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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2020
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
kshb-20200531_g1.jpg
KUSHCO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada46-5268202
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6261 Katella Avenue, Suite 250, Cypress, CA 90630
(Address of principal executive offices, including zip code)
(714) 462-4603
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
KSHB
OTCQX
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by 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 ☒ 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
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes No ☒
The number of outstanding shares of the Registrant’s common stock as of July 7, 2020 was 125,576,568 shares.


KUSHCO HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2020
TABLE OF CONTENTS
Page


Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
KUSHCO HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands)
(Unaudited)
May 31,
2020
August 31,
2019
ASSETS
Current assets:
Cash
$11,088  $3,944  
Accounts receivable, net
11,162  25,972  
Inventory, net24,048  43,768  
Prepaid expenses and other current assets
15,655  12,209  
Total current assets
61,953  85,893  
Goodwill
52,267  52,267  
Intangible assets, net
2,393  3,103  
Property and equipment, net
9,296  11,054  
Other assets
9,759  6,917  
Total Assets
$135,668  $159,234  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, net$5,497  $10,907  
Customer deposits4,217  2,992  
Accrued expenses and other current liabilities
10,424  6,468  
Line of credit
  12,261  
Total current liabilities
20,138  32,628  
Long-term liabilities:
Notes payable
24,084  18,975  
Warrant liability
2,009  5,444  
Other non-current liabilities
4,562  833  
Total long-term liabilities
30,655  25,252  
Total liabilities
50,793  57,880  
Commitments and contingencies (Note 12)


Stockholders' equity
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding
    
Common stock, $0.001 par value, 265,000 shares authorized, 119,933 and 90,041 shares issued and outstanding, respectively
120  90  
Additional paid-in capital
218,117  164,258  
Accumulated deficit
(133,362) (62,994) 
Total stockholders' equity
84,875  101,354  
Total liabilities and stockholders' equity
$135,668  $159,234  
The accompanying notes are an integral part of the condensed consolidated financial statements.


Table of Contents
KUSHCO HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
May 31,
2020
May 31,
2019
May 31,
2020
May 31,
2019
Net revenue
$22,264  $41,486  $87,369  $101,982  
Cost of goods sold
19,892  34,090  86,634  86,834  
Gross profit2,372  7,396  735  15,148  
Operating expenses:
Selling, general and administrative
12,719  20,719  60,977  52,032  
Gain on disposition of assets
      (1,254) 
Change in fair value of contingent consideration
  2,961    (2,247) 
Restructuring costs
952    8,253    
Total operating expenses
13,671  23,680  69,230  48,531  
Loss from operations
(11,299) (16,284) (68,495) (33,383) 
Other income (expense):
Change in fair value of warrant liability
(1,160) 6,254  3,435  7,309  
Change in fair value of equity investment
(9) (71) (1,100) (663) 
Interest expense
(1,487) (474) (4,594) (1,452) 
Other income (expense), net
468  (10) 386  110  
Total other income (expense)
(2,188) 5,699  (1,873) 5,304  
Loss before income taxes
(13,487) (10,585) (70,368) (28,079) 
Income tax expense
  (13)   (13) 
Net loss
$(13,487) $(10,598) $(70,368) $(28,092) 
Net loss per share:
Basic net loss per common share
$(0.11) $(0.12) $(0.64) $(0.34) 
Diluted net loss per common share
$(0.11) $(0.19) $(0.64) $(0.42) 
Basic weighted average number of common shares outstanding
119,574  88,286  110,440  83,338  
Diluted weighted average number of common shares outstanding
119,574  88,377  110,440  83,535  
The accompanying notes are an integral part of the condensed consolidated financial statements.


Table of Contents
KUSHCO HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(Amounts in thousands)
(Unaudited)
Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Shares Issued
Amount
Balances at August 31, 201990,041  $90  $164,258  $(62,994) $101,354  
Stock-based compensation
99  —  3,189    3,189  
Stock sold to investors, net of offering costs
17,198  17  27,362  —  27,379  
Stock issued for acquisitions
23  —  —  —  —  
Net loss
—  —  —  (12,506) (12,506) 
Balances at November 30, 2019
107,361  $107  $194,809  $(75,500) $119,416  
Stock-based compensation89  —  3,141  —  3,141  
Issuance of restricted stocks15  —  —  —  —  
Stock sold to investors10,000  10  14,706  —  14,716  
Stock issued for equity investment1,653  2  2,526  —  2,528  
Net loss—      (44,375) (44,375) 
Balances at February 29, 2020119,118  $119  $215,182  $(119,875) $95,426  
Stock-based compensation353  —  2,936  —  2,936  
Issuance of restricted stocks462  1  (1) —  —  
Net loss—  —  —  (13,487) (13,487) 
Balances at May 31, 2020119,933  $120  $218,117  $(133,362) $84,875  

Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Shares Issued
Amount
Balances at August 31, 201878,273  $78  $104,918  $(23,358) $81,638  
Stock option exercises
281  1  41  —  42  
Stock-based compensation
5  —  2,297  —  2,297  
Net loss
—  —  —  (8,579) (8,579) 
Balances at November 30, 2018
78,559  $79  $107,256  $(31,937) $75,398  
Stock option exercises89  —  —  —  —  
Stock-based compensation125  —  3,178  —  3,178  
Stock sold to investors, net of offering costs9,077  9  41,584  —  41,593  
Stock issued for acquisition of Hybrid162  —  140  —  140  
Net loss—  —  —  (8,915) (8,915) 
Balances at February 28, 201988,012  $88  $152,158  $(40,852) $111,394  
Stock option exercises—  —  —  —  —  
Stock-based compensation328  1  2,740  —  2,741  
Stock issued for acquisition of Hybrid500  —  —  —  —  
Net loss—  —  —  (10,598) (10,598) 
Balances at May 31, 201988,840  $89  $154,898  $(51,450) $103,537  
The accompanying notes are an integral part of the condensed consolidated financial statements.


Table of Contents
KUSHCO HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended
May 31,
2020
May 31,
2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$(70,368) $(28,092) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
3,259  1,711  
Amortization of debt discount
3,902    
Provision for bad debt
10,421  2,313  
Provision for sales returns
30  540  
Inventory obsolescence
2,218    
Provision for inventory reserve
14,619  2,133  
Loss (gain) on disposal of assets
26  (1,254) 
Gain on termination of leases(798)   
Impairment of assets
6,895    
Change in fair value of equity investment
1,100  663  
Stock compensation expense
11,074  8,839  
Change in fair value of warrant liability
(3,435) (7,309) 
Change in fair value of contingent consideration
  (2,247) 
Changes in operating assets and liabilities:
Accounts receivable
6,854  (8,756) 
Inventory
5,101  (43,446) 
Prepaid expenses and other current assets
(7,854) (1,632) 
Other non-current assets
498  (706) 
Accounts payable
(5,813) 13,278  
Customer deposits1,225  2,253  
Accrued expenses and other current liabilities
1,600  4,232  
Other non-current liabilities(752)   
Net cash used in operating activities
(20,198) (57,480) 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and intangibles
(4,317) (5,420) 
Net cash used in investing activities
(4,317) (5,420) 
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases
(86) (105) 
Proceeds from notes payable1,900  19,935  
Proceeds from stock option exercises
  42  
Proceeds from issuance of common stock
42,095  41,593  
Proceeds from line of credit
76,325  94,808  
Repayments on line of credit
(88,575) (94,610) 
Net cash provided by financing activities
31,659  61,663  
NET INCREASE (DECREASE) IN CASH
7,144  (1,237) 
CASH AT BEGINNING OF YEAR
3,944  13,467  
CASH AT END OF YEAR
$11,088  $12,230  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest
$624  $959  
NON-CASH INVESTING AND FINANCING ACTIVITIES
Services prepaid for in common stock
$646  $1,277  
Accrued and unpaid amounts for purchase of property & equipment
$403  $356  
Stock issuance for acquisition of Hybrid
$  $141  
Shares issued in exchange for equity investment in Xtraction Services
$2,528  $  
Fair value of shares received from sale of assets$  $1,791  
The accompanying notes are an integral part of the condensed consolidated financial statements.


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KUSHCO HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
(Unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the activity of KushCo Holdings, Inc. (the “Company”) and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. Accordingly, they do not include all of the information and notes required by GAAP 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 in the condensed consolidated financial statements for the interim periods presented herein, but are not necessarily indicative of operating results to be achieved for full fiscal years or other interim periods. The condensed consolidated balance sheet as of August 31, 2019 was derived from the audited financial statements as of that date but does not include all disclosures as required by GAAP. These 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, 2019 and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year then ended and filed with the SEC on November 12, 2019.
References to amounts in these notes to condensed consolidated financial statements are in thousands, except per share amounts, unless otherwise specified.
Use of Estimates
The preparation of financial statements in conformity with 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, 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 expenses, 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.
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 the customer's past credit history and current financial condition. The Company’s net accounts receivable balance was $11,162 and $25,972 as of May 31, 2020 and August 31, 2019, respectively. The Company’s allowance for doubtful accounts was $3,660 and $1,058 as of May 31, 2020 and August 31, 2019, respectively. The increase in allowance for doubtful accounts was driven primarily by the deteriorating credit conditions in California exhibited by the Company’s customers in this market, which have significantly impacted the Company’s ability to collect, in part or in full, amounts owed by these customers. The Company’s sales return reserve was $506 and $477 as of May 31, 2020 and August 31, 2019, respectively, and is included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheet.
Inventory
Inventories are stated at the lower of cost or net realizable value using the average cost method. The Company’s inventory consists of finished goods of $24,048 and $43,768 as of May 31, 2020 and August 31, 2019, respectively. The Company also makes prepayments against the future delivery of inventory classified as prepaid inventory. The Company’s prepaid inventory


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was $8,429 and $7,134 as of May 31, 2020 and August 31, 2019, respectively. The Company regularly reviews inventory and, when appropriate, records a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life. As of May 31, 2020, the Company had $11,285 of inventory reserve. As of August 31, 2019, the Company had $2,640 of inventory reserve.
Equity Investment

On January 30, 2020, the Company partnered with Xtraction Services Holding Corp (“Xtraction Services”), a provider of equipment leasing solutions to owners and operators of cannabis and hemp companies in the United States in order to provide such solutions to the Company’s network of regulated cannabis and cannabidiol (“CBD”) operators. The Company’s Chief Financial Officer, Stephen Christoffersen, has served on the board of directors for Xtraction Services since May 2019. Under the terms of its agreement with Xtraction Services, upon the closing of the transaction, the Company issued 1,653 of its common shares in exchange for 10,600 proportionate voting shares (the “XS Shares”) of Xtraction Services, the equivalent of 19.9% of Xtraction Services' market capitalization on the closing date. On January 30, 2020, the value of the Company's shares issued in exchange for the equity investment in Xtraction Services was $2,528. The Company’s investment in Xtraction Services is included in “Other assets” on the Company’s condensed consolidated balance sheet.
Net Loss Per Share
The Company computes earnings per share under Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share (“ASC 260”). Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the sum of (a) the weighted average number of shares of common stock outstanding during the period and (b) the potentially dilutive securities outstanding during the period. Stock options are potentially dilutive securities; and the number of dilutive options is computed using the treasury stock method.
For the three and nine months ended May 31, 2020, basic and diluted weighted average shares are the same, as the Company generated a net loss for the period. The computation for the three and nine months ended May 31, 2020 does not include 11,368 options and 21,737 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.
For the three and nine months ended May 31, 2019, net loss is adjusted for changes in fair value of warrants recorded as a liability (see Note 9 below) and weighted average diluted shares includes dilutive warrants. The computation of diluted net loss per share for the three and nine months ended May 31, 2019 does not include 12,662 options and 6,988 warrants, as their inclusion would have an anti-dilutive effect on net loss per share.
Revenue Recognition
The Company markets and sells a wide variety of ancillary products and services to customers operating in the regulated medical and recreational cannabis and CBD industries. These complementary products and services include compliant and custom packaging products; vape hardware; hydrocarbons and solvents; natural products; stainless steel tanks; custom branded anti-counterfeit and authentication labels; hemp trading services; and retail services focused on CBD mass distribution, industry education and compliance.
In accordance with ASC 606, Revenue from Contracts with Customers, 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:
Identify the contract with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the contract.
Recognize revenue when the Company satisfies a performance obligation.
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 $21 and $207 for the three


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months ended May 31, 2020 and May 31, 2019, respectively. Advertising costs were $199 and $877 for the nine months ended May 31, 2020 and May 31, 2019, respectively.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The ASU removes, modifies, and adds certain disclosure requirements and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the potential impact of adoption of this standard on its consolidated financial statements.
In December 2019, the FASB Issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting of Income Taxes”, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this guidance to determine its impact it may have on its financial statements.
In January 2020, the FASB issued ASU 2020-1, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-1made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is evaluating the potential impact of adoption of this standard on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the 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.
Update on COVID-19

On March 11, 2020, the World Health Organization ("WHO") recognized COVID-19 as a global pandemic, prompting many national, regional, and local governments, including in the markets that the Company operates in, to implement preventative or protective measures, such as travel and business restrictions, temporary store closures, and wide-sweeping quarantines and stay-at-home orders. As a result, COVID-19 has significantly curtailed global economic activity, including in the regulated cannabis and CBD industries in which the Company operates.

While the Company is actively working to successfully navigate the financial, operational, and personnel challenges presented by the COVID-19 pandemic, the full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain, out of our control and cannot be predicted at this time.
NOTE 2 - CONCENTRATIONS OF RISK 
Supplier Concentrations
The Company purchases inventory from various suppliers and manufacturers. For the nine months ended May 31, 2020 and May 31, 2019, the Company had one vendor which accounted for approximately 33% and 42%, respectively, of total inventory purchases. As of May 31, 2020, there were two vendors in the aggregate that represented approximately 23% of accounts payable. As of May 31, 2019, there were two vendors that represented approximately 42% of accounts payable.



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Customer Concentrations
During the nine months ended May 31, 2020, no customer represented over 10% of the Company’s revenue. For the nine months ended May 31, 2019, the Company had one customer that represented approximately 10% of the Company’s revenues. As of May 31, 2020, there were two customers in aggregate, that represented approximately 47% of accounts receivable. As of May 31, 2019, there was one customer that represented 24% of accounts receivable.
NOTE 3 – RELATED-PARTY TRANSACTIONS
The Company sells certain products and supplies to two related parties. Sales recognized during the three months ended May 31, 2020 and May 31, 2019 from the related parties totaled $113 and $40, respectively. Sales recognized during the nine months ended May 31, 2020 and May 31, 2019 from the related parties totaled $1,299 and $99, respectively. Total accounts receivable from related parties was $755 and $465 as of May 31, 2020 and August 31, 2019, respectively. Further, the Company rents certain warehouse equipment from a related party. No rental payments were made from the related party during the three months ended May 31, 2020. During the three months ended May 31, 2019, total rental payments of $112 were made from the related party. During the nine months ended May 31, 2020 and May 31, 2019, total rental payments of $231 and $210, respectively, were made to the related party.
NOTE 4 - PROPERTY AND EQUIPMENT
The major classes of fixed assets consist of the following:
May 31,
2020
August 31,
2019
Machinery and equipment
$6,116  $4,430  
Vehicles
540  603  
Office Equipment
3,395  3,232  
Leasehold improvements
1,963  3,296  
Construction in progress
661  1,930  
12,675  13,491  
Accumulated Depreciation
(3,379) (2,437) 
$9,296  $11,054  
Depreciation expense was $990 and $397 for the three months ended May 31, 2020 and May 31, 2019, respectively. Depreciation expense was $2,549 and $965 for the nine months ended May 31, 2020 and May 31, 2019, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consist of the following:
 
 
As of May 31, 2020As of August 31, 2019
Description
Weighted
Average
Estimated
Useful Life
Gross
Carrying
Value
Accumulated
Amortization
Net
Amount
Gross
Carrying
Value
Accumulated
Amortization
Net
Amount
Trade name
6 years2,600  (1,336) 1,264  2,600  (1,011) 1,589  
Non-compete agreement
4 years2,370  (1,241) 1,129  2,370  (856) 1,514  
 
$4,970  $(2,577) $2,393  $4,970  $(1,867) $3,103  
Amortization expense was $237 for the three months ended May 31, 2020 and 2019. Amortization expense was $710 and $746 for the nine months ended May 31, 2020 and May 31, 2019, respectively.




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The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of May 31, 2020:
For the year ended August 31,
 
2020 (remaining three months)$237  
2021881  
2022747  
2023528  
 $2,393  
NOTE 6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
May 31,
2020
August 31,
2019
Accrued compensation2,532  3,485  
Sales tax payable745  1,047  
Lease liability1,605    
Other accrued expenses5,542  1,936  
$10,424  $6,468  
NOTE 7 – LEASES
The Company adopted ASC 842 “Leases” (“ASC 842”) effective September 1, 2019 utilizing the modified retrospective approach for adoption for all leases that existed at or are commenced after the date of initial application with an option to use certain practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together, and (iv) the short-term lease for leases with a term of 12 months or less.
The adoption of ASC 842 had a material impact on the condensed consolidated balance sheet due to the recognition of Right of Use (“ROU”) assets and lease liabilities. The adoption of this ASC did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a material cumulative effect adjustment to the opening balance sheet retained earnings on September 1, 2019. Because the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company recognized operating lease ROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 10.7%, which reflects the interest rate the Company would pay to borrow funds over a similar term and in a similar economic environment, was used to determine the present value of lease payments. Based on the impact of ASC 842 on the lease population, the Company recorded $7.6 million in lease liabilities and $6.8 million for ROU assets based upon the lease liabilities adjusted for deferred rent. ROU assets are included in “Other assets” and lease liabilities are included in “Accrued expenses and other current liabilities” and “Other non-current liabilities” on the Company’s condensed consolidated balance sheet.
The Company determines if an arrangement is a lease at inception. The Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2026. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. The ROU asset also includes any fixed lease payments, including in-substance fixed lease payments and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease term is determined at lease commencement and includes any non-cancellable period for which the Company has the right to use the underlying asset, together with any options to extend that the Company is reasonably certain to exercise.



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Lease Liabilities
Lease liabilities as of May 31, 2020 consist of the following:
Current portion of lease liabilities
$1,605  
Long term lease liabilities, net of current portion
4,562  
Total lease liabilities
$6,167  
Aggregate lease maturities as of May 31, 2020 are as follows:
Year ended August 31,
 
2020 (remaining three months)$647  
20212,054  
20221,968  
20231,362  
2024764  
Thereafter579  
Total minimum lease payments7,374  
Less imputed interest(1,207) 
Total lease liabilities$6,167  
Rent expense was $590 and $2,279, respectively, for the three and nine months ended May 31, 2020. At May 31, 2020, the leases had a weighted average remaining lease term of 3.7 years and a weighted average discount rate of 8.5%. Rent expense for the three and nine months ended May 31, 2019 was $720 and $2,226, respectively, under ASC 840, the predecessor to ASC 842.
NOTE 8 – DEBT
Monroe Revolving Credit Facility
On August 21, 2019, the Company and its subsidiaries (collectively, the “Borrowers”) entered into a secured asset based revolving credit facility (the “Monroe Revolving Credit Facility”), with an aggregate amount not to exceed $35.0 million outstanding at any time, with Monroe Capital Management Advisors, LLC (“Monroe”), as collateral agent and administrative agent, and the various lenders party thereto. The Monroe Revolving Credit Facility also includes an accordion feature that permits the Company to increase the available revolving commitments under the Monroe Revolving Credit Facility by up to an additional $15.0 million, subject to satisfaction of certain conditions. The Monroe Revolving Credit Facility has a 5-year term which matures on August 21, 2024 and is secured by a first priority lien on substantially all of the assets of the Borrowers.
The Monroe Revolving Credit Facility contains customary representations and warranties, affirmative and negative covenants, including a financial covenant requiring certain minimum availability, and events of default. As of May 31, 2020, there was no balance outstanding under the facility. As of August 31, 2019, the outstanding balance under the facility was $12.3 million.
The Company incurred closing costs associated with the Monroe Revolving Credit Facility in the amount of $2,602, which were deferred and amortized over the 5-year term of the Monroe Revolving Credit Facility on a straight-line basis. As of May 31, 2020, unamortized debt issuance costs of $2,194 are included in “Other assets.” Interest expense and amortization of debt discount, associated with the Monroe Revolving Credit Facility during the three months ended May 31, 2020 amounted to $73 and $154, respectively. Interest expense and amortization of debt discount, associated with the Monroe Revolving Credit Facility during the nine months ended May 31, 2020 amounted to $528 and $461, respectively.
Monroe Warrants
On August 21, 2019, the Company entered into a subscription agreement with Monroe, pursuant to which the Company issued to Monroe a warrant to purchase up to 500 shares of its common stock (the “Monroe Warrant”) at an exercise price of $4.25 per share. The Monroe Warrant has a 5-year term and as such will expire on August 21, 2024. Amortization expense for the three and nine months ended May 31, 2020 was $50 and $148, respectively.



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Long-term Debt
On April 29, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which the Company issued and sold a senior note (the “Original Note”) to the Investor in a private placement offering in the aggregate principal amount of $21.3 million with an original issue discount of $1.3 million, and received net proceeds of $20.0 million. The Original Note was a senior unsecured obligation, and unless earlier redeemed, was scheduled to mature on October 30, 2020. The Original Note did not bear interest, except upon the occurrence of an event of default.
On August 21, 2019, the Company entered into an exchange agreement (the “Exchange Agreement”) with the Investor in order to amend and waive certain provisions of the Purchase Agreement and the Original Note and to exchange the Original Note for (i) a new senior note (the “Amended Senior Note”) for the same aggregate principal amount as the Original Note and (ii) a warrant to purchase up to 650 shares of its common stock at an exercise price of $4.25 per share. The warrant has an expiration date of August 21, 2024 and has not been exercised as of May 31, 2020. As of August 21, 2019, the warrant was reclassified from a derivative liability to equity with a corresponding adjustment to additional paid-in capital.
Similar to the terms of the Original Note, the Amended Senior Note was set to mature on October 30, 2020, at which time the Company was to pay the Investor an amount in cash representing 120% of all outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the terms of the Original Note, the Amended Senior Note did not bear interest except upon the occurrence of an event of default.
On November 8, 2019, the Company entered into a Second Exchange Agreement (“Second Exchange Agreement”) with the Investor, pursuant to which the Company amended the Amended Senior Note (as amended, the “Second Amended Senior Note”). Pursuant to the terms of the Second Amended Senior Note, the maturity date of the Second Amended Senior Note was extended to April 29, 2021 and the aggregate principal amount of the Second Amended Senior Note was increased to approximately $24.0 million and the original issue discount was increased to $1.5 million. Upon maturity, the Company was to pay the Investor an amount in cash representing 120% of all outstanding principal, less original issue discount, plus any accrued and unpaid interest and accrued and unpaid late charges. Similar to the terms of the Original Note, the Second Amended Senior Note did not bear interest, except upon the occurrence of an event of default.
See Note 14 below for a description of the Third Exchange Agreement entered into by the Company and the Investor subsequent to May 31, 2020.
PPP Loan

On April 30, 2020, the Company qualified for and received a loan pursuant to the Paycheck Protection Program, a program implemented by the U.S. Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act, from a qualified lender (the “PPP Lender”), for an aggregate principal amount of approximately $1.9 million (the "PPP Loan"). The PPP Loan bears interest at a fixed rate of 1.0% per annum, with the first six months of interest deferred, has a term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration. The principal amount of the PPP Loan is subject to forgiveness under the Paycheck Protection Program upon the Company’s request to the extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company. The Company intends to apply for forgiveness of the PPP Loan with respect to these covered expenses. To the extent that all or part of the PPP Loan is not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of 1.0% per annum, and commencing in October 2020 principal and interest payments will be required through the maturity date in April 2022. The terms of the PPP Loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loan may be accelerated upon the occurrence of an event of default.
NOTE 9 – WARRANT LIABILITY
In addition to the warrants described above, in June 2018, the Company issued warrants to purchase 3,750 shares of its common stock exercisable at a price per share of $5.28 (the “2018 Warrants”) to investors in a registered direct offering. The 2018 Warrants have a term of five years from the date of issuance. Pursuant to ASC Topic 815, the initial fair value of the 2018 Warrants of $15,350 was recorded as a warrant liability on the issuance date. The estimated fair values of the 2018 Warrants were computed at issuance using a Black-Scholes option pricing model.
The estimated fair value of the outstanding liabilities associated with the 2018 Warrants was $2,009 and $5,444 as of May 31, 2020 and August 31, 2019, respectively.


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Increases or decreases in fair value of the Company's liability associated with the 2018 Warrants are included as a component of “Other expense” in the accompanying condensed consolidated statements of operations for the respective period. The changes to the liability associated with the 2018 Warrants resulted in an increase of $1,160 and decrease of $3,435 in liability and a corresponding loss and gain for the three and nine months ended May 31, 2020, respectively. The changes to the liability associated with the 2018 Warrants resulted in a decrease of $6,254 and $7,309 in liability and a corresponding gain for the three and nine months ended May 31, 2019, respectively.
The estimated fair value of the 2018 Warrants was computed as of May 31, 2020 using the Black Scholes model with the following assumptions: stock price of $1.19, volatility of 119.5%, risk-free rate of 0.22%, annual dividend yield of 0% and expected life of 3.0 years.
NOTE 10 – 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 820”). ASC 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 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, equity investments, accounts receivable, accounts payable and accrued liabilities and obligations 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 Company accounts for its investment in Smoke Cartel, Inc. (“Smoke Cartel”) at fair value. On September 21, 2018, Smoke Cartel and the Company entered into an agreement to sell Rowl-Uh-Bowl (the “RUB”) web domain and inventory related to this product line and in exchange, received 1,410 shares of Smoke Cartel common stock. The fair value of the Company’s investment as of August 31, 2019 and May 31, 2020 was based upon the closing price of Smoke Cartel's common stock on each respective date. The investment was classified as a Level 2 financial instrument.
The Company accounts for its investment in Xtraction Services at fair value. The fair value of the Company’s investment at May 31, 2020 was based upon the closing price of Xtraction Services' common stock on each respective date. 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 the 2018 Warrants, which are accounted for as a warrant liability (see Note 9 above.) The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument.
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.


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The following table details the fair value measurement 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 May 31, 2020
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Equity investment
$2,060  $  $2,060  $  
Liabilities:
Warrant liability
$2,009  $  $  $2,009  
 
Fair Value at August 31, 2019
 
Total
Level 1
Level 2
Level 3
Assets:
 
 
 
 
Equity investment
$592  $  $592  $  
Liabilities:
Warrant liability