Attached files

file filename
EX-10.9 - SECURITIES PURCHASE AGREEMENT BY AND BETWEEN GROW SOLUTIONS HOLDINGS, INC. AND P - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex10ix_growsol.htm
EX-32.2 - CERTIFICATION - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex32ii_growsolutions.htm
EX-32.1 - CERTIFICATION - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex32i_growsolutions.htm
EX-31.2 - CERTIFICATION - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex31ii_growsolutions.htm
EX-31.1 - CERTIFICATION - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex31i_growsolutions.htm
EX-10.11 - LETTER AGREEMENT BETWEEN GROW SOLUTIONS HOLDINGS, INC. AND POWER UP LENDING GROU - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex10xi_growsol.htm
EX-10.10 - SECURITIES PURCHASE AGREEMENT BY AND BETWEEN THE GROW SOLUTIONS HOLDINGS, INC. A - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex10x_growsol.htm
EX-10.8 - DEBT PURCHASE AGREEMENT BY AND AMOUNT TCA GLOBAL CREDIT MASTER FUND, LP, L2 CAPI - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex10viii_growsol.htm
EX-10.7 - FIRST AMENDMENT TO CREDIT AGREEMENT BY AND AMONG GROW SOLUTIONS HOLDINGS, INC., - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex10vii_growsol.htm
EX-4.7 - CONVERTIBLE PROMISSORY NOTE ISSUED BY THE COMPANY IN FAVOR OF CAREBOURN CAPITAL - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex4vii_growsol.htm
EX-4.6 - 10% SENIOR REPLACEMENT CONVERTIBLE PROMISSORY NOTE ISSUED BY GROW SOLUTIONS HOLD - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex4vi_growsol.htm
EX-4.5 - CONVERTIBLE PROMISSORY NOTE ISSUED BY THE COMPANY IN FAVOR OF POWER UP LENDING G - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex4v_growsol.htm
EX-2.4 - ASSET PURCHASE AGREEMENT BY AND BETWEEN ONE LOVE GARDEN SUPPLY LLC AND KEYS ORGA - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex2iv_growsol.htm
EX-2.3 - ASSET PURCHASE AGREEMENT BY AND BETWEEN ONE LOVE GARDEN SUPPLY LLC AND WESTCOAST - GROW SOLUTIONS HOLDINGS, INC.f10k2016ex2iii_growsol.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

 

     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-29301

 

GROW SOLUTIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   87-0575118
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

1111 Broadway - Suite 406

Denver, CO 80203

(Address of principal executive offices)

 

(646) 863-6341

(Issuer’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Stock, $0.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   Non-accelerated filer
Accelerated filer   Smaller reporting company
      Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

The aggregate market value of registrant’s voting and non-voting common equity held by non-affiliates (as defined by Rule 12b-2 of the Exchange Act) computed by reference to the average bid and asked price of such common equity on June 30, 2016, was $23,806,612. As of July 24, 2017, the registrant has one class of common equity, and the number of shares issued and outstanding of such common equity was 53,472,415.

 

Documents Incorporated By Reference: None.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Mine Safety Disclosures 22
 
  PART II  
     
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 23
Item 6. Selected Financial Data 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements 35
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 37
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 38
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
Item 13. Certain Relationships and Related Transactions, and Director Independence 45
Item 14. Principal Accounting Fees and Services 45
     
  PART IV  
     
Item 15. Exhibits, Financial Statements Schedules 46
     
SIGNATURES 48

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Included in this Form 10-K are “forward-looking” statements, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled “Risk Factors.” Forward-looking statements include those that use forward-looking terminology, such as the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “will,” “shall,” “should,” and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include the following:

 

  the availability and adequacy of our cash flow to meet our requirements;
     
  economic, competitive, demographic, business and other conditions in our local and regional markets;
     
  changes or developments in laws, regulations or taxes in the legal cannabis industries;
     
  actions taken or not taken by third-parties, including our suppliers and competitors, as well as legislative, regulatory, judicial and other governmental authorities;
     
  competition in the legal cannabis industry;
     
  changes in our business and growth strategy (including our acquisition strategy), capital improvements or development plans;
     
  the availability of additional capital to support capital improvements and development; and
     
  other factors discussed under the section entitled “Risk Factors” or elsewhere in this annual report.

 

All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.

 

 

 

 

PART I

 

Item 1. Business.

 

As used in this annual report, “we”, “us”, “our”, or the “Company” refers to Grow Solutions Holdings, Inc., a Nevada corporation.

 

Overview

 

Corporate Information

 

Grow Solutions Holdings, Inc. (formerly LightTouch Vein & Laser, Inc.) is a corporation incorporated under the laws of the State of Nevada on May 1, 1981 (the “Company”). The focus of the Company’s business operations is to provide comprehensive services within the legal cannabis industry to those growing, processing and dispensing legal cannabis and legal cannabis infused products. The Company operates in verticals within the legal cannabis industry, consisting of but not limited to (i) sales of unregulated products through retail agricultural grow stores, (ii) consumer products, (iii) distribution of unregulated products, equipment and supplies to agricultural grow stores, and (iv) management and consulting services.

 

Our business strategy is structured into various operating divisions to attain penetration within our customer base and create opportunities and customer relationships between our operating divisions. We have a team of experienced personnel in each area of our business model and our team has successfully operated legal cannabis grow operations, managed dispensaries and navigated the legal cannabis licensing process in the United States. Further, our planned retail agricultural grow stores are staffed with individuals knowledgeable in all products and growing needs.

 

Corporate History

 

Acquisition of Grow Solutions, Inc.

 

Effective April 28, 2015, LightTouch Vein & Laser, Inc. (“LightTouch”) entered into an Acquisition Agreement and Plan of Merger (the “Grow Solutions Acquisition Agreement”) with Grow Solutions, Inc., a Delaware corporation (“Grow Solutions”) and LightTouch Vein & Laser Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (“LightTouch Acquisition”). Under the terms of the Grow Solutions Acquisitions Agreement, Grow Solutions merged with LightTouch Acquisition and became a wholly owned subsidiary of LightTouch (the “Merger”). The Grow Solutions’ shareholders and certain creditors of LightTouch received 44,005,000 shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Grow Solutions. Following the closing of the Grow Solutions Acquisition Agreement, Grow Solutions’ business became the primary focus of LightTouch and Grow Solutions management assumed control of the management of LightTouch with the former director of LightTouch resigning upon closing of the Agreement.

 

The Grow Solutions Acquisition Agreement and related transaction documents are included as exhibits to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 19, 2015 and are hereby incorporated by reference. All references to the Grow Solutions Acquisition Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

Acquisition of One Love Garden Supply LLC

 

Effective May 13, 2015 (the “Closing Date”), LightTouch entered into an Acquisition Agreement and Plan of Merger (the “OneLove Acquisition Agreement’) with Grow Solutions Acquisition LLC, a Colorado limited liability company and a wholly owned subsidiary of LightTouch (“Grow Solutions Acquisition”), One Love Garden Supply LLC, a Colorado limited liability company (“OneLove”), and all of the members of OneLove (the “Members”). On the Closing Date, OneLove merged with Grow Solutions Acquisition and became a wholly owned subsidiary of LightTouch. Under the terms of the OneLove Acquisition Agreement, the Members received (i) 1,450,000 shares of LightTouch common stock (the “Equity”), (ii) Two Hundred Thousand Dollars (US$200,000) (the “Cash”), and (iii) a cash flow promissory note in the aggregate principal amount of $50,000 issued by OneLove in favor of the Members (the “Cash Flow Note”), whereby each fiscal quarter, upon LightTouch recording on its financial statements $40,000 in US GAAP Net Income (“Net Income”) from sales of LightTouch products (the “Net Income Threshold”), LightTouch shall pay to the Members 33% of LightTouch Net Income generated above the Net Income Threshold. The aforementioned obligations owed under the Cash Flow Note shall extinguish upon the earlier of (i) payment(s) by LightTouch in an amount equal to $50,000 in the aggregate or (ii) May 5, 2016 (collectively, the Cash Flow Note, the Equity, and the Cash, the “Consideration”). The Consideration provided to the Members was in exchange for all of the issued and outstanding membership interests of OneLove. Following the Closing Date, OneLove’s indoor and outdoor gardening supply business was acquired by LightTouch and LightTouch management assumed control of the management of OneLove with the former managing members of OneLove resigning from OneLove upon closing of the OneLove Acquisition Agreement.

 

The OneLove Acquisition Agreement and related transaction documents are included as exhibits to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 20, 2015 and are hereby incorporated by reference. All references to the OneLove Acquisition Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

On June 24, 2015, LightTouch filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to change its corporate name from LightTouch Vein & Laser, Inc. to Grow Solutions Holdings, Inc.

 

 1 

 

 

Our Industry

 

Legalization of recreational marijuana initially in Colorado and Washington and the growing number of jurisdictions with medical marijuana laws spawned a new industry in America in 2014. Under Voter approved Amendment 64, the State of Colorado became the first state to legalize the use of recreational marijuana. Colorado residents, who are at least 21 years of age with photo identification, may legally purchase as much as one ounce of marijuana in a single transaction. Non-Colorado residents, bearing the same identification, may purchase as much as one-quarter ounce. Marijuana cannot be consumed in any public space, including the shops where it was purchased. In 2015, Oregon, Alaska and the District of Columbia legalized marijuana for recreational use. In 2016, California, Nevada, Massachusetts and Maine legalized marijuana for recreational use. At this time, sales currently remain banned in the District of Columbia. Additionally, 29 states have legalized marijuana for medical purposes.

 

Grow Solutions Holdings, Inc. provides products and services to the regulated legal cannabis industry. At this time, the Company currently focuses its operations in the following areas:

 

Retail Grow Stores and Distribution

 

Our business model is based on the aggressive consolidation of what we believe to be the “best of breed” operations for the retail sale and distribution of indoor and outdoor garden supplies and grow equipment, including for the legal growing of cannabis, throughout the United States, and eventually world-wide, through aggressive acquisition and consolidation of smaller businesses and organic growth of the existing business. Our growth strategy and continued success depends largely on our ability to (i) properly service our customers; (ii) acquire cash flowing, profitable companies; (iii) successfully integrate our acquisitions and eliminate operational inefficiencies; (iv) increase sales; and (v) establish and sell branded growing mediums and nutrients.

 

We plan to leverage our strengths in industry knowledge and operational experience to identify and systematically integrate a network of standalone retail grow stores. The Company’s management believes retail grow stores in the legal cannabis industry are ripe for successful consolidation. We have experience in the legal cannabis industry and we have developed a strategic plan for identifying potential acquisition targets. Management of the Company is recognized in the industry, which we believe will enable the Company to efficiently identify, negotiate and close acquisitions. We believe the consolidation of these companies will allow the consolidated group to achieve significant savings throughout the value chain due to synergies and economies of scale.

 

As a larger entity, we believe we will be able to access growth capital more easily than we would be as a single, early stage company, and we project that the synergy of multiple business units leveraging shared marketing and sales functions will further increase revenue and accelerate growth, while simultaneously reducing the cost of customer acquisition. We believe this will allow the collective group to attain an improved market share more quickly and allow capital investors to invest in a larger pool of business units, representing a greater opportunity to further seize market share.

 

Consumer Products

 

We design and manufacture products sold in tobacco stores, smoke shops and cannabis dispensaries. These products include vaporizers, extraction presses, quartz accessories and storage solutions.

 

Job Posting Platform

 

On June 29, 2015, the Company and Jasper Group Holdings, Inc. entered into a Joint Marketing Agreement (the “Joint Marketing Agreement”) to provide services related to website creation for a legal cannabis job posting platform. We plan for the website to include an employee leasing program and allow employers, recruiters and potential employees to communicate through its platform for a fee. All potential employees will be screened with background checks by independent third parties and provided the necessary applications and related materials for individuals to become licensed in the legal cannabis industry on a state by state basis. In accordance with the terms of the Joint Marketing Agreement, Jasper Group Holdings, Inc. shall invest all funds necessary to form the website. At this time, the website has been initiated and is still under construction. The Company plans to launch its job posting platform by the end of fiscal 2017.

 

Consulting and Advisory

 

The Company delivers comprehensive consulting services that includes design and construction to approved and licensed legal cannabis operators, as well as assistance with licensure and related applications for potential legal cannabis operators. The Company’s business plan is based on the future growth of the regulated legal cannabis market in the United States. The Company will provide general advisory services for business development, facilities design and construction, cultivation and retail operations, marketing and the improvement and expansion of existing operations.

 

 2 

 

 

Competition

 

All of the Company’s planned retail and online distribution channels will compete for customers and sales with many different companies and products that are competitive today and likely to be even more competitive in the future. Accordingly, we believe it is essential that the Company and its verticals continue to develop, improve, and refine the value propositions that are offered to its customers.

 

Competition in the legal cannabis industry is significant, as competing companies and retail grow stores continually open. With regard to competition in the California, Colorado and Washington market, there are numerous retail indoor and outdoor gardening stores that we believe will compete with the Company for business.

 

The Company’s size relative to its competition is difficult to gauge as most of our competition is privately held and does not publicly report their earnings. We do know of several competitors who own and operate more retail indoor and outdoor gardening stores than we currently do, but they are privately held and, therefore, we are unable to determine their size in terms of annual revenue.

 

We also face competition from other public companies that offer equipment and expendables. Moreover, as the negative stigma associated with some types of urban gardening such as legal cannabis plants diminishes, it is very possible that other better capitalized public and private companies may enter the market and may effectively challenge the value proposition offered by the Company. These competitors may be able to attract customers more easily because of their financial resources. Our larger competitors can also devote substantially more resources to business development and may adopt more aggressive pricing policies. We plan to compete on the strength of our multiple business verticals, product offerings, and management.

  

While our management believes that we have the opportunity to be successful in the legal cannabis industry, there can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.

 

Intellectual Property

 

We do not currently hold the rights to any intellectual property.

 

Regulations

 

Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.

 

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse.  The Department of Justice defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.”  If the federal government decides to enforce the Controlled Substances Act in the states which have legalized marijuana for recreational or medical use, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine.

 

As of April 30, 2015, 29 states and the District of Columbia allow their citizens to use medical marijuana.  In 2015, cannabis was legalized for recreational use in Washington D.C., Oregon, Washington, Colorado and Alaska. In 2016, cannabis was also legalized for recreational use in California, Nevada, Massachusetts and Maine. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. At this time, the Company does not believe that President Trump and his administration will have a negative effect on the Company and its business operations. The Company believes there is overwhelming support for both recreational and medical cannabis use and there have been multiple bills introduced at the State level to provide support to the Cannabis industry in the event of action taken by President Trump and his administration.

 

However, any such change in the federal government’s enforcement of such current federal laws could cause significant financial damage to the Company and its shareholders.  While the Company does not intend to harvest, distribute or sell cannabis, the Company may be irreparably harmed by a change in enforcement by the federal or state governments or the enactment of new and more restrictive laws.

 

 3 

 

 

At this time, the Company does not believe that President Trump and his administration will have a negative effect on the Company and its business operations. The Company believes there is overwhelming support for both recreational and medical cannabis use and there have been multiple bills introduced at the State level to provide support to the Cannabis industry in the event of action taken by President Trump and his administration.

 

Employees

 

As of the date hereof, the Company has 15 full time employees and 5 part time employees. 

 

Legal Proceedings

 

Except as disclosed below, the Company is unaware of any action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Ralph Aiello Complaint and Settlement Agreement

 

The Company was involved in litigation against Ralph Aiello (the “Plaintiff” and together with the Company, the “Parties”). On January 19, 2017, the Plaintiff filed a complaint in the Supreme Court of the State of New York County of Nassau (the “Court”), alleging claims including breach of contract in connection with certain loans made by Plaintiff to the Company in the amount of $500,000 plus interest (the “Dispute”). On March 15, 2017, the Parties filed a Settlement Agreement (the “Settlement Agreement”) with the Court whereby the Company agreed to pay the Defendant $550,000 by September 15, 2018. The Company has not made timely payments in accordance with the Settlement Agreement. The Company is working to establish a payment plan for the Plaintiff and expedite the settlement of the Dispute.

 

Bronstein Complaint and Settlement Agreement

 

The Company was involved in litigation against Tal Bronstein, Kathleen Bronstein, and Milehigh Wholesale Inc. (the “Plaintiffs” and together with the Company, the “Parties”). On May 4, 2017, the Plaintiffs filed a complaint in the District Court, City and County of Denver (the “Court”), alleging claims including breach of contract in connection with the acquisition of Milehigh Wholesale Inc. and the employment of Mr. Bronstein in connection with such acquisition (the “Dispute”). On or about June 14, 2017, the Parties entered into a settlement agreement and release of all claims whereby upon payment by the Company of $16,000 to Plaintiffs by July 14, 2017, Plaintiffs would dismiss with prejudice their claims against the Company and release the Company from any and all claims, known or unknown, on conditions of such payment. On June 23, 2017, counsel for the Plaintiffs filed with the Court a Notice of Settlement with respect to the Dispute. On June 27, 2017, the Court ordered that the Parties file a Stipulated Dismissal within 35 days of the Order (August 1, 2017).

 

On or about July 10, 2017, the Company notified the Plaintiffs that it would not be able to pay the $16,000 by July 14, 2017 and renegotiated the Settlement Agreement and Release of All Claims (the “Agreement”) as follows: (i) on or before July 14, 2017, Company shall deliver to the office of Plaintiffs’ counsel a Certified check in the amount of $5,000 (ii) on or before August 14, 2017, Company shall deliver to the office of Plaintiffs’ counsel a certified check in the amount of $13,500 (iii) the parties intend that the total amount paid from Company to Plaintiffs will be $18,500 (iv) if Company fail to pay the $13,500 by August 14, 2017, they will pay $100 per day thereafter as an additional penalty payment for each and every day that the $13,500 is not paid until the full amount of $13,500 is paid, or until August 31, 2017 (v) no later than July 17, 2017, Counsel for the Parties will file an unopposed Motion to Extend the time by which they have to file the Stipulated Motion to Dismiss to and including August 31, 2017 (vi) if Company fail to pay the $13,500 by August 31, 2017, they agree that Plaintiffs may then seek a default judgment to enter against the Company in the amount of $21,700, without decrease for the $5,000 expected to be paid on or before July 14, 2017. Further, all attorney fees and costs of collection thereafter shall be paid for by Company.

 

 4 

 

 

Alessi Complaint and Dismissal

 

The Company was involved in litigation against William Alessi (“Alessi”). On February 15, 2017, Alessi filed a complaint in the General Court of Justice, Superior Court Division, State of North Carolina, County of Mecklenburg (the “Court”), alleging claims including breach of contract or unjust enrichment (the “Dispute”). On July 12, 2017, the Honorable Jeff Hunt presiding over the matter issued an order in favor of the Company dismissing Alessi’s action with prejudice due to the Court’s lack of jurisdiction and further stating that the proper forum for all claims in connection with the Dispute is an American Arbitration Association proceeding.

 

Where You Can Find More Information

 

We are subject to the reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These obligations include filing an annual report under cover of Form 10-K, with audited financial statements, unaudited quarterly reports on Form 10-Q and the requisite proxy statements with regard to annual stockholder meetings. The public may read and copy any materials the Company files with the Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

Selected Risks Associated with Our Business

 

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include: 

 

  The Company received a going concern opinion from its auditors and must receive debt or equity financing to continue its business operations;
     
  Cannabis remains illegal under federal law.  It is a schedule-I controlled substance.  Even in those jurisdictions in which the use of medical and recreational marijuana have been legalized at the state level, its use is a violation of federal law;
     
  If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult;
     
  Our industry is highly competitive, and our failure to compete effectively could adversely affect our market share, financial condition and future growth;
     
  Adverse publicity or consumer perception of our services, products and any similar products distributed by others could harm our reputation and adversely affect our sales and revenues;
     
  We rely on skilled personnel and, if we are unable to retain or motivate key personnel, hire qualified personnel, we may not be able to grow effectively;
     
  If we are unable to retain key personnel, our ability to manage our business effectively and continue our growth could be negatively impacted;
     
  Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations;

 

 5 

 

 

  You may experience dilution in the event we issue common stock in the future;
     
  Our common stock is quoted on the OTCQB which may have an unfavorable impact on our stock price and liquidity;
     
  Nevada corporation laws limit the personal liability of corporate directors and officers and require indemnification under certain circumstances;
     
  Future financings through debt securities may restrict our operations;
     
  Our common stock price may be volatile and could fluctuate widely in price, which could result in substantial losses for investors;
     
  Our common stock is subject to the SEC’s penny stock rules and as such broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected;
     
  A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline and may impair our ability to raise capital in the future;

 

Recent Developments

 

The Carebourn Capital Debt Financing

 

On December 15, 2016 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Carebourn Capital LP an accredited investor (the “Purchaser”) pursuant to which the Company sold $285,775 in principal amount of an 8% Convertible Promissory Note (the “Note”) for a purchase price of $248,500 with a 15% original issue discount (“OID”). On December 19, 2016, the Company received $240,000 in net proceeds from the sale of the Note after deducting fees and expenses (the “Funding Date”). The Note and the shares of common stock of the Company issuable upon conversion of the Note are collectively referred to herein as the “Securities.”

 

The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Notwithstanding the foregoing, the minimum conversion price under the Note is $0.20 (the “Floor Price”), provided that, at any time following 180 days from the Issuance Date, if the closing price of the common stock of the Company is equal to or less than the Floor Price for two consecutive trading days, the Floor Price will extinguish and be of no further force or effect.

 

 6 

 

 

In accordance with the terms and conditions of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,190 from the Company’s bank account on each business day, until the amounts due under the Note are satisfied in full. At the sole discretion of the Purchaser, the Company may prepay in cash any portion of the principal amount of the Note and any accrued and unpaid interest in accordance with the terms and conditions of the Note.

 

Acquisition of Keys Organic and Hydroponic Supply LLC

 

Effective January 1, 2017 (the “Closing Date”), One Love, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement (the “APA”) with Keys Organic and Hydroponic Supply LLC, a Florida limited liability company (“Seller”). On the Closing Date, the Buyer purchased and the Seller sold all the assets, rights, and properties of the Seller including certain debts of the Seller (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Company on the Closing Date, the Company paid the Seller the purchase price in the amount of $120,000 as follows (A) $25,000 cash at closing, (B) the issuance of 100,000 shares of restricted common stock of the Company, and (C) the issuance of a promissory note by the Company in favor of the Seller in the amount of $95,000 (the “Note”), provided, however, the Note shall be adjusted based upon the following formula: (i) the principal balance under the Note shall be reduced or increased by the amount which is less than or exceeds $55,000 of the value of Seller’s inventory on the Closing Date.

 

All references to the APA do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

Acquisition of Westcoast Organic & Hydroponic Inc.

 

Effective January 1, 2017 (the “Closing Date”), One Love, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement (the “APA”) with Westcoast Organic & Hydroponic Inc., an Oregon corporation (“Seller”). On the Closing Date, the Company purchased and the Seller sold all the assets, rights, and properties of the Seller including certain debts of the Seller (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Company on the Closing Date, the Company paid the Seller as follows (A) $50,000 cash at closing (B) issuance of a promissory note by the Company in favor of the Seller in the amount of $143,273, (C) the issuance of 600,000 shares of restricted common stock of the Company, and (D) the issuance by the Company of a Cash Flow Promissory Note in favor of the Seller, whereby for a period of one year, each quarter upon the Seller reporting net income generated by the Seller in an amount exceeding $50,000 (the “Net Income Threshold Amount”), the Seller received 20% of the amount exceeding the Net Income Threshold Amount. In the event the Seller does not exceed the Net Income Threshold Amount during a quarterly period, the Company has no obligation to pay the Seller for such quarter.

 

All references to the APA do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

The Power Up Lending Group Ltd. Debt Financing

 

On January 19, 2017 (the “Initial Issuance Date”), the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which the Company sold $125,000 in principal amount of a Convertible Promissory Note (the “Power Up Note”). On or about January 19, 2017, the Company received $121,500 in net proceeds from the sale of the Power Up Note after deducting fees and expenses. The Power Up Note and the shares of common stock of the Company issuable upon conversion of the Power Up Note are collectively referred to herein as the “Securities.”

 

The Power Up Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Power Up Note. The Power Up Note is convertible following 180 days from the Initial Issuance Date, in whole or in part, at the option of Power Up into shares of common stock of the Company at a conversion price equal to 61% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

The JSJ Investments Inc. Debt Financing

 

On January 30, 2017 (the “Issuance Date”), the Company issued a 10% Convertible Promissory Note (the “JSJ Note”) in the principal amount of $100,000 in favor of JSJ Investments Inc. (“JSJ”). On or about January 30, 2017, the Company received $98,000 in net proceeds from the sale of the JSJ Note after deducting fees and expenses. The JSJ Note and the shares of common stock of the Company issuable upon conversion of the JSJ Note are collectively referred to herein as the “Securities.”

 

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The JSJ Note bears interest at a rate of 10% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the JSJ Note. The JSJ Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of JSJ into shares of common stock of the Company at a conversion price equal to 60% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Under the terms and conditions of the JSJ Note, the Company and JSJ agreed to enter into a mutually agreed upon Leak-Out Agreement whereby JSJ shall not sell more than the greater of (i) 20% of the trading volume per week or (ii) $20,000 in shares of common stock per week.

 

The Cicero Consulting Group, Inc. Debt Financing

 

On February 8, 2017 (the “Issuance Date”), the Company, entered into a Securities Purchase Agreement with Cicero Consulting Group, LLC (“Cicero”) pursuant to which the Company sold $50,000 in principal amount of a Convertible Promissory Note (the “Cicero Note”). On or about February 8, 2017, the Company received $50,000 in net proceeds from the sale of the Cicero Note. The Power Up Note and the shares of common stock of the Company issuable upon conversion of the Cicero Note are collectively referred to herein as the “Securities.”

 

The Cicero Note bears interest at a rate of 12% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Cicero Note. The Cicero Note is convertible at any time from the Issuance Date, in whole or in part, at the option of Cicero into shares of common stock of the Company at a conversion price equal to 70% of the lowest closing bid price of the common stock in the prior five (5) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Amendment of TCA Credit Agreement

 

As previously disclosed, effective December 7, 2015, Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”) closed a Senior Secured Credit Facility Agreement (the “Credit Agreement”) by and among the Company, as borrower, Grow Solutions, Inc., a Delaware corporation and One Love Garden Supply, a Colorado limited liability company, as joint and several guarantors (such guarantors, collectively, the “Subsidiaries”) and TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership, as lender (“TCA”). Pursuant to the Credit Agreement, at closing TCA funded the Company $950,000 evidenced by that certain Convertible Promissory Note issued by the Company in favor of TCA (the “Original Note”).

 

On February 14, 2017, the Company entered into a First Amendment to Credit Agreement (the “Amended Agreement”) by and between the Borrowers and TCA. Pursuant to the Amended Agreement, the Original Note was severed, split, divided and apportioned into two separate and distinct replacement notes consisting of (i) First Replacement Note A, evidencing principal indebtedness of $325,000 which was executed and delivered by the Company as the first purchase tranche paid by the Assignee (as defined below) to TCA, and (ii) First Replacement Note B evidencing the reduced outstanding balance of principal indebtedness of $876,441.25 (collectively, First Replacement Note A and First Replacement Note B, the “Replacement Notes”). The Replacement Notes replaced and superseded the Original Note in its entirety by substituting one evidence of debt for another without extinguishing the indebtedness and obligations evidenced under the Original Note.

 

Under the terms and conditions of Replacement Note B, the Company has the right to prepay Replacement Note B evidencing the remaining outstanding balance of principal indebtedness owed to TCA in full and for cash, at any time prior to the Maturity Date (as defined therein), with three (3) Business Days (as defined therein) advance written notice to TCA.

 

TCA and L2 Capital Debt Purchase Agreement

 

On February 15, 2017 (the “Effective Date”), the Company entered into a Debt Purchase Agreement (the “Debt Purchase Agreement”) by and among the Company, TCA, and L2 Capital, LLC, a Kansas limited liability company (the “Assignee”). Pursuant to the Debt Purchase Agreement, on the Effective Date, TCA sold and assigned to Assignee, TCA’s right, title and interest in and to the monetary obligations evidenced under Replacement Note A thereby reducing the TCA outstanding principal indebtedness. Assignee shall subsequently purchase from TCA the remaining debt evidenced by First Replacement Note B in purchase tranches. The indebtedness underlying the Replacement Notes are evidenced by a newly issued 10% Senior Replacement Convertible Promissory Note.

 

Upon the purchase of all debt under Replacement Note B the Company will have no further obligations to TCA.

 

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Issuance of 10% Senior Replacement Convertible Promissory Note to L2 Capital

 

On February 15, 2017, the Company issued a 10% Senior Replacement Convertible Promissory Note (the “L2 Note”) to the Assignee in the principal amount of $1,201,441.25. The initial principal amount under the L2 Note is $325,000, representing the first tranche purchased by Assignee under First Replacement Note A and such amounts shall increase in tranches upon the purchase of such tranches by the Assignee from TCA pursuant to the Debt Purchase Agreement. The maturity date for each tranche shall be six months from that date of the purchase of that tranche and the Company shall pay interest to the Assignee on the aggregate unconverted and then outstanding principal amount of the L2 Note at the rate of 10% per annum. The Company may prepay any portion of the principal amount under the L2 Note and any accrued and unpaid interest in cash equal to the sum of the then outstanding principal amount under the L2 Note and interest multiplied by 140%.

 

The L2 Note is convertible at any time, in whole or in part, at the option of the holder into shares of common stock of the Company at a conversion price equal to 62.5% of the lowest closing bid price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Additionally, the terms under the L2 Note include make-whole rights whereby upon liquidation by the Assignee of the shares converted under the L2 Note, provided that the Assignee realizes a net amount from such liquidation equal to less than the conversion amount specified in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company shall issue to the Assignee additional shares of common stock of the Company equal to: (i) the conversion amount; minus (ii) the Realized Amount; divided by (iii) the average volume weighted average price of the Company’s common stock during the five (5) business days immediately prior to the date upon which the Assignee delivers notice to the Company that such additional shares are requested by the Assignee (the “Make-Whole Shares”). Following the sale of the Make-Whole Shares by the Assignee: (i) in the event that Assignee receives net proceeds from such sale which, when added to the Realized Amount from the prior relevant conversion notice, is less than the conversion amount specified in the relevant conversion notice, Assignee shall deliver an additional make-whole notice to the Company and the Company obligation to issue Make-Whole Shares shall continue until the conversion amount has been fully satisfied; and (ii) in the event that Assignee received net proceeds from the sale of Make-Whole Shares in excess of the conversion amount specified in the relevant conversion notice, such excess amount shall be applied to satisfy any and all amounts owed hereunder in excess of the conversion amount specified in the relevant conversion notice.

 

Stress Free Capital Inc. Receivable Purchase Agreement

 

On February 24, 2017 (the “Effective Date”), the Company entered into a Receivable Purchase Agreement (the “Agreement”) with Stress Free Capital, Inc. (“Lender”). Pursuant to the Agreement, the Company sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for $250,000 (the “Purchase Price”), the Company’s entire right, title, and interest in $355,000 (the “Purchased Amount”) of each of the Company’s future sales, and credit card receivables owed to the Company from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the Company irrevocably authorized the Purchaser’s right to withdraw $2,218.75 from the Company’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the Company’s obligations under the Agreement, the Company granted the Lender a continuing security interest in all of the Company’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the Company’s credit card processor, all future receivables of the Company, and all other assets and personal property of the Company. Additionally, the Company agreed to issue the Lender common stock of the Company equal to 20% of the Purchase Price under the Agreement. The issuance price of the common stock is calculated by using the average closing price for the previous 20 days from the Effective Date.

 

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Power Up Lending Group Ltd. Factoring Agreement

 

On February 24, 2017 (the “Effective Date”), One Love, a wholly owned subsidiary of the Company, entered into a Factoring Agreement (the “Agreement”) with Power Up Lending Group Ltd. (“Lender”). Pursuant to the Agreement, One Love, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for $100,000 (the “Purchase Price”), One Love’s entire right, title, and interest in $139,000 (the “Purchased Amount”) of each of One Love’s future sales, and credit card receivables owed to One Love from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, One Love irrevocably authorized the Purchaser’s right to withdraw $1,103.18 from the One Love bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of One Love’s obligations under the Agreement, One Love granted the Lender a continuing security interest in all of the One Love’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by One Love’s credit card processor, all future receivables of One Love, and all other assets and personal property of One Love.

 

On June 30, 2017, the Company entered into a Letter Agreement with Power Up, whereby in order to stay any collection and litigation with respect to the Factoring Agreement and the Power Up Note (as defined above), the Company and Power Up modified the terms of the Power Up Note to provide for a daily ACH payment in the amount of $1,592.01 per business day until such time that the amounts due to Power Up under the Power Up Note and the Factoring Agreement have been paid in full (or with respect to the Power Up Note, converted into shares of common stock of the Company pursuant to the terms of the Power Up Note in the sole discretion of Power Up). The increased portion of the modified payment will be applied to reduce the balance of the Note.

 

AKF Inc. Merchant Agreement 1

 

On March 8, 2017 (the “Effective Date”), One Love, a wholly owned subsidiary of the Company, entered into a Merchant Agreement (the “Agreement”) with AKF Inc. (“Lender”). Pursuant to the Agreement, One Love sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for net proceeds of $91,975 (the “Purchase Price”), One Love’s entire right, title, and interest in $137,280 (the “Purchased Amount”) of each of the One Love’s future sales, and credit card receivables owed to One Love from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, One Love irrevocably authorized the Purchaser’s right to withdraw $980.57 from One Love’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the One Love’s obligations under the Agreement, One Love granted the Lender a continuing security interest in all of the One Love’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by One Love’s credit card processor, all future receivables of One Love, and all other assets and personal property of One Love.

 

AKF Inc. Merchant Agreement 2

 

On March 8, 2017 (the “Effective Date”), One Love, a wholly owned subsidiary of the Company entered into a Merchant Agreement (the “Agreement”) with AKF Inc. (“Lender”). Pursuant to the Agreement, the One Love sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for net proceeds of $95,100 (the “Purchase Price”), One Love’s entire right, title, and interest in $135,993 (the “Purchased Amount”) of each of the One Love’s future sales, and credit card receivables owed to the One Love from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the One Love irrevocably authorized the Purchaser’s right to withdraw $971.38 from One Love’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the One Love’s obligations under the Agreement, the One Love granted the Lender a continuing security interest in all of the One Love’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the One Love’s credit card processor, all future receivables of the One Love, and all other assets and personal property of One Love.

 

Demand Promissory Note

 

On May 25, 2017 (the (“Issuance Date”), the Company issued a Promissory Note to an investor (the “Lender”) in the principal amount of $100,000 (the “Note”). The Company received $100,000 in net proceeds from the sale of the Note.

 

The Note is due on demand 180 days from the Issuance Date (the “Maturity Date”). Payment by the Company to Lender under the terms of the Note may be made in either cash or common stock of the Company, at the option of the Lender. In the event the Company repays the Note in common stock, such common stock will be issued at a price equal to the closing price of the Company’s common stock on the Maturity Date (the “Conversion Price”). The Note bears interest at a rate of fifteen percent (15%) per annum, to be accrued through the Maturity Date. Interest may be paid in cash or common stock of the Company at the option of the Lender on the Maturity Date at the Conversion Price.

 

Additionally, the Company will issue the Lender shares of common stock in an amount equal to thirty three percent (33%) of the outstanding balance of principal and interest under the Note on the Maturity Date (the “Issuance”). The Issuance of the Company’s common stock to the Lender shall be at the Conversion Price on the Maturity Date. The Company shall deliver the shares of common stock to the Lender within ten days after the Maturity Date.

 

Upon the occurrence of an Event of Default (as defined in the Note), the Lender shall provide the Company notice of such occurrence, at which time the Company will have five (5) business days from receipt of such notice to pay the outstanding principal amount of the Note, with any unpaid interest thereof, in full. In the event full payment is not made upon the expiry of the five (5) day period, here is a default penalty equal to two percent (2%) of the principal amount per month during the period of default (the “Default Penalty”). Lender may then, at its sole discretion declare the entire then outstanding principal amount of this Note together with any unpaid interest and the Default Penalty immediately due and payable, in which event the Lender may, at its sole discretion take any action it deems necessary to recover amounts due under this Note. 

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The foregoing descriptions of the Note do not purport to be complete and is subject to, and qualified in its entirety by the Note, a copy of which is attached as Exhibit 4.1 to the Current Report on Form 8-K filed on June 13, 2017, and incorporated herein by reference.

 

Carebourn Capital Debt Refinancing

 

On July 14, 2017 (the “Effective Date”), the Company and the Purchaser Agreed to cancel the Purchase Agreement, the Note and the related transaction documents and refinanced the original loan by the Company’s issuance of a Convertible Promissory Note dated the Effective Date (the “Note”). The principal amount of the Note is $262,877.42, the Purchase Price is $228,589.06, and the Company received $50,000 in proceeds from the Purchaser. The Maturity Date of the Note is July 14, 2018.

 

The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Effective July 24, 2017, in accordance with the terms and conditions of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,095.32 from the Company’s bank account on each business day, until the amounts due under the Note are satisfied in full. At the sole discretion of the Purchaser, the Company may prepay in cash any portion of the principal amount of the Note and any accrued and unpaid interest in accordance with the terms and conditions of the Note.

 

Item 1A. Risk Factors.

 

Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this prospectus before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and results of operations.

 

Risks Related to Our Company and Our Industry

 

WE ARE A DEVELOPING BUSINESS AND CAN MAKE NO ASSURANCES THAT WE WILL BE PROFITABLE.

 

We are a developing business and there can be no assurance at this time that we will operate profitably or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. Such risks include the following:

 

  changes in the laws of federal and state governments;
     
  our ability to raise capital as and when we need it;
     
  our ability to continue to develop and extend our brand identity;
     
  our ability to anticipate and adapt to a competitive market;
     
  our ability to effectively manage expanding operations;
     
  the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure;
     
  our ability to deliver and maintain high quality products and services;
     
  our dependence upon key personnel; and
     
  our dependence upon the performance of associated businesses and third parties with whom we may conduct business with or invest.

 

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We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected. See the Recent Developments section herein for a description of the Company’s debt financing transactions. The Company may be unable to meet its financial obligations as they become due and may have to cease its business operations.

 

WE HAVE A LIMITED OPERATING HISTORY AND OPERATE IN A NEW INDUSTRY, AND WE MAY NOT SUCCEED.

 

We have a limited operating history and may not succeed. We are subject to all risks inherent in a developing business enterprise. Our likelihood of continued success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in the competitive and regulatory environment in which we operate. For example, the recreational and medical marijuana industry is a new industry that as a whole may not succeed, particularly should the federal government change course and decide to prosecute those dealing in medical and recreational marijuana under federal law. If that happens there may not be an adequate market for our products. As a new industry, there are not established entities whose business model we can follow or build on the success of. Similarly, there is limited information about comparable companies available for potential investors to review in making a decision about whether to invest in the Company. Further, as the medical and recreational marijuana industry is a new market it is ripe for technological advancements that could limit or eliminate the need for our services and products.

 

You should further consider, among other factors, the risks and uncertainties encountered by companies that, like us, are in their early stages. For example, unanticipated expenses, problems, and technical difficulties may occur and they may result in material delays in the operation of our business, in particular with respect to our services and products. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of our capital stock to the point investors may lose their entire investment.

  

THE COMPANY’S FAILURE TO COMPLY WITH THE OBLIGATIONS SET FORTH IN THE AGREEMENTS ENTERED INTO WITH TCA GLOBAL CREDIT MASTER FUND, LP AND L2 CAPITAL LLC MAY RESULT IN THE FORECLOSURE OF THE COMPANY’S OR ITS SUBSIDIARIES’ PLEDGED ASSETS AND OTHER ADVERSE CONSEQUENCES.

 

TCA Credit Agreement

 

Effective December 7, 2015, the Company closed the Credit Agreement by and among the Company, as borrower, Grow Solutions, Inc. and One Love Garden Supply LLC as joint and several guarantors (such guarantors, collectively, the “Subsidiaries” and together with the Company, the “Borrowers”) and TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership, as lender (“TCA”). Pursuant to the Credit Agreement, TCA agreed to loan the Company up to a maximum of $3,000,000 for the Company’s product division, construction and renovation of two stores, and inventory. An initial amount of $950,000 was funded by TCA at the closing of the Credit Agreement.  Any increase in the amount extended to the Borrowers shall be at the discretion of TCA.

 

The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets in favor of TCA, as evidenced by a Security Agreement by and between the Company and TCA (the “Company Security Agreement”) and a first position security interest in substantially all of the Subsidiaries’ assets in favor of TCA, as evidenced by a Security Agreement by and among the Subsidiaries and TCA (the “Subsidiaries Security Agreement” and, together with the Company Security Agreement, the “Security Agreements”).  The Revolving Note is in the original principal amount of $950,000, is due and payable, along with interest thereon, on June 7, 2017 (the “Maturity Date”), and bears interest at the rate of 18% per annum, with the first four months of payments by the Company under the Revolving Note being interest only. Upon the occurrence of an Event of Default (as defined in the Credit Agreement) the interest rate shall increase to the Default Rate (as defined in the Credit Agreement). The payments under the Revolving Note are amortized over 18 months.

 

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Only upon the occurrence of an Event of Default or mutual agreement between TCA and the Company, at the sole option of TCA, TCA may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Revolving Note into shares of the Company’s common stock at a conversion price equal to 85% of the lowest daily volume weighted average price of the Company’s common stock during the five trading days immediately prior to such applicable conversion date, in each case subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common stock upon any conversion.

 

As further consideration for TCA entering into and structuring the Credit Agreement, the Company shall pay to TCA an advisory fee by issuing shares of restricted common stock of the Company (the “Advisory Fee Shares”) equal to $325,000 (the “Advisory Fee”). In the event that the Company pays TCA all of the outstanding obligations due under the Credit Agreement on or before June 7, 2015, the Advisory Fee shall be reduced to $292,500. Additionally, as long as there is (i) no Event of Default (ii) no occurrence of any other event that would cause an Event of Default, and (iii) the Company makes timely Advisory Fee Payments (as defined below), TCA agrees that it will not sell any Advisory Fee Shares in the Principal Trading Market (as defined in the Credit Agreement) prior to the Maturity Date, in exchange for monthly cash payments by the Company beginning on July 4, 2016 and ending on the Maturity Date as set forth in the Credit Agreement, which shall be credited and applied towards the repayment of the Advisory Fee (the “Advisory Fee Payments”). In the event that TCA shall sell the Advisory Fee Shares, as long as there is no Event of Default, TCA shall not, during any given calendar week, sell Advisory Fee Shares in excess of 25% of the average weekly volume of the common stock of the Company on the Principal Trading Market over the immediately preceding calendar week, as reported by Bloomberg.

 

As additional security, the Company pledged its ownership interests in the Subsidiaries, pursuant to a Stock Pledge and Escrow Agreement entered into as of December 7, 2015 (the “Pledge Agreement”).

 

Amendment of TCA Credit Agreement

 

On February 14, 2017, the Company entered into a First Amendment to Credit Agreement (the “Amended Agreement”) by and between the Borrowers and TCA. Pursuant to the Amended Agreement, the Original Note was severed, split, divided and apportioned into two separate and distinct replacement notes consisting of (i) First Replacement Note A, evidencing principal indebtedness of $325,000 which was executed and delivered by the Company as the first purchase tranche paid by the Assignee (as defined below) to TCA, and (ii) First Replacement Note B evidencing the reduced outstanding balance of principal indebtedness of $876,441.25 (collectively, First Replacement Note A and First Replacement Note B, the “Replacement Notes”). The Replacement Notes replaced and superseded the Original Note in its entirety by substituting one evidence of debt for another without extinguishing the indebtedness and obligations evidenced under the Original Note.

 

Under the terms and conditions of Replacement Note B, the Company has the right to prepay Replacement Note B evidencing the remaining outstanding balance of principal indebtedness owed to TCA in full and for cash, at any time prior to the Maturity Date (as defined therein), with three (3) Business Days (as defined therein) advance written notice to TCA.

 

Debt Purchase Agreement

 

On February 15, 2017 (the “Effective Date”), the Company entered into a Debt Purchase Agreement (the “Debt Purchase Agreement”) by and among the Company, TCA, and L2 Capital, LLC, a Kansas limited liability company (the “Assignee”). Pursuant to the Debt Purchase Agreement, on the Effective Date, TCA sold and assigned to Assignee, TCA’s right, title and interest in and to the monetary obligations evidenced under Replacement Note A thereby reducing the TCA outstanding principal indebtedness. Assignee shall subsequently purchase from TCA the remaining debt evidenced by First Replacement Note B in purchase tranches. The indebtedness underlying the Replacement Notes are evidenced by a newly issued 10% Senior Replacement Convertible Promissory Note.

 

Upon the purchase of all debt under Replacement Note B the Company will have no further obligations to TCA.

 

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Issuance of 10% Senior Replacement Convertible Promissory Note

 

On February 15, 2017, the Company issued a 10% Senior Replacement Convertible Promissory Note (the “L2 Note”) to the Assignee in the principal amount of $1,201,441.25. The initial principal amount under the L2 Note is $325,000, representing the first tranche purchased by Assignee under First Replacement Note A and such amounts shall increase in tranches upon the purchase of such tranches by the Assignee from TCA pursuant to the Debt Purchase Agreement. The maturity date for each tranche shall be six months from that date of the purchase of that tranche and the Company shall pay interest to the Assignee on the aggregate unconverted and then outstanding principal amount of the L2 Note at the rate of 10% per annum. The Company may prepay any portion of the principal amount under the L2 Note and any accrued and unpaid interest in cash equal to the sum of the then outstanding principal amount under the L2 Note and interest multiplied by 140%.

 

The L2 Note is convertible at any time, in whole or in part, at the option of the holder into shares of common stock of the Company at a conversion price equal to 62.5% of the lowest closing bid price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Additionally, the terms under the L2 Note include make-whole rights whereby upon liquidation by the Assignee of the shares converted under the L2 Note, provided that the Assignee realizes a net amount from such liquidation equal to less than the conversion amount specified in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company shall issue to the Assignee additional shares of common stock of the Company equal to: (i) the conversion amount; minus (ii) the Realized Amount; divided by (iii) the average volume weighted average price of the Company’s common stock during the five (5) business days immediately prior to the date upon which the Assignee delivers notice to the Company that such additional shares are requested by the Assignee (the “Make-Whole Shares”). Following the sale of the Make-Whole Shares by the Assignee: (i) in the event that Assignee receives net proceeds from such sale which, when added to the Realized Amount from the prior relevant conversion notice, is less than the conversion amount specified in the relevant conversion notice, Assignee shall deliver an additional make-whole notice to the Company and the Company obligation to issue Make-Whole Shares shall continue until the conversion amount has been fully satisfied; and (ii) in the event that Assignee received net proceeds from the sale of Make-Whole Shares in excess of the conversion amount specified in the relevant conversion notice, such excess amount shall be applied to satisfy any and all amounts owed hereunder in excess of the conversion amount specified in the relevant conversion notice.

 

The Company’s failure to comply with the obligations in connection with the TCA and L2 transactions discussed herein or the occurrence of certain other specified events related thereto could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt, potential foreclosure on our assets and other adverse consequences. In the event TCA acceleration of our debt it would have a materially adverse effect on the Company and we may have to cease our business operations.

 

OUR CONTINUED SUCCESS IS DEPENDENT ON ADDITIONAL STATES LEGALIZING MEDICAL AND RECREATIONAL MARIJUANA.

 

Continued development of the medical and recreational marijuana market is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt the progress. Further, progress, while encouraging, is not assured and the process normally encounters set-backs before achieving success. While there may be ample public support for legislative proposal, key support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative process. Any one of these factors could slow or halt the progress and adoption of marijuana for recreational and medical purposes, which would limit the market for our products and negatively impact our business and revenues.

 

THE ALTERNATIVE MEDICINE INDUSTRY FACES STRONG OPPOSITION WHICH MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS OPERATIONS.

 

It is believed by many that well-funded, significant businesses may have a strong economic opposition to the medical marijuana industry as currently formed. We believe that the pharmaceutical industry does not want to cede control of any compound that could become a strong selling drug. For example, medical marijuana will likely adversely impact the existing market for Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana industry could face a material threat from the pharmaceutical industry should marijuana displace other drugs or simply encroach upon the pharmaceutical industry’s market share for compounds such as marijuana and its component parts. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on the market for our products and thus on our business, operations and financial condition.

 

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MARIJUANA REMAINS ILLEGAL UNDER FEDERAL LAW. EVEN IN THOSE JURISDICTIONS IN WHICH THE USE OF MEDICAL MARIJUANA HAS BEEN LEGALIZED AT THE STATE LEVEL, ITS USE AND PRESCRIPTION ARE VIOLATIONS OF FEDERAL LAW WHICH MAY DISRUPT THE ON GOING BUSINESS OF THE COMPANY.

 

Although we do not sell marijuana or have any operations that directly work with the marijuana plant, we may be deemed to assist in facilitating the selling or distribution of marijuana in violation of the federal Controlled Substances Act. Marijuana remains illegal under federal law. It is a schedule-I controlled substance. Even in those jurisdictions in which the use of medical and recreational marijuana have been legalized at the state level, its prescription and sale is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical and recreational purposes. Therefore, federal law criminalizing the use of marijuana trumps state laws that legalize its use for medicinal and recreational purposes. At this time, the states are standing against the federal government, maintaining existing laws and passing new ones in this area. Currently, the Company does not believe that President Trump and his administration will have a negative effect on the Company and its business operations. The Company believes there is overwhelming support for both recreational and medical cannabis use and there have been multiple bills introduced at the State level to provide support to the Cannabis industry in the event of action taken by President Trump and his administration. A change in the federal attitude towards enforcement could cripple the industry. The legal cannabis industry is our target market, and if this industry is unable to operate, we would lose the majority of our potential clients, which would have a negative impact on our business, operations and financial condition.

 

THE COMPANY MAY HAVE DIFFICULTY ACCESSING THE SERVICE OF BANKS, WHICH MAY MAKE IT DIFFICULT TO CONDUCT OUR BUSINESS OPERATIONS.

 

As discussed above, the use of marijuana is illegal under federal law. Therefore, there is a compelling argument that banks cannot accept for deposit funds from the legal cannabis industry and therefore cannot do business with the Company. While U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow banks to transact business with state-authorized medical and recreational marijuana businesses, there can be no assurance his legislation will be successful, that banks will decide to do business with medical marijuana and recreational marijuana industry participants, or that in the absence of legislation state and federal banking regulators will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. The potential inability of the Company to open accounts and otherwise use the service of banks may have a material adverse effect on our business operations.

 

The Company has no current plans and has no current need to seek bankruptcy protection. However, in the event the Company ever needs to seek bankruptcy protection, it may have difficulty accessing bankruptcy courts considering its involvement in the legal cannabis industry. In September 2014, the U.S. Bankruptcy Court in Denver, Colorado, in the matter of In re Frank Arenas and Sarah Arenas, 14-11406-HRT (Bankr. D. Co. 2014), denied bankruptcy protection to the individuals in the business of growing and storing marijuana in a commercial building in Denver, Colorado. Such building had been partially leased to a corporate entity that operated a marijuana dispensary. The U.S. Bankruptcy Court ruled that, although their activities were legal under Colorado law, they were violating the federal Controlled Substances Act. The U.S. Bankruptcy Court denied protection to the debtors under both bankruptcy liquidation and reorganization because marijuana is illegal under federal law. Therefore, even though the Company is not in the business of growing and storing marijuana, in the event the Company ever needs to seek protection under the bankruptcy laws, its involvement in the legal cannabis industry may prevent it from receiving such relief.

 

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THE SUCCESS OF OUR NEW AND EXISTING PRODUCTS AND SERVICES IS UNCERTAIN.

 

We have committed, and expect to continue to commit, significant resources and capital to develop and market existing product and service enhancements and new products and services. These products and services are relatively untested, and we cannot assure you that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the legal cannabis industry. In addition, new products, services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements could seriously harm our business, financial condition and results of operations.

 

OUR BUSINESS IS DEPENDENT UPON CONTINUED MARKET ACCEPTANCE BY CONSUMERS.

 

We are substantially dependent on continued market acceptance of our products and services by consumers. Although we believe that the use of our products and services in the United States will gain consumer acceptance, we cannot predict the future growth rate and size of this market.

 

IF WE ARE ABLE TO EXPAND OUR OPERATIONS, WE MAY BE UNABLE TO SUCCESSFULLY MANAGE OUR FUTURE GROWTH.

 

If we are able to expand our operations in the United States and in other countries where we believe our products and services will be successful, as planned, we may experience periods of rapid growth, which will require additional resources. Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse effect on our business and results of operations.

 

THE COMPANY COULD LOSE STRATEGIC RELATIONSHIPS THAT ARE ESSENTIAL TO ITS BUSINESS.

 

The loss of certain current strategic relationships, the inability to find other strategic partners or the failure of the Company’s existing relationships to achieve meaningful positive results could harm the Company’s business. The Company intends to rely in part on strategic relationships to help it (i) maximize adoption of the Company’s products through retail sales and distribution arrangements to enhance the Company’s brand, (ii) expand the range of commercial activities based on the Company’s technology, and (iii) increase the performance and utility of the Company’s products and services.

 

Many of these goals are beyond the Company’s expertise. The Company anticipates that the efforts of the Company’s strategic partners will become more important as the medical and recreational legal cannabis industry matures. In addition, the efforts of the Company’s strategic partners may be unsuccessful. Furthermore, these strategic relationships may be terminated before the Company realizes any benefit.

 

THE DEATH OF OUR FORMER CHIEF EXECUTIVE OFFICER AND DIRECTOR COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

 

Our success has been dependent on the services of our former Chief Executive Officer, John M. Phelps, Jr. On January 11, 2015, Mr. Phelps passed away. On January 19, 2015, the board of directors appointed Mr. Jeffrey W. Beverly to succeed him as the President and Director of the Company. The death of Mr. Phelps could have a material adverse effect on our business.

 

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WE DEPEND UPON KEY PERSONNEL, THE LOSS OF WHICH COULD SERIOUSLY HARM OUR BUSINESS.

 

Our operating performance is substantially dependent on the continued services of our executive officers and key employees, in particular, Mr. Jeffrey W. Beverly, our President and Director. We believe Mr. Beverly possesses valuable knowledge about and experience in the alternative medicine and recreational cannabis market, as well as a history of success in business management, and that his knowledge and relationships would be difficult to replicate. We have not entered into an employment agreement with Mr. Beverly and, although we are considering doing so, have not acquired key-person life insurance on such executive officer. The unexpected loss of the services of Mr. Beverly could have a material adverse effect on our business, operations, financial condition and operating results, as well as the value of our common stock.

 

THE COMPANY MAY BE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE IN ITS INDUSTRY AND SUCH CHANGE MAY INCREASE COSTS AND COMPETITION THAT MAY ADVERSELY AFFECT ITS BUSINESS.

 

Rapidly changing technologies, frequent new product and service introductions and evolving industry standards characterize the Company’s market. The continued growth of the Internet and intense competition in the Company’s industry exacerbate these market characteristics. The Company’s future success will depend on its ability to adapt to rapidly changing technologies by continually improving the performance features and reliability of its products and services. The Company may experience difficulties that could delay or prevent the successful development, introduction or marketing of its products and services. In addition, any new enhancements must meet the requirements of its current and prospective users and must achieve significant market acceptance. The Company could also incur substantial costs if it needs to modify its products and services or infrastructures to adapt to these changes.

 

The Company also expects that new competitors may introduce products, systems or services that are directly or indirectly competitive with the Company. These competitors may succeed in developing, products, systems and services that have greater functionality or are less costly than the Company’s products, systems and services, and may be more successful in marketing such products, systems and services. Technological changes have lowered the cost of operating communications and computer systems and purchasing software. These changes reduce the Company’s cost of providing services but also facilitate increased competition by reducing competitors’ costs in providing similar services. This competition could increase price competition and reduce anticipated profit margins.

 

THE COMPANY’S INDUSTRY IS HIGHLY COMPETITIVE AND WE HAVE LESS CAPITAL AND RESOURCES THAN MANY OF OUR COMPETITORS, WHICH MAY GIVE THEM AN ADVANTAGE IN DEVELOPING AND MARKETING PRODUCTS SIMILAR TO OURS OR MAKE OUR PRODUCTS OBSOLETE.

 

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.

 

THE COMPANY’S SERVICES ARE NEW AND ITS INDUSTRY IS EVOLVING.

 

You should consider the Company’s prospects in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stage of development, particularly companies in the rapidly evolving legal cannabis industry. To be successful in this industry, the Company must, among other things:

 

  develop and introduce functional and attractive service offerings;
     
  attract and maintain a large base of consumers;
     
  increase awareness of the Company brand and develop consumer loyalty;
     
  establish and maintain strategic relationships with distribution partners and service providers;

 

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  respond to competitive and technological developments;
     
  build an operations structure to support the Company business; and
     
  attract, retain and motivate qualified personnel.

 

The Company cannot guarantee that it will succeed in achieving these goals, and its failure to do so would have a material adverse effect on its business, prospects, financial condition and operating results.

 

Some of the Company’s products and services are new and are only in early stages of commercialization. The Company is not certain that these products and services will function as anticipated or be desirable to its intended market. Also, some of the Company’s products and services may have limited functionalities, which may limit their appeal to consumers and put the Company at a competitive disadvantage. If the Company’s current or future products and services fail to function properly or if the Company does not achieve or sustain market acceptance, it could lose customers or could be subject to claims which could have a material adverse effect on the Company business, financial condition and operating results.

 

As is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for the Company is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. The Company cannot guarantee that a market for the Company will develop or that demand for Company services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, the Company’s business, financial condition and operating results would be materially adversely affected.

 

THERE COULD BE UNIDENTIFIED RISKS INVOLVED WITH AN INVESTMENT IN OUR SECURITIES.

 

The foregoing risk factors are not a complete list or explanation of the risks involved with an investment in the securities. Additional risks will likely be experienced that are not presently foreseen by the Company. Prospective investors must not construe this the information provided herein as constituting investment, legal, tax or other professional advice. Before making any decision to invest in our securities, you should read this entire prospectus and consult with your own investment, legal, tax and other professional advisors. An investment in our securities is suitable only for investors who can assume the financial risks of an investment in the Company for an indefinite period of time and who can afford to lose their entire investment. The Company makes no representations or warranties of any kind with respect to the likelihood of the success or the business of the Company, the value of our securities, any financial returns that may be generated or any tax benefits or consequences that may result from an investment in the Company.

 

WHILE NO CURRENT LAWSUITS ARE FILED AGAINST THE COMPANY, THE POSSIBILITY EXISTS THAT A CLAIM OF SOME KIND MAY BE MADE IN THE FUTURE.

 

While no current lawsuits are filed against us, the possibility exists that a claim of some kind may be made in the future. While we will work to ensure high product and service quality and accuracy, no assurance can be given that some claims for damages will not arise. At this time we do not carry product liability insurance. We cannot make any assurances that we will obtain such product liability insurance, and if obtained, if such product liability insurance will completely cover any potential claims against the Company.

 

THE COMPANY’S FAILURE TO CONTINUE TO ATTRACT, TRAIN, OR RETAIN HIGHLY QUALIFIED PERSONNEL COULD HARM THE COMPANY’S BUSINESS.

 

The Company’s success also depends on the Company’s ability to attract, train, and retain qualified personnel, specifically those with management and product development skills. In particular, the Company must hire additional skilled personnel to further the Company’s research and development efforts. Competition for such personnel is intense. If the Company does not succeed in attracting new personnel or retaining and motivating the Company’s current personnel, the Company’s business could be harmed.

 

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IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE FUTURE TRADING PRICE OF OUR COMMON STOCK.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital.

 

We currently have insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements. Additionally, there is a lack of formal process and timeline for closing the books and records at the end of each reporting period and such weaknesses restrict the Company’s ability to timely gather, analyze and report information relative to the financial statements.

 

Because of the Company’s limited resources, there are limited controls over information processing. There is inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff. Currently, the Company is unable to hire additional staff to facilitate greater segregation of duties but will reassess its capabilities during this fiscal year.

 

Risks Related to Our Common Stock

 

OUR SHARES OF COMMON STOCK HAVE LIMITED TRADING AND THERE CAN BE NO ASSURANCE THAT THERE WILL BE AN ACTIVE MARKET FOR OUR SHARES OF COMMON STOCK EITHER NOW OR IN THE FUTURE.

 

Our shares of common stock have limited trading, and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business. If a more active market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock or because we are involved in the legal cannabis industry, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares of common stock as collateral for any loans.

 

WE MAY BE SUBJECT TO PENNY STOCK RULES WHICH WILL MAKE THE SHARES OF OUR COMMON STOCK MORE DIFFICULT TO SELL.

 

We may be subject now and in the future to the SEC’s “penny stock” rules if our shares common stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker- dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

In addition, the penny stock rules require that prior to a transaction the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.

 

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GROW SOLUTIONS HOLDINGS LLC, A COLORADO LLC CONTROLLED EQUALLY BY THE BOARD, HAS SUFFICIENT VOTING POWER TO CONTROL THE VOTE ON SUBSTANTIALLY ALL CORPORATE MATTERS.

 

Grow Solutions Holdings LLC controlled equally by the Board has sufficient voting power to control the vote on substantially all corporate matters.  Accordingly, Grow Solutions Holdings LLC will be able to retain the effective voting power to approve all matters requiring shareholder approval, will prevail in matters requiring shareholder approval, including, in particular the election and removal of directors, and will continue to have significant influence over our business.  As a result of holding the Series A Preferred Stock of the Company, Grow Solutions Holdings LLC is able to influence all matters requiring shareholder action, including significant corporate transactions.

 

SHARES OF OUR CURRENTLY ISSUED AND OUTSTANDING STOCK MAY BECOME FREELY TRADABLE PURSUANT TO RULE 144 AND MAY DILUTE THE MARKET FOR YOUR SHARES AND HAVE A DEPRESSIVE EFFECT ON THE PRICE OF THE SHARES OF OUR COMMON STOCK.

 

A substantial majority of our outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that an Affiliate (as such term is defined in Rule 144(a)(1)) of an issuer who has held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by a person who is not an Affiliate of the Company and who has satisfied a one- year holding period. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.

 

YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTEREST BECAUSE OF THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK AND OUR PREFERRED STOCK.

 

In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 125,000,000 shares of capital stock consisting of 100,000,000 shares of common stock, par value $0.001 per share and 25,000,000 shares of blank check preferred stock, par value $0.001 per share.

 

We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock or other securities may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes or for other business purposes, including at a price (or exercise prices) below the price at which shares of our common stock are trading.

 

WE DO NOT EXPECT TO PAY DIVIDENDS AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK EXPECTING TO RECEIVE DIVIDENDS.

 

We have not paid any dividends on our common stock in the past, and do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, investors will only realize an economic gain on their investment in our common stock if the price appreciates. Investors should not purchase our common stock expecting to receive cash dividends. Because we do not pay dividends, and there may be limited trading, investors may not have any manner to liquidate or receive any payment on their investment. Therefore, our failure to pay dividends may cause investors to not see any return on investment even if we are successful in our business operations. In addition, because we do not pay dividends we may have trouble raising additional funds, which could affect our ability to expand our business operations.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

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Item 2. Description of Property.

  

Our principal office is located at 1111 Broadway - Suite 406 Denver, Colorado 80203.

 

The Company entered into a lease agreement for its office space located in Denver, Colorado commencing September 1, 2016 for a period of one year. Pursuant to the Company’s lease agreement, the Company pays $1,400 in rent per month for a period of one year commencing on October 1, 2016.

 

Keys Organic and Hydroponic Supply is located at 85 Industrial Road, Units 1 & 2, Big Pine Key, FL 33043.

 

The Company assumed the leases for the storefront property in Big Pine Key, Florida. Pursuant to the Company’s lease agreement, it pays $1,290 in rent per month for a period of one year commencing on October 1, 2016.

 

West Coast Organic and Hydroponic is located at 12410 SE 282nd Ave # C, Boring, Oregon 97009.

 

Our One Love Garden Supply locations are as follows:

 

One Love Garden Supply, 6271

Beach St F, Denver, CO 80221

 

One Love Garden Supply

618 E 4th St

Pueblo, CO 81001.

 

The Company assumed the Hygrow leases for the storefront properties in Denver, Colorado and Pueblo, Colorado. The leases are on a month to month basis with monthly payments of $3,700 and $800, respectively.

 

One Love Garden Supply

3620 Walnut St

Boulder, CO 80301

 

The Company assumed the OneLove lease for storefront property in Boulder, Colorado. The lease is for a five-year period and requires initial base annual rent of $93,600 with 5% increases thereafter. In addition, the Company is responsible for its pro-rata charges for operating expenses and taxes for $39,624 per year.

  

Item 3. Legal Proceedings.

 

Except as disclosed below, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Ralph Aiello Complaint and Settlement Agreement

 

The Company was involved in litigation against Ralph Aiello (the “Plaintiff” and together with the Company, the “Parties”). On January 19, 2017, the Plaintiff filed a complaint in the Supreme Court of the State of New York County of Nassau (the “Court”), alleging claims including breach of contract in connection with certain loans made by Plaintiff to the Company in the amount of $500,000 plus interest (the “Dispute”). On March 15, 2017, the Parties filed a Settlement Agreement (the “Settlement Agreement”) with the Court whereby the Company agreed to pay the Defendant $550,000 by September 15, 2018. The Company has not made timely payments in accordance with the Settlement Agreement. The Company acknowledges the debt owed to the Plaintiff and is working with the Board to establish a payment plan for the Plaintiff and expedite the settlement of the Dispute.

 

Bronstein Complaint and Settlement Agreement

 

The Company was involved in litigation against Tal Bronstein, Kathleen Bronstein, and Milehigh Wholesale Inc. (the “Plaintiffs” and together with the Company, the “Parties”). On May 4, 2017, the Plaintiffs filed a complaint in the District Court, City and County of Denver (the “Court”), alleging claims including breach of contract in connection with the acquisition of Milehigh Wholesale Inc. and the employment of Mr. Bronstein in connection with such acquisition (the “Dispute”). On or about June 14, 2017, the Parties entered into a settlement agreement and release of all claims whereby upon payment by the Company of $16,000 to Plaintiffs by July 14, 2017, Plaintiffs would dismiss with prejudice their claims against the Company and release the Company from any and all claims, known or unknown, on conditions of such payment. On June 23, 2017, counsel for the Plaintiffs filed with the Court a Notice of Settlement with respect to the Dispute. On June 27, 2017, the Court ordered that the Parties file a Stipulated Dismissal within 35 days of the Order (August 1, 2017).

 

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On or about July 10, 2017, the Company notified the Plaintiffs that it would not be able to pay the $16,000 by July 14, 2017 and renegotiated the Settlement Agreement and Release of All Claims (the “Agreement”) as follows: (i) on or before July 14, 2017, Company shall deliver to the office of Plaintiffs’ counsel a Certified check in the amount of $5,000 (ii) on or before August 14, 2017, Company shall deliver to the office of Plaintiffs’ counsel a certified check in the amount of $13,500 (iii) the parties intend that the total amount paid from Company to Plaintiffs will be $18,500 (iv) if Company fail to pay the $13,500 by August 14, 2017, they will pay $100 per day thereafter as an additional penalty payment for each and every day that the $13,500 is not paid until the full amount of $13,500 is paid, or until August 31, 2017 (v) no later than July 17, 2017, Counsel for the Parties will file an unopposed Motion to Extend the time by which they have to file the Stipulated Motion to Dismiss to and including August 31, 2017 (vi) if Company fail to pay the $13,500 by August 31, 2017, they agree that Plaintiffs may then seek a default judgment to enter against the Company in the amount of $21,700, without decrease for the $5,000 expected to be paid on or before July 14, 2017. Further, all attorney fees and costs of collection thereafter shall be paid for by Company.

 

Alessi Complaint and Dismissal

 

The Company was involved in litigation against William Alessi (“Alessi”). On February 15, 2017, Alessi filed a complaint in the General Court of Justice, Superior Court Division, State of North Carolina, County of Mecklenburg (the “Court”), alleging claims including breach of contract or unjust enrichment (the “Dispute”). On July 12, 2017, the Honorable Jeff Hunt presiding over the matter issued an order in favor of the Company dismissing the Alessi’s action with prejudice due to the Court’s lack of jurisdiction and further stating that the proper forum for all claims in connection with the Dispute is an American Arbitration Association proceeding.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Common Equity and Related Stockholder Matters.

 

(a) Market Information

 

Our shares of common stock began trading under the symbol “LTVL” and are now trading on the OTC Markets OTCQB quotation platform under the symbol “GRSO” since June 24, 2015.

 

The following table sets forth the high and low trade information for our common stock for each quarter during the past two fiscal years. The prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.

 

Fiscal Year 2016  Low Price   High Price 
March 31, 2016  $0.76   $5.00 
June 30, 2016  $0.51   $1.20 
September 30, 2016  $0.25   $1.00 
December 31, 2016  $0.10   $0.70 
Fiscal Year 2015          
March 31, 2015  $0.90   $0.90 
June 30, 2015  $1.06   $1.06 
September 30, 2015  $1.00   $1.00 
December 31, 2015  $1.40   $1.40 

 

(b) Holders

 

As of July 24, 2017, a total of 53,472,415 shares of the Company’s common stock are currently outstanding held by approximately 162 shareholders of record.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is VStock Transfer LLC with its business address at 18 Lafayette Place, Woodmere, New York 11598 and telephone number (212) 828-8436.

 

(c) Dividends

 

We have not declared or paid any dividends on our common stock and intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not anticipate paying dividends on our common stock for the foreseeable future. There are no restrictions on our present ability to pay dividends to stockholders of our common stock, other than those prescribed by Nevada law.

 

(d) Securities Authorized for Issuance under Equity Compensation Plans

 

The Company has not adopted an equity compensation plan.

 

Unregistered Sales of Equity Securities

 

On December 15, 2016 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Carebourn Capital LP an accredited investor (the “Purchaser”) pursuant to which the Company sold $285,775 in principal amount of an 8% Convertible Promissory Note (the “Note”) for a purchase price of $248,500 with a 15% original issue discount (“OID”).On December 19, 2016, the Company received $240,000 in net proceeds from the sale of the Note after deducting fees and expenses. The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Notwithstanding the foregoing, the minimum conversion price under the Note is $0.20 (the “Floor Price”), provided that, at any time following 180 days from the Issuance Date, if the closing price of the common stock of the Company is equal to or less than the Floor Price for two consecutive trading days, the Floor Price will extinguish and be of no further force or effect.

 

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On January 1, 2017, Pursuant to the Asset Purchase Agreement with Keys Organic Hydroponic Supply LLC, the Company issued 100,000 shares of restricted common stock of the Company to the Seller.

 

On January 1, 2017, under the terms and conditions of the Asset Purchase Agreement with Westcoast Organic & Hydroponic Supply Inc., the Company issued 600,000 shares of its restricted common stock to the Seller.

 

On January 19, 2017 (the “Initial Issuance Date”), the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which the Company sold $125,000 in principal amount of a Convertible Promissory Note (the “Power Up Note”). On or about January 19, 2017, the Company received $121,500 in net proceeds from the sale of the Power Up Note after deducting fees and expenses.

 

The Power Up Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Power Up Note. The Power Up Note is convertible following 180 days from the Initial Issuance Date, in whole or in part, at the option of Power Up into shares of common stock of the Company at a conversion price equal to 61% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

  

On January 30, 2017 (the “Issuance Date”), the Company issued a 10% Convertible Promissory Note (the “JSJ Note”) in the principal amount of $100,000 in favor of JSJ Investments Inc. (“JSJ”). On or about January 30, 2017, the Company received $98,000 in net proceeds from the sale of the JSJ Note after deducting fees and expenses.

 

The JSJ Note bears interest at a rate of 10% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the JSJ Note. The JSJ Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of JSJ into shares of common stock of the Company at a conversion price equal to 60% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Under the terms and conditions of the JSJ Note, the Company and JSJ agreed to enter into a mutually agreed upon Leak-Out Agreement whereby JSJ shall not sell more than the greater of (i) 20% of the trading volume per week or (ii) $20,000 in shares of common stock per week.

 

On February 8, 2017 (the “Issuance Date”), the Company, entered into a Securities Purchase Agreement with Cicero Consulting Group, LLC (“Cicero”) pursuant to which the Company sold $50,000 in principal amount of a Convertible Promissory Note (the “Cicero Note”). On or about February 8, 2017, the Company received $50,000 in net proceeds from the sale of the Cicero Note.

 

The Cicero Note bears interest at a rate of 12% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Cicero Note. The Cicero Note is convertible at any time from the Issuance Date, in whole or in part, at the option of Cicero into shares of common stock of the Company at a conversion price equal to 70% of the lowest closing bid price of the common stock in the prior five (5) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

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On February 15, 2017, in connection with the Debt Purchase Agreement by and among the Company, TCA and L2, the Company issued a 10% Senior Replacement Convertible Promissory Note (the “L2 Note”) to TCA in the principal amount of $1,201,441.25. The initial principal amount under the L2 Note is $325,000, representing the first tranche purchased by L2 under First Replacement Note A and such amounts shall increase in tranches upon the purchase of such tranches by L2 from TCA pursuant to the Debt Purchase Agreement. The maturity date for each tranche shall be six months from that date of the purchase of that tranche and the Company shall pay interest to L2 on the aggregate unconverted and then outstanding principal amount of the L2 Note at the rate of 10% per annum. The Company may prepay any portion of the principal amount under the L2 Note and any accrued and unpaid interest in cash equal to the sum of the then outstanding principal amount under the L2 Note and interest multiplied by 140%.

 

The L2 Note is convertible at any time, in whole or in part, at the option of the holder into shares of common stock of the Company at a conversion price equal to 62.5% of the lowest closing bid price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

On July 14, 2017 (the “Effective Date”), the Company and the Purchaser Agreed to cancel the Purchase Agreement, the Note and the related transaction documents and refinanced the original loan by the Company’s issuance of a Convertible Promissory Note dated the Effective Date (the “Note”). The principal amount of the Note is $262,877.42, the Purchase Price is $228,589.06, and the Company received $50,000 in proceeds from the Purchaser. The Maturity Date of the Note is July 14, 2018. 

 

The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

During the year ended December 31, 2016, the Company issued 1,985,000 shares of common stock to employees and consultants for services rendered.

 

The above issuances of securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, and manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, the Investor had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, the securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.

 

Rule 10B-18 Transactions

 

During the years ended December 31, 2016 and 2015, there were no repurchases of the Company’s common stock by the Company.

 

Item 6. Selected Financial Data.

 

None.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

This annual report contains forward-looking statements within the meaning of the federal securities laws. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “management believes” and similar language. Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this annual report are forward-looking statements that involve risks and uncertainties. The factors listed in the section captioned “Risk Factors,” as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this annual report.

 

Overview

 

We intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

 

Business Overview

 

Grow Solutions Holdings, Inc. is a corporation incorporated under the laws of the State of Nevada (the “Company”). The focus of the Company is to provide comprehensive services within the legal cannabis industry to those growing, processing and dispensing legal cannabis and legal cannabis related products.

 

The Merger

 

Effective April 28, 2015, the Company entered into an Acquisition Agreement and Plan of Merger (the “Grow Solutions Agreement”) with Grow Solutions, Inc., a Delaware corporation (“Grow Solutions”) and LightTouch Vein & Laser Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (“LightTouch Acquisition”). Under the terms of the Grow Solutions Agreement, Grow Solutions merged with LightTouch Acquisition and became a wholly owned subsidiary of the Company. The Grow Solutions’ shareholders and certain creditors of the Company received 44,005,000 shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Grow Solutions. Following the closing of the Grow Solutions Agreement, Grow Solutions’ business became the primary focus of the Company and Grow Solutions management assumed control of the management of the Company with the former director of the Company resigning upon closing of the Agreement. 

 

The Grow Solutions Agreement and related transaction documents are included as exhibits to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 19, 2015 and is hereby incorporated by reference. All references to the Grow Solutions Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by the text of such exhibits. 

 

Results of Operations 

 

The following table sets forth the summary statements of operations for the year ended December 31, 2016 and 2015:

 

    Year Ended  
    December 31, 2016     December 31, 2015  
             
Net Sales   $ 6,780,591     $ 2,693,212  
Gross profit   $ 1,250,773     $ 786,892  
Selling, general and administrative expenses   $ (4,717,255 )   $ (2,021,134 )
Other expense   $ (1,207,659 )   $ (227,697 )
Net loss   $ (4,674,141 )   $ (1,461,939 )

 

Net Sales

 

Net sales increased to $6,780,591 during the year ended December 31, 2016, from $2,693,212 for the year ended December 31, 2015. The increase in net sales is primarily related to the Company executing on their expansion strategy and completing the acquisitions of OneLove in May 2015 and Hygrow in September 2015.

 

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Gross Profit

 

The gross profit was $1,250,773 for the year ended December 31, 2016 and $786,892 for the year ended December 31, 2015. This increase is due to the acquisitions of OneLove in May 2015 and Hygrow in September 2015. 

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for the year ended December 31, 2016 and 2015 were $4,717,255 and $2,021,134, respectively. Selling, general and administrative expenses consisted primarily of professional fees related to operating as a public company, legal settlement expenses and payroll expenses from the operations of OneLove and Hygrow. The Company also recorded share-based compensation of $1,652,274 and $410,000 during the year ended December 31, 2016 and 2015, respectively, for services provided by employees and consultants.

 

Other income (expense)

 

Other expense for the year ended December 31, 2016 and 2015 was $1,207,659 and $227,697, respectively. Other expenses for the year ended December 31, 2016 consisted primarily of the change in fair value of the derivative liabilities of $106,262, interest expense of $266,173, $705,138 and $90,831 from interest expense on debt, accretion of debt discount and amortization of debt issuance costs related to the convertible notes, respectively, and derivative expense of $46,583 offset by other income of $7,328. Other expenses for the year ended December 31, 2015 consisted primarily of the change in fair value of the derivative liabilities of $(112,342) and interest expense of $17,387, $86,687 and $11,281 from the interest expense, accretion of debt discount and amortization of debt issuance costs related to the convertible notes, respectively. 

 

Net Loss

 

As a result of the foregoing factors, the net loss for the year ended December 31, 2016 and 2015 was $4,674,141 and $1,461,939, respectively.

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at December 31, 2016 compared to December 31, 2015:

 

   Year Ended     
   December 31,
2016
   December 31, 2015   Increase/
(Decrease)
 
             
Current Assets  $1,488,338   $1,701,236   $(212,898)
Current Liabilities  $3,094,669   $1,075,351   $2,019,318 
Working Capital  $(1,606,331)  $625,885   $(2,232,216)

 

As of December 31, 2016, we had working capital deficit of ($1,606,331) as compared to working capital of $625,885 as of December 31, 2015, a decrease of $2,232,216 The decrease in working capital is primarily attributable to decreases in cash. These changes were offset by increases in accounts receivable, notes receivable, inventories and balances due from convertible notes.

 

Net Cash

 

Net cash used in operating activities for the year ended December 31, 2016 was $1,722,278 compared to $970,271 used in operations for the year ended December 31, 2015. This change is primarily attributable to the net loss for the current period offset by the change in accounts payable and accrued expenses of $60,561, accrued settlement expense of $568,500, share-based compensation of $1,652,274, the accretion of debt discount and debt issuance costs of $795,969, derivative expense of $46,583 and the change in fair value of the derivative liability of $106,262. These increases were offset by changes in accounts receivable and inventory $52,923 and $235,933, respectively.

 

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Net cash used in investing activities for the year ended December 31, 2016 was $273,103. The Company paid $73,103 for machinery and equipment purchased during the period. In addition, the Company loaned $200,000 to a third party. Net cash used in investing activities during the year ended December 31, 2015 was $215,941. The Company utilized net cash of $193,906 to complete the acquisitions of One Love and Hygrow during the period. In addition, the Company paid $22,035 for the purchase of machinery and equipment during the year ended December 31, 2015. 

 

Net cash provided by financing activities during the year ended December 31, 2016 and 2015 was $1,376,479 and $1,548,600, respectively. These amounts during the current period represent repayments of $256,076 on outstanding notes payable offset by proceeds of $1,357,000 from the issuance of convertible notes payable. In addition, we received proceeds of $316,241 from the issuance of common stock issued to investors and we repaid a note payable totaling $40,000. During the year ended December 31, 2015, we received proceeds of $616,000 from the issuance of common stock in a private placement offering under Section 4(a)(2) of the Securities Act. In addition, we received proceeds of $1,070,000 from a convertible note issued to a third-party lender and paid $137,400 in debt issuance costs related to the note. 

 

At December 31, 2016, the Company had a cash balance of $195,761 and for the year ended December 31, 2016, the Company had a net loss of $4,674,141. 

 

Acquisitions and Asset Purchases

 

One Love Garden Supply LLC Acquisition

 

Effective May 13, 2015 (the “Closing Date”), the Company entered into an Acquisition Agreement and Plan of Merger (the “OneLove Agreement’) with Grow Solutions Acquisition LLC, a Colorado limited liability company and a wholly owned subsidiary of the Company (“Grow Solutions Acquisition”), One Love Garden Supply LLC, a Colorado limited liability company (“OneLove”), and all of the members of OneLove (the “Members”). On the Closing Date, OneLove merged with Grow Solutions Acquisition and became a wholly owned subsidiary of the Company. Under the terms of the OneLove Agreement, the Members received (i) 1,450,000 shares of the Company’s common stock (the “Equity”), (ii) Two Hundred Thousand Dollars (US$200,000) (the “Cash”), and (iii) a cash flow promissory note in the aggregate principal amount of $50,000 issued by OneLove in favor of the Members (the “Cash Flow Note”), whereby each fiscal quarter, upon the Company recording on its financial statements $40,000 in US GAAP Net Income (“Net Income”) from sales of the Company’s products (the “Net Income Threshold”), the Company shall pay to the Members 33% of the Company’s Net Income generated above the Net Income Threshold. The aforementioned obligations owed under the Cash Flow Note shall extinguish upon the earlier of (i) payment(s) by Company in an amount equal to $50,000 in the aggregate or (ii) May 5, 2016 (collectively, the Cash Flow Note, the Equity, and the Cash, the “Consideration”). The Consideration provided to the Members was in exchange for all of the issued and outstanding membership interests of OneLove. Following the Closing Date, OneLove’s indoor and outdoor gardening supply business was acquired by the Company and the Company’s management assumed control of the management of OneLove with the former managing members of OneLove resigning from OneLove upon closing of the OneLove Agreement. 

 

Additionally, on the same date, the Company entered into a two-year employment agreement (with three consecutive two year renewal options) with Michael Leago (“Leago”), a former managing member of OneLove (the “Employment Agreement”). Under the terms of the Employment Agreement, Leago serves as the Retail Grow Store Division Head and receives $65,000 per year, payable monthly on the first Monday of each month. Additionally, each fiscal quarter of 2015, upon the Company recording on its financial statements $40,000 in US GAAP gross pretax profits (the “Gross Pretax Profits”) from sales of the Retail Store Division of the Company (the “Pretax Threshold”), the Company shall pay to Leago a cash payment equal to 15% of the Company’s Gross Pretax Profits generated above the Pretax Threshold, but in any event not to exceed $150,000 of bonus for the 2015 calendar year paid to Leago. 

 

The OneLove Agreement and related transaction documents are included as exhibits to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 20, 2015 and are hereby incorporated by reference. All references to the OneLove Agreement and related transaction documents do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

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Hygrow Asset Purchase

 

Effective September 23, 2015 (the “Closing Date”), Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”) entered into an Asset Purchase Agreement (the “APA”) by and among One Love Garden Supply LLC, a Colorado limited liability company and a wholly owned subsidiary of the Company (“Buyer”), and D&B Industries, LLC, a Colorado limited liability company doing business as Hygrow (“Seller”). On the Closing Date, the Buyer purchased and the Seller sold all of the assets, rights, properties, and business of the Seller including certain debts of the Seller (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Buyer on the Closing Date, Buyer issued to Seller three hundred thousand (300,000) shares of common stock of the Company and a payment from Buyer to Seller in the amount of $5,200 in cash (the “Consideration”). Following the Closing Date, the Assets were acquired by the Buyer and the Company’s management assumed control of the management of the Seller with the former managing members of the Seller resigning from the Seller upon closing of the APA. All references to the APA do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

Acquisition of Keys Organic and Hydroponic Supply LLC Asset Purchase

 

Effective January 1, 2017 (the “Closing Date”), One Love, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement (the “APA”) with Keys Organic and Hydroponic Supply LLC, a Florida limited liability company (“Seller”). On the Closing Date, the Buyer purchased and the Seller sold all the assets, rights, and properties of the Seller including certain debts of the Seller (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Company on the Closing Date, the Company paid the Seller the purchase price in the amount of $120,000 as follows (A) $25,000 cash at closing, (B) the issuance of 100,000 shares of restricted common stock of the Company, and (C) the issuance of a promissory note by the Company in favor of the Seller in the amount of $95,000 (the “Note”), provided, however, the Note shall be adjusted based upon the following formula: (i) the principal balance under the Note shall be reduced or increased by the amount which is less than or exceeds $55,000 (the Closing Date value of the Inventory).

 

Following the Closing Date, the Assets were acquired by the Buyer and the Company’s management assumed control of the management of the Seller with the former managing members of the Seller resigning from the Seller upon closing of the APA. All references to the APA do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

Westcoast Organic & Hydroponic Inc. Asset Purchase

 

Effective January 1, 2017 (the “Closing Date”), One Love, a wholly owned subsidiary of the Company entered into an Asset Purchase Agreement (the “APA”) with Westcoast Organic & Hydroponic Inc., an Oregon corporation (“Seller”). On the Closing Date, the Company purchased and the Seller sold all the assets, rights, and properties of the Seller including certain debts of the Seller (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Company on the Closing Date, the Company paid the Seller as follows (A) $50,000 cash at closing (B) issuance of a promissory note by the Company in favor of the Seller in the amount of $143,273, and (C) the issuance of 600,000 shares of restricted common stock of the Company, (D) the issuance by the Company of a Cash Flow Promissory Note in favor of the Seller, whereby for a period of one year, each quarter upon the Seller reporting net income generated by the Seller in an amount exceeding $50,000 (the “Net Income Threshold Amount”), the Seller shall receive 20% of the amount exceeding the Net Income Threshold Amount. In the event the Seller does not exceed the Net Income Threshold Amount during a quarterly period, the Company shall have no obligation to pay the Seller for such quarter.

 

Following the Closing Date, the Assets were acquired by the Buyer and the Company’s management assumed control of the management of the Seller with the former managing officer and directors of the Seller resigning from the Seller upon closing of the APA. All references to the APA do not purport to be complete and are qualified in their entirety by the text of such exhibits.

 

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Joint Marketing Agreement

 

On June 29, 2015, the Company and Jasper Group Holdings, Inc. (“Jasper”), entered into a Joint Marketing Agreement (the “Joint Marketing Agreement”) whereby Jasper shall provide services related to website creation for a legal cannabis job posting platform. The website shall include an employee leasing program and allow employers, recruiters and potential employees to communicate through its platform for a fee. All potential employees will be screened with background checks by independent third parties and provided the necessary applications and related materials for individuals to become licensed in the legal cannabis industry on a state by state basis. In accordance with the terms of the Joint Marketing Agreement, Jasper shall invest all funds necessary to form the website.

 

Pursuant to the Joint Marketing Agreement, the Company issued to Jasper 250,000 common shares upon execution. Additionally, upon the transfer of ownership in the website from Jasper to the Company, the Company issued to Jasper an additional 500,000 shares of common stock of the Company. 

 

Proceeds derived from the Company’s website shall be divided as follows: (i) the Company shall retain 75% of the gross proceeds less any sales commissions to third parties collected by the Company for all business that is generated through the website (the “Net Fees”) and pay to Jasper a commission equal to 25% of the Net Fees with payments due within 15 days of the end of each quarter (ii) the Company shall grant to Jasper a warrant for the purchase of one share of common stock of the Company, with an exercise price of $0.75 per share, for every dollar of revenue that the Company earns from the website, up to a maximum of One Million Dollars ($1,000,000).

 

The initial term of the Joint Marketing Agreement shall be for three (3) years and shall automatically renew for additional three-year periods unless terminated by the Company with written notice at least 30 days prior to the expiration of the initial term, or any subsequent term.

 

Financing Transactions

 

The Carebourn Capital Debt Financing

 

On December 15, 2016 (the “Issuance Date”), the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Carebourn Capital LP an accredited investor (the “Purchaser”) pursuant to which the Company sold $285,775 in principal amount of an 8% Convertible Promissory Note (the “Note”) for a purchase price of $248,500 with a 15% original issue discount (“OID”). On December 19, 2016, the Company received $240,000 in net proceeds from the sale of the Note after deducting fees and expenses (the “Funding Date”). The Note and the shares of common stock of the Company issuable upon conversion of the Note are collectively referred to herein as the “Securities.”

 

The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible following 180 days from the Issuance Date, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Notwithstanding the foregoing, the minimum conversion price under the Note is $0.20 (the “Floor Price”), provided that, at any time following 180 days from the Issuance Date, if the closing price of the common stock of the Company is equal to or less than the Floor Price for two consecutive trading days, the Floor Price will extinguish and be of no further force or effect.

 

In accordance with the terms and conditions of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,190 from the Company’s bank account on each business day, until the amounts due under the Note are satisfied in full. At the sole discretion of the Purchaser, the Company may prepay in cash any portion of the principal amount of the Note and any accrued and unpaid interest in accordance with the terms and conditions of the Note.

 

The Power Up Lending Group Ltd. Debt Financing

 

On January 19, 2017 (the “Initial Issuance Date”), the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which the Company sold $125,000 in principal amount of a Convertible Promissory Note (the “Power Up Note”). On or about January 19, 2017, the Company received $121,500 in net proceeds from the sale of the Power Up Note after deducting fees and expenses. The Power Up Note and the shares of common stock of the Company issuable upon conversion of the Power Up Note are collectively referred to herein as the “Securities.”

 

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The Power Up Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Power Up Note. The Power Up Note is convertible following 180 days from the Initial Issuance Date, in whole or in part, at the option of Power Up into shares of common stock of the Company at a conversion price equal to 61% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

The JSJ Investments Inc. Debt Financing

 

On January 30, 2017 (the “Second Issuance Date”), the Company issued a 10% Convertible Promissory Note (the “JSJ Note”) in the principal amount of $100,000 in favor of JSJ Investments Inc. (“JSJ”). On or about January 30, 2017, the Company received $98,000 in net proceeds from the sale of the JSJ Note after deducting fees and expenses. The JSJ Note and the shares of common stock of the Company issuable upon conversion of the JSJ Note are collectively referred to herein as the “Securities.”

 

The JSJ Note bears interest at a rate of 10% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the JSJ Note. The JSJ Note is convertible following 180 days from the Second Issuance Date, in whole or in part, at the option of JSJ into shares of common stock of the Company at a conversion price equal to 60% of the lowest closing bid price of the common stock in the prior ten (10) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events. Under the terms and conditions of the JSJ Note, the Company and JSJ agreed to enter into a mutually agreed upon Leak-Out Agreement whereby JSJ shall not sell more than the greater of (i) 20% of the trading volume per week or (ii) $20,000 in shares of common stock per week.

 

The Cicero Consulting Group, Inc. Debt Financing

 

On February 8, 2017 (the “Third Issuance Date”), the Company, entered into a Securities Purchase Agreement with Cicero Consulting Group, LLC (“Cicero”) pursuant to which the Company sold $50,000 in principal amount of a Convertible Promissory Note (the “Cicero Note”). On or about February 8, 2017, the Company received $50,000 in net proceeds from the sale of the Cicero Note. The Power Up Note and the shares of common stock of the Company issuable upon conversion of the Cicero Note are collectively referred to herein as the “Securities.”

 

The Cicero Note bears interest at a rate of 12% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Cicero Note. The Cicero Note is convertible at any time from the Third Issuance Date, in whole or in part, at the option of Cicero into shares of common stock of the Company at a conversion price equal to 70% of the lowest closing bid price of the common stock in the prior five (5) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Amendment of TCA Credit Agreement

 

As previously disclosed, effective December 7, 2015, Grow Solutions Holdings, Inc., a Nevada corporation (the “Company”) closed a Senior Secured Credit Facility Agreement (the “Credit Agreement”) by and among the Company, as borrower, Grow Solutions, Inc., a Delaware corporation and One Love Garden Supply, a Colorado limited liability company, as joint and several guarantors (such guarantors, collectively, the “Subsidiaries”) and TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership, as lender (“TCA”). Pursuant to the Credit Agreement, at closing TCA funded the Company $950,000 evidenced by that certain Convertible Promissory Note issued by the Company in favor of TCA (the “Original Note”).

 

On February 14, 2017, the Company entered into a First Amendment to Credit Agreement (the “Amended Agreement”) by and between the Borrowers and TCA. Pursuant to the Amended Agreement, the Original Note was severed, split, divided and apportioned into two separate and distinct replacement notes consisting of (i) First Replacement Note A, evidencing principal indebtedness of $325,000 which was executed and delivered by the Company as the first purchase tranche paid by the Assignee (as defined below) to TCA, and (ii) First Replacement Note B evidencing the reduced outstanding balance of principal indebtedness of $876,441.25 (collectively, First Replacement Note A and First Replacement Note B, the “Replacement Notes”). The Replacement Notes replaced and superseded the Original Note in its entirety by substituting one evidence of debt for another without extinguishing the indebtedness and obligations evidenced under the Original Note.

 

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Under the terms and conditions of Replacement Note B, the Company has the right to prepay Replacement Note B evidencing the remaining outstanding balance of principal indebtedness owed to TCA in full and for cash, at any time prior to the Maturity Date (as defined therein), with three (3) Business Days (as defined therein) advance written notice to TCA.

 

TCA and L2 Capital Debt Purchase Agreement

 

On February 15, 2017 (the “Effective Date”), the Company entered into a Debt Purchase Agreement (the “Debt Purchase Agreement”) by and among the Company, TCA, and L2 Capital, LLC, a Kansas limited liability company (the “Assignee”). Pursuant to the Debt Purchase Agreement, on the Effective Date, TCA sold and assigned to Assignee, TCA’s right, title and interest in and to the monetary obligations evidenced under Replacement Note A thereby reducing the TCA outstanding principal indebtedness. Assignee shall subsequently purchase from TCA the remaining debt evidenced by First Replacement Note B in purchase tranches. The indebtedness underlying the Replacement Notes are evidenced by a newly issued 10% Senior Replacement Convertible Promissory Note.

 

Upon the purchase of all debt under Replacement Note B the Company will have no further obligations to TCA.

 

Issuance of 10% Senior Replacement Convertible Promissory Note to L2 Capital

 

On February 15, 2017, the Company issued a 10% Senior Replacement Convertible Promissory Note (the “L2 Note”) to the Assignee in the principal amount of $1,201,441.25. The initial principal amount under the L2 Note is $325,000, representing the first tranche purchased by Assignee under First Replacement Note A and such amounts shall increase in tranches upon the purchase of such tranches by the Assignee from TCA pursuant to the Debt Purchase Agreement. The maturity date for each tranche shall be six months from that date of the purchase of that tranche and the Company shall pay interest to the Assignee on the aggregate unconverted and then outstanding principal amount of the L2 Note at the rate of 10% per annum. The Company may prepay any portion of the principal amount under the L2 Note and any accrued and unpaid interest in cash equal to the sum of the then outstanding principal amount under the L2 Note and interest multiplied by 140%.

 

The L2 Note is convertible at any time, in whole or in part, at the option of the holder into shares of common stock of the Company at a conversion price equal to 62.5% of the lowest closing bid price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Additionally, the terms under the L2 Note include make-whole rights whereby upon liquidation by the Assignee of the shares converted under the L2 Note, provided that the Assignee realizes a net amount from such liquidation equal to less than the conversion amount specified in the relevant conversion notice (such net realized amount, the “Realized Amount”), the Company shall issue to the Assignee additional shares of common stock of the Company equal to: (i) the conversion amount; minus (ii) the Realized Amount; divided by (iii) the average volume weighted average price of the Company’s common stock during the five (5) business days immediately prior to the date upon which the Assignee delivers notice to the Company that such additional shares are requested by the Assignee (the “Make-Whole Shares”). Following the sale of the Make-Whole Shares by the Assignee: (i) in the event that Assignee receives net proceeds from such sale which, when added to the Realized Amount from the prior relevant conversion notice, is less than the conversion amount specified in the relevant conversion notice, Assignee shall deliver an additional make-whole notice to the Company and the Company obligation to issue Make-Whole Shares shall continue until the conversion amount has been fully satisfied; and (ii) in the event that Assignee received net proceeds from the sale of Make-Whole Shares in excess of the conversion amount specified in the relevant conversion notice, such excess amount shall be applied to satisfy any and all amounts owed hereunder in excess of the conversion amount specified in the relevant conversion notice.

 

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Stress Free Capital Inc. Receivable Purchase Agreement

 

On February 24, 2017 (the “Effective Date”), the Company entered into a Receivable Purchase Agreement (the “Agreement”) with Stress Free Capital, Inc. (“Lender”). Pursuant to the Agreement, the Company sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for $250,000 (the “Purchase Price”), the Company’s entire right, title, and interest in $355,000 (the “Purchased Amount”) of each of the Company’s future sales, and credit card receivables owed to the Company from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the Company irrevocably authorized the Purchaser’s right to withdraw $2,218.75 from the Company’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the Company’s obligations under the Agreement, the Company granted the Lender a continuing security interest in all of the Company’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the Company’s credit card processor, all future receivables of the Company, and all other assets and personal property of the Company. Additionally, the Company agreed to issue the Lender common stock of the Company equal to 20% of the Purchase Price under the Agreement. The issuance price of the common stock is calculated by using the average closing price for the previous 20 days from the Effective Date.

 

Power Up Lending Group Ltd. Factoring Agreement

 

On February 24, 2017 (the “Effective Date”), the Company entered into a Factoring Agreement (the “Agreement”) with Power Up Lending Group Ltd. (“Lender”). Pursuant to the Agreement, the Company sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for $100,000 (the “Purchase Price”), the Company’s entire right, title, and interest in $139,000 (the “Purchased Amount”) of each of the Company’s future sales, and credit card receivables owed to the Company from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the Company irrevocably authorized the Purchaser’s right to withdraw $1,103.18 from the Company’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the Company’s obligations under the Agreement, the Company granted the Lender a continuing security interest in all of the Company’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the Company’s credit card processor, all future receivables of the Company, and all other assets and personal property of the Company.

 

On June 30, 2017, the Company entered into a Letter Agreement with Power Up, whereby in order to stay any collection and litigation with respect to the Factoring Agreement and the Power Up Note (as defined above), the Company and Power Up modified the terms of the Power Up Note to provide for a daily ACH payment in the amount of $1,592.01 per business day until such time that the amounts due to Power Up under the Power Up Note and the Factoring Agreement have been paid in full (or with respect to the Power Up Note, converted into shares of common stock of the Company pursuant to the terms of the Power Up Note in the sole discretion of Power Up). The increased portion of the modified payment will be applied to reduce the balance of the Note.

 

AKF Inc. Merchant Agreement 1

 

On March 8, 2017 (the “Effective Date”), the Company entered into a Merchant Agreement (the “Agreement”) with AKF Inc. (“Lender”). Pursuant to the Agreement, the Company sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for net proceeds of $91,975 (the “Purchase Price”), the Company’s entire right, title, and interest in $137,280 (the “Purchased Amount”) of each of the Company’s future sales, and credit card receivables owed to the Company from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the Company irrevocably authorized the Purchaser’s right to withdraw $980.57 from the Company’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the Company’s obligations under the Agreement, the Company granted the Lender a continuing security interest in all of the Company’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the Company’s credit card processor, all future receivables of the Company, and all other assets and personal property of the Company.

 

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AKF Inc. Merchant Agreement 2

 

On March 8, 2017 (the “Effective Date”), One Love Garden Supply LLC, a wholly owned subsidiary of the Company entered into a Merchant Agreement (the “Agreement”) with AKF Inc. (“Lender”). Pursuant to the Agreement, the One Love sold, assigned and transferred, without recourse (except as specified in the Agreement), and Lender purchased for net proceeds of $95,100 (the “Purchase Price”), One Love’s entire right, title, and interest in $135,993 (the “Purchased Amount”) of each of the One Love’s future sales, and credit card receivables owed to the One Love from its credit card processors and customers, until the Purchased Amount has been paid to the Lender. Under the terms of the Agreement, the One Love irrevocably authorized the Purchaser’s right to withdraw $971.38 from One Love’s bank account on each business day, until the amounts due under the Agreement are satisfied in full. To secure the performance of the One Love’s obligations under the Agreement, the One Love granted the Lender a continuing security interest in all of the One Love’s accounts, deposit accounts, chattel paper, goods, inventory, equipment, instruments, causes of action, investment property, documents, and general intangibles, all reserve and reserve accounts maintained by the One Love’s credit card processor, all future receivables of the One Love, and all other assets and personal property of One Love.

 

Demand Promissory Note

 

On May 25, 2017 (the (“Issuance Date”), the Company issued a Promissory Note to an investor (the “Lender”) in the principal amount of $100,000 (the “Note”). The Company received $100,000 in net proceeds from the sale of the Note.

 

The Note is due on demand 180 days from the Issuance Date (the “Maturity Date”). Payment by the Company to Lender under the terms of the Note may be made in either cash or common stock of the Company, at the option of the Lender. In the event the Company repays the Note in common stock, such common stock will be issued at a price equal to the closing price of the Company’s common stock on the Maturity Date (the “Conversion Price”). The Note bears interest at a rate of fifteen percent (15%) per annum, to be accrued through the Maturity Date. Interest may be paid in cash or common stock of the Company at the option of the Lender on the Maturity Date at the Conversion Price.

 

Additionally, the Company will issue the Lender shares of common stock in an amount equal to thirty three percent (33%) of the outstanding balance of principal and interest under the Note on the Maturity Date (the “Issuance”). The Issuance of the Company’s common stock to the Lender shall be at the Conversion Price on the Maturity Date. The Company shall deliver the shares of common stock to the Lender within ten days after the Maturity Date.

 

Upon the occurrence of an Event of Default (as defined in the Note), the Lender shall provide the Company notice of such occurrence, at which time the Company will have five (5) business days from receipt of such notice to pay the outstanding principal amount of the Note, with any unpaid interest thereof, in full. In the event full payment is not made upon the expiry of the five (5) day period, here is a default penalty equal to two percent (2%) of the principal amount per month during the period of default (the “Default Penalty”). Lender may then, at its sole discretion declare the entire then outstanding principal amount of this Note together with any unpaid interest and the Default Penalty immediately due and payable, in which event the Lender may, at its sole discretion take any action it deems necessary to recover amounts due under this Note.

 

The foregoing descriptions of the Note do not purport to be complete and is subject to, and qualified in its entirety by the Note, a copy of which is attached as Exhibit 4.1 to the Current Report on Form 8-K filed on June 13, 2017, and incorporated herein by reference. 

 

Carebourn Capital Debt Refinancing

 

On July 14, 2017 (the “Effective Date”), the Company and the Purchaser Agreed to cancel the Purchase Agreement, the Note and the related transaction documents and refinanced the original loan by the Company’s issuance of a Convertible Promissory Note dated the Effective Date (the “Note”). The principal amount of the Note is $262,877.42, the Purchase Price is $228,589.06, and the Company received $50,000 in proceeds from the Purchaser. The Maturity Date of the Note is July 14, 2018.

 

The Note bears interest at a rate of 8% per annum on the aggregate unconverted and then outstanding principal, subject to increase according to the terms and conditions of the Note. The Note is convertible, in whole or in part, at the option of the Purchaser into shares of common stock of the Company at a conversion price equal to 58% of the lowest closing price of the common stock in the prior twenty (20) trading days, which is subject to adjustment for stock dividends, stock splits, combinations or similar events.

 

Effective July 24, 2017, in accordance with the terms and conditions of the Note, the Company irrevocably authorized the Purchaser’s right to withdraw $1,095.32 from the Company’s bank account on each business day, until the amounts due under the Note are satisfied in full. At the sole discretion of the Purchaser, the Company may prepay in cash any portion of the principal amount of the Note and any accrued and unpaid interest in accordance with the terms and conditions of the Note.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2016, the Company had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 amounts of revenues and expenses during the reporting period.

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The Company’s significant accounting estimates and assumptions affecting the financial statements were the valuation allowance for deferred tax assets and estimates and assumptions used in valuation of equity instruments. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.

 

Income Taxes

 

We comply with section 740 of the FASB Accounting Standards Codification for income taxes, which requires an asset and liability approach to financial reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. 

 

Stock Based Compensation

 

All stock-based payments to employees, non-employee consultants, and to nonemployee directors for their services as directors, including any grants of restricted stock and stock options, are measured at fair value on the grant date and recognized in the statements of operations as compensation or other expense over the relevant service period. Stock-based payments to nonemployees are recognized as an expense over the period of performance. Such payments are measured at fair value at the earlier of the date a performance commitment is reached or the date performance is completed. In addition, for awards that vest immediately and are non-forfeitable the measurement date is the date the award is issued.

 

Recent Accounting Pronouncements

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

Item 8. Financial Statements.

 

Our consolidated financial statements are contained in pages F-1 through F-29 which appear at the end of this Annual Report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this annual report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act) are not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

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(b) Management’s Report on Internal Control Over Financial Reporting

 

This Company’s management is responsible for establishing and maintaining internal controls over financial reporting and disclosure controls. Internal Control Over Financial Reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

(1)  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
   
(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the registrant; and
   
(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is appropriately recorded, processed, summarized and reported within the specified time periods.

 

Management has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, management concluded that as of the period covered by this annual report on Form 10-K, it had material weaknesses in its internal control procedures.

 

As of the period covered by this annual report on Form 10-K, we have concluded that our internal control over financial reporting was ineffective. The Company’s assessment identified certain material weaknesses which are set forth below:

 

Functional Controls and Segregation of Duties

 

Because of the Company’s limited resources, there are limited controls over information processing.

 

There is an inadequate segregation of duties consistent with control objectives. Our Company’s management is composed of a small number of individuals resulting in a situation where limitations on segregation of duties exist. In order to remedy this situation we would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible.

 

Accordingly, as the result of identifying the above material weakness we have concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

 

Management believes that the material weaknesses set forth above were the result of the scale of our operations and are intrinsic to our small size. Management believes these weaknesses did not have a material effect on our financial results and intends to take remedial actions upon receiving funding for the Company’s business operations.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report herein.

 

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(c) Changes in Internal Controls Over Financial Reporting

 

We are committed to improving our financial organization. As part of this commitment, we will create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us by preparing and implementing sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and U.S. Securities and Exchange Commission disclosure requirements.

 

Management believes that preparing and implementing sufficient written policies and checklists will remedy the material weaknesses pertaining to insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and U.S. Securities and Exchange Commission disclosure requirements.

 

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, including:

 

(1)  We will revise processes to provide for a greater role of independent board members in the oversight and review until such time that we are adequately capitalized to permit hiring additional personnel to address segregation of duties issues, ineffective controls over the revenue cycle and insufficient supervision and review by our corporate management.
   
(2) We will update the documentation of our internal control processes, including formal risk assessment of our financial reporting processes.

 

We intend to consider the results of our remediation efforts and related testing as part of our year-end 2016 assessment of the effectiveness of our internal control over financial reporting.

 

Subsequent to December 31, 2016, we have undertaken the following steps to address the deficiencies stated above:

 

  Continued the development and documentation of internal controls and procedures surrounding the financial reporting process, primarily through the use of account reconciliations, and supervision.
     
  Added additional accounting staff to further segregate duties and help the Company maintain timely reporting of financial results.

 

Item 9B. Other Information.

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

Directors and Executive Officers

 

The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers as of July 24, 2017. There is no familial relationship between or among the nominees, directors or executive officers of the Company. 

 

Name   Age   Position
         
Jeffrey Beverly   47   President and Director
Howard Karasik   80   Director
Leslie Bocskor   53   Director
William Hayde   56   Director
Peter Lau (1)   64   Director

 

(1)On September 13, 2016, Mr. Peter Lau was appointed as a member of the board of directors of the Company.

 

Jeffrey Beverly, age 47, President and Director

 

Since January 19, 2017, Mr. Beverly has served as the President and a member of the board of directors of the Company. Mr. Beverly has seven years of experience in the cannabis industry and a total of 19 years in management with various corporations, including Bank of America, Northern Trust and Raymond James, Inc. From 2011 through 2014, Mr. Beverly was the Vice President of Impulse National, Inc. the creators of the StoK brand of vaporizer products. Mr. Beverly is also an attorney who has practiced law in the State of Florida.

 

Mr. Beverly has an undergraduate degree from the Ohio State University and a law degree from Chicago-Kent School of Law. The board of directors of the Company believe that Mr. Beverly’s leadership skills, experience in business management and team building will be critical in supporting the Company’s growth plans.

 

Leslie Bocskor, age 53, Director

 

Mr. Bocskor, age 53, combines two years of experience in the cannabis industry and a total of 20 years in senior management in the financial industry. Since June 2000, Mr. Bocskor has served as the President of Venture Catalyst LLC, a consulting company. From February 2011 through September 2012, Mr. Bocskor was employed in the investment banking division of Network One Financial, Inc. From May 2005 through June 2011, Mr. Bocskor was Managing Partner of Lenox Hill Partners, LLC an advisory firm that focused on corporate finance and business consulting.

 

Currently, Mr. Bocskor serves as the Chairman of the Board of The Nevada Cannabis Industry Association, a trade association working to establish an exemplary legal Cannabis Industry in the State of Nevada.  Mr. Bocskor is also Chairman of the Board for the Figment Project, an arts and cultural organization. The board of directors believes that Mr. Bocskor’s experience in the legal cannabis industry and extensive experience in the financial markets will be critical in supporting the Company’s growth plans.

 

Howard Karasik, age 80, Director

 

Mr. Karasik, age 80, is a corporate lawyer admitted to practice in the State of New York. Since receiving his law degree from the Harvard Law School, his extensive career includes his partnership in the New York firm, Sherman, Citron & Karasik, P.C. He has been involved in bankruptcy law, corporate negotiation & mediation, and all aspects of creditor and debtor matters. Mr. Karasik is a lecturer, published author, honors graduate of Brooklyn College and Harvard Law School and a member of the New York State Bar and the District of Columbia Bar.

 

William Hayde, age 56, Director

 

Mr. Hayde, age 56, is currently a co-founder and executive vice president of Intercontinental Beverage Capital Inc. since 2013. He has been a Wall Street professional for over 25 years, in investment banking and the securities industry.  He has successfully raised a significant amount of growth and acquisition capital for middle market companies and facilitated mergers, acquisitions, financial restructurings and divestitures. Mr. Hayde has insight into privately-held businesses, has assisted with strategic options, access to capital markets, and maximized value for clients.

 

Mr. Hayde is currently registered as an investment banker with Network 1 Financial Securities since January 2011. His current FINRA licenses include Series 6, 7, 24, 55 and 63 and the Investment Banking 79.

 

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From 2002 through 2009, he was co-owner of Waterville Investment Research, which also operated a small hedge fund, and was sold in 2009. From 2010 through 2012, he was an officer, director and controlling shareholder of E Global Marketing and W3 Group, Inc., public entities which were successfully merged with larger public companies.

 

Prior to focusing on investment banking, Mr. Hayde was Head of Corporate Finance for Brockington Securities for over 12 years and was responsible for the firm’s underwriting activities, private placements, and initiation of trading.  From 1992 through 1995, Mr. Hayde was employed at Aegis Capital Corp., where he was responsible for compliance for all facets of the firm’s underwriting and selling group participation and developed their wholesale trading operation. Through his experience, Mr. Hayde has knowledge of FINRA, NASDAQ and other regulatory bodies and issues.  

 

Peter Lau, age 64, Director

 

Mr. Lau is a shareholder at Buckman, Buckman, and Reid, a wealth management and brokerage firm. Mr. Lau has over 30 years’ experience providing financial advisory services, including investment banking and mergers and acquisitions for multi-national companies. Previously, he was Senior Managing Director of Corporate Finance for American Frontier and Managing Director of Corporate Finance at Ridgewood Capital, a venture capital firm. Early in his career, he also worked for a number of multi-national companies. Mr. Lau is the Chairman of the NY Asian Republican Leadership Council and a Director on the Finance committee of NY State Republican Party. Peter is a CPA and holds FINRA (NASD) Licenses: series 7, 63 & 79.

 

Family Relationships

 

There are no family relationships among our directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.

 

Executive Legal Proceedings

 

No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past five years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past five years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past five years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past five years.

 

None of our directors or executive officers or their respective immediate family members or affiliates are indebted to us.

 

Committees of the Board of Directors

 

Not applicable.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a). To the best of the Company’s knowledge, any reports required to be filed were timely filed as of the date hereof.

 

 39 

 

 

Code of Ethics

 

The Company has not adopted a Code of Ethics that applies to the Company’s directors, officers and key employees.

 

Item 11. Executive Compensation.

 

The following table sets forth information with respect to compensation paid by us to our executive officers during the three most recent fiscal years. This information includes the dollar value of base salaries, bonus awards and number of stock options granted, and certain other compensation, if any.

 

SUMMARY COMPENSATION TABLE

 

Name and Principal Position (1)   Year     Salary
($)(2)
    Bonus
($)
    Stock
Awards
($)(1)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Non-Qualified
Deferred
Compensation
Earnings 
($)
    All Other
Compensation
($)
    Total
($)
 
                                                       
Jeffrey Beverly     2016       90,000                                               33,600       123,600  
President     2015       80,000       0       0       0       0       0       33,600       113,600  
      2014                                                                  

  

(1) On April 28, 2015, Mr. Ed Bailey resigned from his position as President, Secretary and Treasurer of the Company. On the same date, Jeffrey Beverly was appointed as the President of the Company.

 

2016 DIRECTOR COMPENSATION TABLE

 

Name(1)  Fees Earned or Paid in Cash
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-Equity Incentive Plan Compensation
($)
   Change in Pension Value and Non- Qualified Deferred Compensation Earnings
($)
   All Other Compensation
($)
   Total 
($)
 
                             
Jeffrey Beverly        0         0         0         0         0         0         0 
                                    
Howard Karasik   0    0    0    0    0    0    0 
                                    
Leslie Bocskor   0    0    0    0    0    0    0 
                                    
William Hayde   0    0    0    0    0    0    0 
                                    
Peter Lau   0    0    0    0    0    0    0 

 

 

(1) Effective September 13, 2016, Peter Lau was appointed as a director of the Company.

 

 40 

 

 

Employment Agreements

 

Leago Employment Agreement and Resignation

 

On May 5, 2015, the Company entered into a two-year employment agreement (with three consecutive two year renewal options) with Michael Leago (“Leago”), a former managing member of OneLove (the “Employment Agreement”). Under the terms of the Employment Agreement, Leago serves as the Retail Grow Store Division Head and receives $65,000 per year, payable monthly on the first Monday of each month. Additionally, each fiscal quarter of 2015, upon the Company recording on its financial statements $40,000 in US GAAP gross pretax profits (the “Gross Pretax Profits”) from sales of the Retail Store Division of the Company (the “Pretax Threshold”), the Company shall pay to Leago a cash payment equal to 15% of the Company’s Gross Pretax Profits generated above the Pretax Threshold, but in any event not to exceed $150,000 of bonus for the 2015 calendar year paid to Leago.

 

On August 27, 2016, Leago resigned from his position as President of One Love Garden Supply, LLC and Vice President of Grow Solutions, Inc. effective September 30, 2016. On the same date, Leago’s Employment Agreement with the Company was of no further force or effect.

 

Consulting Agreement Termination 

 

On May 8, 2017, the Company terminated Otisfund, a New Jersey partnership controlled by Victor Wexler for cause pursuant to that certain Consulting Agreement by and between the Company and Otisfund, dated January 1, 2015. 

 

Consulting Agreement Termination and Settlement Agreement 

 

On or about January 6, 2017, the Company terminated the Consulting Agreement with Cimarron Capital Ltd., a Nevada corporation controlled by Peter Aiello Sr. (“Cimarron”) pursuant to that certain Consulting Agreement by and between the Company and Cimarron, dated January 1, 2015 (the “Cimarron Termination”). 

 

In connection with the Cimarron Termination, the Company and Cimarron entered into a Settlement and Release Agreement dated February 28, 2017 (the “Cimarron Settlement Agreement”). Under the Cimarron Settlement Agreement, the Company and Cimarron agreed to a mutual release of all claims in connection with the Cimarron Consulting Agreement and the Cimarron Termination for payment by the Company to Cimarron in the amount of $5,000 per month for a period of 14 months. Additionally, Cimarron agreed to certain lockup and leak-out provisions with respect to the sale of its shares of common stock of the Company. The Company has not made timely payments in accordance with the Settlement Agreement. The Company is working with the Board to establish a payment plan for Cimarron and expedite the final settlement of this matter.

 

 41 

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth certain information regarding the beneficial ownership of our capital stock as of July 24, 2017, of (i) each person known to us to beneficially own more than 5% of capital stock, (ii) our directors, (iii) each named executive officer and (iv) all directors and named executive officers as a group. As of July 24, 2017, there were 53,472,415 shares of our common stock issued and outstanding and 51 shares of our Series A Preferred Stock issued and outstanding. 

 

Name of Beneficial Owner (1)  Shares of Series A Preferred   Percent of Series A Preferred (2)   Shares of Common Stock   Percent of Common Stock (2) 
                 
Jeffrey Beverly   0    0%   1,100,000    2.06%
President, Director                    
                     
Howard Karasik   0    0%   150,000    *%
Director                    
                     
Leslie Bocskor   0    0%   150,000    *%
Director                    
                     
William Hayde (3)   0    0%   500,000    *%
Director                    
                     
Peter Lau (4)   0    0%   713,500    1.33%
Director                    
                     
All officers and directors as a group (5 persons)   0    0%   

2,613,500

    

4.89

%
                     
Grow Solutions Holdings LLC (5)   51    100%   0    0%
                     
Bayside Funding LLC (6)   0    0%   3,710,000    6.93%
                     
RLJ Partners (7)   0    0%   4,000,000    7.47%
                     
Joshua Wexler (8)   0    0%   5,400,000    10.08%
                     
Rose Wexler (9)   0    0%   5,400,000    10.08%
                     
5% Beneficial Owners (5 entities)   51    100%   18,510,000    34.59%

 

* represents less than 1%

 

(1)

For each shareholder, the calculation of percentage of beneficial ownership is based upon the aggregate voting power outstanding as of July 24, 2017, and shares of capital stock subject to options, warrants and/or conversion rights held by the shareholder that are currently exercisable or exercisable within 60 days, which are deemed to be outstanding and to be beneficially owned by the shareholder holding such options, warrants, or conversion rights. The total aggregate number of votes is approximately 53,472,415. The percentage ownership of any shareholder is determined by assuming that the shareholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other shareholder has exercised such rights.

(2) The number of shares beneficially owned is determined under the rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose.  Under those rules, beneficial ownership includes any shares as to which a person or entity has sole or shared voting power or investment power plus any shares which such person or entity has the right to acquire within sixty (60) days of the date hereof through the exercise or conversion of any stock option, convertible security, warrant or other right. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity. The mailing address for all officers, directors and 5% beneficial owners is 1111 Broadway - Suite 406, Denver, CO 80203.
(3) The Hayde Family Revocable Trust DTD has beneficial ownership of 500,000 shares of common stock of the Company and is controlled by Mr. William Hayde.
(4) Mr. Peter Lau and Mrs. Cecilia Soh are married and as such have beneficial ownership over 713,500 shares of common stock of the Company.
(5) Grow Solutions Holdings, LLC, a Colorado limited liability company, is controlled equally by each member of the Board.
(6) The 3,710,000 shares of the Company’s common stock held by Bayside Funding LLC is beneficially owned by Mr. Mark Pagani and Mr. Kevin S. Sisti.
(7) The 4,000,000 shares of the Company’s common stock held by RLJ Partners is beneficially owned by siblings Ms. Rachel Wexler, Ms. Leigh Wexler, and Mr. Joshua Wexler (the “Wexler Siblings”). Mr. Victor Wexler and Mrs. Rose Wexler are the father and mother of each of the Wexler Siblings (the “Parents”) and as such may be deemed to have beneficial ownership of each other’s shares.
(8) LW Associates beneficially owns 2,200,000 shares of common stock of the Company and is controlled by Ms. Leigh Wexler. JTW Grow Services owns 615,000 shares of common stock of the Company and is controlled by Mr. Joshua Wexler.
(9) Mrs. Rose Wexler is married to Mr. Victor Wexler. Otis Fund beneficially owns 875,000 shares of the Company’s common stock and is controlled by Mr. Wexler.  Mr. Wexler and Mrs. Wexler may be deemed to have beneficial ownership of each other’s shares.

 42 

 

 

Description of Securities

 

General

 

Our authorized capital stock consists of 100,000,000 shares of common stock, par value of $0.001 per share, and 25,000,000 shares of blank check preferred stock, par value of $0.001 per share. As of July 24, 2017 there were 53,472,415 shares of our common stock issued and outstanding held by 162 holders of record of our common stock, including 4,905,000 shares of common stock underlying outstanding warrants if all of the outstanding warrants are exercised and 51 shares of Series A Preferred Stock issued and outstanding and held by one entity.  

 

Common Stock

 

Each share of our common stock entitles its holder to one vote in the election of each director and on all other matters voted on generally by our stockholders. No share of our common stock affords any cumulative voting rights. This means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors to be elected if they choose to do so.

 

Holders of our common stock will be entitled to dividends in such amounts and at such times as our Board of Directors in its discretion may declare out of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the common stock in the foreseeable future. Any future dividends will be paid at the discretion of our Board of Directors after taking into account various factors, including:

 

  general business conditions;
     
  industry practice;
     
  our financial condition and performance;
     
  our future prospects;
     
  our cash needs and capital investment plans;
     
  our obligations to holders of any preferred stock we may issue;
     
  income tax consequences; and
     
  the restrictions Nevada and other applicable laws and our credit arrangements then impose.

 

If we liquidate or dissolve our business, the holders of our common stock will share ratably in all our assets that are available for distribution to our stockholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any, receive their liquidation preferences in full.

 

Our common stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.

 

 43 

 

 

Preferred Stock

 

Our Board has the authority, within the limitations and restrictions in our certificate of incorporation, to issue 25,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of any series, without further vote or action by the stockholders. The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in our control without further action by the stockholders. The issuance of shares of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of our common stock, including voting rights, of the holders of our common stock. In some circumstances, this issuance could have the effect of decreasing the market price of our common stock.

 

Undesignated preferred stock may enable our Board to render more difficult or to discourage an attempt to obtain control of our company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of preferred stock may adversely affect the rights of our common stockholders. For example, any shares of preferred stock issued may rank prior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common stock. As a result, the issuance of shares of preferred stock, or the issuance of rights to purchase shares of preferred stock, may discourage an unsolicited acquisition proposal or bids for our common stock or may otherwise adversely affect the market price of our common stock or any existing preferred stock.

 

Series A Preferred Stock

 

On June 7, 2017, the Company filed an amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences and restrictions of the Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”).

 

Among other provisions, each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) 0.019607 multiplied by the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036).

 

Fifty-one (51) shares of Series A Preferred Stock were authorized and fifty-one (51) shares of Series A Preferred Stock were issued to Grow Solutions Holdings, LLC, a Colorado limited liability company (the “LLC”) controlled equally by each member of the Board.

 

The Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank (i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created, (ii) pari passu with any class or series of capital stock of the Company hereafter created and specifically ranking, by its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

 

Additionally, all of the issued and outstanding shares of Series A Preferred Stock will be forfeited and canceled by the LLC upon the earlier of (i) the Company closing a financing transaction whereby it receives an investment in an amount equal to at least $3,000,000, or (ii) twenty four (24) months from the filing date of the Amendment in the State of Nevada (the “Holding Period”), unless such Holding Period is extended by a majority vote of the Board.

 

The foregoing descriptions of the Amendment and the Series A Preferred Stock designations do not purport to be complete and are subject to, and qualified in its entirety by, the Amendment, a copy of which is attached as Exhibit 3.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2017, and incorporated herein by reference.

 

 44 

 

 

Warrants

 

As of July 24, 2017, there are outstanding warrants to purchase approximately 4,955,000 shares of common stock if all of the outstanding warrants are exercised. The warrants are exercisable at $0.40 per warrant into a share of the Company’s common stock and have a maturity of three years. Each warrant is callable by the Company upon the Company’s common stock trading at $0.60 or higher for 20 consecutive days. The warrants include standard weighted average anti-dilution protection.

 

Anti-Takeover Provisions

 

Our Amended and Restated Articles of Incorporation and Bylaws contain provisions that may make it more difficult for a third party to acquire or may discourage acquisition bids for us. Our Board of Directors may, without action of our stockholders, issue authorized but unissued common stock and preferred stock. The issuance of additional shares to certain persons allied with our management could have the effect of making it more difficult to remove our current management by diluting the stock ownership or voting rights of persons seeking to cause such removal. The existence of unissued preferred stock may enable the Board of Directors, without further action by the stockholders, to issue such stock to persons friendly to current management or to issue such stock with terms that could render more difficult or discourage an attempt to obtain control of us, thereby protecting the continuity of our management. Our shares of preferred stock could therefore be issued quickly with terms that could delay, defer, or prevent a change in control of us, or make removal of management more difficult.

 

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

 

The Company’s Amended Articles of Incorporation provide for indemnification of directors and officers against certain liabilities. Officers and directors of the Company are indemnified generally for any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, has no reasonable cause to believe his conduct was unlawful.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our directors, officers or controlling persons in the successful defense of any action, suit or proceedings) is asserted by such director, officer, or controlling person in connection with any securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues.

 

Item 13. Certain Relationships and Related Transactions.

 

None.

 

Item 14. Principal Accountant Fees and Services.

 

a. Audit Fees: Aggregate fees billed by KLJ & Associates for professional services rendered for the audit of our financial statements included in this Annual Report on Form 10-K and review of our financial statements included in our Quarterly Report on Form 10-Q for the years ended December 31, 2016 and 2015, were approximately $28,000 and $10,500, respectively.

 

b. Audit-Related Fees: No fees were billed for assurance and related services reasonably related to the performance of the audit or review of our financial statements and not reported under “Audit Fees” above in the years ended December 31, 2016 and 2015.

 

c. Tax Fees: Aggregate fees billed by KLJ & Associates for tax services for the years ended December 31, 2016 and 2015, were approximately $0 and $0.

 

d. All Other Fees: Aggregate fees billed for professional services provided by KLJ & Associates other than those described above were approximately $0 for the year ended December 31, 2016 and $0 for the year ended December 31, 2015.

 

 45 

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

Exhibit No.   Description
2.1   Form of Acquisition Agreement and Plan of Merger by and among LightTouch Vein & Laser, Inc., LightTouch Vein & Laser Acquisition Corporation, and Grow Solutions, Inc. incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 19, 2015
     
2.2   Form of Acquisition Agreement and Plan of Merger by and among LightTouch Vein & Laser, Inc., Grow Solutions Acquisition LLC, One Love Garden Supply LLC and all of the members of One Love Garden Supply LLC incorporated herein by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 20, 2015
     
2.3*   Asset Purchase Agreement by and between One Love Garden Supply LLC and Westcoast Organic & Hydroponic, dated January 1, 2017
     
2.4*   Asset Purchase Agreement by and between One Love Garden Supply LLC and Keys Organic and Hydroponic Supply LLC, dated January 1, 2017
     
3.1   Certificate of Incorporation of Grow Solutions, Inc. incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 4, 2015
     
3.12   Amended and Restated Certificate of Incorporation for Grow Solutions, Inc. incorporated herein by reference to Exhibit 3.3 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 4, 2015
     
3.13   Articles of Incorporation of Grow Solutions Holdings, Inc. incorporated herein by reference to Exhibit 3.2 to the Company’s Form 10SB12G filed with the U.S. Securities and Exchange Commission on February 2, 2000
     
3.14   Certificate of Amendment to the Articles of Incorporation incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 26, 2015
     

3.15

 

Amendment to Articles of Incorporation, filed June 7, 2017 incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2017

     
3.21   Bylaws of Grow Solutions, Inc. incorporated herein by reference to Exhibit 3.5 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 4, 2015
     
3.22   Bylaws of Grow Solutions Holdings, Inc. incorporated herein by reference to Exhibit 3.2 to the Company’s Form 10SB12G filed with the U.S. Securities and Exchange Commission on February 2, 2000
     
4.1   Form of Promissory Note in favor of R. Bailey incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 19, 2015
     
4.2   Form of Promissory Note in favor of Grow Solutions, Inc. incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 19, 2015
     
4.3   Form of Promissory Note in favor of Michael Leago and Ashley N. Hollow incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 20, 2015
     
4.4   Revolving Note issued by the Company in favor of TCA Global Credit Master Fund, LP incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2015
     
4.5*   Convertible Promissory Note issued by the Company in favor of Power Up Lending Group Ltd., dated January 19, 2017
     
4.6*   10% Senior Replacement Convertible Promissory Note issued by Grow Solutions Holdings, Inc. in favor of L2 Capital LLC, dated February 15, 2017
     
4.7*   Convertible Promissory Note issued by the Company in favor of Carebourn Capital LP, dated July 14, 2017
     
4.8*   Form of Promissory Note, dated May 25, 2017 incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 13, 2017
     
10.1   Form of Employment Agreement incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on May 20, 2015
     
10.2   Asset Purchase Agreement by and between Grow Solutions Holdings, Inc,, One Love Garden Supply LLC, and D&B Industries incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission on November 16, 2015

   

 46 

 

 

Exhibit No.   Description
10.3   Credit Agreement by and among Grow Solutions Holdings, Inc., Grow Solutions, Inc., One Love Garden Supply LLC, and TCA Global Credit Master Fund, LP incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2015
     
10.4   Security Agreement by and between Grow Solutions Holdings, Inc. and TCA Global Credit Master Fund, LP incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2015
     
10.5   Security Agreement by and among Grow Solutions, Inc., One Love Garden Supply LLC, and TCA Global Credit Master Fund, LP incorporated herein by reference to Exhibit 10.4 the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2015
     
10.6   Pledge Agreement by and between Grow Solutions Holdings, Inc. and TCA Global Credit Master Fund, LP, with joinder of escrow agent incorporated herein by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2015
     
10.7*   First Amendment to Credit Agreement by and among Grow Solutions Holdings, Inc., Grow Solutions Inc., One Love Garden Supply LLC, Jeffery Beverly, and TCA Global Credit Master Fund LP, dated February 9, 2017
     
10.8*   Debt Purchase Agreement by and amount TCA Global Credit Master Fund, LP, L2 Capital LLC, and Grow Solutions Holdings Inc, dated February 15, 2017
     
10.9*   Securities Purchase Agreement by and between Grow Solutions Holdings, Inc. and Power Up Lending Group Ltd., dated January 19, 2017
     
10.10*   Securities Purchase Agreement by and between the Grow Solutions Holdings, Inc. and Carebourn Capital LP, dated July 14, 2017
     
10.11*   Letter Agreement between Grow Solutions Holdings, Inc. and Power Up Lending Group Ltd., dated June 30, 2017
     
31.1*   Rule 13a-14(a) Certification – Principal Executive Officer
     
31.2*   Rule 13a-14(a) Certification – Principal Financial Officer
     
32.1*   Section 1350 Certification – Principal Executive Officer
     
32.2*   Section 1350 Certification – Principal Financial Officer
     
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

   

* Filed herewith

 

 47 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GROW SOLUTIONS HOLDINGS, INC.
     
Date: July 24, 2017 By: /s/ Jeffrey Beverly
  Name: Jeffrey Beverly
  Title: President and Director
    (Principal Executive Officer)
    (Principal Financial Officer)
    (Principal Accounting Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
/s/ Jeffrey Beverly   President and Director   July 24, 2017
    (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)    
         
/s/ Howard Karasik   Director   July 24, 2017
         
/s/ Leslie Bocskor   Director   July 24, 2017
         
/s/ William Hayde   Director   July 24, 2017
         
/s/ Peter Lau   Director   July 24, 2017
         

 

 48 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

    Page
     
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Financial Statements:    
     
Consolidated Balance Sheets   F-3
     
Consolidated Statements of Operations   F-4
     
Consolidated Statements of Stockholders’ Deficit   F-5
     
Consolidated Statements of Cash Flows   F-6
     
Notes to the Consolidated Financial Statements   F-7

 

 F-1 

 

   

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Grow Solutions Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Grow Solutions Holdings, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2016 and 2015. Grow Solutions Holdings, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grow Solutions Holdings, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 2 to the financial statements, the entity has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ KLJ & Associates, LLP

 

KLJ & Associates, LLP

Edina, MN

July 24, 2017

 

 

 

5201 Eden Avenue

Suite 300

Edina, MN 55436

630.277.2330

 F-2 

 

 

Grow Solutions Holdings, Inc.

Consolidated Balance Sheets

 

    December 31,     December 31,  
    2016     2015  
Assets
             
Assets:            
Cash   $ 195,761     $ 814,663  
Accounts receivable, net     133,478       80,555  
Note receivable and accrued interest     207,979       -  
Inventories, net     915,832       679,899  
Debt issuance costs, net     35,288       126,119  
Total current assets     1,488,338       1,701,236  
                 
Property and Equipment, net     75,372       20,818  
                 
Goodwill     507,815       507,815  
Total Assets   $ 2,071,525     $ 2,229,869  
                 
Liabilities and Stockholders’ Deficit
                 
Current Liabilities:                
Accounts payable and accrued expenses   $ 972,030     $ 926,588  
Accrued settlement expense     568,500       -  
Convertible notes, net of debt discount     1,554,139       108,763  
Related party payable     -       40,000  
Total current liabilities     3,094,669       1,075,351  
                 
Long-term Liabilities:                
Derivative liabilities     1,068,605       1,167,836  
Total long-term liabilities     1,068,605       1,167,836  
                 
Total Liabilities     4,163,274       2,243,187  
                 
Commitments and contingencies                
                 
Stockholders’ Deficit                
Preferred Stock, par value $0.001: 25,000,000 shares authorized; none issued and outstanding     -       -  
Common stock, $0.001 par value; 100,000,000 shares authorized; 49,690,303 and 46,389,545 shares issued and outstanding     49,690       46,390  
Additional paid in capital     4,147,550       1,555,140  
Accumulated deficit     (6,288,989 )     (1,614,848 )
Total Stockholders’ Deficit     (2,091,749 )     (13,318 )
Total Liabilities and Stockholders’ Deficit   $ 2,071,525     $ 2,229,869  

 

See accompanying notes to the consolidated financial statements

 

 F-3 

 

 

Grow Solutions Holdings, Inc.

Consolidated Statements of Operations 

 

    For the Years Ended  
    December 31,
2016
    December 31,
2015
 
             
Net Sales   $ 6,780,591     $ 2,693,212  
                 
Cost of goods sold     5,529,818       1,906,320  
                 
Gross profit     1,250,773       786,892  
                 
Selling, general and administrative expenses     4,717,255       2,021,134  
Total Selling, general and administrative     4,717,255       2,021,134  
                 
Loss from operations     (3,466,482 )     (1,234,242 )
                 
Other income (expense)                
Other income     7,328       -  
Interest expense     (1,062,142 )     (115,355 )
Derivative expense     (46,583 )     -  
Change in fair value of derivative liabilities     (106,262 )     (112,342 )
Total other (expense) income     (1,207,659 )     (227,697 )
                 
Net loss   $ (4,674,141 )   $ (1,461,939 )
                 
Net loss income per common share - basic and diluted   $ (0.10 )   $ (0.03 )
                 
Weighted average common shares outstanding -basic and diluted     46,968,635       50,757,482  

  

See accompanying notes to the consolidated financial statements

 

 F-4 

 

 

Grow Solutions Holdings, Inc.

Consolidated Statements Changes in of Stockholders’ Deficit

For the Years Ended December 31, 2016 and 2015

 

    Preferred Stock     Common Stock     Additional
Paid In
    Accumulated     Stockholders’
(Deficit)
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Equity  
                                           
Balance, December 31, 2014     -     $ -       46,255,000     $ 46,255     $ 485,745     $ (152,909 )   $ 379,091  
                                                         
Recapitalization     -       -       1,886,612       1,887       21,351       -       23,238  
                                                         
Common stock issued for services     -       -       4,217,933       4,218       405,782       -       410,000  
                                                         
Common stock and warrants issued for cash, net of derivative liability     -       -       3,080,000       3,080       283,212       -       286,292  
                                                         
Common stock issued for acquisition     -       -       1,750,000       1,750       348,250       -       350,000  
                                                         
Cancellation of founder’s shares     -       -       (10,800,000 )     (10,800 )     10,800       -       -  
                                                         
Net loss for the period ended December 31, 2015                                             (1,461,939 )     (1,461,939 )
                                                         
Balance, December 31, 2015          -     $ -       46,389,545     $ 46,390     $ 1,555,140     $ (1,614,848 )   $ (13,318 )
                                                         
Common stock issued for services     -       -       1,985,000       1,985       1,163,465       -       1,165,450  
                                                         
Options issued for services     -       -       -       -       486,824       -       486,824  
                                                         
Common stock and warrants issued for cash     -       -       1,626,200       1,626       314,615       -       316,241  
                                                         
Conversion of notes to equity     -       -       1,532,491       1,532       133,587       -       135,119  
                                                         
Derivative cease to exist     -             -       -       -       492,076       -       492,076  
                                                         
Cancellation of shares     -       -       (1,842,933 )     (1,843 )     1,843       -       -  
                                                         
Net loss for the year ended December 31, 2016     -       -       -       -       -       (4,674,141 )     (4,674,141 )
                                                         
Balance, December 31, 2016     -     $ -       49,690,303     $ 49,690     $ 4,147,550     $ (6,288,989 )   $ (2,091,749 )

 

See accompanying notes to the consolidated financial statements

 

 F-5 

 

 

Grow Solutions Holdings, Inc.

Consolidated Statements of Cash Flows

 

    For the Years Ended  
    December 31,
2016
    December 31,
2015
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (4,674,141 )   $ (1,461,939 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Recapitalization     -       46,150  
Depreciation     18,549       2,149  
Accretion of debt discount and debt issuance costs     795,969       97,968  
Derivative expense     46,583       -  
Interest income     (7,979 )     -  
Share-based compensation     1,652,274       410,000  
Change in fair value of derivative liabilities     106,262       112,342  
Changes in operating assets and liabilities:                
Accounts receivable     (52,923 )     (67,190 )
Inventory     (235,933 )     (343,562 )
Accounts payable and accrued expenses     60,561       233,811  
Accrued legal settlement expense     568,500       -  
Net Cash Used In Operating Activities     (1,722,278 )     (970,271 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Net cash paid for business acquisitions     -       (193,906 )
Cash paid for note receivable     (200,000 )     -  
Cash paid for machinery and equipment     (73,103 )     (22,035 )
Net Cash Used In Investing Activities     (273,103 )     (215,941 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from issuance of common stock     316,241       616,000  
Proceeds from issuance of convertible note     1,357,000       1,070,000  
Repayments of convertible note     (256,762 )     -  
Repayments of note payable     (40,000 )     -  
Cash paid for debt issuance costs     -       (137,400 )
Net Cash Provided by Financing Activities     1,376,479       1,548,600  
                 
Net (Decrease) Increase in Cash     (618,902 )     362,388  
                 
Cash - Beginning of Period     814,663       452,275  
                 
Cash - End of Period   $ 195,761     $ 814,663  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:                
Cash Paid During the Period for:                
Income taxes   $ -     $ -  
Interest   $ 91,603     $ -  
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                
                 
Recognition of derivative liability embedded in stock purchase warrant   $ -     $ 255,867  
Debt discount on convertible note   $ 286,583     $ 722,924  
Stock issued for debt discount on convertible note   $ -     $ 325,000  
Stock issued for OneLove acquisition   $ -     $ 290,000  
Stock issued for Hygrow acquisition   $ -     $ 60,000  
Derivative cease to exist upon conversion of notes   $ 492,076     $ -  
Stock issued upon conversion of notes   $ 135,119     $ -  

 

See accompanying notes to the consolidated financial statements

 

 F-6 

 

  

GROW SOLUTIONS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 — Organization and Operations

 

Grow Solutions Holdings, Inc. (formerly known as LightTouch Vein & Laser, Inc. and Strachan, Inc.) (the “Company”) was organized under the laws of the State of Nevada on May 1, 1981. Currently, the Company provides indoor and outdoor gardening supplies to the rapidly growing garden industry.

 

The Merger

 

Effective April 28, 2015, the Company entered into an Acquisition Agreement and Plan of Merger (the “the Merger”) with Grow Solutions, Inc., a Delaware corporation (“Grow Solutions”) and LightTouch Vein & Laser Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (“LightTouch Acquisition”). Under the terms of the Merger, Grow Solutions merged with LightTouch Acquisition and became a wholly owned subsidiary of the Company. The Grow Solutions’ shareholders and certain creditors of the Company received 44,005,000 shares of the Company’s common stock in exchange for all of the issued and outstanding shares of Grow Solutions. Following the closing of the Grow Solutions Agreement, Grow Solutions’ business became the primary focus of the Company and Grow Solutions management assumed control of the management of the Company with the former director of the Company resigning upon closing of the Agreement. Shareholders maintained 1,886,612 shares as part of the recapitalization.

 

As a result of the Merger, the Company discontinued its pre-Merger business. The Merger was accounted for as a “reverse merger,” and Grow Solutions, was deemed to be the accounting acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior to the Merger will be those of Grow Solutions and will be recorded at the historical cost basis and the consolidated financial statements after completion of the Merger will include the assets and liabilities of Grow Solutions., historical operations of the Company, and operations of the Company and its subsidiaries from the closing date of the Merger. As a result of the issuance of the shares of the Company’s Common Stock pursuant to the Merger, a change in control of the Company occurred as of the date of consummation of the Merger. The Merger is intended to be treated as a tax-free exchange under Section 368(a) of the Internal Revenue Code of 1986, as amended. All historical share amounts of the accounting acquirer were retrospectively recast to reflect the share exchange.

 

The Acquisition

 

Effective May 13, 2015 (the “Closing Date”), the Company entered into an Acquisition Agreement and Plan of Merger (the “OneLove Agreement’) with Grow Solutions Acquisition LLC, a Colorado limited liability company and a wholly owned subsidiary of the Company (“Grow Solutions Acquisition”), One Love Garden Supply LLC, a Colorado limited liability company (“OneLove”), and all of the members of OneLove (the “Members”). On the Closing Date, OneLove merged with Grow Solutions Acquisition and became a wholly owned subsidiary of the Company. Under the terms of the OneLove Agreement, the Members received (i) 1,450,000 shares of the Company’s common stock (the “Equity”), (ii) Two Hundred Thousand Dollars (US$200,000) (the “Cash”), and (iii) a cash flow promissory note in the aggregate principal amount of $50,000 issued by OneLove in favor of the Members (the “Cash Flow Note”), whereby each fiscal quarter, upon the Company recording on its financial statements $40,000 in US GAAP Net Income (“Net Income”) from sales of the Company’s products (the “Net Income Threshold”), the Company shall pay to the Members 33% of the Company’s Net Income generated above the Net Income Threshold. The aforementioned obligations owed under the Cash Flow Note shall extinguish upon the earlier of (i) payment(s) by Company in an amount equal to $50,000 in the aggregate or (ii) May 5, 2016 (collectively, the Cash Flow Note, the Equity, and the Cash, the “Consideration”). The Consideration provided to the Members was in exchange for all of the issued and outstanding membership interests of OneLove. Following the Closing Date, OneLove’s business was acquired by the Company and the Company’s management assumed control of the management of OneLove with the former managing members of OneLove resigning from OneLove upon closing of the OneLove Agreement.

 

The Company recorded the purchase of OneLove using the acquisition method of accounting as specified in ASC 805 “Business Combinations.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed based on their acquisition date fair values. Further, the Company commenced reporting the results of OneLove on a consolidated basis with those of the Company effective upon the date of the acquisition

 

 F-7 

 

 

The Company consolidated OneLove as of the effective date of the agreement, and the results of operations of the Company include that of OneLove. The Company recognized net revenues attributable to OneLove of $2,523,595 and recognized income of $217,144 during the period May 13, 2015 through December 31, 2015.

  

The following table summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, and net liabilities to assumed identifiable and unidentifiable intangible assets.

 

Purchase Consideration:    
Common stock at fair market value  $290,000 
Cash paid   200,000 
Cash flow note assumed   50,000 
Current liabilities assumed   226,624 
Total Purchase Consideration  $766,624 

 

The fair value allocation is based on management’s estimates:

 

Purchase Price Allocation    
Cash  $9,961 
Accounts receivable  $13,363 
Inventory  $342,458 
Property and equipment  $932 
Goodwill  $399,910 
Current liabilities  $(226,624)

  

As per the Acquisition agreement, the Company has paid all of the cash flow note and as of December 31, 2016, the balance of the cash flow note is $0.

 

Asset Purchase Agreement

 

On September 23, 2015 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (the “APA”) by and among OneLove and D&B Industries, LLC, a Colorado limited liability company doing business as Hygrow. On the Closing Date, the Company purchased all of the assets, rights, properties, and business of Hygrow including certain debts of Hygrow (the “Assets”). Under the terms and conditions of the APA, and for full consideration of the transfer of such Assets to the Company on the Closing Date, the Company issued Hygrow three hundred thousand (300,000) shares of common stock of the Company and a payment to Hygrow in the amount of $5,200 in cash. Following the Closing Date the Company’s management assumed control of the management of Hygrow with the former managing members of Hygrow resigning upon closing of the APA.

 

The Company recorded the purchase of Hygrow using the acquisition method of accounting as specified in ASC 805 “Business Combinations.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed based on their acquisition date fair values. Further, the Company commenced reporting the results of Hygrow on a consolidated basis with those of the Company effective upon the date of the acquisition.

  

The Company consolidated Hygrow as of the effective date of the agreement, and the results of operations of the Company include that of Hygrow. The Company recognized net revenues attributable to Hygrow of $394,017 and recognized income of $101,213 during the period September 23, 2015 through December 31, 2015.

 

 F-8 

 

  

The following table summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, and net liabilities to assumed identifiable and unidentifiable intangible assets.

 

Purchase Consideration:    
Common stock at fair market value  $60,000 
Cash paid   5,200 
Current liabilities assumed   47,918 
Total Purchase Consideration  $113,118 

 

The fair value allocation is based on management’s estimates:

 

Purchase Price Allocation    
Other assets  $5,213 
Goodwill  $107,905 
Current liabilities  $(47,918)

 

The Financing

 

Also during the period ended December 31, 2015, the Company completed a closing of a private placement offering (the “Offering”) of 2,705,000 Units, at a purchase price of $0.20 per Unit, each Unit consisting of 1 share of the Company’s common stock, and 1 stock purchase warrants. The warrants are exercisable at $0.40 per warrant into a share of the Company’s common stock and have a maturity of 3 years.

 

The aggregate gross proceeds from the closing were $541,000 (the Company recorded $332,570 for the fair value of the warrants as a derivative liability).

 

Note 2 — Going Concern and Management’s Plan

 

The Company has elected to adopt early application of ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the consolidated financial statements, the Company had an accumulated deficit at December 31, 2016, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is attempting to further implement its business plan and generate sufficient revenues; however, its cash position may not be sufficient to support its daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenues and in its ability to raise additional funds by way of a public or private offering, there can be no assurance to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenues and its ability to raise additional funds by way of a public or private offering.

 

The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 F-9 

 

  

Note 3 — Summary of Significant Accounting Policies

 

Basis of presentation

  

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, One Love Garden Supply LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Fair value of financial instruments

 

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet, primarily due to their short-term nature.

  

Use of estimates and assumptions

  

The preparation of financial statements in conformity with US GAAP 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(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

  

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were: 

  

  (1) Fair value of long–lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long–lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long–lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under–performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

 

  (2) Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry–forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred a loss, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
     
  (3) Estimates and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk-free rate(s) to value share options and similar instruments.
     
  (4) Estimates and assumptions used in valuation of derivative liability: Management utilizes an option pricing model to estimate the fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value estimates.

 

 F-10 

 

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

 

Concentration of credit risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution which, at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

 

Cash and Cash Equivalents

  

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2016 and 2015, the Company had cash and cash equivalents of $195,761 and $814,663, respectively. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. As of December 31, 2016 and 2015, the allowance for doubtful accounts was $65,311 and $0, respectively.

  

Inventories

  

Inventories are stated at lower of cost or market using the first-in, first-out (FIFO) valuation method. Inventory was comprised of finished goods at December 31, 2016 and 2015. As of December 31, 2016 and 2015, the allowance for shrinkage was $60,000 and $0, respectively.

  

Debt Discount and Debt Issuance Costs

 

Debt discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements using the straight-line method. Unamortized discounts are netted against long-term debt.

 

 F-11 

 

 

Property and Equipment

 

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:

 

   Estimated Useful
Life (Years)
 
     
Computer equipment and software  3 
Equipment  5 
Furniture and fixture  7 

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31.

 

In accordance with ASC 350–20 “Goodwill”, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit. 

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of its long-lived assets, including property and equipment, when there are indications that the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the asset to its estimated undiscounted future cash flows.  If an asset’s carrying value exceeds such estimated cash flows (undiscounted and with interest charges), the Company records an impairment charge for the difference.

 

Derivative Liability

 

The Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB ASC. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.

  

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

 F-12 

 

 

The Company adopted Section 815-40-15 of the FASB ASC (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock.  Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  

 

The Company utilizes an option pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 FASB Accounting Standards, the related parties include (a) affiliates of the Company (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15 FASB Accounting Standards, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company and members of their immediate families; (e) management of the Company and members of their immediate families; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

Pursuant to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. 

 

Commitments and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

 F-13 

 

  

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Equity–based compensation

 

The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a five-year period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.

 

The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the value of the underlying share, the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is benchmarked against similar companies in a similar industry over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on its Common stock and does not intend to pay dividends on its Common stock in the foreseeable future. The expected forfeiture rate is estimated based on management’s best estimate.

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period. 

 

 F-14 

 

 

Loss Per Share

  

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the year ended December 31, 2016 and 2015 presented in these consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

  

The Company had the following common stock equivalents at December 31, 2016 and 2015:

 

   December 31,
2016
   December 31,
2015
 
Convertible notes payable   9,419,858    6,622,718 
Options   475,000    - 
Warrants   5,121,756    4,955,000 
Totals   15,016,614    11,577,718 

 

Income Taxes

 

The Company accounts for income taxes under ASC Topic 740 “Income Taxes” (“ASC 740”). ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

 

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecoginition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. Since the Company was incorporated on March 21, 2014, the evaluation was performed for the 2014 and 2015 tax years, which will be the only periods subject to examination upon filing of appropriate tax returns. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.

 

The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no amounts accrued for penalties or interest as of or during the year ended December 31, 2016. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.

 

Cash Flows Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (the “Indirect Method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments

 

 F-15 

 

 

Subsequent events  

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company has evaluated events that occurred subsequent to December 31, 2016 and through the date the financial statements were issued.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers”. The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue recognition. In July 2015, the effective date was delayed one year by a vote by the FASB. Public business entities, certain not-for-profit entities, and certain employee benefit plans would apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application would be permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has evaluated the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures. 

 

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

 

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

  a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

 

 F-16 

 

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

  a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company has elected to adopt the methodologies prescribed by ASU 2014-15. The adoption of ASU 2014-15 had no material effect on its financial position or results of operations.

 

In March 2015, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during the year ended December 31, 2016.

 

In January 2016, the FASB issued the FASB Accounting Standards Update No. 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).

 

This Update makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. Some of the major changes as a result of the ASU 2016-01 are summarized below.

 

  Requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
  Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
  Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
  Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
  Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
  Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
  Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

 

 F-17 

 

 

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard.

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-06, “Derivatives and Hedging” (Topic 815). The FASB issued this update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

In April 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation” (Topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard. 

 

In April 2016, the FASB issued ASU 2016–10 “Revenue from Contract with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgment necessary to comply with Topic 606. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the impact of the new standard. 

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

 F-18 

 

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

Note 4 — Notes Receivable and accrued interest

 

In April 2014, the Company signed a letter of intent with Delta Entertainment Group (“Delta”) to enter into a reverse merger transaction. In exchange for Delta’s exclusivity until the earlier of the execution of a stock exchange agreement or June 30, 2014, the Company paid Delta $25,000. Delta was to use the $25,000 to become current with its public filings. Since the stock exchange transaction was not executed by June 30, 2014, the $25,000 that the Company provided to Delta reverted to a one year note with an interest rate at 8% per annum. The Company determined that since Delta lacked the financial resources to get current in its public filings, the collectability of the note was doubtful. Accordingly, the Company has not accrued any interest income on the note and has booked a 100% reserve against the note receivable.

 

During the year ended December 31, 2016, the Company executed a non-recourse loan and security agreement with Infinite Distribution Inc. (“Infinite”) and paid Infinite gross proceeds of $200,000. The note accrues interest at 6% per annum maturing on April 18, 2020. As of December 31, 2016, the outstanding balance of the note including accrued interest was $207,979.

 

Note 5 – Property and Equipment

 

Property and equipment consisted of the following at December 31, 2016 and 2015:

 

       December 31,   December 31, 
   Lives   2016   2015 
             
Equipment  5 years   $29,608   $23,044 
Office equipment  7 years    7,254    3,724 
Software and computer equipment  3 years    44,953    - 
Leasehold improvements  5 years    19,335    1,585 
Less: accumulated depreciation       (25,778)   (7,535)
Property and equipment, net      $75,372   $20,818 

 

Depreciation expense for the year ended December 31, 2016 and 2015 was $18,549 and $2,149, respectively.

 

Note 6 — Convertible notes

 

Debt Offering (A)

 

On September 2, 2015, the Company entered into an agreement for the issuance of a convertible note to a third-party lender for $120,000. The note accrues interest at 12% per annum maturing on July 2, 2016. The notes are convertible into shares of common stock at a conversion price equal to approximately 58% of the average of the lowest 3 trading prices for the common stock during the 20-day trading period ending on the latest and complete trading day prior to the conversion. During the year ended December 31, 2016, the lender elected to convert an aggregate of $135,119 of principal and accrued interest into 1,532,491 shares of common stock. As of December 31, 2016, the principal and accrued interest on the notes due to the lender was $0. 

 

 F-19 

 

 

Debt Offering (B)

 

Effective December 7, 2015, the Company closed a Credit Agreement (the “Credit Agreement”) by and among the Company, as borrower, Grow Solutions, Inc. and One Love Garden Supply LLC as joint and several guarantors (such guarantors, collectively, the “Subsidiaries” and together with the Company, the “Borrowers”) and TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership, as lender (“TCA”). Pursuant to the Credit Agreement, TCA agreed to loan the Company up to a maximum of $3,000,000 for the Company’s product division, construction and renovation of two stores, and inventory. An initial amount of $950,000 was funded by TCA at the closing of the Credit Agreement.  Any increase in the amount extended to the Borrowers shall be at the discretion of TCA.

  

The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the “Revolving Note”) and the repayment of the Revolving Note is secured by a first position security interest in substantially all of the Company’s assets in favor of TCA, as evidenced by a Security Agreement by and between the Company and TCA (the “Company Security Agreement”) and a first position security interest in substantially all of the Subsidiaries’ assets in favor of TCA, as evidenced by a Security Agreement by and among the Subsidiaries and TCA (the “Subsidiaries Security Agreement” and, together with the Company Security Agreement, the “Security Agreements”).  The Revolving Note is in the original principal amount of $950,000, is due and payable, along with interest thereon, on June 7, 2017 (the “Maturity Date”), and bears interest at the rate of 18% per annum, with the first four months of payments by the Company under the Revolving Note being interest only. Upon the occurrence of an Event of Default (as defined in the Credit Agreement) the interest rate shall increase to the Default Rate (as defined in the Credit Agreement). The payments under the Revolving Note are amortized over 18 months. During the year ended December 31, 2016, the Company made principal and interest payments of $234,427 and $96,202, respectively. The outstanding balance due under the note was $703,948 and $950,000 as of December 31, 2016 and 2015, respectively. 

 

Only upon the occurrence of an Event of Default or mutual agreement between TCA and the Company, at the sole option of TCA, TCA may convert all or any portion of the outstanding principal, accrued and unpaid interest, and any other sums due and payable under the Revolving Note into shares of the Company’s common stock at a conversion price equal to 85% of the lowest daily volume weighted average price of the Company’s common stock during the five trading days immediately prior to such applicable conversion date, in each case subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common stock upon any conversion.

 

As further consideration for TCA entering into and structuring the Credit Agreement, the Company shall pay to TCA an advisory fee by issuing shares of restricted common stock of the Company (the “Advisory Fee Shares”) equal to $325,000 (the “Advisory Fee”). In the event that the Company pays TCA all of the outstanding obligations due under the Credit Agreement on or before June 7, 2016, the Advisory Fee shall be reduced to $292,500. Additionally, as long as there is (i) no Event of Default, (ii) no occurrence of any other event that would cause an Event of Default, and (iii) the Company makes timely Advisory Fee Payments (as defined below), TCA agrees that it will not sell any Advisory Fee Shares in the Principal Trading Market (as defined in the Credit Agreement) prior to the Maturity Date, in exchange for monthly cash payments by the Company beginning on July 4, 2016 and ending on the Maturity Date as set forth in the Credit Agreement, which shall be credited and applied towards the repayment of the Advisory Fee (the “Advisory Fee Payments”). In the event that TCA shall sell the Advisory Fee Shares, as long as there is no Event of Default, TCA shall not, during any given calendar week, sell Advisory Fee Shares in excess of 25% of the average weekly volume of the common stock of the Company on the Principal Trading Market over the immediately preceding calendar week.

 

The Company booked the $325,000 as debt discount.

 

The Company issued 325,000 shares of common stock to the creditor as compensation for financing costs of $325,000. The issuance of the 325,000 shares has been recorded at par value with a corresponding decrease to paid-in capital. Upon the sale of the shares by the creditor, the financing cost liability will be reduced by the amount of the proceeds with a corresponding increase to paid-in capital. The Company will still be liable for any shortfall from the proceeds realized by the creditor. The ultimate amount to be recorded in satisfaction of the debt will not exceed the balance of the financing cost recorded.

 

 F-20 

 

 

Debt Offering (C)

 

During the year ended December 31, 2016, the Company entered into an agreement for the issuance of convertible notes to third party lenders for aggregate proceeds of $1,117,000. The notes accrue interest at 12% per annum maturing two years from issuance. The notes are convertible into shares of common stock at a conversion price of $0.80.

 

Debt Offering (D)

 

On December 15, 2016, the Company entered into an agreement for the issuance of a convertible note to a third-party lender for $285,775 with an original issue discount of $37,275. The note accrues interest at 8% per annum maturing on December 15, 2017. The notes are convertible into shares of common stock at a conversion price equal to approximately 58% of the average of the lowest 3 trading prices for the common stock during the 20-day trading period ending on the latest and complete trading day prior to the conversion. Pursuant to the agreement, the Company is required to pay $1,190 As of December 31, 2016, the principal and accrued interest on the notes due to the lender was $275,065. 

 

As of December 31, 2016 and 2015, the total outstanding balance of the above convertible notes, net of debt discount, was $1,554,139 and $108,763, respectively.

 

Derivative Analysis

 

Because the conversion feature included in the convertible note payable has full reset adjustments tied to future issuances of equity securities by the Company, it is subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”).

 

Generally accepted accounting principles require that:

 

a. Derivative financial instruments be recorded at their fair value on the date of issuance and then adjusted to fair value at each subsequent balance sheet date with any change in fair value reported in the statement of operations; and
   
b. The classification of derivative financial instruments be reassessed as of each balance sheet date and, if appropriate, be reclassified as a result of events during the reporting period then ended.

 

Upon issuance of the note, a debt discount was recorded and any difference in comparison to the face value of the note, representing the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to interest expense.  The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations. There was unamortized debt discount of $698,288 and $961,237 as of December 31, 2016 and 2015, respectively.

 

The fair value of the embedded conversion feature was estimated using the Black-Scholes option-pricing model. See Note 7 for the estimates and assumptions used. 

 

Note 7 — Derivative Liabilities

 

In connection with the private placement and debt transactions during the period ended December 31, 2015, the Company issued 4,955,000 warrants, to purchase common stock with an exercise price of $0.40 and a three-year term. The Company identified certain put features embedded in the warrants that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the warrants as a derivative liability.

 

 F-21 

 

 

In connection with the issuance of a convertible note as discussed above in Note 5, the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the convertible note agreement that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.

  

Level 3 Financial Liabilities – Derivative convertible note and warrant liabilities

 

The following are the major categories of assets and liabilities that were measured at fair value during the year ended December 31, 2016 and 2015, using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

  

Quoted Prices

In Active

Markets for

Identical

Liabilities

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Balance at

December 31,

2016

 
                 
Embedded conversion feature  $-   $-   $788,155   $788,155 
Warrant liability   -    -    290,450    290,450 
December 31, 2016  $-   $-   $1,068,605   $1,068,605 

 

  

Quoted Prices

In Active

Markets for

Identical

Liabilities

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Balance at

December 31,

2015

 
                 
Embedded conversion feature  $-   $-   $730,584   $730,584 
Warrant liability   -    -    437,252    437,252 
December 31, 2015  $-   $-   $1,167,836   $1,167,836 

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the year ended December 31, 2016.

 

  

Warrant

Liability

  

Embedded

Conversion

Feature

   Total 
Balance – December 31, 2014  $-   $-   $- 
Change in fair value of derivative liability   104,682    7,660    112,342 
Issuance of derivative liabilities   332,570    -    332,570 
Included in debt discount   -    722,924    722,924 
Balance – December 31, 2015   437,252    730,584    1,167,836 
Change in fair value of derivative liability   (146,802)   253,064    106,262 
Conversion of debt to equity   -    (492,076)   (492,076)
Issuance of derivative liabilities   -    -    - 
Included in debt discount   -    286,583    286,583 
Balance – December 31, 2016  $290,450   $778,155   $1,068,605 

 

 F-22 

 

 

The fair value of the derivative feature of the convertible notes and warrants on the balance sheet date were calculated using an option model valued with the following weighted average assumptions:

  

   December 31,
2016
  December 31,
2015
 
Risk free interest rate