Quarterly report pursuant to Section 13 or 15(d)

Note 2 - Acquisition of Cmp Wellness, Llc

v3.7.0.1
Note 2 - Acquisition of Cmp Wellness, Llc
9 Months Ended
May 31, 2017
Notes  
Note 2 - Acquisition of Cmp Wellness, Llc

NOTE 2 – ACQUISITION OF CMP WELLNESS, LLC

 

On May 1, 2017 (“Merger Date”), the Company and KBCMP, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (“Merger Sub”), entered into an Agreement of Merger (the “Merger Agreement”) with Lancer West Enterprises, Inc, a California corporation and Walnut Ventures, a California corporation, 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 the Company’s indirect acquisition of CMP Wellness, LLC (“CMP”), a California limited liability company, which prior to the merger, was owned 100% by Lancer West Enterprises, Inc and Walnut Ventures. Membership interest in CMP was the sole and only asset of Lancer West Enterprises, Inc and Walnut Ventures. As a result, CMP became a wholly-owned subsidiary of the Company. CMP is a distributor of vaporizers, cartridges and accessories. The Company’s Directors believed the acquisition of CMP and the product offerings of CMP leveraged the Company’s existing product development program and provided the Company with the possibility of generating near term revenue and operating cash flow, as well as establishing a commercial platform whereby other cannabis industry-support products may be accessed in the future. Going forward, the existing product offering and other product licensing opportunities, will be the basis of the Company's long-term product portfolio.

 

The acquisition consideration consisted of a cash payment of $1,500,000, 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 (equal to 13% of the Company’s common stock outstanding as of May 31, 2017). During the one-year period following the closing, the two sellers of CMP may become entitled to receive up to an additional $1,905,000 in cash, in the aggregate, and 4,740,960 shares of common stock of the Company, in the aggregate, based on the gross profit generated by CMP for the period from May 1, 2017 to April 30, 2018. Per the terms of the Merger Agreement, post-closing adjustments to CMP’s working capital is directly offset to the unsecured promissory notes payable. Management has estimated that the preliminary post-closing working capital adjustments amounted to $110,604, which management estimates will result in a decrease of the unsecured promissory notes payable from $770,820 to $660,216. In accordance with ASC 805, management has evaluated the estimated fair value of the contingent consideration based a probability-weighted assessment of the occurrence of CMP reaching certain gross profit earnout targets. The Company recorded a contingent liability for the contingent cash consideration of $1,735,375 and recorded contingent equity consideration of $10,763,760. The fair value of the contingent equity consideration is recorded in additional paid in capital.

 

The acquisition is accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). As such, CMP’s assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The results of operations of CMP were consolidated beginning on the date of the merger.  Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Pursuant to ASC 805, the contingent consideration was recorded at its estimated fair value as of the acquisition date. The subsequent accounting for contingent consideration depends on whether the contingent consideration is classified as a liability or equity. The portion of contingent consideration classified as equity is not remeasured in subsequent accounting periods. However, contingent consideration classified as a liability is remeasured to its fair value at the end of each reporting period and the change in fair value is reflected in income or expense during that period. Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date.

 

The equity consideration received by CMP members was calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price on the acquisition date. The contingent equity consideration was also calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price. The total preliminary acquisition consideration used in preparing the unaudited condensed consolidated financial statements is as follows:

 

Acquisition Consideration:

Cash

   $           1,500,000

Fair value of common shares issued to CMP members

              19,500,000

Promissory notes

                    660,216

Estimated fair value contingent cash consideration

                 1,735,375

Estimated fair value contingent equity consideration

              10,763,760

Total estimated acquisition consideration

   $         34,159,351

 

As of May 31, 2017, the Company has not revised the initial probability-weighted assessment of the contingent consideration. In accordance with the provisions of FASB ASC 805, the following table presents the preliminary allocation of the total fair value of consideration transferred, as discussed above, to the acquired tangible and intangible assets and assumed liabilities of CMP Wellness based on their estimated fair values as of the closing date of the transaction, measurement period adjustments recorded since that date and the adjusted allocation of the total fair value:

 

May 1, 2017

Measurement Period

May 31, 2017

(As initially reported)

Adjustments (1)

(As adjusted)

Accounts receivable

   $              735,513 

   $                           -

   $              735,513 

Inventory

                    655,970 

                                -

                    655,970 

Prepaid expenses

                    206,874 

                                -

                    206,874 

Fixed assets

                        1,737 

                                -

                        1,737 

Deposits

                        6,261 

                                -

                        6,261 

Accounts payable and accrued liabilities

                  (105,124)

                                -

                  (105,124)

Total identifiable net assets

                1,501,231 

                                -

                1,501,231 

Goodwill

              32,658,120 

                                -

              32,658,120 

Total fair value of consideration

   $         34,159,351 

   $                           -

   $         34,159,351 

 

(1)  

The measurement period adjustments may be recorded for a period of 12 months following the acquisition date and will primarily reflect changes in the fair value of the consideration transferred. The measurement period adjustments will be made to reflect facts and circumstances existing as of the merger date and did not result from intervening events subsequent to the merger date.

 

Pro Forma Impact of the CMP Wellness, LLC Acquisition

 

The following unaudited summary pro forma financial information for the three and nine months ended May 31, 2017 and 2016 has been presented for illustrative purposes only and does not purport to represent what the Company’s results of operations would have been if the acquisition had occurred as presented, or to project the Company’s results of operations for any future periods. The pro forma financial information was prepared assuming the acquisition occurred as of September 1, 2015. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable, including those pertaining to revenue, operating expenses, income taxes, and depreciation expense.

 

For the Three Months Ended

For the Nine Months Ended

May 31,

May 31,

2017

2016

2017

2016

Revenues

  $  7,117,612

$ 3,068,973

$ 17,035,227

$ 7,773,438

Income from operations

         552,623

        121,666

       1,151,462

        445,347

Net income

         774,214

        116,396

       1,583,245

        427,415

Net income per common share:

Basic

  $            0.01

$           0.00

$              0.03

$           0.01

Diluted

  $            0.01

$           0.00

$              0.03

$           0.01