We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (together with all amendments and exhibits) under the
Securities Act of 1933, as amended, with respect to the Securities offered by
this prospectus. This prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information, reference is made to the Registration
Statement which may be read and copied at the Commission's Public Reference
Room.
We are subject to the requirements of the Securities and Exchange Act of
1934 and are required to file reports and other information with the Securities
and Exchange Commission. Copies of any such reports and other information filed
by us can also be read and copied at the Commission's Public Reference Room.
The Public Reference Room is located at 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains an
internet site that contains reports, proxy and information statements, and other
information regarding public companies. The address of the site is
http://www.sec.gov.
NOTES TO THE AUDITED FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business - STRAINWISE, INC. (identified in these
footnotes as "we" "us" or the "Company") provides branding and fulfillment
services to entities in the cannabis retail and production industry. The Company
was incorporated in the state of Colorado as a limited liability company on June
8, 2012, and subsequently converted to a Colorado corporation on January 16,
2014.
The Company provides sophisticated fulfillment and branding services and
solutions to (i) six grow facilities and eight retail stores (seven of which
sell recreational and medical marijuana to the public and one of which only
sells medical marijuana to the public) owned by an officer and director of the
Company ("Affiliated Entities"), and (ii) makes such services available to
independent retail stores and grow facilities in the regulated cannabis industry
throughout the United States.
The branding and fulfillment services that we currently provide are summarized,
as follows:
o Branding, Marketing and Administrative Consulting Services: Customers
may contract with us to use the Strainwise name, logo and affinity
images in their retail store locations. A monthly fee permits our
branding customer to use the Strainwise brand at one specific
location. In addition, we will assist operators in marketing and
managing their businesses, setting up new retail locations and general
business planning and execution at an hourly rate. This includes
services to establish an efficient, predictable production process, as
well as, nutrient recipes for consistent and appealing marijuana
strains.
o Accounting and Financial Services: For a monthly fee, we provide our
customers with a fully implemented general ledger system, with an
industry centric chart of accounts, which enables management to
readily monitor and manage all facets of a marijuana medical
dispensary, retail store and grow facility. We provide bookkeeping,
accounts payable processing, cash management, general ledger
processing, financial statement preparation, state and municipal sales
tax filings, and state and federal income tax compilation and filings
on behalf of the Company and the Captive Stores on an ongoing basis.
o Compliance Services: The rules, regulations and state laws governing
the production, distribution and retail sale of marijuana can be
complex, and may prove cumbersome with which to comply. Thus,
customers may contract with us to implement a compliance process,
based upon the number and type of licenses and permits for their
specific business. We provide this service on both an hourly rate and
stipulated monthly fee.
o Nutrient Supplier: The Company presently is a bulk purchaser of
nutrients and other cultivation supplies for the sole purpose of
growing marijuana. As a result, we are able to make bulk purchases
with price breaks, based upon volume. We serve as a sole source
nutrient purchasing agent and distributor with pricing based upon our
bulk purchasing power.
o Lending: We will provide loans to individuals and businesses in the
cannabis industry. However, Colorado State law does not allow entities
operating under a cannabis license to pledge the assets or the license
of the cannabis operation for any type of general borrowing activity.
Thus, our lending will be on an unsecured basis, with reliance on a
personal guarantee of the borrower.
o Lease of Grow Facilities and Equipment: We lease grow equipment and
facilities on a turn-key basis to customers in the cannabis industry.
We will also enter into sale lease backs of grow lights, tenant
improvements and other grow equipment. o
42
We do not directly grow marijuana plants, produce marijuana infused products,
sell marijuana plants and or sell marijuana infused products of any nature.
Share exchange - As more fully described in Note 9 herein, on August 19, 2014,
we entered into an Agreement to Exchange Securities ("Share Agreement") with 4th
Grade Films, Inc. ("FHGR"), pursuant to which FHGR acquired approximately 90 %
of the outstanding shares of Strainwise in exchange for 23,124,184 shares of
FHGR's common stock. FHGR is a publicly-traded company, incorporated in Utah,
with its common stock currently quoted on the OTC Bulletin Board. It is
contemplated that the Exchange will qualify as a tax-free reorganization under
the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director of
FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse acquisitions
whereby the financial statements subsequent to the date of the transaction will
be presented as a continuation of the Company. Under reverse acquisition
accounting, the Company (subsidiary) is treated as the accounting parent
(acquirer) and FHGR (parent) is treated as the accounting Subsidiary (acquiree).
Following the Share Exchange, FHGR has 24,431,184 outstanding shares of common
stock, with the current shareholders of FHGR owning 1,307,000 of the
post-closing shares.
Basis of presentation - The accounting and reporting policies of the Company
conform to U.S. generally accepted accounting principles.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of the statement of cash flows, we
consider all cash in banks, money market funds, and certificates of deposit with
a maturity of less than three months to be cash equivalents.
Prepaid expenses - The amount of prepaid expenses as of January 31, 2014 and
January 31, 2013 is $10,000 and $0, respectively. Prepaid expenses at January
31, 2014 is comprised of a retainer paid to our legal counsel.
Fair value of financial instruments and derivative financial instruments - The
carrying amounts of cash and current liabilities approximate fair value because
of the short maturity of these items. These fair value estimates are subjective
in nature and involve uncertainties and matters of significant judgment, and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates. We do not hold or issue financial
instruments for trading purposes, nor do we utilize derivative instruments in
the management of our foreign exchange, commodity price or interest rate market
risks.
The FASB Codification clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. It also
requires disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets and liabilities
must be grouped, based on significant levels of inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities
and inputs that are observable for the asset or liability.
Level 3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions.
43
The determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
Office equipment - Office equipment is recorded at cost and is depreciated under
straight line methods over each item's estimated useful life. We review our
office equipment for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations.
Major improvements are capitalized. Upon retirement, sale or other disposition
of office equipment, the cost and accumulated depreciation are eliminated from
the accounts and any gain or loss is included in operations.
Office equipment, net of accumulated amortization and depreciation are comprised
of the following:
January 31, January 31,
2014 2013
------------ -----------
Office equipment:
Office furniture and fixtures $10,500 $ -
Accumulated amortization and depreciation - -
------------ ----------
$ 10,500 $ -
============ ==========
|
There was no depreciation charged to operations for the year ended January 2014
and 2013 in that the office equipment was not placed into service until the last
few days of January 2014.
Income taxes - The Company accounts for income taxes pursuant to ASC 740. Under
ASC 740 deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Long-Lived Assets - In accordance with ASC 350, the Company regularly reviews
the carrying value of intangible and other long-lived assets for the existence
of facts or circumstances, both internally and externally, that suggest
impairment. If impairment testing indicates a lack of recoverability, an
impairment loss is recognized by the Company if the carrying amount of a
long-lived asset exceeds its fair value.
Trademarks - Trademarks are stated at cost and are amortized using the
straight-line method over fifteen years. Accumulated amortization was $100 and
$0 at January 31, 2014 and 2013, respectively.
Intangible assets subject to amortization consist of the following at January
31, 2014:
Gross
Carrying Accumulated
Amount Amortization Net
----------- ------------- ----
Trademarks $ 11,010 $ 61 $ 10,949
======== ====== ========
|
Deferred Rent - The Company recognizes rent expense from operating leases on the
straight-line basis. Differences between the expense recognized and actual
payments are recorded as deferred rent.
Revenue recognition - Revenue is recognized on an accrual basis as earned under
contract terms. Revenues from affiliated entities is recognized as follows:
o Branding, Marketing and Administrative Services Revenue: Under the
terms of a ten year master service agreement, we allow an affiliated
entity to use the Strainwise brand for both retail and marketing
purposes at one location, plus we provide administrative services to
assist the employees of the affiliated entity to operate the business
of that related location. We charge the affiliated entity a monthly
fee of approximately $4,500 for the branding, marketing and
administrative services. Since we (i) are the primary obligor, (ii)
determine the price, (iii) perform the service, (iv) have the credit
risk, and (v) there are no additional milestones that need to be met
other than actually providing the services, in accordance with ASC
605-45-45, the revenue is recognized on monthly basis in accordance
with the terms of the applicable master service agreement.
44
o Accounting and Financial Services Revenue: Under the terms of a ten
year master service agreement, we have agreed to provide our
affiliated entities with a fully implemented general ledger system,
coupled with an industry centric chart of accounts, which enables
management to readily monitor and manage all accounting and financial
facets of a marijuana medical dispensary, retail store and/or grow
facility. Under the terms of the master service agreement we have also
agreed to provide bookkeeping, accounts payable processing, cash
management, general ledger processing, financial statement
preparation, state and municipal sales tax filings, and state and
federal income tax compilation and filings. Under the terms of the
master service agreement, we provide the above described accounting
and financial services for a monthly fee of $3,000. Since we (i) are
the primary obligor, (ii) determine the price, (iii) perform the
services, (iv) have the credit risk, and (v) there are no additional
milestones that need to be met other than actually providing the above
described services, in accordance with ASC 605-45-45, the revenue is
recognized on monthly basis in accordance with the terms of the
applicable master service agreement.
o Compliance Services Revenue : Under the terms of a ten year master
service agreement, we provide the affiliated entities with a
compliance process that includes the preparation and filing of state,
city and municipal applications and renewals of licenses in accordance
with the rules, regulations and state laws governing the production,
distribution and retail sale of marijuana. We provide this service to
our affiliate entities under the terms of a master service agreement
for a monthly fee of $2,500. Since we (i) are the primary obligor,
(ii) determine the price, (iii) perform the services, (iv) have the
credit risk, and (v) there are no additional milestones that need to
be met other than actually providing the above described services, in
accordance with ASC 605-45-45, the revenue is recognized on monthly
basis in accordance with the terms of the applicable master service
agreement.
o Nutrient Sales: Under the terms of a ten year master service
agreement, we serve as a sole source nutrient purchasing agent and
distributor for our affiliated entities, with pricing based upon our
bulk purchasing power. We charge the affiliated entities for nutrients
supplied to them at the cost of the nutrients, plus a premium of
ninety percent. Since there are no additional milestones that need to
be met other than actually buying and delivering the above nutrients
to the affiliated entity, in accordance with ASC 605-45-45, the
revenue is recognized in the month in which the nutrient is actually
delivered to the related entity.
o Grow Facilities Revenue: Under the terms of a ten year master service
agreement, we lease grow facilities and equipment for a period equal
to the term of the underlying lease with an independent, third party
lessor in an amount equal to the sum of (i) the monthly lease payment,
(ii) plus the cost of reimbursed operating expenses paid to the lessor
each month, (iii) plus the amount of monthly amortization of tenant
improvements, and (iv) plus a premium of forty percent. Since there
are no additional milestones that need to be met other than actually
leasing the facilities and equipment to the respective affiliated
entity, in accordance with ASC 605-45-45, the revenue is recognized in
the month in which the lease payments are made to us by the lessee.
Comprehensive Income (Loss) - Comprehensive income is defined as all changes in
stockholders' equity (deficit), exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss, changes
in certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries and unrealized
gains (losses) on available-for-sale securities. From our Inception there have
been no differences between our comprehensive loss and net loss.
Net income per share of common stock - We have adopted applicable FASB
Codification regarding Earnings per Share, which require presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. In the accompanying financial statements, basic
earnings per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Note 2 - Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the period ended January 31, 2014,
the Company has had limited operations. As of January 31, 2014, the Company has
45
not become profitable. In view of these matters, the Company's ability to
continue as a going concern is dependent upon the Company's ability to begin
operations and to achieve a level of profitability. The Company intends to
continue financing its future development activities and its working capital
needs largely from the sale of public equity securities with some additional
funding from other traditional financing sources, including term notes until
such time that funds provided by operations are sufficient to fund working
capital requirements. The financial statements of the Company do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note 3 - Related Party Transactions:
Substantially all of our revenues to date have been derived from Master Service
Agreements with eight retail marijuana stores and four cultivation and growing
facility that are majority owned by our Chief Executive Officer, who is also the
husband or our majority shareholder and our President. Pursuant to the terms of
these Master Service Agreements, the marijuana stores and grow facility pay us
monthly fees for branding, marketing, administration, accounting and compliance
services. We also supply nutrients to the six grow facilities at a 90% mark-up
to our cost for the nutrients.
Related party revenue was $104,378 and $0.00, respectively, for the years ended
January 31, 2014 and 2013. As of January 31, 2014 and 2013, we had accounts
receivable from affiliated entities of $70,000 and $0, respectively. As of
January 31, 2013 and 2014, we had accounts payable to affiliated entities of
$120,203 and $0, respectively.
Although our agreements with the marijuana outlets and grow facility expire on
December 31, 2023, all terms and contracts related to this revenue are
determined by related parties and these terms can change at any time.
Note 4 - Operating Leases:
The Company rents office space for its corporate needs from an affiliated
Company. The affiliate entered into a 31 month lease agreement in January 1,
2014 to lease 6,176 square feet for an annual rate of $64,848 for the first
twelve months, and $67,936 for the subsequent 12 months, and $41,431 for the
subsequent 7 months paid monthly, through October 31, 2016. This lease to the
Company is on the same terms and conditions as is the direct lease between the
affiliate and the independent lessor. Consequently, we believe that the lease
terms to the Company are comparable to lease terms we would receive directly
from third party lessors in our market, because the related party terms mirror
the terms of the direct lease between the independent, third party lessor and
the affiliated entity. See Note 9 for a full explanation of operating leases
that went into effect after the balance sheet date, but before issuance.
Note 5 - Issuance of shares:
The Company was originally organized as a limited liability company on June 8,
2012 with $100 of membership equity. On January 16, 2014, the Company converted
to a corporation and issued a total of 20,430,000 shares in exchange for the one
hundred percent of the membership interests owned by the majority shareholder
and President of the Company. As of January 31, 2014 there were a total of
20,430,000 shares of common stock issued and outstanding.
Note 6 - Income Taxes:
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company adopted the provisions of ASC 740, "Income Taxes" on April 1, 2007.
FASB ASC 740 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the
financial statements. Tax positions must meet a "more-likely-than-not"
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods.
46
The components of the income tax provision are as follows:
Year Ended January 31,
2014 2013
----------- ------------
Income tax expense (benefit):
Current:
Federal $ (11,742) $ -
State (3,251) -
--------- -------
Deferred income tax expense (benefit): (14,993) -
Valuation allowance 14,993 -
Provision $ - $ -
========= =======
|
Note 7 - New accounting pronouncements:
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. The Company has reviewed the recently issued
pronouncements. During this review the Company decided to early adopt ASU
2014-10 which eliminates the definition of a development stage entity,
eliminates the development stage presentation and disclosure requirements under
ASC 915, and amends provisions of existing variable interest entity guidance
under ASC 810.
Note 8 - Equity:
Approved Warrants - In January 2014, the Company issued stock-based compensation
to a consultant in the form of warrants to purchase 500,000 shares of the
Company's common stock, at a price of $0.10 per share, at any time prior to
January 31, 2019. The Board of Directors determined the exercise price and terms
of the warrant.
The Black-Scholes option-pricing model was used to estimate the warrant fair
values. This option-pricing model requires a number of assumptions, of which the
most significant are, expected stock price volatility, the expected pre-vesting
forfeiture rate and the expected warrant term (the amount of time from the grant
date until the warrants are exercised or expire). Expected volatility was
estimated utilizing a weighted average of comparable published volatilities
based on industry comparables. Expected pre-vesting forfeitures were based upon
management's best estimates. The expected warrant term was based on the term of
the warrant. The fair value of the warrants granted during the year ended
January 31, 2014 was estimated, as of the grant date, using the Black-Scholes
option pricing model, with the following assumptions:
Expected volatility 187%
Risk-free interest rate .25%
Expected dividends -
Expected terms (in years) 5
Share price at date of issuance $0.10
|
The warrants outstanding and activity as of and for the year ended January 31,
2014:
Weighted Remaining
Average Contractual
Exercise Terms(in
Shares Price years)
---------- -------- ---------
Outstanding at January 31, $ - -
2013
Granted 500,000 $ 0.10 5
Exercised - $ - -
Forfeited - $ - -
Outstanding at January 31, 2014 500,000 $ 0.10 5
--------- -------- -------
Exercisable at January 31, 2015 500,000 $ 0.10 5
--------- -------- -------
|
The weighted average fair value of warrants granted at January 31, 2014 was
$0.10. The exercise price of the warrants granted at January 31, 2014 equaled
the estimated fair market value of the stock at the time of grant which was
$0.10. No warrants were exercised during the current fiscal year. Accordingly,
the Company did not realize any tax deductions related to the intrinsic value of
exercised warrants.
47
In accordance with EITF 96-18 ' Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services', the total amount of share-based compensation expense
recorded at January 31, 2014 of $48,192 will be fully recorded in the current
year since no future services are required for the consultant to exercise the
warrants.
Note 9 - Subsequent events:
Share Exchange - On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange") with 4th Grade Films, Inc. ("FHGR"), pursuant to
which FHGR will acquire approximately 90 % of the outstanding shares of
Strainwise in exchange for 23,124,184 shares of FHGR's common stock. FHGR is a
publicly-traded company, incorporated in Utah, with its common stock currently
quoted on the OTC Bulletin Board. It is contemplated that the Exchange will
qualify as a tax-free reorganization under the U.S. Internal Revenue Code.
As part of the Share Exchange, we paid $134,700 of FHGR's liabilities and
purchased 1,038,000 shares of FHGR's common stock for $120,300 from two
shareholders of FHGR. The 1,038,000 shares were returned to treasury and
cancelled. FHGR also agreed to sell its rights to a motion picture, together
with all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director of
FHGR in consideration for the assumption by a shareholder of FHGR of all
liabilities of FHGR (net of the $134,700 we paid) which were outstanding
immediately prior to the closing of the transaction.
The business combination will be accounted for as a reverse acquisition and
recapitalization, using accounting principles applicable to reverse acquisitions
whereby the financial statements subsequent to the date of the transaction will
be presented as a continuation of the Company. Under reverse acquisition
accounting, the Company (subsidiary) is treated as the accounting parent
(acquirer) and FGHR (parent) is treated as the accounting subsidiary (acquiree).
As a result of the Share Exchange, FGHR has 24,431,184 outstanding shares of
common stock, with the current shareholders of FGHR owning 1,307,000 of the
post-closing shares.
Operating Leases - We entered into a lease agreement on March 7, 2014 to lease
from an unrelated third party a grow facility of approximately 26,700 square
feet ("Custer Lease") for a term of five years commencing on April 1, 2014.
Lease payments are scheduled to be $29,200 per month for the first twelve months
of the lease, and then are scheduled to be $27,500 per month for the subsequent
12 months, $28,325 per month for the subsequent 12 months, $29,170 per month for
the subsequent 12 months and $30,035 per month for the final 12 months of the
lease. Under the terms of the Custer Lease, we are obligated to reimburse the
lessor for operating expenses applicable to the leased property, and we are
obligated to pay a security deposit of $29,200 which was due and paid upon the
execution of the Custer Lease. We have the option to renew the Custer Lease at
the end of the term of the lease at a mutually agreed upon rate per square foot;
there is no option to purchase the property underlying the Custer Lease. We will
provide all of the tenant improvements that will enable the continuous
cultivation of marijuana plants under approximately 460 grow lights. We account
for this lease as an operating lease rather than as a capital lease, because the
lease does not transfer ownership to us at the end of the lease, there is no
bargain purchase price for the grow facility as a component of the lease, the
terms of the lease are less than 75% of the economic life of the grow facility,
and the current present value of the minimum lease payments is less than 90% of
the fair market value of the asset. We will sublease this grow facility to the
affiliated entities for a term of five years in an amount equal to the sum of
(i) the monthly lease payment, (ii) plus the cost of reimbursed operating
expenses paid to the lessor each month, (iii) plus the amount of monthly
amortization of tenant improvements, and (iv) a premium of forty percent.
Revenue from the sublease of the Custer grow facility will be recognized on a
monthly basis as the user is charged for the amount of the sublease
We entered into a lease agreement on April 1, 2014 to lease from an unrelated,
third party a grow facility of approximately 65,000 square feet ("51st Ave
Lease") for a term of five years and nine months. The terms of the 51st Ave
Lease stipulates the payment of $15,000 per month, prorated if necessary, until
such time that the Lessor is able to deliver a Certificate of Occupancy, which
is scheduled to occur on August 1, 2014. Thereafter, lease payments are
scheduled to be $176,456 per month for the first six months of the lease, and
then are scheduled to be $221,833 per month for the subsequent 24 months,
$231,917 per month for the subsequent 12 months, $242,000 per month for the
subsequent 12 months and $247,041 per month for the final 12 months of the
lease. Under the terms of the 51st Ave Lease, we are obligated to reimburse the
lessor for operating expenses applicable to the leased property, and we are
obligated to pay a security deposit of $150,000 one third of which was due and
paid upon the execution of the 51st Ave Lease, the second third is due and
payable after the first harvest or by October 1, 2014, and the final third is
due and payable after the second harvest or by December 1, 2014.We have the
option to renew the 51st Ave Lease at the end of the term of the lease at a
mutually agreed upon rate per square foot; there is no option to purchase the
property underlying the 51st Avenue Lease. The lessor provides all of the tenant
improvements that will enable the continuous cultivation of marijuana plants
under approximately 1,940 grow lights. We account for this lease as an operating
lease rather than as a capital lease, because the lease does not transfer
48
ownership to us at the end of the lease, there is no bargain purchase price for
the grow facility as a component of the lease, the terms of the lease are less
than 75% of the economic life of the grow facility, and the current present
value of the minimum lease payments is less than 90% of the fair market value of
the asset. We will sublease this grow facility to the affiliated entities for a
term of five years and nine months in an amount equal to the sum of (i) the
monthly lease payment, (ii) plus the cost of reimbursed operating expenses paid
to the lessor each month, and (iii) a premium of forty percent. Revenue from the
sublease of the 51st Avenue grow facility will be recognized on a monthly basis
as the user is charged for the amount of the sublease
We entered into a lease agreement on April 22, 2014 to lease from an unrelated,
third party a grow facility of approximately 38,000 square feet ("Nome Lease")
for a term of seven years. The lease payments are scheduled to be $44,570 per
month for the first twelve months of the lease, and then are scheduled to be
$46,151 per month for the subsequent 12 months, $47,743 per month for the
subsequent 12 months, $49,334 per month for the subsequent 12 months and $50,925
per month for the subsequent 12 months, $52,517 per month for the subsequent 12
months, and $54,108 for the final 12 months of the lease. Under the terms of the
Nome Lease, we are obligated to reimburse the lessor for operating expenses
applicable to the leased property, and we are obligated to pay a security
deposit of $133,679 one half of which was due and paid upon the execution of the
Nome Lease, the final half was due and payable 30 days after the commencement
date. We have the option to renew the Nome Lease at the end of the term of the
lease at a mutually agreed upon rate per square foot; there is no option to
purchase the property underlying the Nome Lease. We will provide all of the
tenant improvements that will enable the continuous cultivation of marijuana
plants under approximately 920 grow lights. We account for this lease as an
operating lease rather than as a capital lease, because the lease does not
transfer ownership to us at the end of the lease, there is no bargain purchase
price for the grow facility as a component of the lease, the terms of the lease
are less than 75% of the economic life of the grow facility, and the current
present value of the minimum lease payments is less than 90% of the fair market
value of the asset. We will sublease this grow facility to the affiliated
entities for a term of seven years in an amount equal to the sum of (i) the
monthly lease payment, (ii) plus the cost of reimbursed operating expenses paid
to the lessor each month, (iii) plus the amount of monthly amortization of
tenant improvements, and (iv) a premium of forty percent. Revenue from the
sublease of the Nome grow facility will be recognized on a monthly basis as the
user is charged for the amount of the sublease. Under the terms of the Nome
Lease, the lessor agreed to provide financing for up to $750,000 of tenant
improvements at an interest rate of 25%, payable monthly over 60 months. As of
October 1, 2014, the $750,000 of tenant improvements had been completed at the
facility, and we began paying monthly installments of $22,013 at that time. On
December 1, 2014, the lease was modified to extend the lease term through April
30, 2025; and the lease payments were modified to be $88,616 per month for the
period ending April 30, 2015, and then, for the following twelve months, are
scheduled to be $90,207, $91,799, $93,390, $94,981, $73,578, $75,169, $76,761,
78,352, and then $79,943 per month. The modification of the lease included the
cancellation of the $750,000 payable to the lessor for the financing of tenant
improvements, and the extension of an additional $800,000 to be used by us for
future tenant improvements. The full amount of $1,550,000 of tenant improvement
financing to be provided by the lessor will be amortized over the extended term
of the modified lease as a component of the monthly lease payments.
We entered into a lease agreement on June 10, 2014 to lease from an unrelated,
third party a grow facility of approximately 113,000 square feet ("32nd Ave
Lease") for a term of five years and nine months which will not become effective
until the proper Licenses are awarded, expected to be September 1, 2014. The
terms of the 32nd Ave Lease stipulates the payment of $25,000 per month,
prorated if necessary, until such time that the Lessor is able to deliver a
Certificate of Occupancy, which is scheduled to occur in early 2015. Thereafter,
lease payments are scheduled to be $282,500 per month for the first Sixteen
months of the lease, and then are scheduled to be $301,333 per month for the
subsequent 12 months, $320,167 per month for the subsequent 12 months, and
$329,583 per month for the final 12 months of the lease. Under the terms of the
32nd Ave Lease, we are obligated to reimburse the lessor for operating expenses
applicable to the leased property, and we are obligated to pay a security
deposit of $250,000, $150,000 of which was due and paid upon the execution of
the 32nd Ave Lease, and $100,000 due upon obtaining the Certificate of
Occupancy. We have the option to renew the 32nd Ave Lease at the end of the term
of the lease at a mutually agreed upon rate per square foot; there is no option
to purchase the property underlying the 32nd Ave Lease. The lessor will provide
all of the tenant improvements that will enable the continuous cultivation of
marijuana plants under approximately 3,000 grow lights. We account for this
lease as an operating lease rather than as a capital lease, because the lease
does not transfer ownership to us at the end of the lease, there is no bargain
purchase price for the grow facility as a component of the lease, the terms of
the lease are less than 75% of the economic life of the grow facility, and the
current present value of the minimum lease payments is less than 90% of the fair
market value of the asset. We will sublease this grow facility to the affiliated
entities for a term of five years and nine months in an amount equal to the sum
of (i) the monthly lease payment, (ii) plus the cost of reimbursed operating
expenses paid to the lessor each month, and (iii) plus the amount of monthly
amortization of tenant improvements, and (iv) a premium of forty percent.
Revenue from the sublease of the 32nd Avenue grow facility will be recognized on
a monthly basis as the user is charged for the amount of the sublease.
49
Future minimum payments for these leases are:
For the Year
Ended January 31, Amount
----------------- ------
2015 $2,482,400
2016 $7,656,012
2017 $7,775,609
2018 $8,174,906
2019 $7,472,803
|
Convertible Note Payable - The Company issued $850,000 in a convertible note on
March 20, 2014 (the "Note"). The Note has an interest rate of 25%, payable
monthly, and matures on September 21, 2014. The outstanding principal balance of
the Note, plus any accrued but unpaid interest on the Note, is convertible at
any time on or before the maturity date at $1 per common share. The convertible
note is personally guaranteed by our majority shareholder and by an officer and
director of the Company.
On July 16, 2014, the terms of the Note were amended ("Amendment") wherein the
holder of the Note elected to convert $200,000 of the principal of the Note into
293,000 of our common shares of stock at a price of $.6825 per share. As a
component of the Amendment, we in turn elected to prepay the remaining principal
balance of the Note, after the scheduled payment of the principal and accrued
interest due the holder on July 24, 2014 and to pay a prepayment penalty of
$11,250. The difference in the premium of the per share price of $0.6825 per the
Amendment and the $1 per share per the Note, plus the amount of the prepayment
penalty will be charged to interest expense ratably over the term of the
Amendment.
Private Offering - Through a private offering of our common stock at $1 per
share, we have collected $2,140,700 as of the date of the issuance of the
financial statements, July 31, 2014. Coupled with the 293,000 common shares
issued in connection with the conversion of the convertible note described
above, 22,863,700 shares of common stock would be outstanding upon the
completion of our stock offering. As part of the private offering, we sold
warrants which entitle the holders to purchase up to 1,070,350 shares of our
common stock. The warrants can be exercised at any time prior to January 31,
2019 at a price of $5.00 per share.
50
STRAINWISE, INC.
INTERIM FINANCIAL STATEMENTS
For the three and nine month periods ended October 31, 2014 and 2013
(UNAUDITED)
51
STRAINWISE, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
October 31, January 31,
2014 2014
-------------- ------------
ASSETS
Current assets:
Cash $ 180,840 $ 100
Due from affiliated entities 1,017,077 -
Prepaid expenses and other assets 27,127 10,000
-------------- --------
Total current assets 1,225.044 10,100
Commercial operating property, net of accumulated
amortization of $4,001 and $0 at October 31,
2014 and January 31, 2014, respectively 656,000 -
Tenant improvements and office equipment, net of
accumulated amortization and depreciation of
$110,991 and $0 at October 31, 2014 and
January 31, 2014, respectively 2,102,775 10,501
Prepaid expenses and other assets 346,187 -
Trademark, net of accumulated amortization of
$610 and $61, at October 31, 2014 and January
31, 2014, respectively 10,400 10,949
------------- ---------
Total assets $ 4,340,406 $ 31,550
============= =========
LIABILITIES AND STOCKHOLERS' (DEFICIT) EQUITY
LIABILITIES
Current liabilities:
Accounts payable $ 344,867 $ -
Deferred tax liability 52,814 -
Due to affiliated entities - 50,203
Current portion of tenant allowance note
and mortgage payable 563,644 -
------------- ---------
Total current liabilities 961,325 50,203
Note payable for tenant allowances 443,785 -
Mortgage payable 297,460 -
Deferred rent 207,201 3,273
------------- ---------
Total liabilities 1,909,771 53,476
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 100,000,000
shares authorized, 26,948,884 and
20,430,000 issued and outstanding
at October 31, 2014 and January 31,
2014, respectively - -
Additional paid in capital 2,310,992 48,292
Retained earnings (deficit) 119,643 (70,218)
------------- ---------
Total stockholders' equity 2,430,635 (21,926)
------------- ---------
Total liabilities and stockholders'
equity (deficit) $ 4,340,406 $ 31,550
============= =========
|
See accompanying notes.
52
STRAINWISE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
October 31, October 31,
2014 2013 2014 2013
----- ---- ---- ----
Revenues from affiliated entities
Grow facilities usage fees $1,978,984 $ - $1,418,190 $ -
Sale of nutrient supplies 550,017 - 188,070 -
Branding, marketing and
administrative fees 517,000 - 301,000 -
Accounting and financial
services fees 273,000 - 129,000 -
Compliance services fees 227,500 - 107,500 -
---------- -------- --------- --------
3,546,501 - 2,143,760 -
Consulting services 33,000 - 33,000 -
---------- -------- --------- --------
Total revenues 3,579,501 - 2,176,760 -
---------- -------- --------- --------
Operating costs and expenses
Rent and other occupancy 1,561,811 - 1,155,531 -
Compensation 881,909 - 255,219 -
Nutrient purchases 289,482 - 98,984 -
Professional, legal and consulting 208,901 - 149,420 -
Depreciation and amortization 115,536 - 56,678 -
General and administrative 47,259 - 6,639
---------- -------- --------- --------
Total operating costs and expenses 3,104,898 - 1,722,471 -
---------- -------- --------- --------
Income from operations 474,603 - 454,289 -
Other costs and expenses
Loss on early extinguishment
of debt (93,000) - - -
Interest expense (138,928) - (66,000) -
---------- -------- --------- --------
Earnings (loss) before taxes
on income 242,675 - 388,289 -
Provision for taxes on income (52,814) - (113,716) -
---------- -------- --------- --------
Net income (loss) $ 189,861 $ - $ 274,573 $ -
=========== ======== ========= =========
Basic earnings (loss) per
common share $ 0.0085 $ - $ 0.0197 $ -
========== ========= ========= =========
Fully diluted earnings (loss)
per common share $ 0.0084 $ - $ 0.0112 $ -
========== ========= ========= =========
Basic weighted average number
of shares outstanding 22,475,602 851,250 25,020,371 851,250
========== ========= ========== =========
Fully diluted weighted average
number of shares outstanding 22,563,151 1,350,250 24,421,014 1,350,250
========== ========= ========== =========
|
See accompanying notes.
53
STRAINWISE, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Nine
Months ended Months ended
October 31, 2014 October 31, 2013
--------------- -----------------
Cash flows from operating activities:
Net income $ 189,861 $ -
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase in amounts due from affiliates (1,067,279) -
Increase in prepaid expenses and other assets (363,314) -
Increase in deferred taxes payable 52,814 -
Depreciation and amortization 114,991 -
Increase in accounts payable 344,867 -
Increase in deferred rent and interest 203,928 -
Decrease in trademark 549 -
----------------- ----------------
Net cash flow used in operating activities (523,583) -
Cash flows from investing activities:
Investment in tenant improvements and
office equipment (2,203,266)
Investment in commercial operating building (660,000) -
Share exchange in reverse merger transaction (255,000) -
----------------- ----------------
Net cash flow used in investing activities (3,118,266) -
Cash flows from financing activities:
Proceeds from common stock subscription 2,517,700 100
Note payable for tenant allowances 739,729 -
Proceeds from mortgage 565,160 -
Proceeds from sale of convertible note,
inclusive of discount of $45,000 895,000 -
Payments on convertible note (895,000) -
----------------- ----------------
Net cash flows from financing activities 3,822,589 100
----------------- ----------------
Net cash flows 180,740 100
Cash and equivalent, beginning of period 100 -
----------------- ----------------
Cash and equivalent, end of period $ 180,840 $ 100
================= ================
Supplemental cash flow disclosures:
Cash paid for interest $ 117,666 $ -
================= ================
Cash paid for income taxes $ - $ -
================= ================
|
See accompanying notes.
54
STRAINWISE, INC.
Notes to the Unaudited Financial Statements
October 31, 2014
Note 1 - Organization and summary of significant accounting policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business - STRAINWISE, INC. (identified in these
footnotes as "we" "us" or the "Company") provides branding marketing,
administrative, accounting, financial and compliance services ("Fulfillment
Services") to entities in the cannabis retail and production industry. The
Company was incorporated in the state of Colorado as a limited liability company
on June 8, 2012, and subsequently converted to a Colorado corporation on January
16, 2014.
The Company provides sophisticated Fulfillment Services to (i) the four grow
facilities and eight retail stores (seven of which sell recreational and medical
marijuana to the public and one of which only sells medical marijuana to the
public) owned by an officer and director of the Company ("Affiliated Entities")
and (ii) makes such services available to independent retail stores and grow
facilities in the regulated cannabis industry throughout the United States.
The Fulfillment Services that we currently provide are summarized, as follows:
o Branding, Marketing and Administrative Consulting Services: Customers
may contract with us to use the Strainwise name, logo and affinity
images in their retail store locations. A monthly fee permits our
branding customer to use the Strainwise brand at one specific
location. In addition, we will assist operators in marketing and
managing their businesses, setting up new retail locations and general
business planning and execution at an hourly rate. This includes
services to establish an efficient, predictable production process, as
well as, nutrient recipes for consistent and appealing marijuana
strains.
o Accounting and Financial Services: For a monthly fee, we provide our
customers with a fully implemented general ledger system, with an
industry centric chart of accounts, which enables management to
readily monitor and manage all facets of a marijuana medical
dispensary, retail store and grow facility. We provide bookkeeping,
accounts payable processing, cash management, general ledger
processing, financial statement preparation, state and municipal sales
tax filings, and state and federal income tax compilation and filings
on behalf of the Company and the Captive Stores on an ongoing basis.
o Compliance Services: The rules, regulations and state laws governing
the production, distribution and retail sale of marijuana can be
complex, and may prove cumbersome with which to comply. Thus,
customers may contract with us to implement a compliance process,
based upon the number and type of licenses and permits for their
specific business. We provide this service on both an hourly rate and
stipulated monthly fee.
55
o Nutrient Supplier: The Company presently is a bulk purchaser of
nutrients and other cultivation supplies for the sole purpose of
growing marijuana. As a result, we are able to make bulk purchases
with price breaks, based upon volume. We serve as a sole source
nutrient purchasing agent and distributor with pricing based upon our
bulk purchasing power.
o Lending: We will provide loans to individuals and businesses in the
cannabis industry. However, Colorado State law does not allow entities
operating under a cannabis license to pledge the assets or the license
of the cannabis operation for any type of general borrowing activity.
Thus, our lending will be on an unsecured basis, with reliance on a
personal guarantee of the borrower.
o Lease of Grow Facilities and Equipment: We lease grow equipment and
facilities on a turn-key basis to customers in the cannabis industry.
We will also enter into sale lease backs of grow lights, tenant
improvements and other grow equipment.
We do not directly grow marijuana plants, produce marijuana infused products,
sell marijuana plants and or sell marijuana infused products of any nature.
Share exchange - , On August 19, 2014, we entered into an Agreement to Exchange
Securities ("Share Exchange"), pursuant to which we acquired approximately 90%
of the outstanding shares of a privately held Colorado corporation ("Strainwise
Colorado") in exchange for 23,124,184 shares of our common stock.
As part of the Share Exchange, Strainwise Colorado paid $134,700 of our
liabilities and purchased 1,038,000 shares of our common stock for $120,300 from
two of our shareholders. The 1,038,000 shares were returned to treasury and
cancelled. We also agreed to sell our rights to a motion picture, together with
all related domestic and international distribution agreements, and all
pre-production and other rights to the film, to a former officer and director in
consideration for the assumption by one of our shareholders of all of our
liabilities (net of the $134,700 paid by Strainwise Colorado) which were
outstanding immediately prior to the closing of the transaction.
On September 12, 2014 we acquired the remaining outstanding shares of Strainwise
Colorado in exchange for the issuance of 2,517,000 shares of our common stock.
The resulting business combination has been accounted for as a reverse
acquisition and recapitalization, using accounting principles applicable to
reverse acquisitions whereby the financial statements subsequent to the date of
the transaction will be presented as a continuation of the Company. Under
reverse acquisition accounting, Strainwise Colorado is treated as the accounting
parent (acquirer) and we (parent) are treated as the accounting Subsidiary
(acquiree).
Basis of presentation - The accompanying unaudited condensed financial
statements have been prepared in accordance with accounting principles generally
accepted in the U.S. ("GAAP") for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information required by GAAP for complete annual financial statement
presentation.
56
These condensed financial statements as of and for the three and nine months
ended October 31, 2014 and 2013, reflect all adjustments which, in the opinion
of management, are necessary to fairly present the Company's financial position
and the results of its operations for the periods presented, in accordance with
the accounting principles generally accepted in the United States of America.
Operating results for the three and nine month periods ended October 31, 2014,
are not necessarily indicative of the results to be expected for other interim
periods or for the full year ending January 31, 2015.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of the statement of cash flows, we
consider all cash in banks, money market funds, and certificates of deposit with
a maturity of less than three months to be cash equivalents. During 2014, the
Company entered into an agreement with our Chief Executive Officer to hold all
of our cash funds in his personal bank account in trust for the Company. Because
of current banking regulations, marijuana centric entities are not afforded
normal banking privileges, and thus, we were not able to obtain a corporate bank
account at a federally charted bank until well into the end of the second
quarter of operations in 2014. Under the terms of our trust agreement with our
Chief Executive Officer, he agreed to hold our cash in his personal bank account
and to make payments of our funds only for our business purposes and to allow
daily access to the bank account for ongoing oversight of his fiduciary
responsibility to the Company. Additionally, the trust agreement required that
the Chief Executive Officer make copies available of all transactions applicable
to our operations to our accounting staff on a weekly, or as requested basis. At
October 31, 2014 and January 31, 2014 there were no cash deposits in the
personal bank account of the Chief Executive Officer held in trust for us.
Prepaid expenses and other assets - The Company pays rent in advance of the
rental period. The Company records the carrying amount as of the balance sheet
date of rental payments made in advance of the rental period; such amounts are
charged against earnings within one year. The Company also capitalizes any
prepaid expenses related to the reverse merger.
The amount of prepaid expenses and other assets as of October 31, 2014 and
January 31, 2014 is $373,314 and $10,000, respectively.
Current prepaid expenses and other assets are comprised of the following:
October 31, January 31,
2014 2014
------------ --------------
Prepaid insurance 19,345 -
Legal retainer 7,782 -
Rent deposits -- 10,000
------------ --------------
$ 27,127 $ 10,000
============ ==============
|
57
Noncurrent prepaid expenses and other assets are comprised of the following:
October 31, January 31,
2014 2014
------------ --------------
Prepaid rent $ 54,108 $ -
Security deposits 292,079 -
------------ --------------
$ 346,187 $ -
============ ==============
|
Fair value of financial instruments and derivative financial instruments - The
carrying amounts of cash and current liabilities approximate fair value because
of the short maturity of these items. These fair value estimates are subjective
in nature and involve uncertainties and matters of significant judgment, and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect these estimates. We do not hold or issue financial
instruments for trading purposes, nor do we utilize derivative instruments in
the management of our foreign exchange, commodity price or interest rate market
risks.
The FASB Codification clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. It also
requires disclosure about how fair value is determined for assets and
liabilities and establishes a hierarchy for which these assets and liabilities
must be grouped, based on significant levels of inputs as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets and liabilities
and inputs that are observable for the asset or liability.
Level 3: Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own assumptions.
The determination of where assets and liabilities fall within this hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
Commercial Operating Property - On July 26, 2014 we purchased a commercial
property that was previously leased by one of our affiliates, which we have
leased back to the affiliate. The commercial property consists of land and a
building that contains both a retail store and a grow facility. We have
allocated $220,000 and $440,000 of the purchase price to the cost of land and to
the cost of the improvements to the building, respectively, based upon
management's best estimate and belief. Management's estimate and belief was
based upon consideration of (i) replacement cost, (ii) limited knowledge of
comparable sales, (iii) anticipated future income generation, and (iv) single
use, internally. No intangible asset value was assigned to the existing lease on
the property, because the existing lease was immediately cancelled upon the
completion of the purchase of the commercial property. The cost of the
improvements to the building will be depreciated on a straight line method over
27.5 years, which we believe is the useful life of this asset.
58
Tenant improvements and office equipment - Tenant improvements are recorded at
cost, and are amortized over the lesser of the economic life of the asset or the
term of the applicable lease period. We determined that term of the leases
applicable to our tenant improvements are less than the economic life of the
respective assets that comprise our tenant improvements. Office equipment is
recorded at cost and is depreciated under straight line methods over each item's
estimated useful life. We review our tenant improvements and office equipment
for impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Maintenance and repairs of
property and equipment are charged to operations. Major improvements are
capitalized. Upon retirement, sale or other disposition of property and
equipment, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in operations.
Tenant improvements and office equipment, net of accumulated amortization and
depreciation are comprised of the following:
October 31, January 31,
2014 2014
----------- -----------
Tenant improvements:
Upgrades of HVAC systems $ 864,374 $ -
Upgrades of electrical generators and
power equipment 609,312 -
Structural improvements 588,801
Fire suppression, alarms and surveillance
systems 77,659 -
Office equipment:
Computer equipment 26,369 -
Office furniture and fixtures 22,251 10,500
Machinery 25,000 -
------------- --------
2,213,766 10,500
Accumulated amortization and depreciation (110,991) -
------------- --------
$2,102,775 $ 10,500
============= ========
|
Tenant improvements are amortized over the term of the lease, and office
equipment is depreciated over its useful lives, which has been deemed by
management to be three years. Amortization and depreciation expense for the nine
months ended October 31, 2014 and 2013 was $112,960 and $0, respectively.
Income taxes - The Company accounts for income taxes pursuant to ASC 740. Under
ASC 740 deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
59
Long-Lived Assets - In accordance with ASC 350, the Company regularly reviews
the carrying value of intangible and other long-lived assets for the existence
of facts or circumstances, both internally and externally, that suggest
impairment. If impairment testing indicates a lack of recoverability, an
impairment loss is recognized by the Company if the carrying amount of a
long-lived asset exceeds its fair value.
Trademarks - Trademarks and other intangible assets are stated at cost and are
amortized using the straight-line method over fifteen years. Accumulated
amortization was $610 and $0 at October 31, 2014 and 2013, respectively and
consisted of the following at October 31, 2014:
Gross
Carrying Accumulated
Amount Amortization Net
---------- ------------- --------
Trademarks $11,010 $610 $ 10,400
======= ==== ========
|
Deferred Rent - The Company recognizes rent expense from operating leases on the
straight-line basis. Differences between the expense recognized and actual
payments are recorded as deferred rent.
Revenue recognition - Revenue is recognized on an accrual basis as earned under
contract terms. Revenue from affiliated entities is recognized as follows:
o Branding, Marketing and Administrative Services Revenue: Under the
terms of a ten year master service agreement, we allow an affiliated
entity to use the Strainwise brand for both retail and marketing
purposes at one location, plus we provide administrative services to
assist the employees of the affiliated entity to operate the business
of that related location, Also, under a long term master service
agreement, we provide administrative and management services to assist
employees of affiliated entities to operate their grow facilities. We
charge the affiliated entity a monthly fee of approximately $4,500 a
month for the branding, marketing and administrative services and
$4,500 to $20,000 for grow facility rent. Since we (i) are the primary
obligor, (ii) determine the price, (iii) perform the service, (iv)
have the credit risk, and (v) since there are no additional milestone
that need to be met other than actually providing the services, in
accordance with ASC 605-45-45, the revenue is recognized on monthly
basis in accordance with the terms of the applicable master service
agreement.
o Accounting and Financial Services Revenue: Under the terms of a ten
year master service agreement, we have agreed to provide our
affiliated entities with a fully implemented general ledger system,
coupled with an industry centric chart of accounts, which enables
management to readily monitor and manage all accounting and financial
facets of a marijuana medical dispensary, retail store and/or grow
facility. Under the terms of the master service agreement we have also
agreed to provide bookkeeping, accounts payable processing, cash
management, general ledger processing, financial statement
preparation, state and municipal sales tax filings, and state and
federal income tax compilation and filings. Under the terms of the
master service agreement, we provide the above described accounting
and financial services for a monthly fee of $3,000.Since we (i) are
the primary obligor, (ii) determine the price, (iii) perform the
service, (iv) have the credit risk, and (v) since there are no
additional milestone that need to be met other than actually providing
the above described service, in accordance with ASC 605-45-45, the
60
revenue is recognized on monthly basis in accordance with the terms of
the applicable master service agreement.
o Compliance Services Revenue: Under the terms of a ten year master
service agreement, we provide the affiliated entities with a
compliance process that includes the preparation and filing of state,
city and municipal applications and renewals of licenses in accordance
with the rules, regulations and state laws governing the production,
distribution and retail sale of marijuana. We provide this service to
our affiliate entities under the terms of a master service agreement
for a monthly fee of $2,500 per month. Since we (i) are the primary
obligor, (ii) determine the price, (iii) perform the service, (iv)
have the credit risk, and (v) since there are no additional milestone
that need to be met other than actually providing the above described
service, in accordance with ASC 60545-45, the revenue is recognized on
monthly basis in accordance with the terms of the applicable master
service agreement.
o Nutrient Sales: Under the terms of a ten year master service
agreement, we serve as a sole source nutrient purchasing agent and
distributor for our affiliated entities, with pricing based upon our
bulk purchasing power. We charge the affiliated entities for nutrients
supplied to them at the cost of the nutrients, plus a premium of
ninety percent. Since we (i) are the primary obligor, (ii) determine
the price, (iii) perform the service, (iv) have the credit risk, and
(v) since there are no additional milestone that need to be met other
than actually buying and delivering the above nutrients to the
affiliated entity, in accordance with ASC 605-45-45, the revenue is
recognized in the month in which the nutrient is actually delivered to
the related entity.
o Grow Facilities Revenue: Under the terms of a ten year master service
agreement, we lease grow facilities and equipment for a period equal
to the term of the underlying lease with an independent, third party
lessor in an amount equal to the sum of (i) the monthly lease payment,
(ii) plus the cost of reimbursed operating expenses paid to the lessor
each month, (iii) plus the amount of monthly amortization of tenant
improvements, and (iv) plus a premium of forty percent. Since we (i)
are the primary obligor, (ii) determine the price, (iii) perform the
service, (iv) have the credit risk, and (v) since there are no
additional milestone that need to be met other than actually leasing
the facilities and equipment to the respective affiliated entity, in
accordance with ASC 605-45-45, the revenue is recognized in the month
in which the lease payments are made by us to the respective
independent, third party lessor.
Comprehensive Income (Loss) - Comprehensive income is defined as all changes in
stockholders' equity (deficit), exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss, changes
in certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries and unrealized
gains (losses) on available-for-sale securities. From our Inception there have
been no differences between our comprehensive loss and net loss.
Net income per share of common stock - We have adopted applicable FASB
Codification regarding Earnings per Share, which require presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
61
diluted EPS computation. In the accompanying financial statements, basic
earnings per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Note 2 - Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. For the period ended October 31, 2014,
the Company has had limited operations. As of October 31, 2014, the Company has
only recently become minimally profitable. In view of these matters, the
Company's ability to continue as a going concern is dependent upon the Company's
ability to begin operations and to achieve a level of profitability. The Company
intends to continue financing its future development activities and its working
capital needs largely from the sale of public equity securities with some
additional funding from other traditional financing sources, including term
notes until such time that funds provided by operations are sufficient to fund
working capital requirements. The financial statements of the Company do not
include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Note 3 - Related Party Transactions:
Substantially all of our revenues to date have been derived from long term
contracts with a group of entities that are majority owned by our Chief
Executive Officer, who is also the husband of our majority owner and President.
Note that all terms and contracts related to related party revenue are
determined by related parties and these terms can change at any time.
Related party revenue was $3,878,051 and $0, respectively, for the nine months
ended October 31, 2014 and 2013. As of October 31, 2014 and January 31, 2014, we
had accounts receivable from affiliated entities of $1,011,652 and $-0-
respectively.
Tenant improvements, net of improvements to our executive offices, were
$2,071,466 as of October 31, 2014, and represent the cost of improvements we
made to properties we rent from unrelated third parties and sublease to entities
controlled by our Chief Executive Officer. We paid $660,000 for the property we
purchased in July 2014 (see Note 8). We lease this property to an entity which
is also controlled by our Chief Executive Officer.
Note 4 - Operating Leases:
The Company entered into a lease agreement with an affiliate for our corporate
office needs. The lease is for a 31 month period, commenced in January 2014 for
6,176 square feet at an annual rate of $64,848 for the first twelve months,
$67,936 for the subsequent 12 months, and $41,431 for the subsequent 7 months
paid monthly, through October 31, 2016. This lease to the Company is on the same
terms and conditions as is the direct lease between the affiliate and the
independent lessor. Consequently, we believe that the lease terms to the Company
are comparable to lease terms we would receive directly from third party lessors
in our market, because the related party terms mirror the terms of the direct
lease between the independent, third party lessor and the affiliated entity.
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We entered into a lease agreement on March 7, 2014 to lease from an independent
third party a grow facility of approximately 26,700 square feet ("Custer Lease")
for a term of five years commencing on April 1, 2014. Lease payments are
scheduled to be $29,200 per month for the first twelve months of the lease, and
then are scheduled to be $27,500 per month for the subsequent 12 months, $28,325
per month for the subsequent 12 months, $29,170 per month for the subsequent 12
months and $30,035 per month for the final 12 months of the lease. Under the
terms of the Custer Lease, we are obligated to reimburse the lessor for
operating expenses applicable to the leased property, and we are obligated to
pay a security deposit of $29,200 which was due and paid upon the execution of
the Custer Lease. We have the option to renew the Custer Lease at the end of the
term of the lease at a mutually agreed upon rate per square foot; there is no
option to purchase the property underlying the Custer Lease. We account for this
lease as an operating lease rather than as a capital lease, because the lease
does not transfer ownership to us at the end of the lease, there is no bargain
purchase price for the grow facility as a component of the lease, the terms of
the lease are less than 75% of the economic life of the grow facility, and the
current present value of the minimum lease payments is less than 90% of the fair
market value of the asset. Beginning January 1, 2015, we subleased the Custer
facility to an independent third party for a five-year period on a
triple-net-lease-basis, with monthly rental payments of $20,000 per month for
the six month period beginning January 1, 2015 $51,200 per month for the six
month period beginning July 1, 2015 and $35,600 per month for the 48-month
period beginning January 1, 2016. Effective January 1, 2015 revenue from the
sublease of the Custer facility is recognized on a monthly basis as a reduction
of lease expense.
We entered into a lease agreement on April 1, 2014 to lease from an independent
third party a grow facility of approximately 65,000 square feet ("51st Ave
Lease") for a term of five years and nine months. The terms of the 51st Ave
Lease stipulates the payment of $15,000 per month, prorated if necessary, until
such time that the Lessor is able to deliver a Certificate of Occupancy, which
occurred on August 1, 2014. Thereafter, lease payments are scheduled to be
$176,456 per month for the first six months of the lease, and then are scheduled
to be $221,833 per month for the subsequent 24 months, $231,917 per month for
the subsequent 12 months, $242,000 per month for the subsequent 12 months and
$247,041 per month for the final 12 months of the lease. Under the terms of the
51st Ave Lease, we are obligated to reimburse the lessor for operating expenses
applicable to the leased property and we are obligated to pay a security deposit
in the total amount $150,000, two thirds of which has been paid, with the
remaining $50,000 due by December 1, 2014. We have the option to renew the 51st
Ave Lease at the end of the term of the lease at a mutually agreed upon rate per
square foot; there is no option to purchase the property underlying the 51st
Avenue Lease. The Lessor will provide all of the tenant improvements that will
enable the continuous cultivation of marijuana plants under approximately 1,940
grow lights. We account for this lease as an operating lease rather than as a
capital lease, because the lease does not transfer ownership to us at the end of
the lease, there is no bargain purchase price for the grow facility as a
component of the lease, the terms of the lease are less than 75% of the economic
life of the grow facility, and the current present value of the minimum lease
payments is less than 90% of the fair market value of the asset. We sublease
this grow facility to an affiliated entity under the terms of a Master Service
Agreement for a term of five years and nine months in an amount equal to the sum
of (i) the monthly lease payment, (ii) plus the cost of reimbursed operating
expenses paid to the lessor each month, and (iii) plus the amount of monthly
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amortization of tenant improvements, and (iv) a premium of forty percent.
Revenue from the sublease of the 51st Avenue grow facility is recognized on a
monthly basis as the user is charged for the amount of the sublease.
We entered into a lease agreement on April 22, 2014 to lease from an independent
third party a grow facility of approximately 38,000 square feet ("Nome Lease")
for a term of seven years. The lease payments are scheduled to be $44,570 per
month for the first twelve months of the lease, and then are scheduled to be
$46,151 per month for the subsequent 12 months, $47,743 per month for the
subsequent 12 months, $49,334 per month for the subsequent 12 months and $50,925
per month for the subsequent 12 months, $52,517 per month for the subsequent 12
months, and $54,108 for the final 12 months of the lease. Under the terms of the
Nome Lease, we are obligated to reimburse the lessor for operating expenses
applicable to the leased property, and we are obligated to pay a security
deposit of $133,679 one half of which was due and paid upon the execution of the
Nome Lease, the final half was due and payable 30 days after the commencement
date. We have the option to renew the Nome Lease at the end of the term of the
lease at a mutually agreed upon rate per square foot; there is no option to
purchase the property underlying the Nome Lease. We are responsible to provide
all of the tenant improvements that will enable the continuous cultivation of
marijuana plants under approximately 920 grow lights. We account for this lease
as an operating lease rather than as a capital lease, because the lease does not
transfer ownership to us at the end of the lease, there is no bargain purchase
price for the grow facility as a component of the lease, the terms of the lease
are less than 75% of the economic life of the grow facility, and the current
present value of the minimum lease payments is less than 90% of the fair market
value of the asset. We sublease this grow facility to an affiliated entity under
the terms of a Master Service Agreement for a term of seven years in an amount
equal to the sum of (i) the monthly lease payment, (ii) plus the cost of
reimbursed operating expenses paid to the lessor each month, (iii) plus the
amount of monthly amortization of tenant improvements, and (iv) a premium of
forty percent. Revenue from the sublease of the Nome grow facility is recognized
on a monthly basis as the user is charged for the amount of the sublease.
We entered into a lease agreement on June 10, 2014 to lease from an independent
third party a grow facility of approximately 113,000 square feet ("32nd Ave
Lease") for a term of five years. The Lease will not become fully effective
until we are awarded the necessary licenses, and the Lessor is able to deliver a
Certificate of Occupancy, which is presently estimated to occur sometime during
early to mid-2015. The terms of the 32nd Ave Lease stipulate the payment of
$25,000 per month, prorated if necessary, until such time that the Lessor is
able to deliver a Certificate of Occupancy Thereafter, lease payments are
scheduled to be $282,500 per month for the first 24 months of the lease, and
then are scheduled to be $301,333 per month for the subsequent 12 months,
$320,167 per month for the subsequent 12 months, and $329,583 per month for the
final 12 months of the lease. Under the terms of the 32nd Ave Lease, we are
obligated to reimburse the lessor for operating expenses applicable to the
leased property, and we are obligated to pay a security deposit of $250,000,
$150,000 of which was due and paid upon the execution of the 32nd Ave Lease, and
$100,000 due upon obtaining the Certificate of Occupancy. We have the option to
renew the 32nd Ave Lease at the end of the term of the lease at a mutually
agreed upon rate per square foot; there is no option to purchase the property
underlying the 32nd Ave Lease. The lessor will provide all of the tenant
improvements that will enable the continuous cultivation of marijuana plants
under approximately 3,000 grow lights. We account for this lease as an operating
lease rather than as a capital lease, because the lease does not transfer
ownership to us at the end of the lease, there is no bargain purchase price for
the grow facility as a component of the lease, the terms of the lease are less
than 75% of the economic life of the grow facility, and the current present
value of the minimum lease payments is less than 90% of the fair market value of
the asset. We will sublease this grow facility to an affiliated entity under the
64
terms of a Master Service Agreement for a term of five years in an amount equal
to the sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed
operating expenses paid to the lessor each month, (iii) plus the amount of
monthly amortization of tenant improvements, and (iv) and a premium of forty
percent. Revenue from the sublease of the 32nd Avenue grow facility will be
recognized on a monthly basis as the user is charged for the amount of the
sublease.
We entered into a lease agreement on September 11, 2014 to lease a grow facility
of approximately 20,000 square feet ("Bryant St. Lease") for a term of ten
years. During the first 12 months of the lease, lease payments are scheduled to
be $23,984 for the first four months and 24,531 for the next eight months, and
then are scheduled to be $24,647, $25,140, $31,221, $31,845, $32,483, $33,132,
$33,794, $34,470, and $35,160 for the second through the tenth year of the
lease, respectively. We are not required to provide any security deposits or
first and last month's rental amounts. We have an option to purchase the
building for $2,400,000 at any time during the first 36 months of the lease,
provided that we deliver a purchase option notice to the Lessor prior to the end
of the 33rd month of the lease. We are responsible to provide all of the tenant
improvements that will enable the continuous cultivation of marijuana plants
under approximately 370 grow lights. We account for this lease as an operating
lease rather than as a capital lease, because the lease does not transfer
ownership to us at the end of the lease, there is no bargain purchase price for
the grow facility as a component of the lease, the terms of the lease are less
than 75% of the economic life of the grow facility, and the current present
value of the minimum lease payments is less than 90% of the fair market value of
the asset. We lease this grow facility to an affiliated entity under the terms
of a Master Services Agreement on a long term basis in an amount equal to the
sum of (i) the monthly lease payment, (ii) plus the cost of reimbursed operating
expenses paid to the lessor each month, (iii) plus the amount of monthly
amortization of tenant improvements, and (iv) a premium of forty percent.
Revenue from the sublease of the Bryant Street grow facility is recognized on a
monthly basis as the user is charged for the amount of the sublease.
Future minimum payments for these leases, including the increase in the Nome
Lease payments per the amendment described under subsequent events in Note 10
herein, are:
For the 12 Months
Ending October 31, Amount
------------------ ------
2015 $5,989,627
2016 $7,845,004
2017 $8,086,492
2018 $8,523,339
2019 $8,441,104
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Note 5 - Issuance of Shares:
Through a private offering of our common stock at $1 per share, we collected
$2,224,700 from subscribers, as of October 31, 2014, for 2,224,700 shares of our
common stock. Coupled with the 293,000 common shares issued in connection with
the conversion of the convertible note described in the following Note 7, and
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the Share Exchange described in Note 1, the total number of shares of common
stock issued and outstanding at October 31, 2014 was 26,948,884 shares
Note 6 - Income Taxes:
The Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company's assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.
The Company adopted the provisions of ASC 740, "Income Taxes" on July1, 2007.
FASB ASC 740 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in the
financial statements. Tax positions must meet a "more-likely-than-not"
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods. The components of the income tax
provision are as follows:
Nine Months Ended Three Months Ended
October 31, October 31,
2014 2013 2014 2013
---- ---- ---- ----
Income Tax Expense
Current:
Federal $ 45,113 $ - $ 99,273 $ -
State 7,701 - 14,443 -
-------- ------- -------- ------
Income Tax Provision $ 52,814 $ - $113,716 $ -
======== ======= ======== ======
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We have a net operating loss carryforward for financial statement reporting
purposes of $76,351 from the year ended January 31, 2014.
Note 7 - Convertible Note Payable:
The Company issued a convertible note in the amount of $850,000 on March 20,
2014 (the "Note"). This Note was subsequently amended, and the unpaid principal
balance was converted into common stock, as more fully described below. The Note
had an interest rate of 25%, payable monthly, and was scheduled to mature on
September 21, 2014. The outstanding principal balance of the Note, plus any
accrued but unpaid interest on the Note, was convertible at any time on or
before the maturity date at $1 per common share. The Note was personally
guaranteed by our majority shareholder and by an officer and director of the
Company.
On July 16, 2014, the terms of the Note were amended ("Amendment") wherein the
holder of the Note elected to convert $200,000 of the principal of the Note into
293,000 of our common shares of stock at a price of $.6825 per share. As a
component of the Amendment, we in turn elected to prepay the remaining principal
balance of the Note, after the scheduled payment of the principal and accrued
interest due the holder on July 24, 2014, and to pay a prepayment penalty of
$11,250. The difference of $93,000 in the premium of the per-share price of
$0.6825 per share per the Amendment and the $1 per share per the Note, plus the
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amount of the prepayment penalty was charged to the loss on the early
extinguishment of debt and interest expense, respectively.
Note 8 - Mortgage Payable
On July 26, 2014 the company entered into a mortgage payable for the purpose of
purchasing a commercial operating property that contains a grow facility and
retail store, which we lease to one of our affiliated entities. The amount of
the mortgage is $595,000, has a three year term, and has no stated rate of
interest. In accordance with ASC 835-30, we imputed an interest rate for the
mortgage payable of 21.36%. The mortgage is payable in varying amounts from
$11,000 to $36,000 per month, which includes interest at stated amount of $6,000
per month, with a balloon payment of $126,000 due in the thirty-sixth month of
the term. We account for the mortgage on a straight line basis with an imputed
monthly payment of principal and interests in the amount of $22,301 per month.
The difference between the imputed monthly payment amount and actual payment
amounts is recorded as an increase or decrease to deferred interest expense, at
the time a monthly payment is made. Actual cash payments of principal and
interest due under the terms of the mortgage over the subsequent three year
period are, as follows:
Period ended October 31,
2015 - $221,000
2016 - $232,000
2017 - $232,000
2018 - $126,000
The mortgage is also personally guaranteed by Shawn Phillips, an affiliate of
the Company.
Note 9 - New Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") periodically issues new
accounting standards in a continuing effort to improve standards of financial
accounting and reporting. The Company has reviewed the recently issued
pronouncements and concluded that there are no new accounting standards are
applicable to the Company. The Company elected to adopt ASU 2014-10, Development
Stage Entities: Elimination of Certain Financial Reporting Requirements,
Including an Amendment to Variable Interest Entities Guidance in Topic 810,
Consolidation. The adoption of this ASU allows the Company to remove the
inception to date information and all references to development stage. We do not
expect the adoption of recently issued accounting pronouncements to have a
significant impact on our results of operations, financial position or cash
flow.
Note 10 - Subsequent Events:
We entered into a lease agreement on November 11, 2014 to lease a retail
location of approximately 2,976 square feet ("Federal Heights Lease") for a term
of 5 years and one month, with two 5 year renewal options. During term of the
lease, lease payments are scheduled to be $5,704 per month. We are responsible
to provide all of the tenant improvements that will enable the continuous sale
of marijuana products at the Federal Heights retail location by an affiliated
entity. We account for this lease as an operating lease rather than as a capital
67
lease, because the lease does not transfer ownership to us at the end of the
lease, there is no bargain purchase price for the grow facility as a component
of the lease, the terms of the lease are less than 75% of the economic life of
the grow facility, and the current present value of the minimum lease payments
is less than 90% of the fair market value of the asset. We will lease this
retail location to an affiliated entity under the terms of a Master Services
Agreement on a long term basis in an amount equal to the sum of (i) the monthly
lease payment, (ii) plus the cost of reimbursed operating expenses paid to the
lessor each month, (iii) plus the amount of monthly amortization of tenant
improvements, and (iv) a premium of forty percent. Revenue from the sublease of
the Federal Heights retail location will be recognized on a monthly basis as the
user is charged for the amount of the sublease.
We entered into a modification of the Nome lease on December 1, 2014, wherein
the lease was modified to extend the lease term through April 30, 2025; and, the
lease payments were modified to be $88,616 per month for the five months ending
April 30 2015, and then are scheduled to be $90,207, $91,799, $93,390, $94,981,
$73,578, $75,169, $76,761, 78,352, and then $79,943 per month for the final 12
months of the lease. The modification of the lease included the cancellation of
the $750,000 note payable to the lessor for the financing of tenant
improvements, and the extension of an additional $800,000 to be used by us for
future tenant improvements. The full amount of $1,550,000 of tenant improvement
financing to be provided by the lessor is to be amortized over the extended term
of the modified lease as a component of the monthly lease payments.
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