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 1, 2017
Kush Bottles, Inc.
(State or other jurisdiction of incorporation)
Nevada |
000-55418 |
46-5268202 |
(State or other jurisdiction |
(Commission file Number) |
(IRS Employer |
of incorporation) |
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Identification No.) |
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1800 Newport Circle, Santa Ana, CA |
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92705 |
(Address of principal executive offices) |
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(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:
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q |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
q |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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q |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
q |
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
1
Explanatory Note
On May 4, 2017, Kush Bottles, Inc. (the Company) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the Original Form 8-K) in connection with the completion on May 1, 2017 of the indirect acquisition of all outstanding equity interests of CMP Wellness, LLC, a California limited liability company.
This Current Report on Form 8-K/A amends Item 9.01 of the Original Form 8-K in order to provide the financial information required by Item 9.01(a) and 9.01(b), which the Company indicated in the Original Form 8-K would be filed not later than 71 calendar days after the date on which the Original Form 8-K was required to be filed.
Item 8.01 Other Events.
On July 6, 2017, the Company issued a press release announcing the disclosure of certain audited financial results for CMP Wellness, LLC. A copy of the press release is attached hereto as Exhibit 99.2.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements of CMP Wellness, LLC for the fiscal years ended August 31, 2016 and 2015 are being filed as Exhibit 99.3 to this Form 8-K/A.
The unaudited financial statements of CMP Wellness, LLC for the six months ended February 28, 2017 are being filed as Exhibit 99.4 to this Form 8-K/A.
(b) Pro Forma Financial Information.
The unaudited pro forma combined condensed financial statements of the Company, including the Companys unaudited pro forma combined condensed balance sheet as of February 28, 2017 and statements of operations for the years ended August 31, 2015 and August 31, 2016 and the six month period ended February 28, 2017, giving effect to the acquisition of CMP Wellness, LLC, are being filed as Exhibit 99.5 to this Form 8-K/A.
(d) Exhibits.
The following exhibits are attached with this Current Report on Form 8-K/A:
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2.1 |
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Merger Agreement, dated as of May 1, 2017, by and among Kush Bottles, Inc., KBCMP, Inc., Lancer West Enterprises, Inc, Walnut Ventures, Jason Manasse, and Theodore Nicols. (Incorporated by reference to the Companys Current Report on Form 8-K filed on May 4, 2017.)* |
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Consent of Independent Auditors |
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99.1 |
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Kush Bottles, Inc. Press Release dated May 4, 2017 (Incorporated by reference to the Companys Current Report on Form 8-K filed on May 4, 2017.) |
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Kush Bottles, Inc. Press Release dated July 6, 2017 |
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Audited financial statements of CMP Wellness, LLC for the fiscal years ended August 31, 2016 and 2015 |
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Unaudited financial statements of CMP Wellness, LLC for the three and six months ended February 28, 2017 and February 29, 2016 |
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Unaudited pro forma combined condensed financial statements of the Company, including the Companys unaudited pro forma combined condensed balance sheet as of February 28, 2017 and statements of operations for the years ended August 31, 2015 and August 31, 2016 and the six month period ended February 28, 2017 |
* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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KUSH BOTTLES, INC. |
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Date: July 6, 2017 |
By: /s/ Nicholas Kovacevich |
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Nicholas Kovacevich |
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Chief Executive Officer |
3
EXHIBIT INDEX
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Number |
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Description |
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2.1 |
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Merger Agreement, dated as of May 1, 2017, by and among Kush Bottles, Inc., KBCMP, Inc., Lancer West Enterprises, Inc, Walnut Ventures, Jason Manasse, and Theodore Nicols. (Incorporated by reference to the Companys Current Report on Form 8-K filed on May 4, 2017.)* |
23.1 |
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Consent of Independent Auditors |
99.1 |
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Kush Bottles, Inc. Press Release dated May 4, 2017 (Incorporated by reference to the Companys Current Report on Form 8-K filed on May 4, 2017.) |
99.2 |
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Audited financial statements of CMP Wellness, LLC for the fiscal years ended August 31, 2016 and 2015 |
99.3 |
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Unaudited financial statements of CMP Wellness, LLC for the three and six months ended February 28, 2017 and February 29, 2016 |
99.4 |
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Unaudited pro forma combined condensed financial statements of the Company, including the Companys unaudited pro forma combined condensed balance sheet as of February 28, 2017 and statements of operations for the years ended August 31, 2015 and August 31, 2016 and the six month period ended February 28, 2017 |
* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.
4
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. 333-209439 on Form S-8 of Kush Bottles, Inc. of our report dated July 5, 2017, with respect to the financial statements of the CMP Wellness, LLC for the fiscal years ending August 31, 2016 and 2015, appearing in this Current Report on Form 8-K/A dated July 6, 2017 of Kush Bottles, Inc.
/s/ RBSM LLP
Larkspur, CA
July 6, 2017
101 Larkspur Landing Circle, Suite 321, Larkspur, CA 94939
New York, NY Washington DC San Francisco, CA Las Vegas, NV Kansas City, KS Athens, GRE Beijing, CHN, Mumbai and Pune, IND
Member of ANTEA International with member offices worldwide
Kush Bottles Discloses Audited Financial Results for CMP Wellness
Prior to the May 1 st acquisition by Kush Bottles, CMP Wellness generated revenues of $4.5 million for the six month period ended February 28, 2017
Santa Ana, California July 6, 2017 Kush Bottles, Inc. (OTCQB: KSHB), a dynamic sales platform that provides unique products and services for both businesses and consumers in the cannabis industry, reported historical financial results for its wholly-owned subsidiary CMP Wellness (CMP), a distributor of vaporizers, cartridges and accessories acquired by Kush Bottles on May 1, 2017, in an 8-K filed with the Securities and Exchange Commission today, July 6, 2017. The results include unaudited financial results for the interim periods ended February 28, 2017 and February 29, 2016, as well as audited results for the full fiscal years ended August 31, 2016 and August 31, 2015. Also included in the report are pro forma financials that show the combined performance of Kush Bottles and CMP Wellness as if the business combination had already occurred in these aforementioned reporting periods.
CMP Wellness has been in the business of selling standard and customized vaporizer products since 2013. On May 1, 2017, Kush Bottles acquired CMP with the aim of diversifying its product range, opening new distribution channels and yielding cross-selling opportunities for its existing product lines. The financial results furnished today reflect CMPs performance prior to its acquisition by Kush Bottles. The pro-forma financial statements that are included in the filing are based on the separate historical financial statements of Kush and CMP, and have been combined and condensed to show the potential financial impact had the acquisition taken place in previous reporting periods. These financial statements are purely for informational purposes, having no impact on Kush Bottles actual financial results for the reporting periods referenced.
CMP Financial Highlights for the six month period ended February 28, 2017
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CMP revenue was $4.5 million, compared with $1.2 million in the same period in 2016
o
Pro forma combined condensed revenues for Kush Bottles and CMP was $9.9 million
·
CMP net income was $0.7 million, compared with $0.3 million in the same period in 2016
o
Pro forma combined condensed net income for Kush Bottles and CMP was $0.3 million
CMP Financial Highlights for the Fiscal Year ended August 31, 2016, compared with Fiscal Year ended August 31, 2015
·
CMP revenue was $3.2 million, compared with $0.8 million in the Fiscal Year ended August 31, 2015
Page 1 of 3
o
Pro forma combined condensed revenues for Kush Bottles and CMP was $11.4 million, compared with $4.8 million in the Fiscal Year ended August 31, 2015
·
CMP net income was $0.4 million, compared with a loss of $0.02 million in the Fiscal Year ended August 31, 2015
o
Pro forma combined condensed net income for Kush Bottles and CMP was $0.4 million, compared with a loss of $0.4 million in the Fiscal Year ended August 31, 2015
Mr. Nicholas Kovacevich, Chief Executive Officer of Kush Bottles, commented, In the six months ended February 28, 2017, CMP revenues increased 277% compared with the prior year period to $4.5 million and its net income increased 149% to $0.7 million. These positive results demonstrate the strength of CMPs sales performance, and its impressive growth rate, in the time preceding its acquisition by Kush Bottles. Adding CMPs products and distribution channels to Kush Bottles sales platform is expected to significantly accelerate our growth and be immediately accretive to Kush Bottles bottom line. To encourage and boost performance at CMP we structured the deal to include an incentive-based earn-out opportunity for CMP management if CMP hits certain milestones. With this in place, we are confident CMP will play a meaningful role in our evolution as we grow market share and establish our credentials as a leading player in the cannabis packaging and accessories market.
A further explanation of CMP Wellness financial performance is provided in Kush Bottles amended 8-K, filed with the Securities and Exchange Commission today, Thursday, July 6, 2017. The full report is available on the Companys SEC Filings section of its website at http://ir.kushbottles.com/sec-filings/
To be added to the distribution list, please email ir@kushbottles.com with Kush in the subject line.
About Kush Bottles, Inc.
Kush Bottles, Inc. is a dynamic sales platform that provides unique products and services for both businesses and consumers in the cannabis industry.
Founded in 2010 as a packaging and supplies company for dispensaries and growers, Kush Bottles has sold more than 100 million units and now regularly services more than 4,000 legally operated medical and adult-use dispensaries, growers, and producers across North America, South America, and Europe. The company has facilities in the three largest U.S. cannabis markets and a local sales presence in every major U.S. cannabis market.
Kush Bottles aims to be the gold standard for responsible and compliant products and services in the cannabis industry. Kush Bottles has no direct involvement with the cannabis plant or any products that contain THC.
The company has been featured in media nationwide, including CNBC, Los Angeles Times, TheStreet.com, Entrepreneur, and Inc. Magazine.
For more information, visit www.kushbottles.com or call (888)-920-5874.
Page 2 of 3
To be added to the distribution list, please email ir@kushbottles.com.
Connect :
Website: www.kushbottles.com
Instagram: instagram.com/kushbottles
Facebook: facebook.com/kushbottles
Twitter: twitter.com/kushbottles
Forward-Looking Statements:
This press release may include predictions, estimates or other information that might be considered forward-looking within the meaning of applicable securities laws. While these forward-looking statements represent our current judgments, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this release. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. When used herein, words such as: potential, look forward, believe, dedicated, building, or variations of such words and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are often discussed in filings we make with the United States Securities and Exchange Commission (SEC), available at: www.sec.gov, and on our website, at: www.kushbottles.com.
Company Contact:
Ryan Selewicz
Director of Marketing
714-243-4017
ryan@kushbottles.com
Investor Contact:
Elizabeth Barker / Phil Carlson
KCSA Strategic Communications
212-896-1203 / 212-896-1233
ir@kushbottles.com
Page 3 of 3
CMP WELLNESS, LLC
Financial Statements
August 31, 2016 and 2015
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm |
F-1 |
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Balance sheets |
F-2 |
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Statements of Operations |
F-3 |
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Statements of Members Equity |
F-4 |
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Statements of Cash Flows |
F-5 |
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Notes to the Financial Statements |
F-6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
CMP Wellness, LLC
We have audited the accompanying balance sheets of CMP Wellness, LLC (the Company) as of August 31, 2016 and 2015, and the related statements of operations, members equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CMP Wellness, LLC at August 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ RBSM LLP
July 5, 2017
Larkspur, CA
F-1
F-2
F-3
F-4
F-5
CMP WELLNESS, LLC
Notes to Financial Statements
As of August 31, 2016 and 2015
NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
CMP Wellness, LLC (the Company), a California limited liability company, was organized on March 25, 2013. The Company specializes in the wholesale distribution of vaporizer parts, cartridges and accessories. The Company is 100% owned by Lancer West Enterprises, Inc, a California corporation, and Walnut Ventures, a California corporation.
Basis of Presentation
The accompanying financial statements and related notes include the activity of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to consist of cash on hand and investments having an original maturity of 90 days or less that are readily convertible into cash. As of August 31, 2016 and 2015, the Company had $291,433 and $52,995, respectively.
Accounts Receivable
Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis, and thus trade receivables do not bear interest. Trade accounts receivables are periodically evaluated for collectability based on past credit history and their current financial condition. The Companys allowance for doubtful accounts was $0 as of August 31, 2016 and 2015, respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value using the first-in first out (FIFO) method. The Companys inventory consists of finished goods of $250,930 and $205,031 as of August 31, 2016 and 2015, respectively.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, after the asset is placed in service. Asset lives range from 2 to 7 years. 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.
Fair Value of Financial Instruments
The fair value of certain of the Companys financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, and other accrued liabilities and notes payable, approximate their carrying amounts because of the short-term maturity of these instruments.
F-6
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collateralized. The Companys policy is to place its cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. The Company generally does not require collateral from its customers, but its credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. The Company maintains allowances for potential credit losses.
Comprehensive Income (loss)
Comprehensive income (loss) is the change in the Companys equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. During the years ended August 31, 2016 and 2015, the Company had no elements of comprehensive income or loss.
Revenue Recognition
It is the Companys 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 managements judgments regarding fixed nature in selling prices of the products delivered and the collectability of those amounts. The Company has not implemented any specific rebate programs. Provisions for discounts to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. As of August 31, 2016 and 2015, the Company had provisions for sales discounts of $26,931 and $8,701, respectively. The Company has not established a formal customer incentive program, but considers and accomodates discounts to certain customers on a case by case basis, including by way of example, for volume shipping or for certain new customers with orders over a specific discretionary dollar threshold.
During the year ended August 31, 2016 and 2015, the Company had a refund allowance of $0. Consistent with ASC 605-15-25-1, the Company considers factors such as historical return of products, estimated remaining shelf life, price changes from competitors, and introductions of competing products in establishing a refund allowance. The Company recognizes revenues as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Warranty Costs
The Company has not had any historical warranty related expenditures from the sales of its products, which if incurred would result in the return of any defective products by customers.
Advertising
The Company conducts advertising for the promotion of its services. In accordance with ASC Topic 720-35-25, advertising costs are charged to operations when incurred.
Income Taxes
The Company is a limited liability company and has elected to be taxed as a partnership for Federal and State income tax purposes. Therefore, it has no federal or state income tax liability, and does not record a provision for income taxes in the United States because each member reports that members share of the Companys income or loss on that individual members 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 have been reflected in these financial statements within general and administrative expenses. There was no deferred tax provision for the year because there were no deferred tax assets or liabilities at August 31, 2016 and 2015.
F-7
Pursuant to ASC 740, Accounting for Uncertainty in Income Taxes the accounting for uncertainties in income taxes recognized in an entitys financial statements and prescribes a threshold of more-likely-than-not for recognition and de-recognition of tax positions taken or expected to be taken in a tax return. ASC 740 also provides related guidance on measurement, classification, interest and penalties, and disclosure. The Company is not aware of any uncertain tax positions taken in its US federal or State tax returns.
Fair Value of Financial Instruments
The Company adopted ASC 820 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under this standard certain assets and liabilities must be measured at fair value, and disclosures are required for items measured at fair value.
The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Companys financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Companys cash is based on quoted prices and therefore classified as Level 1.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect managements assumptions about the assumptions that market participants would use in pricing the asset or liability.
Application of Valuation Hierarchy
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
The Company had no financial assets or liabilities that are measured at fair value on a recurring basis as of August 31, 2016 and 2015.
Segment Information
The Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and allocates resources to the business as a whole.
Recently Issued Accounting Pronouncements
In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered completed for purposes of applying the transition guidance. The effective date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance previously issued in 2014, which is effective for interim and annual periods beginning on or after December 15, 2017. The Company not yet determined the impact that this new guidance will have on its financial statements.
F-8
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in this update revise the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures
NOTE 2 CONCENTRATIONS OF RISK
Supplier Concentration
The Company purchases inventory from various suppliers and manufacturers. For the fiscal year ended August 31, 2016 and 2015, two vendors accounted for approximately 89% of total inventory purchases, respectively.
Customer Concentration
For the fiscal year ended August 31, 2016 and 2015, four customers accounted for 60% and 54% of the Companys revenues, respectively.
NOTE 3 RELATED-PARTY TRANSACTIONS
The Company pays its members, Lancer West Enterprises, Inc and Walnut Ventures, a management fee. For the fiscal years ended August 31, 2016 and 2015, the Company paid $208,156 and $38,642, respectively, to its members.
NOTE 4 PROPERTY AND EQUIPMENT
The major classes of fixed assets consist of the following as of August 31:
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2016 |
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2015 |
Computer equipment |
$ 1,776 |
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$ - |
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Accumulated Depreciation |
(1,776) |
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- |
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$ - |
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$ - |
Depreciation expense was $1,776 and $0 for the fiscal years ended August 31, 2016 and 2015, respectively.
NOTE 5 CURRENT LIABILITIES
Accrued Expenses
Accrued expenses and other current liabilities consist of the following as of August 31:
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2016 |
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2015 |
Credit card liabilities |
$ 8,500 |
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$ 2,958 |
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Accrued manager fee |
- |
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1,344 |
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Sales tax payable |
1,154 |
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503 |
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$ 9,654 |
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$ 4,805 |
F-9
NOTE 6 MEMBERS' EQUITY
During the fiscal year ended August 31, 2016 and 2015, members of the Company contributed $14,246 and $0, respectively, to the Company.
NOTE 7 INCOME TAXES
The Company is treated as a partnership for U.S. federal and California state and local income tax purposes. As a partnership, taxable income or loss is passed through to and included in the taxable income of the Companys members. Accordingly, the Companys financial statements do not include a provision for federal or state income taxes.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Lease
The Companys head-quarters and primary distribution center is located in Lawndale, California. The facility lease expires on January 31, 2019. During the years ended August 31, 2016 and 2015, the Company recognized $22,403 and $0, respectively, of rental expense, related to its facility lease.
Minimum future commitments under the non-cancelable operating lease was as follows at August 31, 2016:
Year ended August 31, |
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2017 |
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$ 38,098 |
2018 |
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49,158 |
2019 |
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20,176 |
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$ 107,432 |
Other Commitments
In the ordinary course of business, the Company may enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms. The Company had no such agreements as of August 31, 2016.
Litigation
The Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. The Company had no pending legal proceedings or claims as of August 31, 2016 and 2015.
NOTE 9 SUBSEQUENT EVENTS
On May 1, 2017, Kush Bottles, Inc. (the Parent) and KBCMP, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Parent (Merger Sub), entered into an Agreement of Merger (the Merger Agreement) with Lancer West Enterprises, Inc and Walnut Ventures, pursuant to which each of Lancer West Enterprises, Inc and Walnut Ventures were merged with and into Merger Sub, with Merger Sub as the surviving corporation, resulting in the Parents indirect acquisition of CMP Wellness, LLC.
F-10
CMP WELLNESS, LLC
Unaudited Condensed Financial Statements
February 28, 2017
F-1
F-2
F-3
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
NOTE 1 NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
CMP Wellness, LLC (the Company), a California limited liability company, was organized on March 25, 2013. The Company specializes in the wholesale distribution of vaporizer parts, cartridges and accessories. The Company is 100% owned by Lancer West Enterprises, Inc, a California corporation, and Walnut Ventures, a California corporation.
Basis of Presentation
The accompanying financial statements and related notes include the activity of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to consist of cash on hand and investments having an orginal maturity of 90 days or less that are readily convertible into cash. As of February 28, 2017 and August 31, 2016, the Company had $329,839 and $291,433, respectively.
Accounts Receivable
Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis, thus trade receivables do not bear interest. Trade accounts receivables are periodically evaluated for collectability based on past credit history and their current financial condition. The Companys allowance for doubtful accounts was $0 as of February 28, 2017 and August 31, 2016, respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value using the first-in first out (FIFO) method. The Companys inventory consists of finished goods of $577,264 and $250,930 as of February 28, 2017 and August 31, 2016, respectively.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, after the asset is placed in service. Asset lives range from 2 to 7 years. 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.
Fair Value of Financial Instruments
The fair value of certain of the Companys financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, accrued compensation and employee benefits, other accrued liabilities and notes payable, approximate their carrying amounts because of the short-term maturity of these instruments.
F-4
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations of risk consist primarily of cash and cash equivalents and accounts receivable, which are generally not collateralized. The Companys policy is to place its cash and cash equivalents with high quality financial institutions, in order to limit the amount of credit exposure. The Company generally does not require collateral from its customers, but its credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. The Company maintains allowances for potential credit losses.
Comprehensive Income (loss)
Comprehensive income (loss) is the change in the Companys equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. During the quarters ended February 28, 2017 and February 29, 2016, the Company had no elements of comprehensive income or loss.
Revenue Recognition
It is the Companys 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 managements judgments regarding fixed nature in selling prices of the products delivered and the collectability of those amounts. The Company has not implemented any specific rebate programs. Provisions for discounts to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. During the quarters ended February 28, 2017 and February 29, 2016, the Company had provisions for sales discounts of $3,209 and $4,004, respectively. The Company has not established a formal customer incentive program, but considers and accomodates discounts to certain customers on a case by case basis, including by way of example, for volume shipping or for certain new customers with orders over a specific discretionary dollar threshold.
As of February 28, 2017 and August 31, 2016, the Company had a refund allowance of $0. Consistent with ASC 605-15-25-1, the Company considers factors such as historical return of products, estimated remaining shelf life, price changes from competitors, and introductions of competing products in establishing a refund allowance. The Company recognizes revenues as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Warranty Costs
The Company has not had any historical warranty related expenditures from the sales of its products, which if incurred would result in the return of any defective products by customers.
Advertising
The Company conducts advertising for the promotion of its services. In accordance with ASC Topic 720-35-25, advertising costs are charged to operations when incurred.
Income Taxes
The Company is a limited liability company and has elected to be taxed as a partnership for Federal and State income tax purposes. Therefore, it has no federal or state income tax liability, and does not record a provision for income taxes in the United States because each member reports that members share of the Companys income or loss on that individual members income tax return, if the member is required to file one. There was no deferred tax provision for the year because there were no deferred tax assets or liabilities as of February 28, 2017 and August 31, 2016.
Pursuant to ASC 740, Accounting for Uncertainty in Income Taxes the accounting for uncertainties in income taxes recognized in an entitys financial statements and prescribes a threshold of more-likely-than-not for recognition and de-recognition of tax positions taken or expected to be taken in a tax return. ASC 740 also provides related guidance on measurement, classification, interest and penalties, and disclosure. The Company is not aware of any uncertain tax positions taken in its US federal or State tax returns.
F-5
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
Fair Value of Financial Instruments
The Company adopted ASC 820 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under this standard certain assets and liabilities must be measured at fair value, and disclosures are required for items measured at fair value.
The Company currently does not have non-financial assets or non-financial liabilities that are required to be measured at fair value on a recurring basis. The Companys financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The fair value of the Companys cash is based on quoted prices and therefore classified as Level 1.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect managements assumptions about the assumptions that market participants would use in pricing the asset or liability.
Application of Valuation Hierarchy
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
The Company had no financial assets or liabilities that are measured at fair value on a recurring basis as of February 28, 2017 and August 31, 2016.
Segment Information
The Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and allocates resources to the business as a whole.
Recently Issued Accounting Pronouncements
In August, 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (ASU 2016-15). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows . The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed the analysis of how adopting this guidance will affect its financial statements.
F-6
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
In May 2016, accounting guidance was issued to clarify the not yet effective revenue recognition guidance issued in May 2014. This additional guidance does not change the core principle of the revenue recognition guidance issued in May 2014, rather, it provides clarification of accounting for collections of sales taxes as well as recognition of revenue (i) associated with contract modifications, (ii) for noncash consideration, and (iii) based on the collectability of the consideration from the customer. The guidance also specifies when a contract should be considered completed for purposes of applying the transition guidance. The effective date and transition requirements for this guidance are the same as the effective date and transition requirements for the guidance previously issued in 2014, which is effective for interim and annual periods beginning on or after December 15, 2017. The Company not yet determined the impact that this new guidance will have on its financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the potential impact of the adoption of this standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in this update revise the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The amendments are effective for annual reporting periods after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of the adoption of this standard.
Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 2 CONCENTRATIONS OF RISK
Supplier Concentrations
The Company purchases inventory from various suppliers and manufacturers. For the six months ended February 28, 2017 and February 29, 2016, three vendors accounted for approximately 85% and 94%, respectively, of total inventory purchases.
Customer Concentrations
During the six months ended February 28, 2017 and February 29, 2016, three customers represented 54% and 64% of the Company's revenues, respectively.
NOTE 3 RELATED-PARTY TRANSACTIONS
The Company pays its members, Lancer West Enterprises, Inc and Walnut Ventures, a management fee. For the six months ended February 28, 2017 and 2016 , the Company paid $224,000 and $41,656, respectively, to its members.
F-7
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
NOTE 4 PROPERTY AND EQUIPMENT
The major classes of fixed assets consist of the following as of:
|
|
February 28, |
|
August 31, |
|
|
2017 |
|
2016 |
Computer equipment |
$ 1,776 |
|
$ 1,776 |
|
Accumulated Depreciation |
(1,776) |
|
(1,776) |
|
|
|
$ - |
|
$ - |
Depreciation expense was $0 and $1,776, for the six months ended February 28, 2017 and February 29, 2016, respectively.
NOTE 5 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
|
|
February 28, |
|
August 31, |
|
|
2017 |
|
2016 |
Credit card liabilities |
$ 4,202 |
|
$ 8,500 |
|
Sales tax payable |
2,122 |
|
1,154 |
|
|
|
$ 6,324 |
|
$ 9,654 |
NOTE 6 INCOME TAXES
The Company is treated as a partnership for U.S. federal and California state and local income tax purposes. As a partnership, taxable income or loss is passed through to and included in the taxable income of the Companys members. Accordingly, the Companys financial statements do not include a provision for federal or state income taxes.
NOTE 7 COMMITMENTS AND CONTINGENCIES
Lease
The Companys head-quarters and primary distribution center is located in Lawndale, California. The facility lease expires on January 31, 2019. During the six months ended February 28, 2017 and February 29, 2016 , the Company recognized $15,910 and $10,424, respectively, of rental expense, related to its facility lease.
Minimum future commitments under the non-cancelable operating lease was as follows at February 28, 2017:
Years ended August 31, |
||
2017 |
|
$ 24,186 |
2018 |
|
49,158 |
2019 |
|
20,716 |
|
|
$ 94,060 |
Other Commitments
In the ordinary course of business, the Company may enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms. The Company had no such agreements as of February 28, 2017.
F-8
CMP WELLNESS, LLC
Notes to Condensed Financial Statements
(UNAUDITED)
Litigation
The Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity. The Company had no pending legal proceedings or claims as of February 28, 2017 and August 31, 2016.
NOTE 8 SUBSEQUENT EVENTS
On May 1, 2017, Kush Bottles, Inc. (the Parent) and KBCMP, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Parent (Merger Sub), entered into an Agreement of Merger (the Merger Agreement) with Lancer West Enterprises, Inc and Walnut Ventures, pursuant to which each of Lancer West Enterprises, Inc and Walnut Ventures were merged with and into Merger Sub, with Merger Sub as the surviving corporation, resulting in the Parents indirect acquisition of CMP Wellness, LLC.
F-9
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On May 1, 2017 (Merger Date), Kush Bottles, Inc. (the Company or Kush) and KBCMP, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (Merger Sub), entered into an Agreement of Merger (the Merger Agreement) with Lancer West Enterprises, Inc, a California corporation, Walnut Ventures, a California corporation, Jason Manasse, an individual, and Theodore Nicols, an individual, pursuant to which each of Lancer West Enterprises, Inc and Walnut Ventures were merged with and into Merger Sub, with Merger Sub as the surviving corporation, resulting in the Companys indirect acquisition of CMP Wellness, LLC, a California limited liability company, which prior to the merger, was owned 100% by Lancer West Enterprises, Inc and Walnut Ventures. Membership interest in CMP was the sole and only asset of Lancer West Enterprises, Inc and Walnut Ventures. CMP Wellness, LLC (CMP) is a distributor of vaporizers, cartridges and accessories.
The acquisition consideration consisted of a cash payment of $1,500,000, unsecured promissory notes in the aggregate principal amount of approximately $770,820, having a one-year maturity, and an aggregate of 7,800,000 shares of the Companys common stock. The purchase price is subject to customary post-closing adjustments with respect to confirmation of the levels of working capital and cash held by CMP Wellness, LLC as of the closing. During the-one year period following the closing, Jason Manasse and Theodore Nicols may become entitled to receive up to an additional $1,905,000 in cash, in the aggregate, and 4,740,960 shares of common stock of the Company, in the aggregate, based on the gross profit generated by CMP for the period from May 1, 2017 to April 30, 2018.
The acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations (ASC 805). As such, CMPs assets acquired and liabilities assumed are recorded at their acquisition-date fair values. Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Pursuant to ASC 805, the contingent consideration was recorded at its estimated fair value as of the acquisition date. The subsequent accounting for contingent consideration depends on whether the contingent consideration is classified as a liability or equity. The portion of contingent consideration classified as equity is not remeasured in subsequent accounting periods. However, contingent consideration classified as a liability is remeasured to its fair value at the end of each reporting period and the change in fair value is reflected in income or expense during that period.
The following unaudited pro forma combined condensed financial statements are based on the separate historical financial statements of Kush and CMP after giving effect to Kush's acquisition of CMP, and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. The unaudited pro forma combined condensed balance sheet as of February 28, 2017 gives effect to the business combination of Kush and CMP as if the business combination had occurred on that date. The unaudited pro forma combined condensed statements of operations for the years ended August 31, 2015 and 2016, and the six month period ended February 28, 2017 give effect to the business combination of Kush and CMP as if the business combination had occurred on September 1, 2014, 2015, and 2016, respectively.
The unaudited pro forma combined condensed financial statements are provided for informational purposes only. The unaudited pro forma combined condensed financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated or that may be achieved in the future and should not be taken as representative of future combined results of operations or financial condition of Kush. Furthermore, no effect has been given in the unaudited pro forma combined condensed statements of operations for synergistic benefits and potential cost savings, if any, that may be realized through the combination of the two companies or the costs that may be incurred in integrating their operations.
The unaudited pro forma combined condensed financial statements should be read together with the accompanying notes to the unaudited pro forma combined condensed financial statements, the historical combined financial statements of Kush and accompanying notes included in the Kush Annual Report on Form 10-K for the year ended August 31, 2016 and its Quarterly Report on Form 10-Q for the quarter ended February 28, 2017, and the historical financial statements of CMP and the accompanying notes for the year ended August 31, 2016 and 2015, and the unaudited condensed financial statements for the six months ended February 28. 2017, included in Exhibits 99.3 and 99.4 to this Current Report on Form 8-K/A, respectively .
F-1
KUSH BOTTLES, INC. Unaudited Pro Forma Combined Condensed Statements of Operations Six month period ended February 28, 2017
|
||||||||||||
|
|
|
|
|
CMP |
|
|
|
|
|
|
|
|
|
|
|
Kush Bottles, Inc. |
|
Wellness, LLC |
|
|
|
Pro Forma |
|
Pro Forma |
|
|
|
|
As reported 4(a) |
|
As reported 4(a) |
|
Eliminations 4(b) |
|
Adjustments |
|
Combined |
REVENUE |
|
$ 5,442,593 |
|
$ 4,475,279 |
|
$ (25,180) |
|
$ - |
|
$ 9,892,692 |
||
COST OF GOODS SOLD |
|
3,549,789 |
|
3,317,743 |
|
(16,581) |
|
- |
|
6,850,951 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
1,892,804 |
|
1,157,536 |
|
(8,599) |
|
- |
|
3,041,741 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
19,478 |
|
- |
|
- |
|
- |
|
19,478 |
|
|
Stock compensation expense |
|
262,808 |
|
- |
|
- |
|
- |
|
262,808 |
|
|
Selling, general and administrative |
|
1,741,921 |
|
423,845 |
|
- |
|
- |
|
2,165,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
2,024,207 |
|
423,845 |
|
- |
|
- |
|
2,448,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM OPERATIONS |
|
(131,403) |
|
733,691 |
|
(8,599) |
|
- |
|
593,689 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES) |
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
(23,944) |
|
- |
|
- |
|
- |
|
(23,944) |
|
|
Interest income |
|
- |
|
2 |
|
- |
|
- |
|
2 |
|
|
Interest expense |
|
(1,869) |
|
(120) |
|
- |
|
- |
|
(1,989) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
(25,813) |
|
(118) |
|
- |
|
- |
|
(25,931) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES |
|
(157,216) |
|
733,573 |
|
(8,599) |
|
- |
|
567,758 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
- |
|
- |
|
- |
|
232,781 |
4(g) |
232,781 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
$ (157,216) |
|
$ 733,573 |
|
$ (8,599) |
|
$ - |
|
$ 334,977 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC INCOME (LOSS) PER SHARE |
|
$ (0.00) |
|
$ - |
|
$ - |
|
$ - |
|
$ 0.01 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED INCOME (LOSS) PER SHARE |
|
$ (0.00) |
|
$ - |
|
$ - |
|
$ - |
|
$ 0.01 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF |
|
|
|
|
|
|
|
|
|
|
||
COMMON SHARES OUTSTANDING - BASIC |
|
49,245,364 |
|
- |
|
- |
|
12,205,504 |
4(f) |
61,450,868 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF |
|
|
|
|
|
|
|
|
|
|
||
COMMON SHARES OUTSTANDING - DILUTED |
|
49,245,364 |
|
- |
|
- |
|
13,641,365 |
4(f) |
62,886,729 |
See accompanying notes to the unaudited pro forma combined condensed financial statements
F-2
F-3
KUSH BOTTLES, INC.
Unaudited Pro Forma Combined Condensed Statements of Operations
Year Ended August 31, 2015
F-4
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
1.
Basis of Presentation
The unaudited pro forma combined condensed financial statements have been prepared in accordance with Article 11 of the Securities and Exchange Commission's ("SEC") Regulation S-X . The unaudited pro forma combined condensed financial information is based on the Companys and CMPs historical combined financial statements as adjusted to give pro forma effect to the acquisition of CMP by Kush. The pro forma effects relate to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined condensed statements of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared by management to illustrate the estimated effect of the Merger and certain other adjustments. The final determination of the purchase accounting will be based on the fair values of the CMP assets acquired and liabilities assumed at the Merger Date. The unaudited pro forma combined condensed balance sheet as of February 28, 2017 gives effect to the business combination of Kush and CMP as if the business combination had occurred on that date. The unaudited pro forma combined condensed statements of operations for the years ended August 31, 2015 and 2016, and the six month period ended February 28, 2017 give effect to the business combination of Kush and CMP as if the business combination had occurred on September 1, 2014, 2015, and 2016, respectively.
2.
Summary of Significant Accounting Policies
The accounting policies followed for financial reporting on a pro forma basis are the same as those disclosed in the Kush Annual Report on Form 10-K for the year ended August 31, 2016 and its Quarterly Report on Form 10-Q for the quarter ended February 28, 2017 . The unaudited pro forma combined condensed financial statements do not assume any differences in accounting policies among CMP and Kush. Upon consummation of the business combination, we have reviewed the accounting policies of CMP and Kush to ensure conformity of such accounting policies to those of Kush and, as a result of this review, we did not identify differences among the accounting policies of the two companies, that when conformed, could have a material impact on the combined financial statements.
3.
Acquisition Consideration
The acquisition consideration consisted of a cash payment of $1,500,000, unsecured promissory notes in the aggregate principal amount of approximately $770,820, having a one-year maturity, and an aggregate of 7,800,000 shares of the Companys common stock. During the-one year period following the closing, Jason Manasse and Theodore Nicols may become entitled to receive up to an additional $1,905,000 in cash, in the aggregate, and 4,740,960 shares of common stock of the Company, in the aggregate, based on the gross profit generated by CMP for the period from May 1, 2017 to April 30, 2018. Per the terms of the Merger Agreement, post-closing adjustments to CMPs working capital is directly offset to the unsecured promissory notes payable. Management has estimated that the preliminary post-closing working capital adjustments amounted to $110,604, which management estimates will result in a decrease of the unsecured promissory notes payable from $770,820 to $660,216. In accordance with ASC 805, management has evaluated the estimated fair value of the contingent consideration based on the probability of CMP reaching certain gross profit earnout targets. The Company recorded a contingent liability for the contingent cash consideration of $1,735,375 and recorded contingent equity consideration of $10,763,760.
The equity consideration received by CMP members was calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price. The contingent equity consideration was also calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price. The total preliminary acquisition consideration used in preparing the unaudited pro forma combined condensed financial statements is as follows:
F-5
Acquisition Consideration: |
|
|
Cash |
|
$ 1,500,000 |
Fair value of common shares issued to CMP members |
|
19,500,000 |
Promissory notes |
|
660,216 |
Estimated fair value contingent cash consideration |
|
1,735,375 |
Estimated fair value contingent equity consideration |
|
10,763,760 |
Total estimated acquisition consideration |
|
$ 34,159,351 |
Under the acquisition method of accounting, the total estimated acquisition consideration is allocated to the acquired tangible assets and assumed liabilities of CMP based on their estimated fair values as of the acquisition date. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. The following table summarized the preliminary purchase accounting consideration to the assets acquired and liabilities assumed of CMP:
Net tangible assets acquired |
|
$ 1,501,231 |
Goodwill |
|
32,658,120 |
Total preliminary acquisition consideration allocation |
|
$ 34,159,351 |
4.
Preliminary Pro Forma and Acquisition Accounting Adjustments
(a)
In the unaudited pro forma combined condensed balance sheet as of February 28, 2017 and statements of operations for the years ended August 31, 2015, August 31, 2016 and for the six month period ended February 28, 2017, financial data under Kush represents Kushs historical financial statements prior to the acquisition; and financial data of CMP represents CMPs standalone historical financial statements prior to the acquisition.
(b)
Represents the intercompany elimination adjustments between Kush and CMP.
(c)
Represents the preliminary goodwill recognized as a result of the business combination between Kush and CMP.
(d)
Represents the unsecured promissory notes payable of $660,216 and the estimated fair value of the contingent cash consideration of $1,735,375 as disclosed in footnote 3 to the unaudited pro forma combined condensed financial statements.
(e)
Represents the fair value of the equity consideration of 7,800,000 common shares issued to the sellers of CMP which was $2.50 per share and totaling $19,500,000. Additionally, the estimated fair value of the contingent equity consideration is $10,763,760.
(f)
Represents an adjustment to the weighted average shares outstanding for Kush to illustrate the number of Kush shares exchanged to consummate the Merger. The pro forma number of shares outstanding for the unaudited pro forma combined condensed statements of operations represents the total number of Kush shares exchanged on the Merger Date to CMP members and utilizing dilutive securities of Kush for the year ended August 31, 2016, and for the six month period ended February 28, 2017.
(g)
To report the tax effect of CMPs net taxable income at February 28, 2017 and August 31, 2016.
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