
and grow facilities:
19
Branding,
and Accounting/
Retail Outlets: Administrative Compliance
--------------- -------------- -----------
The Sanctuary (1) $ 4,500 $5,500
The Annie (1) $ 4,500 $2,500
The Ridge $ 4,500 $5,500
The Spring $ 4,500 $2,500
The Retreat $ 4,500 $5,500
The Shelter $ 4,500 $5,500
The Grove (1) $ 4,500 $5,500
The Haven (1) $ 4,500 $5,500
The Range $ 4,500 $5,500
Cultivation Facilities:
-----------------------
51st Avenue $15,000 $5,500
Bryant Street $10,000 $5,500
Nome (2) - -
(1) This outlet also houses a small cultivation facility.
(2) The Nome cultivation facility is subleased to an Affiliated Entity, is
fully built out, and is available for operation. However, the Affiliated
Entity has not been able to obtain sufficient licenses from the state of
Colorado to allow for sufficient production levels for the facility to be
economically viable. Thus, the Affiliated Entity has closed the Nome
facility, and has terminate the employees that had been retained to operate
the facility. Beginning February 1, 2015, the Company suspended recognition
of any facilities usage fees due from the Nome facility under the terms of
a Master Services Agreement until such time that the Nome facility is
granted a sufficient number of licenses to operate the facility on an
economically viable basis. We are not certain that the Nome facility will
ever obtain a sufficient number of licenses from the state of Colorado for
it to operate at a viable level, and thus, we requested that the Affiliated
Entity explore a sublease the Nome facility to unrelated third parties.
As of June 19, 2015, we had not provided any branding and fulfillment services
on an hourly basis. We do not know what our hourly charge will be for any
services we may provide by the hour. Our Master Service agreements expire on
December 31, 2023.
The Company did not begin operations until January 1, 2014, when it began
providing branding and fulfillment services to the cultivation facilities
operated by Shawn Phillips and the retail stores owned by Mr. Phillips, an
officer and director of the Company (collectively the "Affiliated Entities"). As
a result, comparison of the Company's operating results for the three month
ended April 30, 2015, with any prior period would not be meaningful. As of June
19, 2015 the Company was not providing services to any other entities.
The following shows the amounts the Company charged the affiliated entities for
the branding and fulfillment services provided pursuant to the Master Service
Agreements and subleasing cultivation facilities for the periods shown, as well
as the amounts the Company expects to charge during the twelve months ending
April 30, 2016 from these sources. Projected revenue from branding, marketing,
20
accounting and other services has been calculated in whole based upon the terms
of the Master Service Agreements with the Affiliated Entities. Projected revenue
from subleasing is based upon executed agreements with the Affiliated Entities.
Projected revenue does not include any amounts from lending since, as of June
19, 2015, we have not extended any loans and thus, future revenue from lending
cannot be estimated with any degree of certainty.
Projected for
the Twelve
Three Months Ended Months Ending
April 30, April 30,
----------------------- -------------
2015 2014 2016
---------- -------- -------------
Subleasing $ 1,223,400 $ 107,200 $ 4,900,000
Branding, marketing,
accounting and compliance
fees 270,000 240,000 1,100,000
Nutrient sales 205,900 189,000 850,000
----------- --------- -----------
$ 1,699,300 $ 536,200 $ 6,850,000
=========== ========= ===========
As of April 30, 2015, the Company's operating expenses, excluding payments
required for its operating leases, were approximately $200,000 per month.
As of June 19, 2015, the cultivation facilities operated by the Affiliated
Entities had the capacity to provide enough product to supply approximately 15
to 20 marijuana dispensaries. However, as of June 19, 2015, the Affiliated
Entities had only nine dispensaries and the cultivation facilities were not
selling product to any other marijuana dispensaries. As a result, the
cultivation facilities are operating at a loss and are unable to pay the Company
the amounts owed pursuant to their subleases with the Company. Although the
marijuana dispensaries owned by the Affiliated Entities are operating at a
profit, the dispensaries are not able to currently pay all of the amounts billed
to them by the Company, since the profits from the dispensaries are being used
to fund the operating losses of the cultivation facilities.
The Company estimates that if the cultivation facilities were able to supply an
additional five dispensaries (whether operated by the Affiliated Entities or
others) the cultivation facilities would be able to begin making lease payments
to the Company and the dispensaries would be able to resume payments pursuant to
their Master Service agreements with the Company. The Affiliated Entities have
paid the Company approximately $4,145,254 of the amounts billed to them since
their inception through April 30, 2015, including $755,649 during the three
months ended April 30, 2015. However, there is no assurance that the Affiliated
Entities will be able to generate enough cash to pay the $3,319,182 presently
owed to the Company at April 30, 2015, and thus, the receivable from the
Affiliated Entities at April 30, 2015 ($3,319,182) has been fully reserved and
charged to expense.
Shawn Phillips is the sole owner of Rocky Mountain Farmacy, Inc. ("RMF"), one or
our Affiliated Entities, which operates The Retreat medical marijuana
dispensary. In November 2014, Mr. Phillips submitted an application to the
Colorado Marijuana Enforcement Division ("MED") to permit the 51st Avenue
cultivation facility to supply The Retreat with medical marijuana. On June 11,
2015, the State Licensing Authority issued grounds for a denial of the
application, based upon the belief of the MED that the Company and persons other
than Mr. Phillips are indirect and/or beneficial owners of RMF and should have
been included on the application. Since the denial was just recently received,
legal counsel has not had adequate time to evaluate the merits of the grounds
for such denial. Mr. Phillips has requested a hearing to address the issue with
the MED.
21
Leases/Subleasing
As of June 19, 2015 we were leasing five properties in the Denver Metropolitan
area. We sublease three of the properties to the Affiliated Entities for their
marijuana cultivation and growing operations, however one cultivation and
growing facility was not in operation as of June 19, 2015. We will lease one of
the properties to the Affiliated Entities for a medical and retail marijuana
retail outlet. Our subleases with the Affiliated Entities expire on the same
date (generally between 2019 and 2024) 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. None of the persons leasing these facilities to us
are affiliated with us in any way. We believe the terms of our subleases are
comparable to those which we could have obtained from unrelated third parties.
The future minimum amounts we are required to pay under the terms of these five
leases (which we refer to as our "Operating Leases") are shown below.
Lease Payments Due During the Twelve Months Ending April 30,
-------------------------------------------------------------------
2016 2017 2018 2019 2020 Thereafter
---- ---- ---- ---- ---- ----------
Custer $ 330,800 $ 340,700 $ 350,900 $ 300,400 $ - $ -
Nome (1) 1,082,500 1,101,600 1,120,700 1,139,800 882,900 3,722,700
51st 2,682,200 2,803,200 2,914,100 2,470,400 - -
Bryant 295,300 299,700 350,300 379,600 387,200 1,838,900
---------- ---------- ---------- ---------- ---------- ----------
$4,390,800 $4,545,200 $4,736,000 $4,290,200 $1,270,100 $5,561,600
========== ========== ========== ========== ========== ==========
(1) Amounts are based upon terms of lease amended on December 1, 2014. See Note
4 to the financial statements included as part of this report.
Beginning January 1, 2015, we subleased the Custer facility to an independent
third party for a five year period on a triple-net-lease-basis. Pursuant to the
terms of the sublease, the subtenant will pay monthly rent according to the
following schedule:
Period
--------------------
Monthly Rent Beginning Ending
------------ --------- ------
$20,000 1-1-15 6-30-15
$51,200 7-1-15 12-31-15
$35,600 1-1-16 3-31-19
Liquidity and Capital Resources
Between March 15, 2014 and August 19, 2014, the Company 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 the Company's common stock and one warrant. Every two warrants
entitle the holder to purchase one share of the Company's common stock at a
price of $5.00 per share at any time prior to January 31, 2019. When the Company
acquired the remaining shares of Strainwise, the Company exchanged its warrants
for the outstanding Strainwise warrants. The warrants issued by the Company had
the same terms as the Strainwise warrants.
On March 20, 2014 the Company borrowed $850,000 from an unrelated third party.
The loan bears interest at 25% per year, payable monthly, and matures on
September 21, 2014. On July 16, 2014, the terms of the loan were amended such
22
that $200,000 of the loan was converted into 293,000 shares of the Company's
common stock and the Company agreed to pay the remaining balance of the loan
($325,000), plus accrued interest and a prepayment penalty of $11,250, prior to
July 29, 2014. The $850,000 loan was used (i) to secure approximately $217,800
of deposits for the future rental and/or purchase of cultivation 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 cultivation facilities under lease, (iv) to pay approximately $373,000 of
principal and interest to the note holder, and (v) to pay other miscellaneous
expenses
On July 26, 2014 the Company purchased a 5,000 square foot commercial building
for $660,000. The building, which is located at 5110 Race Street in Denver,
Colorado, houses a retail marijuana dispensary and a small cultivation facility
which are owned by Shawn Phillips. The retail dispensary (known as "the
Sanctuary") and cultivation facility are leased to one of the Affiliated
Entities. The purchase price was paid with cash of $60,000 and 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.
As of April 30, 2015, three unrelated third parties collectively loaned the
Company $1,800,000. The loans bear interest at 25% per year, are unsecured, and
are due and payable on January 31, 2017. Interest-only payments are due each
month, and at the option of the lenders, the loans can be converted into shares
of the Company's common stock at the rate of $1.00 per share. Subsequent to
April 30, 2015, one of the third parties loaned the Company an additional
$200,000. The terms of the additional fund are the same as the loans made as of
April 30, 2015.
Any of the following are an event of default which would cause all amounts due
the lenders to become immediately due and payable:
o the Company fails to make any interest payment when due; or
o the Company breaches any representation, warranty or covenant or defaults
in the timely performance of any other obligation in its agreements with
the lenders.
The loan proceeds were used to pay general and administrative expenses. The
future minimum payments under the terms of the Company's material contractual
obligations are shown below.
For the Twelve Months Ending April 30,
-------------------------------------------
2016 2017 2018 2019 2020 Thereafter
---- ---- ---- ---- ----- ----------
Corporate office $ 68,200 $ 35,500 $ - $ - $ - $ -
Operating leases 4,390,800 4,545,200 4,736,000 4,292,200 1,270,100 5,561,600
Mortgage (1) 232,000 232,000 184,000 - - -
Tenant Improvement
loan (1) 528,700 528,700 528,700 528,700 - -
Convertible loans:
Interest 493,200 369,000 - - - -
Principal (2) - 2,000,000 - - - -
---------- ---------- ---------- --------- ---------- ----------
$5,712,900 $7,710,400 $5,448,700 $4,818,900 $1,270,100 $5,561,600
(1) Includes principal and interest payments.
(2) Includes $200,000 received subsequent to April 30, 2015.
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In addition to the foregoing, the Company estimates that during the twelve
months ending April 30, 2016 the Company will need approximately $800,000 for
additional equipment such as grow lights, electrical upgrades, generators and
air conditioning and approximately $2,400,000 for general corporate overhead.
The Company plans to fund its operations and contractual requirements through
fees received for branding and fulfillment services, sales of nutrients,
subleasing cultivation 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 The ability of the Affiliated Entities to collectively become
profitable and make payments to the Company in accordance with the
terms of their Master Service Agreements and subleases. In this
regard, On May 12, 2015 the Affiliated Entities collectively laid off
approximately 45% of their employees. The layoffs were primarily the
result of delays in obtaining enough licenses in order for the Nome
cultivation facility to open and be operated on a profitable basis;
o Government regulation of the marijuana industry;
o Revision of Federal banking regulations for the marijuana industry;
and
o Legalization of recreational marijuana in states other than Colorado
and Washington.
Other than the foregoing, the Company does not know of any trends, events or
uncertainties that have had, or are reasonably expected to have, a material
impact on:
o revenues or expenses;
o any material increase or decrease in liquidity; or
o expected sources and uses of cash.
Critical Accounting Policies and New Accounting Pronouncements
See Notes 1 and 9 to the financial statements included as part of this report
for a description of our critical accounting policies and the potential impact
of the adoption of any new accounting pronouncements.
Item 4. Controls and Procedures.
(a) The Company maintains a system of controls and procedures designed to
ensure that information required to be disclosed in reports filed or submitted
under the Securities Exchange Act of 1934, as amended ("1934 Act"), is recorded,
processed, summarized and reported, within time periods specified in the SEC's
rules and forms and to ensure that information required to be disclosed by the
24
Company in the reports that it files or submits under the 1934 Act, is
accumulated and communicated to the Company's management, including its
Principal Executive and Financial Officers, as appropriate to allow timely
decisions regarding required disclosure. As of April 30, 2015, the Company's
Principal Executive and Financial Officers evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Principal Executive and Financial Officers concluded
that the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls. There were no changes in the Company's
internal control over financial reporting during the quarter ended April 30,
2015, that materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
PART II
Item 6. Exhibits
Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRAINWISE, INC.
June 22, 2015 By:/s/ Shawn Phillips
------------------------------------
Shawn Phillips, Chief Executive Officer
June 22, 2015 By:/s/ Erin Phillips
------------------------------------
Erin Phillips, Chief Financial and
Accounting Officer
26