Report of Independent Registered Public Accounting Firm
To the stockholders and the board of directors of STWC Holdings, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of STWC Holdings, Inc. (the "Company") as of January 31, 2019 and 2018,
the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of January 31, 2019 and 2018 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.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 3 to the financial statements, the Company has incurred significant operating losses since inception and has a working capital deficit which raises substantial doubt about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
By: /s/ BF Borgers CPA PC
We have served as the Company's auditor since 2014.
Lakewood, CO
April 30, 2019
STWC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2019 and 2018
|
|
|
2019
|
|
|
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,965
|
|
|
$
|
27,925
|
|
|
Accounts Receivable, net
|
|
|
56,459
|
|
|
|
5,000
|
|
|
Inventory
|
|
|
29,786
|
|
|
|
11,888
|
|
|
Prepaid expenses and other assets
|
|
|
19,675
|
|
|
|
17,592
|
|
|
Total current assets
|
|
|
108,885
|
|
|
|
62,405
|
|
|
Property and equipment, net
|
|
|
2,767
|
|
|
|
3,773
|
|
|
Intangible assets, net
|
|
|
9,452
|
|
|
|
8,021
|
|
|
Notes receivable, related party
|
|
|
452,709
|
|
|
|
94,061
|
|
|
Total assets
|
|
$
|
573,813
|
|
|
$
|
168,260
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
665,791
|
|
|
$
|
284,394
|
|
|
Accrued expenses
|
|
|
437,388
|
|
|
|
82,044
|
|
|
Loans from related parties
|
|
|
32,021
|
|
|
|
490,970
|
|
|
Deferred revenue
|
|
|
192,500
|
|
|
|
150,000
|
|
|
Notes payable current, net of discount
|
|
|
274,282
|
|
|
|
-
|
|
|
Total current liabilities
|
|
|
1,601,982
|
|
|
|
1,007,408
|
|
|
Long-term loan from related party
|
|
|
48,240
|
|
|
|
-
|
|
|
Long-term notes payable
|
|
|
125,000
|
|
|
|
-
|
|
|
Total liabilities
|
|
|
1,775,222
|
|
|
|
1,007,408
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Common stock, no par value, 100,000,000 shares authorized, 33,792,589 and 27,140,550 issued and outstanding,
respectively, at January 31, 2019 and 2018
|
|
|
-
|
|
|
|
-
|
|
|
Additional Paid in Capital
|
|
|
7,238,699
|
|
|
|
5,325,684
|
|
|
Retained deficit
|
|
|
(8,440,108
|
)
|
|
|
(6,164,832
|
)
|
|
Total Stockholders' deficit
|
|
|
(1,201,409
|
)
|
|
|
(839,148
|
)
|
|
Total liabilities and stockholders' deficit
|
|
$
|
573,813
|
|
|
$
|
168,260
|
|
See accompanying notes to the financial statements
STWC HOLDINGS, INC.
CONDENSED AND CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31, 2019 and 2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Consulting Services
|
|
$
|
136,537
|
|
|
$
|
263,500
|
|
|
Cost of consulting services
|
|
|
(110,761
|
)
|
|
|
(233,529
|
)
|
|
Gross profit
|
|
|
25,776
|
|
|
|
29,971
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
Rents and other occupancy
|
|
|
59,450
|
|
|
|
67,927
|
|
|
Compensation
|
|
|
744,128
|
|
|
|
523,805
|
|
|
Professional, legal and consulting
|
|
|
597,099
|
|
|
|
193,950
|
|
|
General and administrative
|
|
|
355,814
|
|
|
|
307,023
|
|
|
Depreciation and amortization
|
|
|
1,826
|
|
|
|
2,308
|
|
|
Total operating costs and expenses
|
|
|
1,758,317
|
|
|
|
1,095,013
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(104,783
|
)
|
|
|
(1,016
|
)
|
|
Other expenses
|
|
|
6,666
|
|
|
|
-
|
|
|
Loss on impairment of investment
|
|
|
(345,394
|
)
|
|
|
-
|
|
|
Loss on debt conversion
|
|
|
(80,502
|
)
|
|
|
-
|
|
|
Loss on investment in affiliate
|
|
|
(18,722
|
)
|
|
|
(24,159
|
)
|
|
Total other income (expense)
|
|
|
(542,735
|
)
|
|
|
(25,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, before provision for taxes on income
|
|
|
(2,275,276
|
)
|
|
|
(1,090,217
|
)
|
|
Provision for taxes on income
|
|
|
-
|
|
|
|
-
|
|
|
Loss from continuing operations, net of tax
|
|
|
(2,275,276
|
)
|
|
|
(1,090,217
|
)
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
1,479,497
|
|
|
Net income (loss)
|
|
$
|
(2,275,276
|
)
|
|
$
|
389,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings and fully diluted income (loss) per common share
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
|
Discontinued operations
|
|
$
|
-
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted weighted average number of shares outstanding
|
|
|
29,222,516
|
|
|
|
27,140,550
|
|
See
accompanying notes to the financial statements
STWC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2019 and 2018
|
|
|
2019
|
|
|
2018
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,275,276
|
)
|
|
$
|
389,280
|
|
|
Depreciation and Amortization
|
|
|
1,826
|
|
|
|
2,308
|
|
|
Accretion of debt discount
|
|
|
68,182
|
|
|
|
-
|
|
|
Loss on debt conversion
|
|
|
80,502
|
|
|
|
-
|
|
|
Loss on impairment of investment
|
|
|
345,394
|
|
|
|
-
|
|
|
Loss on investment in affiliates
|
|
|
18,722
|
|
|
|
24,159
|
|
|
Stock compensation
|
|
|
197,720
|
|
|
|
-
|
|
|
Shares and warrants issued for services
|
|
|
272,438
|
|
|
|
-
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(51,459
|
)
|
|
|
(5,000
|
)
|
|
Inventory
|
|
|
(17,898
|
)
|
|
|
(11,888
|
)
|
|
Investments in affiliates
|
|
|
(364,116
|
)
|
|
|
15,000
|
|
|
Notes receivable, related party
|
|
|
(358,648
|
)
|
|
|
(94,061
|
)
|
|
Deposits, prepaids and other
|
|
|
(2,083
|
)
|
|
|
(17,592
|
)
|
|
Accounts payable
|
|
|
386,397
|
|
|
|
36,324
|
|
|
Accrued expenses
|
|
|
295,042
|
|
|
|
139,156
|
|
|
Deferred revenue
|
|
|
42,500
|
|
|
|
150,000
|
|
|
Net cash (used in) operating activities from continuing operations
|
|
|
(1,360,757
|
)
|
|
|
627,686
|
|
|
Net cash (used in) operating activities from discontinued operations
|
|
|
-
|
|
|
|
(1,047,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
-
|
|
|
|
(4,024
|
)
|
|
Investment in Intangible assets
|
|
|
(2,250
|
)
|
|
|
-
|
|
|
Net cash provided (used) by investing from continuing operations
|
|
|
(2,250
|
)
|
|
|
(4,024
|
)
|
|
Net cash provided (used) by investing from discontinued operations
|
|
|
-
|
|
|
|
2,137,026
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing:
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuance
|
|
|
765,700
|
|
|
|
-
|
|
|
Proceeds from warrant exchange
|
|
|
49,650
|
|
|
|
-
|
|
|
Proceeds from debt
|
|
|
551,100
|
|
|
|
-
|
|
|
Proceeds from related party loans
|
|
|
171,597
|
|
|
|
181,263
|
|
|
Payment to related party loans
|
|
|
(200,000
|
)
|
|
|
-
|
|
|
Net cash from (used) by financing from continuing operations
|
|
|
1,338,047
|
|
|
|
181,263
|
|
|
Net cash from (used) by financing from discontinued operations
|
|
|
-
|
|
|
|
(2,000,000
|
)
|
|
Net cash flows
|
|
|
(24,960
|
)
|
|
|
(105,264
|
)
|
|
Cash, beginning of period
|
|
|
27,925
|
|
|
|
133,189
|
|
|
Cash, end of period
|
|
$
|
2,965
|
|
|
$
|
27,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
20,079
|
|
|
$
|
171,736
|
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
|
Shares issued in exchange for debt
|
|
|
402,508
|
|
|
|
-
|
|
|
Shares and warrants issued for services
|
|
|
272,438
|
|
|
|
-
|
|
|
Debt Discount
|
|
|
225,000
|
|
|
|
-
|
|
|
|
|
$
|
899,946
|
|
|
$
|
-
|
|
See accompanying notes to the
financial statements
STWC HOLDINGS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICT)
FOR THE YEARS ENDED JANUARY 31, 2019 and 2018
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional Capital in excess of par value
|
|
|
Accumulated Deficit
|
|
|
Total
|
|
|
Balance, January 31, 2017
|
|
|
27,140,550
|
|
|
$
|
-
|
|
|
$
|
3,152,658
|
|
|
$
|
(5,578,692
|
)
|
|
$
|
(2,426,034
|
)
|
|
Gain from related party transaction
|
|
|
-
|
|
|
|
-
|
|
|
|
2,173,026
|
|
|
|
(975,420
|
)
|
|
|
1,197,606
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
389,280
|
|
|
|
389,280
|
|
|
Balance, January 31, 2018
|
|
|
27,140,550
|
|
|
|
-
|
|
|
|
5,325,684
|
|
|
|
(6,164,832
|
)
|
|
|
(839,148
|
)
|
|
Private share offering
|
|
|
3,828,500
|
|
|
|
-
|
|
|
|
765,700
|
|
|
|
-
|
|
|
|
765,700
|
|
|
Shares issued in exchange for debt
|
|
|
2,012,539
|
|
|
|
-
|
|
|
|
402,507
|
|
|
|
-
|
|
|
|
402,507
|
|
|
Warrants issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
172,438
|
|
|
|
-
|
|
|
|
172,438
|
|
|
Beneficial conversion feature on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
225,000
|
|
|
|
-
|
|
|
|
225,000
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
197,720
|
|
|
|
-
|
|
|
|
197,720
|
|
|
Shares issued for investment
|
|
|
500,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Warrants exchange for shares
|
|
|
311,000
|
|
|
|
-
|
|
|
|
49,650
|
|
|
|
-
|
|
|
|
49,650
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,275,276
|
)
|
|
|
(2,275,276
|
)
|
|
Balance, January 31, 2019
|
|
|
33,792,589
|
|
|
$
|
-
|
|
|
$
|
7,238,699
|
|
|
$
|
(8,440,108
|
)
|
|
$
|
(1,201,409
|
)
|
See accompanying notes to the financial statements
STWC HOLDINGS, INC.
Notes to the Audited Consolidated Financial Statements
January 31, 2019 and 2018
Note 1 – Organization
STWC HOLDINGS, INC., through its wholly-owned subsidiary, Strainwise, Inc., (identified in these footnotes as “STWC” “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 originally incorporated in the State of
Utah on April 25, 2007, and redomiciled to Colorado by merging into a Colorado corporation incorporated June 7, 2016. Strainwise, Inc, was originally 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.
On December 13, 2018, the Company invested in Meridian A, LLC which owns a CBD retail store located in Oklahoma. The company’s
Chief executive office is the managing member of the entity and STWC Holdings, Inc. owns 75% of the legal entity. In accordance with Accounting Standards Codification 810
Consolidation
, the Company has consolidated the entity.
Note 2 – Summary of significant accounting policies
Basis of
presentation
- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The Company has elected a fiscal year ending on January 31.
All intercompany balances and transactions have been eliminated in the consolidated financial statements.
Going
Concern and Management’s Plan
-
Our Consolidated Financial Statements as of and for the year ended January 31, 2019 were prepared on the basis of a
going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that could be necessary should we be
required to liquidate assets.
Our ability to continue as a going concern and raise capital for specific strategic initiatives could also depend on obtaining
adequate capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be
obtainable on acceptable terms.
Use of
estimates
–
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the
financial statements in the period they are deemed to be necessary. Significant estimates made in the accompanying financial statements include but are not limited to following: those related to revenue recognition, allowance for doubtful
accounts and notes receivable and unbilled services, lives and recoverability of equipment and other long-lived assets, realization of deferred tax assets, valuation of equity-based transactions, contingencies and litigation. The Company is
subject to uncertainties, such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is
deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company's financial statements will change as new events
occur, as more experience is acquired, as additional information is obtained and as the Company's operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation
methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Cash and
cash equivalents
–
the company considers all cash in banks, money market funds, and certificates of deposit with a maturity
of less than three months to be cash equivalents.
During the year-ended January 31, 2019 the Company was able to obtain a corporate bank account at a major
financial institution. Cash balances may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. For the years presented no balances
exceeded the federally insured limits.
Prepaid
expenses and other assets
–
Prepaid expenses and other current assets consist of various payments the Company has made in
advance for goods or services to be received in the future. As of January 31, 2019, prepaid expenses was comprised of advance payments made to third parties for general expenses. Prepaid general expenses are amortized over the applicable
periods which approximate the life of the contract or service period.
Tenant
improvements and office equipment
–
Tenant improvements and office equipment are recorded at cost and are depreciated under
straight line methods over each item's estimated useful life. Management reviews the Company’s 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:
|
|
|
January 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Leasehold improvements
|
|
$
|
2,200
|
|
|
$
|
2,200
|
|
|
Office equipment, furniture and fixtures
|
|
|
26,276
|
|
|
|
26,276
|
|
|
|
|
|
28,476
|
|
|
|
28,476
|
|
|
Accumulated amortization and depreciation
|
|
|
(25,709
|
)
|
|
|
(24,703
|
)
|
|
|
|
$
|
2,767
|
|
|
$
|
3,773
|
|
|
|
|
|
|
|
|
|
|
|
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 related to tenant improvements and office equipment for the fiscal years ended January 31, 2019 and 2018 was $1,006 and $1,576, respectively.
Income
taxes
–
T
he 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.
Investment
in Unconsolidated Entity
–
The Company has a significant and non-controlling investment in several entities. The Company
accounts for its investment using the equity method based on the ownership interest and ability to exert significant influence. Accordingly, investments are recorded at cost, and adjustments to the carrying amount of the investment are
recognized in the period incurred. The Company’s share of the earnings or losses are reported in the other income and expense section of the income statement.
The Company acquired a 50% interest in Sentinel Strainwise, LLC (“SSL”) in June 2015 for $25,000. In accordance with
Accounting Standard Codification 810-10, Consolidation-Overall
, management evaluated the fair value of the Company’s investment in SLL
and determined that there is no value as of January 31, 2018. The entity was non-operational in the year-ended January 31, 2018 and fully dissolved in the year-ended January 31, 2019.
On September 5, 2018, the Company entered into a Binding Term Sheet (“BTS”) with Michael Hornbeck for the acquisition of an
interest in a yet to be established joint-venture entity that will hold the intellectual property assets related to HiLife Creative (et. al.) Pursuant to the BTS, the Company agreed to pay
$120,000 overall consideration, payable as follows:
|
|
●
|
$25,000 within twenty-four (24) hours of execution of the BTS,
|
|
|
●
|
$25,000 on or before November 1, 2018.
|
|
|
●
|
500,000 shares of common stock in STWC
|
|
|
|
●
|
500,000 common share purchase warrants
|
|
STWC will assume approximately $70,000 in debt owned by Hornbeck to various creditors. The
$70,000.00 assumed by STWC will be paid to Hornbeck or his assigns pursuant to a yet to be executed promissory note with a maturity date of January 31, 2019.
The joint-venture entity was established September 10, 2018 as Volume 2, LLC and was 51%
owned by STWC and 49% by Michael Hornbeck. Notwithstanding the foregoing, the BTS called for Hornbeck to retain all control of and manage the day-to-day operations of Volume 2, LLC and draw a salary of $6,000 per month. The Company recognized
an impairment on the investment effective day one as the entity is not able to funds its operations. Loss on impairment of $345,394 was recognized in other expense for the year-ended January 31, 2019. The Company recognized its share of the
Volume 2’s losses of $18,722 in other expense for the year-ended January 31, 2019. The consideration payment due November 1, 2018 has not been paid.
During the year-ended January 31, 2019 the Company invested in 2600 Meridian, LLC as a 25% owner. The Company also loaned $29,368
to the entity during 2018. The loans are reflected on the balance sheet in notes receivable, related party.
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.
Beneficial
Conversion Feature -
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF
is recorded by the Company as a debt discount pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20
Debt with Conversion and Other Options
. In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense over the life of
the debt using the effective interest method.
Trademarks
– Trademarks and other intangible assets are stated at cost and are amortized using the straight-line method over fifteen years. Amortization expense for the years ended January 31, 2019 and 2018 was
$820 and $732, respectively.
|
Trademarks
|
2019
|
2018
|
|
Gross carrying amount
|
$ 13,260
|
$ 11,010
|
|
Accumulated amortization
|
3,809
|
2,989
|
|
Net intangible assets
|
$ 9,451
|
$ 8,021
|
Discontinued
Operations
–
During November 2017, the Company settled all remaining operations related to its rental activities with regulated entities. As a consequence of the disposition, the operating results and the assets and liabilities
of the discontinued operations, which formerly comprised the rental operations, are presented separately in the Company's financial statements. Summarized financial information for the discontinued rental business is shown below. Prior period
balances have been reclassified to present the operations of the rental business as a discontinued operation. No amounts related to discontinued operations remained on the balance sheet as of January 31, 2018. There was no discontinued
operations activity during the year ended January 31, 2019.
|
Discontinued Operations Income Statement
|
|
|
Year Ended January 31,
|
|
|
|
2018
|
|
Rental income from the Regulated Entities (Affiliates)
|
$
|
2,342,391
|
|
Total revenues
|
|
2,342,391
|
|
Operating costs and expenses
|
|
|
|
Reserve for amounts due from Regulated Entities (Affiliates)
|
|
657,402
|
|
Rents and other occupancy
|
|
1,762,858
|
|
Depreciation and amortization
|
|
146,150
|
|
Total operating costs and expenses
|
|
2,566,410
|
|
Loss from continuing operations
|
|
(224,019)
|
|
Other income and (expenses)
|
|
|
|
Interest expense
|
|
(171,636)
|
|
Gain on settlement and cancellation of leases
|
|
1,959,177
|
|
Gain on sale of assets
|
|
—
|
|
Income (loss) from discontinued operations
|
$
|
1,563,522
|
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. Since the Company’s inception there have been no differences between the Company’s comprehensive loss and net loss.
Net
income per share of common stock
- We present earnings per share (“EPS”) in accordance with ASC 260
Earnings per Share
,
which requires 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.
Convertible notes, outstanding options and warrants underlying 4,150,000 and 2,224,700 shares, respectively, at January 31, 2019 and
2018 do not assume conversion, exercise or contingent exercise in the computation of diluted loss per share because the effect would be anti-dilutive.
Revenue Recognition
Effective February 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers using the modified retrospective
method. There was no adjustment required upon transition. Under ASC 606, the Company recognizes revenue applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under
ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a
customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
Consulting
Services
We
generate revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on an hourly basis for an hourly fee; or, (2) on a fixed fee basis; or (3) a monthly fee basis. Generally, we require a
complete or partial prepayment or retainer prior to performing services for hourly or fixed fee contracts.
For
hourly based service contracts, we recognize revenue over time as services are performed and customers simultaneously consume such services. Any advances or retainers received from clients for hourly services are reflected in the Deferred
revenue liability account until we recognize revenues as we incur and charge billable hours.
Our fixed
fee basis engagements are recognized at a point in time. Generally, our fixed fee arrangements are for completion of a final deliverable or act which is significant to the arrangement as a whole. Although fees are typically collected in
advance and the services provided have no alternative use to the Company, there is not a specific enforceable right to payment for the cost of services provided plus a reasonable profit margin. Accordingly, advances received at contract
inception are reflected in the Deferred revenue liability account until the end of the contract when revenue is recognized and the customer takes control of the deliverable. These engagements do not generally exceed a one-year term.
Revenue
recognition is affected by a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing, awaiting notification of license award from local government, and the level of
client involvement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. During the year ended January 31, 2019 we have refunded approximately $26,251 of
advances or retainers from fixed fee and hourly engagements that terminated prior to completion. We believe if an engagement terminates prior to completion, we can recover the costs incurred related to the services provided.
Certain
of our fixed fee contracts assisting customers with license applications include a success fee which is earned if the customer is awarded a license. We exclude such variable consideration from the transaction price and recognize the revenue
when and if the license is awarded as the uncertainty of the application process creates a probability of significant revenue reversal.
Our
monthly fee arrangements are billed on a monthly basis in arrears for a variety of services and are recognized over time as the customers simultaneously consume such services.
The revenue by contract type for the periods ending January 31, 2019 and 2018 are listed in
the table below.
|
|
2019
|
2018
|
|
|
|
|
|
Hourly fee contracts
|
$ 3,749
|
$ -
|
|
Fixed fee contracts
|
96,000
|
263,500
|
|
Monthly contracts
|
36,788
|
-
|
|
|
$ 136,537
|
$ 263,500
|
Deferred
revenue as of January 31, 2019 and 2018 was $192,500 and $150, respectively. The Company is unable to determine the timing for revenue recognition at this time for its deferred revenue due to state regulation changes.
Reclassifications-
Certain account reclassifications have been made
to prior period balances to reflect the current period’s presentation format; such reclassifications had no impact on the Company’s consolidated statements of operations or consolidated statements of cash flows and had no material impact on
the Company’s consolidated balance sheets.
Stock-Based
Compensation
– The Company records equity instruments at their fair value on the measurement date by utilizing the Black-Scholes option-pricing model. Stock Compensation for all share-based payments, is recognized as an expense over
the requisite service period.
Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of
the options, risk-free interest rate and forfeiture rate. The term of the options was assumed to be five years. The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option
grant. Finally, management assumed a 0% forfeiture rate in fiscal year 2018.
Non-employee share-based compensation charges generally are immediately vested and have no future performance requirements by the
non-employee and the total share-based compensation charge is recorded in the period of the measurement date.
Recently Issued
Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a
new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and ensure that there are proper controls in place to ascertain that
the Company’s financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes Topic 840,
Leases
(“ASU 2016-02”). The
guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions
for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years, with early adoption permitted. The Company
adopted the standard effective February 1, 2019 by recording an immaterial
transition adjustment and right of use assets and lease liabilities of approximately $150,000.
In July 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit
losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to
better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods
beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820),
“Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”.
The amendments in this Update modify certain
disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted the
standard effective February 1, 2019 by recording an immaterial transition adjustment and right of use assets and lease liabilities of approximately $150,000.
is in the process of evaluation the impact of the pronouncement.
Note 3 – Going concern:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since
inception, we have not achieved profitable operations, and have cumulative losses through January 31, 2019 of $8.4 million. The Company’s losses to date raise substantial doubt about the Company’s ability to continue as a going concern. The
Company’s ability to continue as a going concern is dependent upon the Company’s achieving a sustainable level of profitability. The Company intends to continue financing its future development activities and its working capital needs largely
from the private sale of the Company’s securities, with additional funding from other traditional financing sources, including convertible term notes, until such time that funds provided by operations are sufficient to fund working capital
requirements. However, 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 4 – Fair value of
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 the Company’s 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.
Note 5 – Commitments and contingencies
The Company entered into a lease agreement with an affiliate for the Company’s corporate office needs, consisting of 4,000 square
feet of office space. The lease is for a 5-year period ending October 31, 2021. This lease to the Company is on the same terms and conditions as is the direct lease between the affiliate and the independent lessor.
During the year’s ended January 31, 2019 and 2018, rent expense was $59,450 and $67,927, respectively.
As of January 31, 2019, future minimum lease payments are as follows:
|
For the Fiscal Year Ending January 31,
|
|
|
|
|
2020
|
|
|
55,250
|
|
|
2021
|
|
|
56,250
|
|
|
2022
|
|
|
42,750
|
|
|
Thereafter
|
|
|
—
|
|
|
Total minimum lease payments
|
|
$
|
154,250
|
|
Note 6 – Notes Receivable
The
Company has management and licensing agreements with a private entity in Puerto Rico 39% owned by Erin Phillips to operate four dispensaries and one cultivation operation in Puerto Rico. In conjunction with these agreements, the Company as
begun providing funds to operate the Puerto Rico operations, which will be evidenced by a promissory note. The terms have not been finalized on this note and currently there is no specified terms to the agreement. Through January 31, 2019 the
Company has advanced $280,607 related to the note.
The
Company has management and licensing agreements with two private entities in Oklahoma. STWC has a 25% ownership in 2600 Meridian LLC, and an option to acquire 25% interest in HWH Farms, LLC. In conjunction with these agreements, the Company
has begun providing funds for start-up and development costs, which will be evidenced by a promissory note. The terms have not been finalized on these notes and currently there is no specified terms to the agreement. Through January 31, 2019
the Company has advanced $29,368 to 2600 Meridian, LLC and $141,388 to HWH Farms, LLC related to the notes.
Note 7 – 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.
ASC 740,
Income Taxes
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. The components of the income tax provision are as follows:
|
|
Year Ended January 31
|
|
|
2019
|
|
2018
|
|
Income tax expense (benefit):
|
|
|
|
|
Current:
|
|
|
|
|
Federal
|
$ (346,143)
|
|
$ 138,483
|
|
State
|
(76,361)
|
|
18,024
|
|
Deferred income tax expense (benefit):
|
(422,504)
|
|
156,507
|
|
Valuation allowance
|
422,504
|
|
(156,507)
|
|
Provision
|
$ -
|
|
$ -
|
The enactment of the Tax Cuts and Jobs Act reduced the Federal corporate tax rate from 35% to 21%.
We have a net operating loss carryforward for financial statement reporting purposes of $8,440,108 and
$6,164,832 from the years ended January 31, 2019 and 2018, respectively.
The net deferred tax assets for 2018 and 2017 were fully offset by a 100% valuation allowance.
Note purchase and
security agreement
–
On August 29, 2018, the Company entered into a Note Purchase and Security Agreement with Richland Fund, LLC., a
Delaware limited liability company. Pursuant to the Agreement, Richland agreed to purchase Convertible Promissory Notes of the Company in the aggregate principal amount of $225,000, funded in three tranches, (i) $100,000.00 (the "First Note"),
(ii) $67,000.00 (the "Second Note"), and (iii) the balance of $58,000.00 (the "Third Note"). The Notes bear 12% interest per annum, with the last payment under the Notes due December 15, 2020. The Notes are secured by all assets of the Company
and guarantees from Shawn and Erin Phillips.
The Notes are convertible into common stock of the Company. The conversion price will be equal to the lower of (i) $0.15 cents per
share (ii) or the average of the closing bid price of the Company's common stock taken over the three trading days prior to conversion or (iii) upon any issuance by the Company of common stock, or a security that is convertible into common
stock, at a price lower than a net receipt to the Company of $0.15 per share, at such price that shall be at the same discount ratio as on the Funding Date. The conversion price of the Notes will be further subject to proportional adjustment
for stock splits, reverse stock splits or combinations of shares, stock dividends, and the like. There are penalties for failure to timely deliver conversion shares. The company recognized a beneficial conversion feature on the notes as a
discount and additional paid in capital of $225,000. The company has recognized $68,182 in interest expense for the amortization of the debt discount.
In connection with the funding agreement, the Company agreed to form and organize a subsidiary. The Company and the lender are in
discussions regarding the assets to be held in the subsidiary. Nothing has been finalized as of the issuance date.
Loan Agreement
–
On April 6, 2018, the Company entered into a loan agreement with Green Acres Partners A, LLC, (the “lender”) whereby the lender agreed to loan to the Company $205,000. The loan proceeds are to be used specifically for the capital needs of two
related party projects in San Diego, California. The interest rate on the notes is 12% per annum and monthly interest payments are due the first day beginning no later than August 1, 2019, thereafter the Company shall pay interest and
principal on 60% of the Company’s ownership percentage of the available profits from the San Diego projects. The loan is personally guaranteed by Shawn Phillips.
Secured Promissory Note
– On December 7, 2018, the Company entered into a 15% Secured Promissory Note with Richland Fund, LLC, (the “lender”) whereby the lender agreed to loan to the Company $126,100. The interest rate on the notes is 15% per annum and monthly
interest payments are due the first day each month beginning January 1, 2019. If any interest payment remains unpaid and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that
amount only will be increased to 20% per annum, until the past due interest amount is paid in full. The note originally matured on March 7, 2019 but was extended to a maturity date of August 1, 2019.
The table below indicates the mandatory principal payments under the notes payable.
|
2019
|
$ 431,100
|
|
2020
|
125,000
|
|
|
556,100
|
|
Less Debt discount
|
(156,818)
|
|
|
$ 399,282
|
Warrants
On August 29, 2018 the Company issued Richland Fund, LLC warrants to purchase 100,000 shares of the Company's common stock. Richland
Fund, LLC exercised the warrants on October 3, 2018 for $18,000.
On
October 15, 2018, the Company issued warrants to purchase 1,900,000 shares of its common stock to three individuals in exchange for services, respectively. The warrants all carry two-year terms and an exercise price of $0.16 per share. Forty
percent of each warrant may be exercised pursuant to a cashless exercise formula.
On September 5, 2018, the Company granted 500,000 common share purchase warrants to Mr. Hornbeck as consideration for the joint-venture in
Volume 2, LLC, the warrants have an exercise price equal to the 20 day volume weighted average price (VWAP). These warrants are not included in the table below as the exercise price is variable.
The company entered into a consulting arrangement with J Paul Consulting during the period.
As compensation for services, JPCC will receive warrants to purchase up to 150,000 shares of our common stock. The three-year Warrants shall vest according to the following schedule:
(i) 50,000 two months from the November 1, 2018 (the "First Tranche"); (ii) 50,000 four months from the November 1, 2018 (the "Second Tranche"); and (iii) 3, 50,000 six months from the November 1, 2018 (the "Third Tranche"). The exercise
price for the Warrants is $0.80 per share for the First Tranche, $1.00 for the Second Tranche, and $1.25 for the Third Tranche. The term of the Consulting Agreement is for six months beginning on November 1, 2018. The warrants have not
been granted as of the issuance date.
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Exercise Price
|
|
Wtgd Avg Calculation
|
|
Wtgd Avg Remining Life
|
|
Balance at 1/31/2017
|
|
2,224,700
|
|
$ 5.00
|
|
$ 11,123,500
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
-
|
|
-
|
|
$ -
|
|
|
|
Exercised
|
|
-
|
|
-
|
|
$ -
|
|
|
|
Cancelled
|
|
-
|
|
-
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1/31/2018
|
|
2,224,700
|
|
$ 5.00
|
|
$ 11,123,500
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
2,000,000
|
|
0.16
|
|
$ 322,000
|
|
|
|
Exercised
|
|
(311,000)
|
|
0.16
|
|
$ (49,650)
|
|
|
|
Cancelled
|
|
(2,013,700)
|
|
$ 5.00
|
|
$ (11,091,850)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1/31/19
|
|
1,900,000
|
|
$ 0.16
|
|
$ 304,000
|
|
1.71
|
The Company granted 250,000 stock options during the period. The Company has recognized stock compensation expense of $197,720 for
the period ended January 31, 2019.
The company entered into a consulting arrangement with Hayden & Tysadco during the period.
As compensation for their services, we the Company issued a total of 25,000 shares which vest at a schedule of 10,000 shares on November 1, 2018, 7,500 shares on the 120
th
day from November 1, 2018, and 7,500 shares on the 180
th
day
from November 1, 2018, subject to the IR Agreement being in effect as of each applicable vesting date. Shares issued for services are recognized in other expense in the period earned.
The Company accounts for unit-based compensation using the Black-Scholes model to estimate the fair value of unit-based awards at
the date of grant. The Black-Scholes model requires the use of highly subjective assumptions, including value of the enterprise, expected life, expected volatility, and expected risk-free rate of return. Other reasonable assumptions could
provide differing results.
The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the
vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to
the contractual terms, expected time to a liquidity event, exercise patterns, and post-vesting forfeitures. The Company estimates volatility based on the historical volatility of comparable company’s common stock over the most recent period
corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black-Scholes model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent term
equal to the expected life of the award. The Company uses historical data to estimate pre-vesting option forfeitures and record unit-based compensation for those awards that are expected to vest. The Company adjusts unit-based compensation for
changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.
The assumptions used in the fair value calculations are as follows for the period ended January 31, 2019:
|
Expected term (years)
|
5
|
|
Risk-free interest rate
|
2.73%
|
|
Volatility
|
218%
|
|
Expected dividend yield
|
0.00%
|
The Company has entered into separate management and licensing contracts with STWC Sorrento Valley, LLC which is partially owned
by the Company's CEO, Erin Phillips. Ms. Phillips owns 27.5% of the STWC Sorrento Valley, LLC. Ms. Phillips allocated $200,000 of the Green Acres note to fund the related project in California as directed by the note agreement which reduced
the liability to Ms. Phillips for loan advances received as of January 31, 2019.
The Company manages its cash flow by utilizing related party loans. During the year ended January 31, 2019 and 2018 the company
borrowed
$171,597 and $181,263, respectively, from related parties to fund operations. The loans do not carry any
interest. The Company converted an accrued expense to a related party to a note payable in the amount of $60,300. The note has a maturity of May 2020, $48,240 is reflected in Long-term loan to related party on the balance sheet. As of
January 31, 2019, and 2018, the Company reflected current loans payable to related parties of $32,021 and $490,970, respectively.
Note 11
–
Subsequent Events
GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued
(“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, (“recognized subsequent events”). The second type consists of events that provide evidence about conditions that
did not exist at the date of the balance sheet but arose subsequent to that date (“non-recognized subsequent events”).
On February 13, 2019, the Company
entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $103,000. On February 15, 2019, the Company issued
the Note. The Note matures on February 13, 2020, and bears interest at 12% per annum, increasing to 22% after maturity.
On March 18, 2019, STWC Holdings, Inc., entered into the second tranche of the potential $1,000,000 funding with Power Up. The Company entered into a
second Securities Purchase Agreement pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $53,000. On March 18, 2019, the Company issued the Note. The Note matures on March 18, 2020, and bears
interest at 12% per annum, increasing to 22% after maturity.
Under the Note, Power Up may convert all or a portion of the outstanding principal of the Note into shares of common stock of the Company beginning on the
date which is 180 days from the date of the Note, at a price equal to 61% of the lowest trading price during the 20 trading day period ending on the last complete trading date prior to the date of conversion; provided, however, that Power
Up may not convert the Note to the extent that such conversion would result in beneficial ownership by Power Up and its affiliates of more than 4.99% of the Company’s issued and outstanding Common Stock.
If the Company prepays the Note within 30 days of the date of the Note, the Company must pay all of the principal at a cash redemption premium of 110%; if
the prepayment is made between the 31
st
day and the 60
th
day after the date of the Note, then the redemption premium is 115%; if the prepayment is made from the 61
st
to the 90
th
day after date of
the Note, then the redemption premium is 120%; if the prepayment is made from the 91
st
to the 120
th
day after the date of the Note, then the redemption premium is 125%; if the prepayment is made from the 121
st
to
the 150
th
day after the date of the Note, then the redemption premium is 130%; and if the prepayment is made from the 151
st
to the 180
th
day after the date of the Note, then the redemption premium is 135%.
The Note cannot be prepaid after the 180
th
day following the date of the Note.
The Company is required to reserve for issuance upon conversion of the Note, six times the number of shares that would be issuable upon full conversion of
the Note, assuming the 4.99% limitation were not in effect. In connection with the Note, the Company has caused its transfer agent to reserve initially 1,494,276 shares of Common Stock. The Company received a net amount of $150,000, with
$6,000 paid for Power Up’s legal and due diligence expenses.