UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 8-K/A

(Amendment No. 1)

   

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): May 2, 2018

 

KUSH BOTTLES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 000-55418 46-5268202
(State or other jurisdiction
of incorporation)
(Commission File Number) (IRS Employer
Identification No.)

 

1800 Newport Circle, Santa Ana, CA 92705
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code:   (714) 243-4311

 

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

 

 

 

 

 

 

Item 1.01. Entry into a Material Definitive Agreement.

 

On May 3, 2018, Kush Bottles, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) reporting, among other items, that on May 2, 2018, the Company completed its previously announced acquisition of Summit Innovations, Inc. (“Summit”). Pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Summit, KCH Energy, LLC, a wholly owned subsidiary of the Company (“Merger Sub”) and Mark Driver, in his capacity as Member Representative, Summit merged with and into Merger Sub, with Merger Sub surviving the merger as a wholly-owned subsidiary of the Company. This Amendment No. 1 to Current Report on Form 8-K amends the Original Form 8-K to provide (i) the historical audited financial statements of Summit and (ii) the pro forma condensed combined financial information as required by Items 9.01(a) and 9.01(b) of Current Report on Form 8-K, respectively. Such financial information was excluded from the Original Form 8-K in reliance on the instructions to such Items.

 

Item 9.01. Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired.

 

The audited financial statements of Summit as of February 28, 2018 and for the year ended February 28, 2018 are filed herewith as Exhibit 99.2 and are incorporated herein by reference. The consent of RBSM LLP, the Company’s independent registered public accounting firm, is attached as Exhibit 23.1 to this Amendment No. 1 to Current Report on Form 8-K.

 

(b) Pro Forma Financial Information.

 

The unaudited pro forma combined condensed financial information of the Company and Summit as of February 28, 2018, and for the year ended February 28, 2018 are filed herewith as Exhibit 99.3 and are incorporated herein by reference.

 

(d) Exhibits.

 

Exhibit
Number
  Title  
2.1*†   Agreement and Plan of Merger, dated April 10, 2018, by and among Kush Bottles, Inc., KCH Energy, LLC, Summit Innovations, LLC and Mark Driver (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Kush Bottles, Inc. on April 10, 2018).
2.2†   Amendment to Agreement and Plan of Merger, dated May 2, 2018, by and among Kush Bottles, Inc., KCH Energy, LLC, Summit Innovations, LLC and Mark Driver.
23.1   Consent of Independent Registered Public Accounting Firm
99.1†   Kush Bottles, Inc. Press Release dated May 3, 2018.
99.2   Audited financial statements of Summit Innovations, LLC as of February 28, 2018 and for the year ended February 28, 2018.
99.3   Unaudited pro forma condensed consolidated financial information of Kush Bottles, Inc. and Summit Innovations, LLC as of and for the year ended February 28, 2018.

 

* Schedules (and similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish to the Securities and Exchange Commission a copy of such schedules and exhibits, or any section thereof, upon request.
Previously filed.

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    KUSH BOTTLES, INC.
    (Registrant)
     
June 5, 2018   /s/   Nicholas Kovacevich
(Date)   Nicholas Kovacevich
Chairman and Chief Executive Officer

 

 

 

 

INDEX TO EXHIBITS

 

Exhibit
Number
  Title  
2.1*†   Agreement and Plan of Merger, dated April 10, 2018, by and among Kush Bottles, Inc., KCH Energy, LLC, Summit Innovations, LLC and Mark Driver (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Kush Bottles, Inc. on April 10, 2018).
2.2†   Amendment to Agreement and Plan of Merger, dated May 2, 2018, by and among Kush Bottles, Inc., KCH Energy, LLC, Summit Innovations, LLC and Mark Driver.
23.1   Consent of Independent Registered Public Accounting Firm
99.1†   Kush Bottles, Inc. Press Release dated May 3, 2018.
99.2   Audited financial statements of Summit Innovations, LLC as of February 28, 2018 and for the year ended February 28, 2018.
99.3   Unaudited pro forma condensed consolidated financial information of Kush Bottles, Inc. and Summit Innovations, LLC as of and for the year ended February 28, 2018.

  

* Schedules (and similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish to the Securities and Exchange Commission a copy of such schedules and exhibits, or any section thereof, upon request.
Previously filed.

 

 

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Kush Bottles, Inc.

Santa Ana, CA

 

We consent to the incorporation by reference in Registration Statement No. 333-221910 on Form S-3 and Registration Statement No. 333-209439 on Form S-8 of Kush Bottles, Inc. of our report dated June 1, 2018, with respect to the financial statements of the Summit Innovations, LLC for the fiscal year ending February 28, 2018, appearing in this Current Report on Form 8-K/A dated June 5, 2018 of Kush Bottles, Inc.

 

 

/s/ RBSM LLP

Larkspur, CA

June 5, 2018

 

 

 

 

Exhibit 99.2

 

Summit Innovations LLC

 

Financial Statements

February 28, 2018

 

 

 

 

SUMMIT INNOVATIONS LLC

 

TABLE OF CONTENTS

 

FISCAL YEAR ENDED

FEBRUARY 28, 2018

 

  Page
   
Audit Report of Independent Registered Public Accounting Firm 1
   
Balance Sheet 2
   
Statement of Operations 3
   
Statement of Changes in Members’ Deficit 4
   
Statement of Cash Flows 5
   
Notes to the Consolidated Financial Statements 6-18

 

 

 

 

101 Larkspur Landing

Suite 321

Larkspur, CA 94939

415.448.5061

www.rbsmllp.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Members of

Summit Innovations, LLC

Denver, Colorado

 

Opinion on the Financial Statements

We have audited the accompanying balance sheet of Summit Innovations, LLC (the Company) as of February 28, 2018, and the related statements of operations, members’ equity, and cash flows for the fiscal year ended February 28, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2018, and the results of its operations and its cash flows for the fiscal year ended February 28, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

We have served as the Company’s auditor since 2018.

 

Larkspur, CA

 

June 1, 2018

 

New York | Washington, DC | California | Nevada

China | India | Greece

Member of ANTEA International with offices worldwide

 

 

 

 

SUMMIT INNOVATIONS, LLC

 

BALANCE SHEET

As of February 28, 2018

 

ASSETS        
         
CURRENT ASSETS        
Cash and cash equivalents   $ 225,906  
Trade accounts receivable, net of allowance for doubtful accounts of $19,720     500,653  
Inventories     267,275  
Other     35,303  
Total current assets     1,029,137  
         
Property and equipment, net     654,894  
         
TOTAL ASSETS   $ 1,684,031  
         
LIABILITIES AND MEMBERS' DEFICIT        
         
CURRENT LIABILITIES        
Accounts payable   $ 1,119,513  
Accrued expenses     21,394  
Sales tax payable     200,070  
Customer deposits     70,710  
Current portion of long-term liabilities, related parties     6,980  
Current portion of long-term liabilities     41,395  
Total current liabilities     1,460,062  
         
LONG-TERM LIABILITIES        
Notes payable, related parties     573,110  
Notes payable     171,205  
Total long-term liabilities     744,315  
         
MEMBERS' EQUITY (DEFICIT)        
Members' capital     37,078  
Accumulated deficit     (557,424 )
Members' deficit     (520,346 )
         
    $ 1,684,031  

 

The accompanying notes are an integral part of these financial statements

 

  2  

 

 

SUMMIT INNOVATIONS, LLC

 

STATEMENT OF OPERATIONS

For Period from March 1, 2017 to February 28, 2018

 

Revenue, net of discounts and returns and allowances of $70,814   $ 2,389,679  
         
Cost of Goods Sold        
Product costs     1,709,423  
Cost of labor     54,924  
Delivery and other     199,339  
      1,963,686  
         
Gross profit     425,993  
         
Selling, general and administrative expenses        
Payroll and related costs     404,276  
Depreciation and amortization     76,121  
Other     654,589  
      1,134,986  
         
Net loss before other expenses and income taxes     (708,993 )
         
Other expenses, interest     (24,632 )
         
Net loss before income taxes     (733,625 )
         
Income taxes     -  
         
Net loss   $ (733,625 )

 

The accompanying notes are an integral part of these financial statements

 

  3  

 

 

SUMMIT INNOVATIONS, LLC

 

Statement of Changes in Members' Equity (Deficit)

For Period from March 1, 2017 to February 28, 2018

 

    Number of
Units
    Membership
Capital
    Accumulated
Deficit
    Total  
Beginning Balance, February 28, 2017     -     $ -     $ -     $ -  
                                 
Issuance of membership units     4,798,641       7,663       -       7,663  
Sale of membership units     820,000       17,600       -       17,600  
Membership units issued for services     4,630,893       317,645       -       317,645  
Member distributions     -       (129,629 )     -       (129,629 )
Net loss     -       -       (733,625 )     (733,625 )
Reclassification of net loss for the period from inception to December 31, 2017     -       (176,201 )     176,201       -  
Ending Balance, February 28, 2018     10,249,534     $ 37,078     $ (557,424 )   $ (520,346 )

 

The accompanying notes are an integral part of these financial statements

 

  4  

 

 

SUMMIT INNOVATIONS, LLC

 

STATEMENT OF CASH FLOWS

For Period from March 1, 2017 to February 28, 2018

 

CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss   $ (733,625 )
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation     76,121  
Equity based compensation     317,645  
Change in assets and liabilities:        
Accounts receivable     (500,653 )
Inventories     (267,275 )
Other     (35,303 )
Accounts payable     1,119,513  
Accrued expenses     21,394  
Sales tax payable     200,070  
Customer deposits     70,710  
Net cash used in operating activities     268,597  
         
CASH FLOWS USED IN INVESTING ACTIVITIES,        
Purchase of property and equipment     (731,015 )
Net cash used in investing activities     (731,015 )
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from long term liabilities     817,639  
Payments on long term liabilities     (24,949 )
Issuance of membership units, net     25,263  
Distributions paid to members     (129,629 )
Net cash provided by financing activities     688,324  
         
Net increase in cash     225,906  
         
Cash and cash equivalents, beginning     -  
Cash and cash equivalents, ending   $ 225,906  
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION        
Cash payments for taxes   $ -  
Cash payments for interest   $ 20,231  

 

The accompanying notes are an integral part of these financial statements

 

  5  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies

 

Nature of operations:

 

Summit Innovations, LLC (The Company), was organized in the state of Colorado on October 11, 2016, and began operations in March 2017. The Company was formed by its Members as a limited liability company. The Company specializes in the distribution of hydrocarbon products, such as propane, butane, and all related products to the legal cannabis industry. Hydrocarbon gases are used to turn cannabis plants into oils. The Company operates primarily in Colorado, and also has operation in several states throughout the United States.

 

Basis of Presentation

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.

 

Cash and cash equivalents:

 

The Company considers all short-term highly liquid investments (with original maturities of three months or less) at date of acquisition as cash equivalents, including money market funds. Cash equivalents are reported at fair value. As of February 28, 2018, the Company did not have any cash equivalents.

 

Trade accounts receivable and allowance for doubtful accounts:

 

Trade accounts receivable are customer obligations due under normal trade terms and are reported at their net realizable value. Trade credit is generally extended on a short-term basis; thus, trade receivables do not bear interest. The Company reviews accounts receivable for uncollectible accounts and provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. The Company considers trade accounts receivable past due for more than 90 days to be delinquent. The Company writes off delinquent receivables against our allowance for doubtful accounts based on individual credit evaluations, the results of collection efforts, and specific circumstances of customers.

 

The Company records recoveries of accounts previously written off as an increase in allowance for doubtful accounts when received. To the extent data the Company uses to calculate these estimates does not accurately reflect bad debts; adjustments to these reserves may be required. The total allowance for doubtful accounts at February 28, 2018 was $19,720.

 

  6  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Financial instruments:

 

The carrying values of cash and cash equivalents, trade receivables, accounts payable, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The Company has determined that it is not practical to estimate the fair value of our notes payable and because of their unique nature and the costs that would be incurred to obtain an independent valuation. The Company does not have comparable outstanding debt on which to base an estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the notes payable and have not yet obtained or developed a valuation model.

 

Inventories:

 

Inventories consist of gases (e.g., butane), liquids, and related products of different chemical makeups. The inventories are stated at the lower of cost or or net realizable value (determined on an average cost basis). The Company’s inventory consists of finished goods of $267,275 as of February 28, 2018.

 

Property and equipment:

 

Property and equipment are carried at cost less accumulated depreciation. Gains and losses from the retirement or disposition of property and equipment are included in operations in the period incurred. Maintenance and repairs are expensed as incurred. Depreciation is computed using straight line methods over the estimated useful lives of the assets as follows:

 

  Years
Cylinders 2.5
Equipment 5
Vehicles 5

 

The Company reviews the carrying values of its property and equipment for possible impairment when events or changes in circumstance indicate that the related carrying amount may not be recoverable. Property and equipment to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

 

Reportable Segment:

 

The Company has one reportable segment. The Company’s activities are interrelated, and each activity is dependent upon and supportive of the others. Accordingly, all significant operating decisions are based on the analysis of financial results provided by one single business.

 

  7  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Revenue Recognition:

 

The Company recognizes revenues from the sale of its products, primarily chemical gases or chemical liquids. It is the Company’s policy that revenues from product sales is recognized in accordance with ASC 605 "Revenue Recognition". Four basic criteria must be met before revenue can be recognized; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding fixed nature in selling prices of the products delivered and the collectability of those amounts. Provisions for discounts to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company recognizes revenues as risk and title to products transfers to the customer (which generally occurs at the time delivery is made or product is accepted by the customre), the sales price is fixed or determinable, and collectability is reasonably assured. Sales tax amounts collected from customers are recorded on a net basis.

 

Shipping and Handling Fees and costs:

 

The Company records shipping and handling fees billed to customers as revenue, and shipping and handling costs incurred by the Company in cost of goods sold.

 

Income taxes:

 

The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

 

The Company applies the provisions of ASC 740, "Accounting for Uncertainty in Income Taxes". The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any material uncertain tax positions on returns that have been filed or that will be filed. The Company did not recognize any interest or penalties for unrecognized tax benefits during the fiscal year ended February 28, 2018, nor were any interest or penalties accrued as of February 28, 2017.

 

  8  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Income taxes (continued):

 

The Company is a limited liability company and has elected to be taxed as a partnership for Federal and State income tax purposes, from date of inception to December 31, 2017. Therefore, it has no federal or state income tax liability as of December 31, 2017 and does not record a provision for income taxes in the United States during the period from inception till December 31, 2017, because each member reports that member’s share of the Company’s income or loss on that individual member’s income tax return, if the member is required to file one. The State of California imposes an annual franchise tax of $800, and an annual fee based on the amount of revenues, which has been reflected in these financial statements within general and administrative expenses. There was no deferred tax assets or liabilities at February 28, 2017.

 

As of January 1, 2018, the Company elected to be treated as a regular Corporation for tax purposes. The necessary documentation has been filed to effect such a transition with the Internal Revenue Service. Accordingly, income taxes are provided for the tax effects of transactions in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of certain assets and liabilities for financial and tax reporting.

 

All federal and state income tax return of the Company for 2016 and 2017 are subject to examination by the IRS, generally for three years after they were filed.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation awards in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718 ("ASC"), Compensation-Stock Compensation ("ASC 718"). ASC 718 requires all equity-based payments to employees, including grants of profits interest, to be recognized in the statements of operations based on their fair values. The Company’s determination of fair value of membership unit-based payment awards on the date of grant is affected by a number of highly complex and subjective variables. These variables include but are not limited to the Company’s expected future cash flows. Because changes in the subjective assumptions can materially affect the estimated value.

 

Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASC 505, Equity Based Payments to Non-Employees, or ASC 505. ASC 505 defines the measurement date and recognition period for such instruments. In general, the measurement date is when either (a) a performance commitment, as defined, is reached or (b) the earlier of the non-employee performance is complete. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in ASC 505.

 

  9  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Use of estimates:

 

The preparation of financial statements in conformity with generally accepted accounting principles requires members to make estimates and assumptions that affect the reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

Advertising expense:

 

The Company expenses advertising costs in the period they are incurred. Total advertising expense for the period from the date of inception to February 28, 2018 was $16,000.

 

Financial Instruments

 

The carrying amounts of "Cash and cash equivalents," "Accounts receivable," "Accounts payable," and "Accrued expenses" approximate fair value due to the short-term nature of these accounts.

 

Fair Value of Financial Instruments

 

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, are used to measure fair value:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company applies the guidance applicable to fair value measurements. This accounting guidance clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. During the fiscal year ended February 28, 2018, there were no transfers between Level 1, Level 2 and Level 3.

 

  10  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Fair Value Option for Financial Assets and Financial Liabilities

 

Authoritative guidance allows companies to choose to measure many financial instruments and certain other items at fair value. The Company has not elected to apply the fair value option to any of its financial assets or liabilities.

 

Other Risks, Uncertainties, and Concentrations

 

The Company’s clients participate in an industry that is characterized by intense competitive pressure, government regulations and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions, entry into the Company’s business space by new competitors, the ability to provide sufficient quantities of a given products or service(s) in a timely manner. Based on the factors noted herein, and the Company may experience substantial period-to-period fluctuations in future operating results.

 

Legal Proceedings

 

From time to time, the Company may be involved in disputes, litigation and other legal actions. The Company will record a charge equal to at least the minimum estimated liability for a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The actual liability in any such matters may be materially different from the Company’s estimates, which could result in the need to adjust the liability and record additional expenses. The Company is not aware of any material pending or threatened litigation that is reasonably likely to have a material adverse effect on the results of operations, financial position or liquidity.

 

Comprehensive Income

 

Comprehensive income includes net income, as well as other changes in members’ equity that result from transactions and economic events other than those with members. Comprehensive income/loss consists of two components, net loss and other comprehensive income/loss. Other comprehensive income/loss refers to revenue, expenses, gains and losses that under U.S. generally accepted accounting principles are recorded as an element of members’ equity but are excluded from net loss. The Company’s has no elements of other comprehensive income/loss for the fiscal year ended February 28, 2018.

 

  11  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 1: Nature of Business and Significant Accounting Policies (continued)

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The ASC is effective for fiscal years beginning after December 15, 2018, including interim reporting periods therein. The Company is currently evaluating the impact of the adoption of ASU 2016-12 on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either operating or financing, with such classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements and associated disclosures.

 

In August 2016, FASB issued accounting standards update ASU-2016-15, “Statement of Cash Flows” (Topic 230) – Classification of Certain Cash Receipts and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU are effective for public and nonpublic entities for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on the Company’s financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.

 

  12  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 2: Concentrations of Credit Risk

 

The Company maintains cash balances at several financial institutions located in Colorado. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to the maximum limit of $250,000. At various times during the periods since inception to February 28, 2018, the Company had balances over the maximum limits at certain financial institutions.

 

For the period from fiscal year ended February 28, 2018, the Company had three major vendor/ supplier. These vendors were approximately 77% of the total product costs for the same period. The total balance owed to this vendor at February 28, 2018 was $984,152.

 

Note 3: Property and Equipment

 

As of February 28, 2018, the major classes of property and equipment consist of:

 

Cylinder   $ 483,763  
Equipment     14,953  
Vehicles     232,299  
Accumulated Depreciation     (76,121 )
    $ 654,894  

 

Depreciation expense was $76,121, for the year ended February 28, 2018.

 

Note 4: Accrued Expenses

 

Accrued expenses consist of the following:

 

Payroll   $ 7,500  
Payroll taxes     10,100  
Other     3,794  
    $ 21,394  

 

  13  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 5: Long-term Notes Payable- Related Party

 

On August 29, 2017, the Company sold in a private placement to qualified buyer and accredited investor a note unit. The Note Unit consisted of $250,000 principal amount of 12% secured Notes (August Note) due September 1, 2019, and an 8% membership interest. Total funds received of $250,000 were allocated $17,600 to the membership interest and $232,400 to the Note. The August Note requires monthly payments of interest only at 12% per year starting October 1, 2017. The note is secured by all inventory of the Company and is personally guaranteed by the majority member of the Company. The outstanding principle balance of the note is $250,000 at February 28, 2018. Accrued interest on this note was $-0- at February 28, 2018. The fair value of the membership interest of $17,600 at the time of issuance, which was determined based on valuation report prepared by a third-party valuation firm. The amount attributable to the membership interest was recorded as members’ capital and reduced the carrying value of the Notes. The discount on the Notes is being amortized to interest expense over the term of the Notes. At February 28, 2018, the unamortized discount on the Notes is approximately $13,933.

 

On December 4, 2107, the Company issued $345,000 secured note payable to a member, due on December 4, 2019. The interest rate is based on prime rate per the Wall Street Journal less 1.26%. The note requires monthly payments for principle and interest of $1,453 for the months from January 2018 to December 2018. The monthly payments increase to $1,498 for the months from January 2019 to December 2019. The note payable requires a final balloon payment which is due December 4, 2019. The payments include interest at the Wall Street Journal prime rate minus 1.26%. The note is secured by all personal property of the Company including inventory and related inventory equipment. The note is personally guaranteed by the majority member of the Company. The outstanding balance of the note is $343,289 at February 28, 2018. Accrued interest on the note was $-0- at February 28, 2018.

 

Maturities of related party long-term liabilities are as follows:

 

Years Ending February 28:        
2019   $ 6,980  
2020     586,309  
      593,289  
Less note discount     13,199  
    $ 580,090  

 

  14  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 6: Long- term Notes Payable

 

From December 1, 2017 to January 4, 2018, the Company entered into six notes payable for the purchase of vehicles. The loans are secured by the vehicles and bear interest at a rate of 3.89% per annum. The notes and accrued and unpaid interest are payable in monthly installments ranging from $655 to $709. The principal balance of these loans at February 28, 2018, was $212,600. Accrued interest on these notes was $-0- at February 28, 2018.

 

Maturities of long-term liabilities are as follows:

 

Years Ending February 28:        
2019   $ 41,395  
2020     43,034  
2021     44,739  
2022     46,510  
2023     36,921  
    $ 212,600  

 

Note 7: Members’ Equity

 

Membership Interest:

 

The term of the Company’s Operating Agreement (as amended) commenced in 2016 and shall continue in perpetuity until the Company is dissolved in accordance with the provisions of either the Operating Agreement or Colorado State law. The Company expresses its equity in terms of Units. Members’ equity was comprised of 10,249,534 Units at February 28, 2018. Until December 31, 2017, the profits and losses of the Company and all items of Company’s income, gain, loss, deduction, or credit are allocated to all Members in proportion to their respective Units, except in case of a loss. A net loss is allocated to the equity membership unit holders. Each holder of Units shall be entitled to one vote for each Unit held by such holder.

 

Effective January 1, 2018 the Company elected to be taxed as regular C-corporation, however, retaining its legal form as a limited liability company. The company is authorized to issue membership interest units.

 

In the fiscal year ended February 28, 2018 the Company issued an aggregate of 820,000 units. The estimated fair value of the 8% membership interest is $17,600.

 

On February 28, 2018, the Company issued approximately a 2% membership interest or 205,000 membership units to a consulting firm in exchange for professional services. The estimated fair value of the membership interest granted is recognized as a component of general and administrative expenses amounted to $217,194. The membership interest granted is fully vested on date of grant.

 

  15  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 7: Members’ Equity (continued)

 

Membership Interest (continued):

 

Profits Interest:

 

During 2017 the Company entered into various Profits Interest Agreements with certain employees resulting in the Company granting a profits interest. These Agreements provide the employee will receive distributions of certain percentages of net profits earned by the Company.

 

On August 28, 2017, the Company issued Profits Interest to two individuals equivalent to 30.0% of the Company’s membership units or 3,807,470 units at February 28, 2018. On September 15, 2017, the Company issued profits interest to three individuals equivalent to 6.38% of the Company’s membership units or 618,424 units at February 28, 2018. The profits interests granted were immediately vested. The fair value of these Profit Interests granted is recognized as general and administrative expense in the statement of operations and amounted to $100,451.

 

The Company engaged the services of a valuation firm to assist management to estimate the fair value of all membership interest grants. The estimate was determined using the market and income approach. The income approach utilizes a discounted future cash flow model. The weighted average assumptions from multiple valuation methods were used in determining the fair value of the Profit Interests.

 

Note 8: Income Taxes

 

From the Company’s inception in October 2016 to December 31, 2017, the Company was not subject to federal and state income taxes since it was taxed as a partnership. Effective January 1, 2018, the Company converted from being taxed as a partnership to a C corporation and, as a result, became subject to corporate federal and state income taxes. The Company’s accumulated deficit of $176,201 at that date was reclassified to membership capital.

 

For the period from January 1, 2018 to February 28, 2018, the Company incurred net operating losses and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At February 28, 2018, the Company had approximately $431,000 of federal and $431,000 of state net operating losses. The net operating loss carryforwards, if not utilized, will begin to expire in 2038 for federal purposes and in 2033 for state purposes. The major components of the Company’s deferred tax assets consist of federal and state net loss carryforwards (ability to offset against future taxable income) and reserves for bad debts.

 

  16  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 8: Income Taxes (continued)

 

For financial reporting purposes, the Company has incurred a loss in each period since its inception. Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance of $111,146 against its net deferred tax assets at February 2018.

 

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by President Trump. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Since the Company elected to be taxed as a C-corporation effective January 1, 2018, there was no impact the Tax Act on the financial statements.

 

Note 9: Commitments and Contingencies

 

The Company has several short-term operating leases in several states. The leases expire at various dates during 2018. The total rent expense for the period from inception to February 28, 2018 was $52,397.

 

From time to time the Company rents various pieces of equipment under short- term rated agreements.

 

Note 10: Liquidity

 

During the fiscal year ended February 28, 2018, the Company has incurred a net loss. The Company has the ability to obtain additional capital through the issuance of debt or equity to meet its working capital needs from its members. The Company obtained additional debt financing subsequent to fiscal year end. The Company has made expenditures in its infrastructure and had substantially increased the customer support, sales and marketing staff. Management believes the Company has sufficient working capital resources to continue as a going concern through June 30, 2019. The Company has entered into a merger agreement with Kush Bottles, Inc., a public company, (see Note 11).

 

  17  

 

 

SUMMIT INNOVATIONS, LLC

 

NOTES TO FINANCIAL STATEMENTS

 

 

Note 11: Subsequent Events

 

In accordance with ASC 855, “Subsequent Events”, the Company’s management has evaluated all subsequent events through May 31, 2018, the date the financial statements were available to be issued.

 

Subsequent to February 28, 2018 the Company did secure additional notes payable of $200,000 to fund working capital needs.

 

In April 2018, The Company entered into a merger agreement to be acquired by Kush Bottles, Inc., a provider of packaging, supplies, vaporizers, accessories and branding solutions for the regulated cannabis industry. The transaction is expected to close subject to confirmatory due diligence and certain closing conditions, including (among others) approval of the transaction by the equity holders of the Company. Under the terms of the merger agreement, the Company will merge into a wholly-owned subsidiary of Kush Bottles in exchange for 1,280,000 shares of Kush Bottles common stock and $3.2 million in cash, a portion of which will be held back to satisfy certain post-closing obligations. Kush Bottles will also issue up to an additional 1,280,000 shares of Kush Bottles common stock if the Company’s business achieves certain earn-out milestones of up to $12.0 million in eligible revenues during the twelve-month period following closing.

 

  18  

 

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under accounting principles generally accepted in the United States (“GAAP”), and gives effect to an agreement between Kush Bottles, Inc. (“Kush”) and Summit Innovations, LLC (“Summit”). The Agreement and Plan of Merger (the “Merger Agreement”), will be accounted for as an acquisition, with Kush being deemed the acquiring company for accounting purposes.

 

Kush was determined to be the accounting acquirer based upon the terms of the Merger Agreement and other factors including: (i) Kush stockholders are expected to own approximately 96% of the voting interests of the combined company immediately following the closing of the transaction and (ii) directors appointed by Kush will hold a majority of board seats in the combined company.

 

The following unaudited pro forma condensed combined financial statements are based on our historical financial statements and Kush’s historical financial statements as adjusted to give effect to Kush’s acquisition of Summit. The unaudited pro forma condensed combined statement of operations for the year ended August 31, 2017 gives effect to these transactions as if they had occurred on September 1, 2016. The unaudited pro forma condensed combined statement of operations for the six months ended February 28, 2018 gives effect to these transactions as if they had occurred on September 1, 2017. The unaudited pro forma condensed combined balance sheet as of February 28, 2018 gives effect to these transactions as if they had occurred on February 28, 2018. Summit was organized in the state of Colorado on October 11, 2016, and began operations on March 1, 2017.

 

Summit’s assets and liabilities will be measured and recognized at their fair values as of the transaction date, and combined with the assets, liabilities and results of operations of Kush after the consummation of the transaction.

 

The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. The application of the acquisition method of accounting is dependent upon certain valuations and other studies that have yet to be completed. Accordingly, the pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed, and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final acquisition accounting, expected to be completed after the closing of the transaction, will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined company’s future results of operations and financial position.

 

The unaudited pro forma condensed combined financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the two companies. The unaudited pro forma condensed combined financial information is preliminary and has been prepared for illustrative purposes only and is not necessarily indicative of the financial position or results of operations in future periods or the results that actually would have been realized had Kush and Summit been a combined company during the specified periods. The actual results reported in periods following the transaction may differ significantly from those reflected in this pro forma financial information presented herein for a number of reasons, including, but not limited to, differences between the assumptions used to prepare this pro forma financial information.

 

The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.

 

The unaudited pro forma condensed combined financial statements should be read together with Kush’s historical financial statements, which are included in Kush’s latest annual report on Form 10-K and interim report on Form 10-Q and Summit’s historical information included herein.

  

 

 

 

Pro Forma Condensed Combined Balance Sheet as of February 28, 2018

 

    (1)     (2)     Pro Forma         Pro Forma  
    Kush     Summit     Adjustments     Note 3   Combined  
                             
ASSETS                                    
Current assets                                    
Cash and cash equivalents   $ 7,059,922     $ 225,906     $ -         $ 7,285,828  
Accouts receivable     3,896,196       500,653       -           4,396,849  
Prepaid expense and other current assets     4,204,253       35,303       -           4,239,556  
Inventory     7,259,369       267,275       -           7,526,644  
Total current assets     22,419,740       1,029,137       -           23,448,877  
                                     
Property and equipment, net     1,077,160       654,894       -           1,732,054  
Goodwill     34,247,344       -       18,030,746     (b)     52,278,090  
Intangibles     3,363,536       -       -           3,363,536  
Deposits     191,423       -       -           191,423  
Deferred tax asset     30,081       -       -           30,081  
Total assets   $ 61,329,284     $ 1,684,031     $ 18,030,746         $ 81,044,061  
                                     
LIABILITIES AND STOCKHOLDERS' EQUITY                                    
Current liabilities                                    
Accounts payable   $ 3,161,169     $ 1,119,513     $ 250,000     (c)   $ 4,530,682  
Accrued expenses     1,184,240       292,174       -           1,476,414  
Contingent cash consideration     1,650,000       -       -           1,650,000  
Notes payable - current portion     354,613       48,375       -           402,988  
Line of credit - current portion     742,504       -       -           742,504  
Total current liabilities     7,092,526       1,460,062       250,000           8,802,588  
Deferred tax liability     1,151,536       -       -           1,151,536  
Notes payable     27,447       744,315       -           771,762  
Total liabilities     8,271,509       2,204,377       250,000           10,725,886  
                                     
Commitments and contingencies                                    
                                     
Stockholders' deficit                                    
Preferred stock, $.001 par value     -       -       -           -  
Common stock, $.001 par value     63,624       -       2,560     (a)     66,184  
Additional paid-in-capital     54,397,094       37,078       (2,560 )   (a)     71,904,934  
                      17,510,400     (b)        
                      (37,078 )   (b)        
Stock subscription     30,000       -       -     (b)     30,000  
Accumulated deficit     (1,432,943 )     (557,424 )     557,424     (b)     (1,682,943 )
                      (250,000 )   (c)        
Total stockholders' equity     53,057,775       (520,346 )     17,780,746           70,318,175  
Total liabilities and stockholders' equity   $ 61,329,284     $ 1,684,031     $ 18,030,746         $ 81,044,061  

 

Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet:

(1) Derived from the unaudited balance sheet of Kush as of February 28, 2018

(2) Derived from the audited balance sheet of Summit as of February 28, 2018

 

 

 

 

Pro Forma Condensed Combined Statement of Operations - Year Ended August 31, 2017

 

    (1)     (2)     Pro Forma       Pro Forma  
    Kush     Summit     Adjustments    Note 3   Combined  
Revenue:   $ 18,799,169     $ 218,369     $ -       $ 19,017,538  
Cost of goods sold     12,596,544       178,945                 12,775,489  
Gross profit     6,202,625       39,424       -         6,242,049  
                                   
Operating expenses:                                  
General and administrative     5,822,266       206,191       -         6,028,457  
      5,822,266       206,191       -         6,028,457  
Operating income (loss)     380,359       (166,767 )     -         213,592  
                                   
Other income (expense):                                  
Other expenses     (85,166 )     (167 )     -         (85,333 )
Interest expense     (6,647 )     -       -         (6,647 )
Income (loss) before income taxes     288,546       (166,934 )     -         121,612  
Income tax expense     219,082       -       -         219,082  
Net income (loss)   $ 69,464     $ (166,934 )   $ -       $ (97,470 )
                                   
Net income (loss) per common share:                                  
Basic   $ 0.00                       $ (0.00 )
Diluted   $ 0.00                       $ (0.00 )
Weighted average common shares outstanding:                                  
Basic     52,430,070               2,560,000   (d)     54,990,070  
Diluted     58,429,683               2,560,000   (d)     60,989,683  

 

Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations:

(1) Derived from the audited statement of operations of Kush for the year ended August 31, 2017

(2) Derived from the unaudited statement of operations of Summit for the period from March 1, 2017 (Inception) to August 31, 2017

 

 

 

 

Pro Forma Condensed Combined Statement of Operations – Six Months Ended February 28, 2018

 

    (1)     (2)     Pro Forma       Pro Forma  
    Kush     Summit     Adjustments    Note 3   Combined  
                           
Revenue:   $ 19,208,491     $ 2,171,310     $ -       $ 21,379,801  
Cost of goods sold     13,612,854       1,784,742                 15,397,596  
Gross profit     5,595,637       386,569       -         5,982,206  
                                   
Operating expenses:                                  
General and administrative     6,324,164       928,795       -         7,252,959  
      6,324,164       928,795       -         7,252,959  
Operating loss     (728,527 )     (542,226 )     -         (1,270,753 )
                                   
Other income (expense):                                  
Other expenses     -       (24,465 )     -         (24,465 )
Interest expense     (30,994 )     -       -         (30,994 )
Loss before income taxes     (759,521 )     (566,691 )     -         (1,326,212 )
Income tax expense     66,178       -       -         66,178  
Net loss   $ (825,699 )   $ (566,691 )   $ -       $ (1,392,390 )
                                   
Net loss per common share:                                  
Basic and diluted   $ (0.01 )                     $ (0.02 )
Weighted average common shares outstanding:                                  
Basic and diluted     60,614,074               2,560,000   (d)     63,174,074  

 

Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations:

(1) Derived from the unaudited statement of operations of Kush for the six months ended February 28, 2018

(2) Derived from the unaudited statement of operations of Summit for the six months ended February 28, 2018

 

 

 

 

Notes to the Unaudited Pro Forma Condensed Combined Financial Information

 

Note 1 — Description of Transaction and Basis of Presentation

 

The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X, and present the pro forma financial position and results of operations of the combined companies based upon the historical data of Kush and Summit.

 

For the purposes of the unaudited pro forma combined financial information, the accounting policies of Kush and Summit are aligned with no differences. Accordingly, no effect has been provided for the pro forma adjustments described in Note 3, “Pro Forma Adjustments.”

 

Description of Transaction

 

On May 2, 2018, Kush completed its acquisition of Summit. Pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”).

 

The consideration paid to the members of Summit (the “Members”) at the closing included an aggregate of $3.2 million in cash (the “Cash Consideration”), as adjusted to reflect estimated working capital, indebtedness and transaction expenses as of the closing date, and an aggregate of 1,280,000 shares (the “Share Consideration”) of the Kush’s common stock (the “Common Stock”). $500,000 of the Cash Consideration and approximately 640,000 shares of Common Stock from the Share Consideration were held back by the Company for a period of 15 months (the “Holdback Period”) for potential post-closing working capital and/or indemnification claims relating to, among other things, breaches of representations, warranties and covenants contained in the Merger Agreement. The Members may become entitled to receive earn-out consideration of up to an additional 1,280,000 shares of Common Stock, in the aggregate, based on the performance of the Summit business during a one-year period following the closing.

 

Basis of Presentation

 

Kush has preliminarily concluded that the transaction represents a business combination pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations . Kush has not yet completed an external valuation analysis of the fair market value of Summit’s assets to be acquired and liabilities to be assumed. Using the estimated total consideration for the transaction, Kush has estimated the allocations to such assets and liabilities. This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet. The final purchase price allocation will be determined when Kush has determined the final consideration and completed the detailed valuations and other studies and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used to prepare the pro forma adjustments. The final purchase price allocation may include (i) changes in allocations to intangible assets or goodwill based on the results of certain valuations and other studies that have yet to be completed, (ii) other changes to assets and liabilities and (iii) changes to the ultimate purchase consideration due to working capital adjustments.

 

 

 

 

Note 2 — Preliminary purchase price allocation

 

Kush has performed a preliminary valuation analysis of the fair market value of Summit’s assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:

 

       
Cash and cash equivalents   $ 225,906  
Accounts receivable     500,653  
Prepaid expense and other current assets     35,303  
Inventory     267,275  
Property and equipment, net     654,894  
Goodwill     18,030,746  (w)
Accounts payable     (1,119,513 )
Accrued expenses     (292,174 )
Notes payable     (792,690 )
Total consideration   $ 17,510,400  

 

(w) To reflect preliminary goodwill recognized as a result of the transaction.

 

Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities of Summit based on their estimated fair values as of the transaction closing date. The excess of the acquisition consideration paid over the estimated fair values of net assets acquired will be recorded as goodwill in the condensed combined balance sheet.

 

Note 3 — Pro forma adjustments

 

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:

 

(a) Represents the issuance of 2,560,000 shares (1,280,000 of which is contingently payable) of Kush’s common stock and its effect on the common stock and additional paid in capital accounts. The 1,280,000 shares of Kush’s common stock which represents contingent consideration was treated as issued because it was considered highly probable.

 

(b) Represents the elimination of the historical equity of Summit and the initial allocation of excess purchase price to identified intangibles, fair value adjustments and goodwill, as follows:

 

Total consideration   $ 17,510,400  (y)
Additional paid-in-capital     (37,078 )
Accumulated deficit     557,424  
Goodwill - related to the Merger   $ 18,030,746  

 

(y) Consideration of $17.5 million represents the market value ($5.59 per share as of May 2, 2018) on 2.56 million common shares of Kush and approximately 3.2 million in cash.

 

(c) Reflects an adjustment of approximately $250,000 for the estimated transaction costs for both Kush and Summit, such as adviser fees and legal and accounting expenses that were not incurred as of February 28, 2018.

 

(d) Represents the increase in the weighted average shares due to the issuance of 2,560,000 common shares in connection with the Merger.