Company Quick10K Filing
Quick10K
Kush Bottles
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-K 2018-08-31 Annual: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-K 2017-08-31 Annual: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-K 2016-08-31 Annual: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
8-K 2019-06-07 Officers, Other Events, Exhibits
8-K 2019-04-29 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2019-04-11 Earnings, Exhibits
8-K 2019-04-08 Amendment, Other Events, Exhibits
8-K 2019-02-21 Shareholder Vote
8-K 2019-02-11 Officers, Other Events, Exhibits
8-K 2019-01-15 Enter Agreement, Other Events, Exhibits
8-K 2019-01-08 Earnings, Exhibits
8-K 2018-11-26 Earnings, Exhibits
8-K 2018-11-20 Officers, Other Events, Exhibits
8-K 2018-11-09 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-24 Officers
8-K 2018-09-21 Enter Agreement, Other Events, Exhibits
8-K 2018-09-18 Earnings, Exhibits
8-K 2018-08-29 Amend Bylaw, Other Events, Exhibits
8-K 2018-07-31 Officers
8-K 2018-07-16 Sale of Shares, Other Events
8-K 2018-07-12 Earnings, Exhibits
8-K 2018-06-07 Enter Agreement, Other Events, Exhibits
8-K 2018-05-08 Shareholder Vote
8-K 2018-05-02 Enter Agreement, M&A, Sale of Shares, Other Events, Exhibits
8-K 2018-04-11 Earnings, Exhibits
8-K 2018-04-10 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-03-09 Code of Ethics, Other Events, Exhibits
8-K 2018-01-31 Officers, Other Events, Exhibits
8-K 2018-01-12 Officers, Other Events, Exhibits
GBCI Glacier Bancorp 3,580
FCF First Commonwealth Financial 1,350
MERC Mercer 1,110
RILY B. Riley Financial 517
ADVM Adverum Biotechnologies 415
FTR Frontier Communications 228
FRAF Franklin Financial Services 171
DRAD Digirad 14
MYOS MYOS RENS 11
MATR Mattersight 0
KSHB 2019-02-28
Part I - Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Note 1 - Nature of Business and Significant Accounting Policies
Note 2 - Restatement
Note 3 - Acquisition of Summit Innovations, Llc
Note 4 - Acquisition of The Hybrid Creative, Llc
Note 5 - Concentrations of Risk
Note 6 - Related Party Transactions
Note 7 - Sale of Rub
Note 8 - Property and Equipment
Note 9 - Intangible Assets
Note 10 - Accrued Expenses and Other Current Liabilities
Note 11 - Notes Payable
Note 12 - Loan Agreement
Note 13 - Warrant Liability
Note 14 - Fair Value of Financial Instruments
Note 15 - Stockholders' Equity
Note 16 - Commitments and Contingencies
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities.
Item 3. Default Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-10.7 tv518812_ex10-7.htm
EX-31.1 tv518812_ex31-1.htm
EX-31.2 tv518812_ex31-2.htm
EX-32.1 tv518812_ex32-1.htm
EX-32.2 tv518812_ex32-2.htm

Kush Bottles Earnings 2019-02-28

KSHB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv518812_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2019

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to

 

Commission File Number: 000-55418

 

 

 

KUSHCO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 46-5268202
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

11958 Monarch Street, Garden Grove, CA 92841

(Address of Principal Executive Offices) (Zip Code)

 

(714) 243-4311

(Registrant's telephone number, including area code)

 

N/A
Former name, former address, and former fiscal year, if changed since last report

 

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     x    No     ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes     x   No     ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ¨   Accelerated filer x
Non-accelerated Filer ¨   Smaller reporting company x
Emerging growth company x      

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 88,017,716 shares outstanding as of April 11, 2019.

 

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology.

 

The identification in this report of factors that may affect our future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

 

Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to:

 

·Trends affecting our financial condition, results of operations or future prospects;

 

·Our business and growth strategies;

 

·Our financing plans and forecasts;

 

·The factors that we expect to contribute to our success and our ability to be successful in the future;

 

·Our business model and strategy for realizing positive results as sales increase;

 

·Competition, including our ability to respond to such competition and its expectations regarding continued competition in the market in which we compete;

 

·Our ability to meet our projected operating expenditures and the costs associated with development of new projects;

 

·Our ability to pay dividends or to pay any specific rate of dividends, if declared;

 

·The impact of new accounting pronouncements on our financial statements;

 

·That our cash flows from operating activities will be sufficient to meet our operating expenditures;

 

·Our market risk exposure and efforts to minimize risk;

 

·Development opportunities and our ability to successfully take advantage of such opportunities;

 

·Regulations, including anticipated taxes, tax credits or tax refunds expected;

 

·The outcome of various tax audits and assessments, including appeals thereof, timing of resolution of such audits, our estimates as to the amount of taxes that will ultimately be owed and the impact of these audits on our financial statements;

 

·Our overall outlook including all statements under Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

·That estimates and assumptions made in the preparation of financial statements in conformity with US GAAP may differ from actual results; and

 

·Our expectations as to future financial performance, cash and expense levels and liquidity sources.

 

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, Part I, Item 1A. “Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2018 filed with the SEC on April 11, 2019 and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

 

 

 

KUSHCO HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2019

TABLE OF CONTENTS

 

    Page
     
Part I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of February 28, 2019 (unaudited) and August 31, 2018 3
     
  Condensed Consolidated Statements of Operations for the three and six months ended February 28, 2019 and 2018 (unaudited) 4
     
  Condensed Consolidated Statements of Stockholders’ Equity for the six months ended February 28, 2019 and 2018 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2019 and 2018 (unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
     
Item 4. Controls and Procedures 23
     
Part II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 24
     
Item 1A Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
     
Item 3. Defaults Upon Senior Securities 24
     
Item 4. Mine Safety Disclosures 24
     
Item 5. Other Information 24
     
Item 6. Exhibits 25
     
SIGNATURES   26

 

 2 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

KUSHCO HOLDINGS, INC.

Condensed Consolidated Balance Sheets

 

   February 28,   August 31, 
   2019   2018 
   (Unaudited)   (As Restated) 
ASSETS          
Current assets:          
Cash  $17,941,908   $13,466,807 
Accounts receivable, net of allowance   11,315,237    8,600,959 
Prepaid expenses and other current assets   14,215,998    13,623,285 
Inventory, net   35,798,958    11,813,755 
Total current assets   79,272,101    47,504,806 
           
Goodwill   52,267,353    52,267,353 
Intangible assets, net   3,576,889    4,487,415 
Equity investment   1,198,768    - 
Property and equipment, net   6,886,721    4,135,090 
Other assets   1,093,229    250,296 
Total Assets  $144,295,061   $108,644,960 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $11,375,885   $2,821,839 
Accrued expenses and other current liabilities   6,111,739    3,008,385 
Contingent consideration payable   -    5,488,410 
Notes payable - current portion   116,892    61,685 
Line of credit - current portion   1,496,534    918,124 
Total current liabilities   19,101,050    12,298,443 
           
Long-term liabilities:          
Notes payable   310,085    172,021 
Warrant liability   13,375,000    14,430,000 
Deferred rent   115,127    106,032 
Total liabilities   32,901,262    27,006,496 
           
Commitments and contingencies (Note 16)          
           
Stockholders’ equity          
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding   -    - 
Common stock, $0.001 par value, 265,000,000 shares authorized, 88,011,867 and 78,273,124 shares issued and outstanding, respectively   88,012    78,273 
Additional paid-in capital   152,157,458    104,917,890 
Accumulated deficit   (40,851,671)   (23,357,699)
Total stockholders’ equity   111,393,799    81,638,464 
Total liabilities and stockholders’ equity  $144,295,061   $108,644,960 

 

See accompanying notes to the unaudited condensed consolidated financial statements

   

 3 

 

 

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended
February 28,
   For the Six Months Ended
February 28,
 
   2019  

2018

(As Restated)

   2019  

2018

(As Restated)

 
Net revenue  $35,176,332   $10,361,400   $60,495,973   $19,208,492 
Cost of goods sold   30,654,239    7,172,082    52,744,742    13,132,523 
Gross profit   4,522,093    3,189,318   7,751,231   6,075,969 
                     
Operating expenses:                    
Selling, general and administrative   

18,765,667

    4,071,566    31,313,065    6,806,774 
Gain on disposition of assets   -    -    (1,254,414)   - 
Change in fair value of contingent consideration   (5,602,336)   6,684,754    (5,208,071)   11,141,256 
Total operating expenses   

13,163,331

    10,756,320    24,850,580    17,948,030 
Loss from operations   (8,641,238)   (7,567,002)   (17,099,349)   (11,872,061)
                     
Other income (expense):                    
Change in fair value of warrant liability   1,271,000    -    1,055,000    - 
Change in fair value of equity investment   (1,128,116)   -    (592,116)   - 
Interest expense   (490,995)   (28,581)   (978,369)   (30,994)
Other income, net   74,451    -    120,862    - 
Total other expense   (273,660)   (28,581)   (394,623)   (30,994)
Loss before income taxes   (8,914,898)   (7,595,583)   (17,493,972)   (11,903,055)
Income tax expense   -    11,763    -    66,178 
Net loss  $(8,914,898)  $(7,607,346)  $(17,493,972)  $(11,969,233)
                     
Net loss per share:                    
Basic and diluted net loss per common share  $(0.10)  $(0.12)  $(0.22)  $(0.20)
                     
Basic and diluted weighted average number of common shares outstanding   86,771,973    62,155,608    84,304,688    60,614,074 

 

See accompanying notes to the unaudited condensed consolidated financial statements

   

 4 

 

 

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   Common Shares   Additional
Paid-in
   Accumulated   Total
Stockholders'
 
   Shares Issued   Amount   Capital   Deficit   Equity 
Balances at August 31, 2018 (Restated)   78,273,124   $78,273   $104,917,890   $(23,357,699)  $81,638,464 
Stock option exercises   370,519    370    41,132    -    41,502 
Stock-based compensation   129,560    130    5,475,071    -    5,475,201 
Stock sold to investors, net of offering costs   9,076,664    9,077    41,583,434    -    41,592,511 
Stock issued for acquisition of Hybrid    162,000    162    139,931    -    140,093 
Net loss   -    -    -    (17,493,972)   (17,493,972)
Balances at February 28, 2019   88,011,867   $88,012   $152,157,458   $(40,851,671)  $111,393,799 

 

   Common Shares   Additional
Paid-in
   Retained
Earnings
(Accumulated
   Total
Stockholders'
 
   Shares Issued   Amount   Capital   Deficit)   Equity 
Balances at August 31, 2017 (Restated)   58,607,066   $58,607   $29,676,883   $979,067   $30,714,557 
Stock sold to investors   4,626,296    4,626    11,412,379    -    11,417,005 
Stock option exercises   234,128    234    196,873    -    197,107 
Stock-based compensation   -    -    458,887    -    458,887 
Stock issued for services   156,624    157    829,672    -    829,829 
Net loss   -    -    -    (11,969,233)   (11,969,233)
Balances at February 28, 2018 (Restated)   63,624,114   $63,624   $42,574,694   $(10,990,166)  $31,648,152 

  

See accompanying notes to the condensed consolidated financial statements  

  

 5 

 

 

KUSHCO HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Six Months Ended February 28, 
   2019  

2018

(As Restated)

 
Cash flows from operating activities          
Net loss  $(17,493,972)  $(11,969,233)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,077,635    490,310 
Gain on disposition of assets   (1,254,414)   - 
Change in fair value of equity investment   592,116    - 
Stock compensation expense   6,534,044    1,408,671 
Change in fair value of warrant liability   (1,055,000)   - 
Provision for deferred taxes   -    (270,359)
Change in contingent consideration   (5,208,071)   11,141,256 
Changes in operating assets and liabilities:          
Accounts receivable   (2,714,278)   (2,200,893)
Prepaids   (1,511,463)   (2,647,357)
Inventory   (24,099,353)   (3,505,198)
Prepaid consulting   (775,102)   - 
Accounts payable   8,041,452    2,070,118 
Accrued expenses and other current liabilities   3,112,449    49,866 
Net cash used in operating activities   (34,753,957)   (5,432,819)
           
Cash flows from investing activities          
Acquisition of web domain   -    (9,321)
Security deposits   (67,831)   - 
Purchase of property and equipment   (2,868,347)   (259,635)
Net cash used in investing activities   (2,936,178)   (268,956)
           
Cash flows from financing activities          
Repayment of capital leases   (47,186)   (8,508)
Repayment of note payable   -    (333,395)
Proceeds from stock option exercises   41,501    - 
Proceeds from sale of stock, net of costs   41,592,511    11,614,112 
Proceeds from line of credit   54,325,000    742,504 
Payments on line of credit   (53,746,590)   - 
Payments on contingent consideration 

-

   (170,000)
Net cash provided by financing activities   42,165,236   11,844,713 
           
Net increase in cash   4,475,101    6,142,938 
           
Cash at beginning of period   13,466,807    916,984 
Cash at end of period  $17,941,908   $7,059,922 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid for:          
Interest  $826,638   $30,994 
Income taxes  $-   $66,178 
Non-cash investing and financing activities          
Property and equipment included in accounts payable  $232,256   $- 
Capital leases  $240,457   $- 
Services prepaid for in common stock  $697,202   $102,800 
Shares issued for accounts payable  $-   $159,983 
Equity investment  $1,790,884   $- 
Stock issue for acquisition of Hybrid  $140,232   $- 

 

See accompanying notes to the condensed consolidated financial statements

 

 6 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

KushCo Holdings, Inc. (“the Company”) was incorporated in the state of Nevada on February 26, 2014.  The Company specializes in marketing and selling packaging products, vaporizers, hydrocarbon gases, solvents, accessories and branding solutions to customers operating in the regulated medical and recreational cannabis industries. The Company provides custom branding on packaging products, and its testing standards meet the requirements set by the Consumer Product Safety Commission. The Company’s packaging products primarily consists of bottles, bags, tubes and containers. The Company maintains relationships with a broad range of manufacturers and also has sophisticated in-house labeling and customization capabilities. The Company sells a wide selection of vaporizer cartridges with a variety of core materials and heating technologies, as well as a wide selection of batteries to match the cartridges. The Company provides ultra-pure hydrocarbon gases, including isobutene, n-butane, propane, ethanol, pre-mixes, custom blends and other solvents, which are essential in the extraction process. The Company’s wholly-owned subsidiary, The Hybrid Creative, LLC, is a full-service creative agency that serves both cannabis and non-cannabis clients across the U.S., Canada and Europe.

 

Basis of Presentation

  

The accompanying unaudited condensed consolidated financial statements and related notes include the activity of the Company and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. All intercompany balances and transactions have been eliminated. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The Company’s operating results for the three and six months periods ended February 28, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ended August 31, 2019, or for any other period. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended August 31, 2018, as restated. The condensed consolidated balance sheet as of August 31, 2018 included herein was derived from the audited financial statements as of that date, as restated, but does not include all disclosures as required by GAAP.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period.

 

Significant estimates relied upon in preparing these condensed consolidated financial statements include revenue recognition, accounts receivable reserves, inventory and related reserves, valuations and purchase price allocations related to business combinations, expected future cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, stock-based compensation, and recoverability of the Company’s net deferred tax assets and any related valuation allowance.

 

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

 

The Company is subject to a number of risks similar to those of other companies of similar size and having a focus of serving the cannabis industry, including, the development stage of certain products, competition, limited number of suppliers, integration of acquisitions, substantial indebtedness, government regulations, protection of proprietary rights, and dependence on key individuals.

 

Reclassification

 

Certain classifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation. The reclassification had no impact on previously reported net income (loss) or retained earnings (accumulated deficit).

 

 7 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Accounts Receivable

 

Trade accounts receivable are carried at their estimated collectible amounts.  Trade credit is generally extended on a short-term basis, thus trade receivables do not bear interest.  Trade accounts receivables are periodically evaluated for collectability based on past credit history and their current financial condition. The Company’s allowance for doubtful accounts was $1,306,346 and $999,752 as of February 28, 2019 and August 31, 2018, respectively.

  

Inventory

 

Inventories are stated at the lower of cost or net realizable value using the first-in first out (FIFO) method. The Company’s inventory consists of finished goods of $35,798,958 and $11,813,755 as of February 28, 2019 and August 31, 2018, respectively. The Company also makes prepayments against the future delivery of inventory classified as prepaid inventory. The Company’s prepaid inventory was $11,667,382 and $11,019,000 as of February 28, 2019 and August 31, 2018, respectively.

 

Net Loss Per Share

 

The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, "Earnings per Share" (“ASC 260-10”).  Basic net income (loss) per common share is computed by dividing net income or loss by the weighted-average number of shares of common stock outstanding during the period.  Diluted net income (loss) per share is computed using the weighted-average number of common shares and common shares equivalents outstanding during the period using the treasury stock method.

  

Revenue Recognition

 

The Company markets and sells packaging products, vaporizers, hydrocarbon gases, solvents, accessories and branding solutions to customers operating in the regulated medical and recreational cannabis industries.  

 

The Company expenses fulfillment costs as incurred because the amortization period would be less than one year in accordance with the ASC 606 practical expedient.

 

In accordance with ASC 606, the Company applies the following steps to recognize revenue for the sale of products that reflects the consideration to which the Company expects to be entitled to receive in exchange for the promised goods:

 

1.Identify the contract with a customer

 

A contract with a customer exists when the Company enters into an enforceable contract with a customer. The contract is based on either the acceptance of standard terms, or the execution of terms and conditions contracts. These contracts define each party's rights, payment terms and other contractual terms and conditions of the sale. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

 

2.Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. The Company has concluded the sale of finished goods and related shipping and handling are accounted for as a single performance obligation.

 

 8 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

3.Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. The Company estimates the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors.

 

Discounts provided to customers are accounted for as an element of the transaction price and as a reduction to revenue. Discounts were $307,583 and $63,551 for the three months ended February 28, 2019 and 2018, respectively, and $619,875 and $117,375 for the six months ended February 28, 2019 and 2018, respectively.

 

Revenue is presented net of taxes collected from customers and remitted to governmental authorities.

 

4.Allocate the transaction price to the performance obligations in the contract

 

The Company’s products are sold at their standalone selling price.

 

5.Recognize revenue when the Company satisfies a performance obligation

 

Revenue is recognized when control of the finished goods is transferred to the customer. Control of the finished goods is transferred at a point in time, upon delivery to the customer. The period of time between the satisfaction of the performance obligation and when payment is due from the customer is not significant.

 

In the following table, product sales are disaggregated as follows for the three and six months ended February 28, 2018 and 2019:

 

   Three Months Ended February 28,   Six Months Ended February 28, 
   2019   2018   2019   2018 
Manufacturing  $34,542,287   $10,229,154   $59,402,237   $18,962,012 
Services   634,045    132,246    1,093,736    246,480 
Total Net Revenue  $35,176,332   $10,361,400   $60,495,973   $19,208,492 

 

Advertising

 

The Company conducts advertising for the promotion of its products and services. In accordance with ASC subtopic 720-35-25 (“ASC 720”), advertising costs are charged to expense when incurred. Advertising costs were $285,266 and $75,984 for the three months ended February 28, 2019 and 2018, respectively. Advertising costs were $777,849 and $183,908 for the six months ended February 28, 2019 and 2018, respectively.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

 

 9 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASC 842, which will increase the total assets and the total liabilities that the Company will report relative to such amounts prior to adoption.

 

Other Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

NOTE 2 - RESTATEMENT

 

In connection with the preparation of the Company’s condensed consolidated interim financial statements as of and for the fiscal quarter ended February 28, 2019, the Company identified inadvertent errors in the accounting for certain shared-settled contingent consideration obligations relating to the Company’s acquisition of CMP Wellness in May 2017, Summit Innovations in May 2018, and Hybrid Creative in July 2018.  In connection with those acquisitions, contingent equity consideration relating to certain earn-out arrangements were accounted for as equity. Upon further evaluation, the Company determined that the share-settled contingent consideration should have been accounted for as liabilities with fair value changes recorded in the Company’s consolidated statements of operations.

 

Accordingly, on April 11, 2019, the Company filed Amendment No. 1 to its Annual Report on Form 10-K/A (the “Amended 10-K”), which restated the Company’s previously issued audited consolidated financial statements as of and for the fiscal years ended August 31, 2018 and 2017 and unaudited condensed consolidated interim financial statements as of and for the fiscal periods ended May 31, 2017, November 30, 2017, February 28, 2018, May 31, 2018 and November 30, 2018.

  

Tables summarizing the effects of the restatement adjustments to the Company’s condensed consolidated balance sheet as of August 31, 2018 and condensed consolidated statements of operations as of and for the three and six months ended February 28, 2018 were presented in Note 2, “Restatement” and Note 18, “Quarterly Information (Unaudited)” to the consolidated financial statements in the Amended 10-K.

 

NOTE 3 - ACQUISITION OF SUMMIT INNOVATIONS, LLC

 

On May 2, 2018, the Company completed its acquisition of Summit Innovations, LLC (“Summit”), a leading distributor of hydrocarbon gases to the legal cannabis industry. Pursuant to the terms of the merger agreement with Summit, Summit merged with and into KCH Energy, LLC, a wholly-owned subsidiary of the Company, with KCH Energy, LLC as the surviving entity.

 

The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations.  Total fixed purchase consideration at closing consisted of 1,280,000 shares of common stock and cash consideration of $905,231, net of cash received. Cash consideration of $187,849 and approximately 640,000 shares of common stock were held back by the Company for a period of 15 months for potential post-closing working capital and/or indemnification claims relating to, among other things, breaches of representations, warranties and covenants contained in the merger agreement. The former members of Summit may become entitled to receive earn-out consideration of up to an additional 1,280,000 shares of the Company’s common stock, in the aggregate, based on the net revenue performance of the Summit business during a one-year period following the closing. As of February 28, 2019, we concluded that it did not appear likely that Summit would meet the minimum earnout target threshold. Accordingly, we estimated the fair value of the related contingent consideration to be zero.

 

NOTE 4 - ACQUISITION OF THE HYBRID CREATIVE, LLC

 

On July 11, 2018, the Company completed its acquisition of Zack Darling Creative Associates (“ZDCA”), and its wholly-owned subsidiary The Hybrid Creative, LLC (“Hybrid”), which together operated as a specialist design agency. Pursuant to the terms of the purchase agreement with the members of ZDCA, the Company purchased the entire issued member interest of ZDCA. Following the acquisition, ZDCA operates as a wholly-owned subsidiary of the Company, with Hybrid continuing to operate as wholly-owned subsidiary of ZDCA.

 

The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations.  The consideration paid to the members of Hybrid at the closing included cash consideration consisting of an aggregate of $847,187 in cash, net of cash received, $82,106 in cash held back and share consideration consisting of an aggregate of 360,000 shares of the Company’s common stock. The former members of ZDCA may become entitled to receive cash contingent consideration of up to $485,000 and up to 212,858 common shares of equity consideration, based on the net revenue performance of Hybrid during the period September 1, 2018 through August 31, 2019. As of February 28, 2019, we concluded that it did not appear likely that ZDCA would meet the minimum earnout target threshold. Accordingly, we estimated the fair value of the related contingent consideration to be zero.

 

 10 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 - CONCENTRATIONS OF RISK

 

Supplier Concentrations

 

The Company purchases inventory from various suppliers and manufacturers. For the six months ended February 28, 2019, one vendor accounted for approximately 37% of total inventory purchases. For the six months ended February 28, 2018, two vendors, accounted for approximately 40% of total inventory purchases.

 

Customer Concentrations

 

During the six months ended February 28, 2019 and 2018, there was one customer which represented over 10% of the Company’s revenues. As of February 28, 2019, there was one customer who represented 21% of accounts receivable. As of February 28, 2018, there were two customers who represented 22% of accounts receivable.

 

NOTE 6 - RELATED PARTY TRANSACTIONS

 

The Company sub-leased its former corporate headquarters from 3 Kings Ventures, LLC, a related party owned by Dallas Imbimbo, Director, Nicholas Kovacevich, Chairman and Chief Executive Officer, and Jeffrey Meng, formerly a greater than 5% stockholder. During the six months ended February 28, 2019 and 2018, the Company made rent payments of $0 and $107,360, respectively, to these related parties.

 

NOTE 7 - SALE OF RUB

 

On September 21, 2018, Smoke Cartel, Inc. (“Smoke Cartel”) and the Company entered into an agreement to sell a web domain and inventory related to the Company’s Roll-uh-Bowl (“RUB”) product line. The Company received 1,410,145 shares of Smoke Cartel common stock as part of the consideration for this transaction. The fair value of its equity investment as of September 21, 2018 was based upon the closing stock price of Smoke Cartel.

 

The following sets forth the calculation of the gain on disposition of assets upon completion of the sale:

 

Fair value of Smoke Cartel as of September 21, 2018  $1,790,884 
RUB web domain and inventory sold   (536,470)
Gain on disposition of assets  $1,254,414 

 

The sale of the RUB assets did not qualify as a discontinued operation as the sale is not a strategic shift that has (or will have) a major effect on the Company’s operations and financial results. 

 

NOTE 8 - PROPERTY AND EQUIPMENT

 

The major classes of fixed assets consist of the following as of February 28, 2019 and August 31, 2018:

 

   February 28,   August 31, 
   2019   2018 
Machinery and equipment  $3,576,577   $2,937,784 
Vehicles   677,092    380,893 
Office Equipment   655,107    385,627 
Leasehold improvements   1,748,613    1,318,805 

Construction in Progress

   

1,684,929

    - 
    

8,342,318

    5,023,109 
Accumulated Depreciation   (1,455,597)   (888,019)
   $

6,886,721

   $4,135,090 

 

Of the $677,092 of vehicles as of February 28, 2019, $240,457 consists of capital leased assets.

 

Depreciation and amortization expense was $302,711 and $58,767, for the three months ended February 28, 2019 and 2018, respectively. Of the $302,711 of depreciation and amortization expense related to property and equipment for the three months ended February 28, 2019, $193,700 is included in selling, general and administrative expense and $109,011 is included in cost of goods sold in the condensed consolidated statements of operations. Of the $58,767 of depreciation and amortization expense for the three months ended February 28, 2018, $17,804 is included in selling, general and administrative expense and $40,963 is included in cost of goods sold in the condensed consolidated statements of operations.

 

Depreciation and amortization expense was $568,053 and $114,239, for the six months ended February 28, 2019 and 2018, respectively. Of the $568,053 of depreciation and amortization expense related to property and equipment for the six months ended February 28, 2019, $356,134 is included in selling, general and administrative expense and $211,919 is included in cost of goods sold in the condensed consolidated statements of operations. Of the $114,239 of depreciation and amortization expense for the six months ended February 28, 2018, $31,500 is included in selling, general and administrative expense and $82,739 is included in cost of goods sold in the condensed consolidated statements of operations.

 

 11 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 - INTANGIBLE ASSETS

 

Intangible assets consist of the following as of February 28, 2019 and August 31, 2018:

 

   Weighted
Average
  As of February 28, 2019   As of August 31, 2018 
   Estimated  Gross           Gross         
   Useful  Carrying   Accumulated   Net   Carrying   Accumulated   Net 
Description  Life  Value   Amortization   Amount   Value   Amortization   Amount 
Domain name  5 years  $-   $-   $-   $598,605   $(166,530)  $432,075 
Trade name  6 years   2,600,000    (794,444)   1,805,556    2,600,000    (577,778)   2,022,222 
Non-compete agreement  4 years   2,370,000    (598,667)   1,771,333    2,370,000    (336,882)   2,033,118 
      $4,970,000   $(1,393,111)  $3,576,889   $5,568,605   $(1,081,190)  $4,487,415 

 

Amortization expense was $109,011 and $40,963 for the three months ended and $509,582 and $376,072, for the six months ended February 28, 2019 and 2018, respectively.

 

The following table shows the remaining estimated amortization expense associated with finite lived intangible assets as of February 28, 2019:

 

   Intangible Assets 
2019  $473,667 
2020   947,333 
2021   947,333 
2022   919,667 
2023   288,889 
   $3,576,889 

 

NOTE 10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 

 

Accrued expenses and other current liabilities consist of the following as of February 28, 2019 and August 31, 2018:

 

   February 28,   August 31, 
   2019   2018 
Customer deposits  $1,563,938   $768,908 
Accrued compensation   2,162,620    992,747 
Sales tax payable   923,686    432,491 
Other accrued expenses   1,461,495    814,239 
   $6,111,739   $3,008,385 

 

NOTE 11 - NOTES PAYABLE

 

Automobile Contracts Payable

 

The Company has entered into purchase contracts for its vehicles.  The loans and automobile contracts are secured by the vehicles and bear interest at an average interest rate of approximately 4% per annum. Future principal payments on these automobile contracts payable is summarized in the table below:

 

 12 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

   Principal Due 
2019  $60,081 
2020   116,297 
2021   110,728 
2022   112,767 
2023   27,104 
   $426,977 

 

NOTE 12 - LOAN AGREEMENT

 

On November 16, 2017, the Company and its wholly-owned subsidiary KIM International Corporation (“KIM”) as borrowers, and all of the Company’s other subsidiaries, as credit parties, entered into a Loan and Security Agreement (the “Loan Agreement”) with Gerber Finance Inc., as lender (“Gerber”), effective as of November 6, 2017. The Loan Agreement originally provided a secured revolving credit facility (the “Revolving Line”) in an aggregate principal amount of up to $2.0 million at any time outstanding. Under the original terms of the Loan Agreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time outstanding cannot exceed up to 85% of the Company’s eligible receivables minus reserves. Under the terms of the Loan Agreement, the Company may also request letters of credit from Gerber. The proceeds of the loans under the Loan Agreement will be used for working capital and general corporate purposes. The Revolving Line has a maturity date of November 6, 2019. Borrowings under the Revolving Line accrues interest at a rate based on the prime rate as customarily defined, plus a margin of 3.0%. On March 8, 2018, the Company and KIM entered into a first amendment to the Loan Agreement with Gerber. Pursuant to the first amendment, the aggregate principal amount of the Revolving Line at any time outstanding was increased to $4.0 million and the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time outstanding could not exceed the lesser of (i) 40% of the value of certain inventory and (ii) 50% of certain accounts receivable.

 

On November 9, 2018, the Company and KIM entered into a second amendment to the Loan Agreement with Gerber. Pursuant to the second amendment, the aggregate principal amount of the Revolving Line at any time outstanding was increased to $8.0 million. Additionally, subject to certain exceptions, the face amount of any outstanding letters of credit, at any time outstanding cannot exceed the lesser of (i) 25% of the value of certain inventory (increasing to 40% upon receipt of certain landlord waivers) and (ii) 50% of certain accounts receivable. In April 2019, the Company obtained a waiver of non-compliance with certain covenant violations associated with the restatements noted in Note 2.

  

NOTE 13 - WARRANT LIABILITY

 

In June of 2018, the Company issued warrants to purchase 3,750,000 shares of its common stock to investors in a registered direct offering. The warrants have a term of five years from the date of issuance. The exercise price of the warrants is protected in the event the Company issues securities with a variable conversion or exercise price during the three-year period following the warrants’ issuance. Pursuant to ASC 815, the fair value of the warrants of $15,350,000 was recorded as a derivative liability on the issuance dates.  The estimated fair values of the warrants were computed at issuance using an option pricing model.

 

The estimated fair value of the outstanding warrant liabilities was $13,375,000 and $14,430,000 as of February 28, 2019 and August 31, 2018, respectively.

 

Increases or decreases in the fair value of the derivative liability are included as a component of other income (expense) in the accompanying condensed consolidated statements of operations for the respective period. Accordingly, the changes to the derivative liability for warrants resulted in a decrease of $1,271,000 and $1,055,000 in warrant liability and a corresponding gain for the three and six months ended February 28, 2019.

 

 13 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The estimated fair value of the warrants was computed as of February 28, 2019 and August 31, 2018 using the following assumptions:

 

   February 28,  August 31,
   2019  2018
Stock price volatility  71% 81%
Risk-free interest rates  2.51%  2.74%
Annual dividend yield  -%  -%
Term (years)  4.3  4.0

 

In addition, as applicable management assessed the probabilities of future financing assumptions in the valuation models.

 

NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value measurements are performed in accordance with the guidance provided by ASC Topic 820, “Fair Value Measurements and Disclosures.” ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.

 

ASC Topic 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities recorded at fair value in the financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

 

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 - Unobservable inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, capital lease obligations and deferred revenue approximate their fair values based on their short-term nature. The carrying amount of the Company’s long-term notes payable approximates its fair value based on interest rates available to the Company for similar debt instruments and similar remaining maturities.

 

The estimated fair value of the contingent consideration related to the Company's business combinations is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

 

The Company accounts for its investment in Smoke Cartel at fair value. On September 21, 2018, Smoke Cartel and the Company entered into an agreement to sell the RUB web domain and inventory related to this product line and in exchange, received 1,410,145 shares of Smoke Cartel common stock (see Note 7 above.) The fair value of its investment as of September 21, 2018 and February 28, 2019 was based upon the closing stock price of Smoke Cartel. The investment was classified as a Level 2 financial instrument.

 

In connection with the Company’s registered direct offering in June 2018, the Company issued warrants to purchase shares of its common stock and recorded embedded conversion features which are accounted for as derivative liabilities (see Note 13 above.) The estimated fair value of the derivatives is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.

 

 14 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial instruments, which includes the Level 2 assets and the Level 3 liabilities:

 

   Fair Value at February 28, 2019 
   Total   Level 1   Level 2   Level 3 
Assets:                    
Equity investment  $1,198,768   $-   $1,198,768   $- 
Liabilities:                    
Warrant liability   13,375,000    -    -    13,375,000 
Total liabilities  $14,573,768   $-   $1,198,768   $13,375,000 

 

   Fair Value at August 31, 2018 
   Total   Level 1   Level 2   Level 3 
Liabilities:                    
Contingent consideration payable  $5,488,410   $-   $-   $5,488,410 
Warrant liability   14,430,000    -    -    14,430,000 
Total liabilities  $19,918,410   $-   $-   $19,918,410 

 

The following table reflects the activity for the Company’s investment in Smoke Cartel measured at fair value using Level 2 inputs:

 

   Investment in Smoke Cartel 
Balance at August 31, 2018  $- 
Acquisition of equity investment   1,790,884 
Adjustments to estimated fair value   (592,116)
Balance at February 28, 2019  $1,198,768 

 

The following table reflects the activity for the Company’s warrant derivative liability measured at fair value using Level 3 inputs:

 

   Warrant Liability 
Balance at August 31, 2018  $14,430,000 
Adjustments to estimated fair value   (1,055,000)
Balance at February 28, 2019  $13,375,000 

 

The following table reflects the activity for the Company’s contingent consideration measured at fair value using Level 3 inputs: 

 

    Total  
As of August 31, 2018   $ 5,488,409  
 Change in Fair Value     394,265  
As of November 30, 2018   $ 5,882,674  
 Change in Fair Value     (5,602,336 )
 Cash Payment     (140,106 )
Settled in shares- Hybrid     (140,232 )
As of February 28, 2019   $ -  

 

    Total  
As of August 31, 2017   $ 10,827,824  
 Change in Fair Value     4,456,502  
 Cash Payment     (85,000 )
As of November 30, 2017   $ 15,199,326  
 Change in Fair Value     6,684,754  
 Cash Payment     (85,000 )
As of February 28, 2018   $ 21,799,080  

 

The fair value of contingent consideration is evaluated each reporting period using projected financial information, discount rates, and key inputs. Projected contingent payment amounts are discounted back to the current period using a discount rate. Financial information is based on the Company’s most recent internal operational budgets and forecasts. Changes in projected financial information may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement.  

 

 15 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 15 - STOCKHOLDERS' EQUITY

 

Preferred Stock

 

The authorized preferred stock is 10,000,000 shares with a par value of $0.001. As of February 28, 2019, and August 31, 2018, the Company has no shares of preferred stock issued or outstanding.

 

Common Stock

 

The authorized common stock is 265,000,000 shares with a par value of $0.001. As of February 28, 2019, and August 31, 2018, 88,011,867 and 78,273,124 shares were issued and outstanding, respectively.

 

On January 15, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Purchasers”) pursuant to which the Company sold an aggregate of 6,476,190 shares of its common stock, par value $0.001 per share (the “Common Stock”) and warrants to purchase 3,238,095 shares of Common Stock (“Warrants”) (collectively, the “Securities”), in a registered direct offering (the “Offering”). The Securities were offered by the Company pursuant to its shelf registration statement on Form S-3 (File No. 333-221910) initially filed with the Securities and Exchange Commission (the “Commission”) on December 5, 2017, as amended on January 25, 2018 and February 14, 2018, and declared effective on February 28, 2018, and an additional registration statement on Form S-3 filed pursuant to Rule 462(b) under the Securities Act, which became effective upon filing on January 16, 2019. Subject to certain ownership limitations, the Warrants are immediately exercisable at an exercise price equal to $5.75 per share of Common Stock. The Warrants are exercisable for five years from the date of issuance.

  

The combined per share purchase price for a share of Common Stock a half of a Warrant was $5.25. The Offering closed on January 18, 2019 with aggregated gross proceeds of approximately $34.0 million. The aggregate net proceeds from the Offering, after deducting the placement agent fees and other estimated offering expenses, approximated $31.2 million.

 

During the six months ended February 28, 2019, the Company sold 9,076,664 shares of its common stock to investors in exchange for aggregate net proceeds of approximately $41.6 million.

 

During the six months ended February 28, 2018, the Company sold 4,626,296 shares of its common stock to investors in exchange for aggregate net proceeds of approximately $11.6 million.

 

Share-based Compensation

 

The Company recorded stock compensation expense of $6,534,044 and $1,408,671 for the six months ended February 28, 2019 and 2018, respectively, in connection with the issuance of shares of common stock and options to purchase common stock.  

 

During the six months ended February 28, 2018, the Company entered into a separation agreement dated as of January 12, 2018 with one employee. The Company issued 100,000 restricted common shares as part of the separation agreement to this employee, which valued at $667,000 and was recorded as share-based compensation as of February 28, 2018.

 

Stock Options

 

The Company’s 2016 Stock Incentive Plan (the “Plan”) was adopted on February 9, 2016. The Plan, as amended, permits the grant of share options and shares to its employees and directors for up to 18,000,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards generally vest based on three years of continuous service and have 10-year contractual terms.

 

 16 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Company estimates the fair value of share-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of our stock price over the expected option term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock options granted during the six months ended February 28, 2019 and 2018:

 

   February 28,   February 28, 
   2019   2018 
Expected term in years   3    1-4 
Expected volatility   72% - 87%    60%
Risk-free interest rate   2.35% - 3.01%    1.14% - 2.37% 
Expected dividend yield   -%   -%

 

The expected life is computed using the simplified method, which is the average of the vesting term and the contractual term. The expected volatility is based on management's analysis of historical volatility for comparable companies. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the time of the grant. While the Company believes these estimates are reasonable, the compensation expense recorded would increase if the expected life was increased, a higher expected volatility was used, or if the expected dividend yield increased.

 

During the six months ended February 28, 2019 and 2018, the Company issued 5,019,000 and 1,517,500 stock options, respectively, pursuant to the Company’s 2016 Stock Incentive Plan. A summary of the Company’s stock option activity during the six month period ended February 28, 2019 is presented below:

 

           Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Stock   Exercise   Contractual   Intrinsic 
   Options   Price   Term (in years)   Value 
                 
Balance Outstanding, August 31, 2018   9,367,693   $3.85    9.1   $14,463,235 
Granted   5,019,000   $5.70    -    - 
Exercised   (370,519)  $0.85    -    - 
Forfeited   (2,012,756)  $4.03    -    - 
Balance Outstanding, February 28, 2019   12,003,418   $4.70    9.2   $15,878,082 
Exercisable, February 28, 2019   2,934,149   $3.18    8.5   $8,336,782 

 

The weighted-average grant-date fair value of options granted during the six months ended February 28, 2019 and 2018, was $3.07 and $3.50, respectively.

 

During the six months ended February 28, 2019 and 2018, the intrinsic value of stock options excercised was $2,230,360 and $1,226,510, respectively.

 

As of February 28, 2019, there was $21,822,071 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.3 years.

 

 17 

 

 

KUSHCO HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

NOTE 16 - COMMITMENTS AND CONTINGENCIES

   

Other Commitments

 

In the ordinary course of business, the Company may enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

 

Litigation

 

The Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Concerning Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included in this report.  This report contains “forward-looking statements.” The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.

 

Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements.  The forward-looking events discussed in this report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties, and assumptions about us.  For these statements, we claim the protection of the “bespeaks caution” doctrine.  All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.

 

Overview

 

We provide customizable packaging products, vaporizers, hydrocarbon gases, solvents, accessories and branding solutions primarily for the cannabis industry. Representative examples of our products include pop-top bottles, vaporizer cartridges and accessories, bags, tubes, and other containers. We sell our solutions predominantly to businesses operating in jurisdictions that have some form of cannabis legalization. These businesses include medical and recreational dispensaries, large and small-scale processors, and packaging re-distributors.

 

We believe that we have created one of the largest product libraries in the cannabis industry, allowing us to be a comprehensive solutions provider to our customers. Our extensive knowledge of the regulatory environment applicable to the cannabis industry allows us to quickly adapt to our customers' packaging requirements. We maintain the flexibility to enter the markets of decriminalized regions by establishing re-distributor partnerships or opening new facilities. We also have the flexibility to introduce new products and services to our vast customer network. We have no supplier “take or pay” arrangements. In addition to these factors, we believe that we offer competitive pricing, prompt deliveries, and excellent customer service. We expect continued growth as we take measures to expand into new markets, invest in our systems and personnel, forge strategic alliances and invest in our own molds and intellectual property.

 

Acquisitions

 

On May 1, 2017 (“Merger Date”), we and our wholly-owned subsidiary, KBCMP, Inc. (“Merger Sub”), entered into an Agreement of Merger (the “Merger Agreement”) with Lancer West Enterprises, Inc. and Walnut Ventures, pursuant to which each of Lancer West Enterprises, Inc. and Walnut Ventures were merged with and into Merger Sub, with Merger Sub as the surviving corporation, resulting in our indirect acquisition of CMP Wellness, LLC (“CMP”). Prior to the merger, CMP was owned 100% by Lancer West Enterprises, Inc. and Walnut Ventures. Membership interest in CMP was the sole asset of Lancer West Enterprises, Inc. and Walnut Ventures. As a result, CMP became our wholly-owned subsidiary. CMP is a distributor of vaporizers, cartridges and accessories.

 

The purchase price for CMP consisted of an aggregate of $1,500,000 in cash, unsecured promissory notes in the aggregate principal amount of approximately $770,820 having a one-year maturity, and an aggregate of 7,800,000 restricted shares of the Company’s common stock.  The purchase price is subject to customary post-closing adjustments with respect to confirmation of the levels of working capital and cash held by CMP as of the closing.  During the one-year period following the closing, the former owners of CMP may become entitled to receive up to an additional approximately $1,905,000 in cash, in the aggregate, and approximately 4,740,960 shares of our common stock, in the aggregate, based on the future performance of CMP.

 

On May 2, 2018, we completed our acquisition of Summit Innovations, LLC (“Summit”), a leading distributor of hydrocarbon gases to the legal cannabis industry. Pursuant to the terms of the merger agreement, Summit merged with and into our wholly-owned subsidiary, KCH Energy, LLC (“KCH”), with KCH as the surviving entity. The consideration paid to the members of Summit at the closing included cash consideration, consisting of an aggregate of $905,231 in cash, net of cash received, and an aggregate of 1,280,000 shares of our common stock. Cash consideration of $187,849 and approximately 640,000 shares of common stock from the share consideration were held back by us for a period of 15 months for potential post-closing working capital and/or indemnification claims relating to, among other things, breaches of representations, warranties and covenants contained in the merger agreement. The former members of Summit may become entitled to receive earn-out consideration of up to an additional 1,280,000 shares of common stock, in the aggregate, based on the net revenue performance of the Summit business during a one-year period following the closing. As of February 28, 2019, we concluded that it did not appear likely that Summit would meet the minimum earnout target threshold. Accordingly, we estimated the fair value of the related contingent consideration to be zero.

 

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On July 11, 2018, the Company completed its acquisition of Zack Darling Creative Associates (“ZDCA”), and its wholly-owned subsidiary The Hybrid Creative, LLC (“Hybrid”), which together operated as a specialist design agency. Pursuant to the terms of the purchase agreement with the members of ZDCA, the Company purchased the entire issued member interest of ZDCA. Following the acquisition, ZDCA operates as a wholly-owned subsidiary of the Company, with Hybrid continuing to operate as wholly-owned subsidiary of ZDCA.

 

The fixed consideration paid to the members of Hybrid at the closing included cash consideration consisting of an aggregate of $847,187 in cash, net of cash received, $82,106 in cash held back and share consideration consisting of an aggregate of 360,000 shares of the Company’s common stock. The former members of ZDCA may become entitled to receive cash contingent consideration of up to $485,000 and up to 212,858 common shares of equity consideration, based on the net revenue performance of Hybrid during the period September 1, 2018 through August 31, 2019. As of February 28, 2019, we concluded that it did not appear likely that ZDCA would meet the minimum earnout target threshold. Accordingly, we estimated the fair value of the related contingent consideration to be zero.

 

Line of Credit

 

On November 16, 2017, we and KIM International Corporation (“KIM”), our wholly-owned subsidiary, as borrowers, and all of our other subsidiaries, as credit parties, entered into a Loan and Security Agreement (the “Loan Agreement”) with Gerber Finance Inc., as lender (“Gerber”), effective as of November 6, 2017. The Loan Agreement originally provided a secured revolving credit facility (the “Revolving Line”) in an aggregate principal amount of up to $2.0 million at any time outstanding. Under the terms of the original Loan Agreement, the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time outstanding cannot exceed up to 85% of our eligible receivables minus reserves. Under the terms of the Loan Agreement, we may also request letters of credit from Gerber. The proceeds of the loans under the Loan Agreement will be used for working capital and general corporate purposes. The Revolving Line has a maturity date of November 6, 2019. Borrowings under the Revolving Line accrues interest at a rate based on the prime rate as customarily defined, plus a margin of 3.0%.  On March 8, 2018, we and KIM entered into a first amendment to the Loan Agreement with Gerber. Pursuant to the first amendment, the aggregate principal amount of the Revolving Line at any time outstanding was increased to $4.0 million and the principal amount of loans, plus the face amount of any outstanding letters of credit, at any time outstanding could not exceed the lesser of (i) 40% of the value of certain inventory and (ii) 50% of certain accounts receivable.

 

On November 9, 2018, we and KIM entered into a second amendment to the Loan Agreement with Gerber. Pursuant to the second amendment, the aggregate principal amount of the revolving credit facility at any time outstanding was increased to $8.0 million. Additionally, subject to certain exceptions, the face amount of any outstanding letters of credit, at any time outstanding cannot exceed the lesser of (i) 25% of the value of certain inventory (increasing to 40% upon receipt of certain landlord waivers) and (ii) 50% of certain accounts receivable. In April 2019, the Company obtained a waiver of non-compliance with certain covenant violations associated with the restatements noted in Note 2.

 

Results of Operations - Comparison for the three-month periods ended February 28, 2019 and 2018  

 

Revenue

 

For the three months ended February 28, 2019, our revenue increased to $35,176,332, compared to $10,361,400 for the three months ended February 28, 2018, which represents an increase of $24,814,936 or 239%. The increase was primarily attributable to significant organic growth across all markets, including California, following the adoption of adult use cannabis sales on January 1, 2018. In addition, vaping product related sales remained strong as this sector of the cannabis industry continues to perform well. In addition, we achieved strong growth for custom branded products as customers seek differentiated brand building solutions in line with regulatory requirements. Non-organic revenue related to acquisitions represented 7% of total revenue during the three months ended February 28, 2019.

 

Gross Profit

 

Gross profit for the three months ended February 28, 2019 was $4,522,093, or 13% of revenue, compared to $3,189,318, or 31% of revenue, for the three months ended February 28, 2018. The decrease in gross profit percentage is primarily attributable to a shift in sales mix, increased freight-in charges, and product quality costs, along with the recent China trade tariffs that have been absorbed into costs of goods sold. Management views these tariffs as short-term and strategically decided not to pass on these tariff cost to drive market share.

 

Operating Expenses

 

Our operating expenses for the three months ended February 28, 2019 increased to $13,163,331, or 37% of total revenue, from $10,756,320, or 104% of total revenue, for the three months ended February 28, 2018. The increase in selling, general and administrative expenses is primarily due to the expansion of the business, primarily attributed to increased compensation cost, insurance, professional and facility expenses. For the three months ended February 28, 2019 and 2018, operating expenses included a gain of $5,602,336 and a loss of $6,684,754, respectively, related to the change in the fair value of contingent consideration. We will continue to make significant investments in infrastructure and supply chain to scale effectively.

 

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Loss from Operations

 

Loss from operations for the three months ended February 28, 2019 was $8,641,238 compared to $7,567,002 for the three months ended February 28, 2018. The increase is primarily attributable to investment in infrastructure and personnel to scale the expanding business, offset partially by the gain on contingent consideration.

 

Other Expense

 

Other expense, during the three months ended February 28, 2019 was net expense of $273,660, as compared to net expense of $28,581 for the three months ended February 28, 2018. The increase is attributed to additional interest expense related to the increased credit line capacity and loss from the change in fair value of our equity investment, partially offset by the warrant liability gain.

 

Income Tax Expense

 

The provision for income taxes was $0 and $11,763, for the three-month periods ended February 28, 2019 and 2018, respectively.

 

Net Loss

 

Our net result for the three months ended February 28, 2019 was a net loss of $8,914,898, or $0.10 per share, compared to net loss of $7,607,346 or $0.12 per share, for the three months ended February 28, 2018.

 

Results of Operations - Comparison for the six-month periods ended February 28, 2019 and 2018  

 

Revenue

 

For the six months ended February 28, 2019, our revenue increased to $60,495,973, compared to $19,208,492 for the six months ended February 28, 2018, which represents an increase of $41,287,481 or 215%. The increase was primarily attributable to significant organic growth across all markets, including California, following the adoption of adult use cannabis sales on January 1, 2018. In addition, vaping product related sales remained strong as this sector of the cannabis industry continues to perform well. In addition, we achieved strong growth for custom branded products as customers seek differentiated brand building solutions in line with regulatory requirements. Non-organic revenue related to acquisitions represented 7% of total revenue during the six months ended February 28, 2019.

 

Gross Profit

 

Gross profit for the six months ended February 28, 2019 was $7,751,231, or 13% of revenue, compared to $6,075,969, or 32% of revenue, for the six months ended February 28, 2018. The decrease in gross profit percentage is primarily attributable to a shift in sales mix, increased freight-in charges, and product quality costs, along with the recent China trade tariffs that have been absorbed into costs of goods sold. Management views these tariffs as short-term and strategically decided not to pass on these tariff cost to drive market share.

 

Operating Expenses

 

Our operating expenses for the six months ended February 28, 2019 increased to $24,850,580, or 41% of total revenue, from $17,948,030, or 93% of total revenue, for the six months ended February 28, 2018. The increase in selling, general and administrative expenses is due to the expansion of the business, primarily attributed to increased compensation cost, insurance, professional and facility expenses. For the six months ended February 28, 2019 and 2018, operating expenses included a gain of $5,208,071 and a loss of $11,141,256, respectively, related to the change in the fair value of contingent consideration. We will continue to make significant investments in infrastructure and supply chain to scale effectively.

 

Loss from Operations

 

Loss from operations for the six months ended February 28, 2019 was $17,099,349 compared to $11,872,061 for the six months ended February 28, 2018. The increase is primarily attributable to investment in infrastructure and personnel to scale the expanding business, offset partially by the gain on contingent consideration.

 

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Other Expense Net

 

Other expense, during the six months ended February 28, 2019 was net expense of $394,623, as compared to net expense of $30,994 for the six months ended February 28, 2018. The increase is attributed to additional interest expense related to the increased credit line capacity and loss from the change in fair value of our equity investment, partially offset by the warrant liability gain.

 

Income Tax Expense

 

The provision for income taxes was $0 and $66,178, for the six-month periods ended February 28, 2019 and 2018, respectively.

 

Net Loss

 

Our net result for the six months ended February 28, 2019 was a net loss of $17,493,972 or $0.22 per share, compared to net loss of $11,969,233 or $0.20 per share, for the six months ended February 28, 2018.

 

Liquidity and Capital Resources

 

As of February 28, 2019, we had cash of $17,941,908 and a working capital surplus of $60,171,051 compared to cash of $13,466,807 and a working capital surplus of $35,206,363 as of August 31, 2018. Working capital increased by $24,964,688 or 71%. The increase in working capital is primarily due to an increase in net revenue for the six-month period ended February 28, 2019, as compared to the same period a year ago, and increased purchases of inventory to meet increased customer demand.

 

Cash Flows from Operating Activities

 

For the six-month period ended February 28, 2019, net cash used in operating activities was $34,753,957 compared to $5,432,819 in net cash used in operating activities for the six-month period ended February 28, 2018. The change is primarily attributed to an increase in inventory, including related prepayments, and accounts receivable during the six-month period ended February 28, 2019.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities increased from $268,956 for the six-month period ended February 28, 2018 to $2,936,178 for the six-month period ended February 28, 2019, which can be primarily attributed to higher levels of equipment purchases during the current period.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities increased from $11,844,713 for the six-month period ended February 28, 2018 to $42,165,236 for the six-month period ended February 28, 2019. The increase is primarily attributed to the sale of common stock to investors. 

 

We manage our liquidity and financial position in the context of our overall business strategy. We continually forecast and manage our cash, working capital balances, and capital structure to meet the short-term and long-term obligations of our business while seeking to maintain liquidity and financial flexibility. We have historically funded our operations primarily through the cash flows generated from our operations, borrowings available under our credit facility and from proceeds from the issuance of equity.

 

We believe that cash generated from our operations, along with the funds available through debt or equity financings, primarily for the purposes of expanding current operations, making capital acquisitions, or consummating strategic transactions are adequate to fund our financial obligations for at least the next twelve months.

 

Off-Balance Sheet Arrangements

 

We do not currently have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of the condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable reserves, inventory and related reserves, valuations and purchase price allocations related to business combinations, expected cash flows used to evaluate the recoverability of long-lived assets, estimated fair values of long-lived assets used to record impairment charges related to intangible assets and goodwill, amortization periods, accrued expenses, stock-based compensation, contingent liabilities, and recoverability of our net deferred tax assets and any related valuation allowance. We base our estimates on historical experience and on various other 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. Actual results may differ from these estimates under different assumptions or conditions.

 

 22 

 

 

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates, other than the adoption of ASC 606, Revenue Recognition, as described in Note 2 to our condensed consolidated financial statement.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents. We consider investments that, when purchased, have a remaining maturity of ninety (90) days or less to be cash equivalents. We do not believe that a notional or hypothetical 10% change in interest rate percentages would have a material impact on the fair value of our investment portfolio or our interest income.

 

Item 4. Controls and Procedures

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the fiscal quarter covered by this report. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective as of February 28, 2019.

 

The material weaknesses that existed on November 30, 2018 are described in Part I, Item 4 - Controls and Procedures in Amendment No 1 to our Quarterly Report on Form 10-K for the interim period ended November 30, 2018, filed with the SEC on April 11, 2019. The material weaknesses in our internal controls have been primarily due to the lack of proper segregation of duties, the lack of sufficient levels of proper supervision and review and a material weakness in the accounting, presentation, and disclosure of share-settled contingent consideration.

 

We have taken steps to enhance our internal controls over financial reporting and plan to take additional steps to remediate the material weaknesses. Specifically:

 

·We appointed additional independent members with public company board experience to our board of directors, such that our board of directors is now composed of a majority of independent directors;

  

·On March 9, 2018, our board of directors formed an Audit Committee composed entirely of independent directors that, among other things, assists the board of directors in its oversight of the integrity of our financial statements and our financing reporting processes and systems of internal control;

 

·The Company announced the hiring of our new Chief Financial Officer, Christopher Tedford, with significant sales and distribution experience who will focus on the development of the finance and accounting function;

 

·We added staff to our finance team, and outsourced to third party the assessment of certain complex transactions under US GAAP;

 

·In January 2018, we hired a controller with public company experience; and

 

·We have adopted a Code of Business Conduct and Ethics and a whistleblower policy.

  

·In February 2019, we engaged a national accounting advisory firm to assist with the design and implementation of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our management will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements.

 

During the period covered by this Quarterly Report on Form 10-Q, we have not been able to remediate the material weaknesses described above. To remediate such weaknesses, we plan to appoint additional qualified personnel to address inadequate segregation of duties and implement modifications to our financial controls to address such inadequacies.

 

The remediation efforts set out herein will continue to be implemented in our 2019 fiscal year. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting identified in connection with our evaluation we conducted of the effectiveness of our internal control over financial reporting as of February 28, 2019, that occurred during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

To the best of the Company’s knowledge and belief, no material legal proceedings are currently pending or threatened.

 

Item 1A. Risk Factors.

 

Item 1A of Part I of Amendment No.1 to our Annual Report on Form 10-K/A for the year ended August 31, 2018, filed with the SEC on April 11, 2019, contains risk factors identified by the Company. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. To our knowledge and except to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes in the risk factors described in “Item 1A. Risk Factors” in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2018.

 

Item 2. Unregistered Sales of Equity Securities.

 

During the six months ended February 28, 2019, we granted 129,560 unregistered shares of our common stock for services pursuant to contracts, with an aggregate fair market value of $842,900.

 

During the six months ended February 28, 2019, we sold 9,076,664 shares of our common stock to investors in exchange for aggregate gross proceeds of approximately $41.6 million.

 

These securities were issued without registration under the Securities Act in reliance on registration exemptions contained in Section 4(a)(2) of the Securities Act and Regulation D as transactions by an issuer not involving any public offering.  The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sales of these securities were made without general solicitation or advertising.

 

Item 3. Default Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits

 

The following exhibits are filed as part of this Current Report on Form 10-Q. Where such filing is made by incorporation by reference to a previously filed document, such document is identified.

  

 

Exhibit

Number

  Description of Exhibit  
4.1(1)   Form of Warrant dated January 18, 2019.
10.1(1)   Form of Securities Purchase Agreement dated January 18, 2019.
10.2(1)   Placement Agency Agreement, dated January 15, 2019, by and between KushCo Holdings, Inc. and Alliance Global Partners.
10.3#(2)   Severance Agreement, dated February 22, 2019, by and between KushCo Holdings, Inc. and Jim McCormick.
10.4#(3)   Offer Letter, dated February 27, 2019, by and between KushCo Holdings, Inc. and Rodrigo de Oliveira.
10.5#(3)   Offer Letter, dated February 27, 2019, by and between KushCo Holdings, Inc. and Jason Vegotsky.
10.6#(3)   Amendment to Offer Letter, dated February 27, 2019, by and between KushCo Holdings, Inc. and Christopher Tedford.
10.7#*   KushCo Holdings, Inc. 2016 Stock Incentive Plan, as amended.
31.1*   Certification of principal executive officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of principal financial and accounting officer pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of principal financial and accounting officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 Labels Linkbase Document.
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

(1) Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed January 16, 2019) and incorporated by reference thereto.
(2) Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed February 28, 2019) and incorporated by reference thereto.
(3) Previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed March 5, 2019) and incorporated by reference thereto.

 

*Filed herewith.

 

**This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

#Management contract or compensatory plan or arrangement.

 

 

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SIGNATURES

 

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

 

  KUSHCO HOLDINGS, INC.
     
Date: April 15, 2019 By:   /s/ Nicholas Kovacevich
    Nicholas Kovacevich
    Chairman and Chief Executive Officer
    (Principal executive officer)
     
Date: April 15, 2019 By: /s/ Christopher Tedford
    Christopher Tedford
    Chief Financial Officer
    (Principal financial and accounting officer)

  

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