10-Q 1 stwc10q31031182.htm STWC HOLDING, INC. 10Q 10-31-18

 



 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 October 31, 2018
 
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act Of 1934
 
For the transition period from __________ to __________
 
 Commission file number: 000-52825
 
STWC HOLDINGS, INC
(Exact name of registrant as specified in its charter)
 
                                       Colorado                                                                                         20-8980078             _
          (State or other jurisdiction of incorporation or organization)                     (I.R.S. Employer Identification No.)
 
1350 Independence St., Suite 300, Lakewood, CO  80215
 (Address of principal executive offices, including Zip Code)
 
(303) 736-2442
(Issuer's telephone number, including area code)
 
________________________________________
(Former name or former address if changed since last report)
 
Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

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


 Large acclerated filer

   

 Accelerated filer

 

 

 

 

 

 

 

 

 

 Non-accelerated filer

 

 Smaller reporting company 

   

  

 

 

 

 

 

 

 

 

 

 Emerging growth company

 

  

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

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 33,350,089 shares of common stock as of November 30, 2018.


 

Table of Contents

 

 

Page

Part I - Financial Information

 

 

 

Item 1 - Financial Statements

3

 

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

Part II - Other Information

 

 

 

Item 1 - Legal Proceedings

19

 

 

Item 1A - Risk Factors

19

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

19

 

 

Item 3 - Defaults Upon Senior Securities

19

 

 

Item 4 - Mine Safety Disclosures

19

 

 

Item 5 - Other Information

19

 

 

Item 6 – Exhibits

20

 

 

Signatures

21

 

2


 

 

 

 STWC HOLDINGS, INC.

 

INTERIM FINANCIAL STATEMENTS

 

As of October 31, 2018 and January 31, 2018 and for the Three and Nine month periods Ended October 31, 2018 and 2017

 

(UNAUDITED)

 








3

 

STWC HOLDINGS, INC.
CONDENSED BALANCE SHEETS

 

 

 

 

October 31, 2018

   
January 31,
2018
 

 

 

(Unaudited)

   

(Audited)

 

ASSETS

           

Current assets:

           

Cash

 

$

30,243

   

$

27,925

 

Accounts Receivable, net

   

48,998

     

5,000

 

Inventory

   

29,786

     

11,888

 

Prepaid expenses and other assets

   

28,881

     

17,592

 

Total current assets

   

137,908

     

62,405

 

Tenant improvements and office equipment, net of accumulated amortization and depreciation of $25,458 and $24,703 at October 31, 2018 and January 31, 2018, respectively

   

3,018

     

3,773

 

Notes receivable

   

503,333

     

94,061

 

Equity method investment in unconsolidated subsidiary

   

339,292

     

 

Trademarks, net of accumulated amortization of $3,538 and $2,989 at October 31, 2018 and January 31, 2018, respectively

   

9,722

     

8,021

 

Total assets

 

$

993,273

   

$

168,260

 
               

LIABILITIES AND STOCKHOLERS' EQUITY (DEFICIT)

               

LIABILITIES

               

Current liabilities:

               

Accounts payable and accrued expenses

 

$

909,590

   

$

366,438

 

Due to related party

   

218,526

     

490,970

 

Deferred revenue

   

176,000

     

150,000

 

Total current liabilities

   

1,304,116

     

1,007,408

 

Notes payable, net of discount

   

27,273

     

 

Total liabilities

   

1,331,389

     

1,007,408

 

Commitments and contingencies

   

     

 

Stockholders' deficit

               

Common stock, no par value, 100,000,000 shares authorized, 33,350,089 issued and outstanding

   

     

 

Additional Paid in Capital

   

6,950,980

     

5,325,684

 

Retained deficit

   

(7,289,096

)

   

(6,164,832

)

Total stockholders' deficit

   

(338,116

)

   

(839,148

)

Total liabilities and stockholders' deficit

 

$

993,273

   

$

168,260

 
 

 

 See accompanying notes.

4

For the Three Months Ended
October 31,

 

For the Nine Months Ended
October 31,

2018

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consulting services

$

12,500

 

$

20,000

 

$

143,749

$

173,500

Cost of consulting services

 

(12,500)

 

 

(55,121)

 

 

(24,943)

 

 

(172,473)

Gross profit

 

 

 

(35,121)

 

 

118,806

 

1,027

Operating costs and expenses

 

 

 

 

 

 

 

 

Rents and other occupancy

 

13,500

 

 

28,143

 

 

39,516

 

56,445

Compensation

 

148,856

 

 

137,206

 

 

433,341

 

389,734

Professional, legal and consulting

 

335,429

 

 

33,150

 

 

420,518

 

84,283

Depreciation and amortization

 

435

 

 

183

 

 

1,304

 

1,874

General and administrative

 

79,895

 

 

97,202

 

 

221,536

 

238,328

Total operating costs and expenses

 

578,115

 

 

295,884

 

 

1,116,215

 

770,664

Loss from continuing operations

 

(578,115)

 

 

(331,005)

 

 

(997,409)

 

(769,637)

Loss on equity investment in unconsolidated subsidiary

 

(10,129)

 

 

 

 

(10,129)

 

 

Other

 

(114,986)

 

 

(115)

 

 

(116,726)

 

(1,016)

Loss from continuing operations, before provision for taxes on income

 

(703,230)

 

 

(331,120)

 

 

 

(1,124,264)

 

 

(770,653)

Provision for taxes on income

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

(703,230)

 

 

(331,120)

 

 

(1,124,264)

 

(770,653)

Income from discontinued operations, net of tax

 

 

 

1,974,363

 

 

 

1,144,976

Net income/(loss)

$

(703,230)

 

$

1,643,243

 

$

(1,124,264)

$

374,323

Basic earnings and fully diluted income (loss) per common share

 

 

 

 

 

 

 

 

Continuing operations

$

(.02)

 

$

(0.01)

 

$

(0.04)

$

(0.03)

Discontinued operations

$

 

$

0.07

 

$

$

0.04

 

 

 

 

 

 

 

 

 

 

 

 

Basic and fully diluted weighted average number of shares outstanding

 

 

 

 

 

 

 

 

29,437,372

 

 

27,140,550

 

27,914,571

27,140,550

STWC HOLDINGS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

See accompanying notes.

 

5

STWC HOLDINGS, INC.

CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

 


 

For the Nine months Ended October 31,

 

 

 

2018

   

2017

 

Cash flows from operating activities:

           

Net (loss)/Income

 

$

(1,124,264

)

 

$

374,323

 

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

   

755

     

1,325

 

Decrease in trademark

   

549

     

549

 

Loss from equity investment in unconsolidated subsidiary

   

10,129

     

15,000

 

Bad debt expense

   

     

3,000

 

Stock-based compensation and conversion of debt

   

183,775

     

 

Increase in accounts receivable

   

(43,998

)

   

(8,000

)

Increase in inventory

   

(17,898

)

   

 

Increase in prepaid expenses and other assets

   

(11,289

)

   

 

Increase in deferred revenue

   

26,000

     

135,000

 

Increase in accounts payable and accrued                     expenses

   

543,152

     

418,420

 

Net cash flow (used in)/provided by operating activities from continuing operations

   

(433,089

)

   

939,617

 

Net cash flow used in operating activities from discontinued operations

   

     

(1,013,193

)

Net cash flow used in operating activities

   

(433,089

)

   

(73,576

)

Cash flows from investing activities:

               

Investment in trademark

   

(2,250

)

   

 

Purchase of equipment

   

     

(4,024

)

Investment in unconsolidated subsidiary

   

(152,983

)

   

 

Net cash flow used in investing activities from continuing operations

   

(155,233

)

   

(4,024

)

Net cash flow used in investing activities from discontinued activities

   

     

 

Net cash flow used in investing activities

   

(155,233

)

   

(4,024

)

Cash flows from financing activities:

               

Proceeds from issuance of stock

   

683,200

     

 

Proceeds from conversion of warrants

   

42,150

     

 

Cash advances for notes receivable

   

(409,272

)

   

(58,766

)

Proceeds from notes payable

   

225,000

     

 

Cash (payments)/advances from related parties

   

49,562

     

68,629

 

Net cash flows from financing activities from continuing operations

   

590,640

     

9,863

 

Net cash flow from financing activities from discontinued activities

   

     

 

Net cash flows from financing activities

   

590,640

     

9,863

 

Net cash flows

   

2,318

     

(67,737

)

Cash and equivalent, beginning of period

   

27,925

     

133,189

 

Cash and equivalent, end of period

 

$

30,243

   

$

65,452

 

 

Supplemental cash flow disclosures:

               

Cash paid for interest

 

$

6,477

   

$

92,861

 

Cash paid for income taxes

 

$

   

$

 

 

               

Supplemental disclosure of non-cash activities:

               

Conversion of related party advances

 

$

402,508

   

$

 

Acquisition of interest in unconsolidated subsidiary

 

$

196,438

   

$

 

 

See accompanying notes.

6

STWC HOLDINGS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)

(Unaudited)

 

 

 

Common Stock

             
 

Shares

   

Amount

   
Additional
Capital In
Excess of Par Value
   
Deficit
Accumulated
   

Total

 

 

Balance,

January 31, 2018

   

27,140,550

     

   

$

5,325,684

   

$

(6,164,832

)

 

$

(839,148

)

Issuance of common stock for:

                                       

    Regulation D offering

   

3,416,000

             

683,200

             

683,200

 

    Warrant conversions

   

281,000

     

     

42,150

     

     

42,150

 

    Conversion of debt

   

2,012,539

     

     

402,508

     

     

402,508

 

    Stock-based compensation

   

     

     

76,000

     

     

76,000

 

    Common stock issued

                                       

         for Volume 2, LLC

   

500,000

     

     

100,000

     

     

100,000

 

    Warrants issued for

                                       

         Volume 2, LLC

   

     

     

96,438

     

     

96,438

 

    Beneficial conversion feature

                                       

          Related to convertible note

   

     

     

225,000

     

     

225,000

 

Net Loss

   

     

     

     

(1,124,264

)

   

(1,124,264

)

 

Balance,

October 31, 2018

   

33,350,089

     

   

$

6,950,980

   

$

(7,289,096

)

 

$

(338,116

)

                                       

 

7

Note 1 - Organization
 
STWC HOLDINGS, INC., formerly known as Strainwise, Inc., (identified in these footnotes as "STWC" "we" "us or the "Company") provides branding marketing, administrative, accounting, financial and compliance services ("Fulfillment Services") to entities in the cannabis retail, cultivation, and manufacturing industry (the "Regulated Entities"). The Company was incorporated in the state of Colorado as a limited liability company on June 8, 2012, and subsequently converted to a Colorado corporation on January 16, 2014.
 
The Company was established to provide sophisticated Fulfillment Services to medical and retail stores, cultivation, and manufacturing facilities in the regulated cannabis industry throughout the United States. Such Fulfillment Services would only be provided to stores and facilities located in geographical areas where the governing state and local ordinances allow for the unfettered provision of such services.
 
The Fulfillment Services that the Company is currently able to provide are summarized, as follows:
 
  • Opportunity Assessment: For a standard fee, we will complete an Opportunity Assessment for a client, which would include financial modeling, completed with our proprietary assessment software.
 
   Application Filing Assistance: Based upon our knowledge of the various rules and regulations of respective state and local jurisdictions, the Company will
    provide turn-key application preparation and submission services for a client, and/or provide consulting assistance to a client who is self-preparing their
    application.
 
   Branding, Marketing and Administrative Consulting Services: Customers may contract with the Company to use the Strainwisname, logo and affinity
    images in their retail store locations. A monthly fee will permit a branding customer to use the Strainwise® brand at a specific location. In addition, the
    Company will assist operators in marketing and managing their businesses, setting up new retail locations and general business planning and execution at an
    hourly rate.This includes services to establish an efficient, predictable production process, as well as, nutrient recipes for consistent and appealing marijuana
    strains.
 
   Accounting and Financial Services: For a monthly fee, the Company will provide a customer with a fully implemented general ledger system, with an industry
    centric chart of accounts, which enables management to readily monitor and manage all facets of a marijuana medical dispensary and cultivation facility. The
    Company will provide bookkeeping, accounts payable processing, cash management, general ledger processing, financial statement preparation, state and
    municipal sales tax filings, and state and federal income tax compilation and filings.
 
   Compliance Services: The rules, regulations and state laws governing the production, distribution and retail sale of marijuana can be complex, and compliance
    may prove cumbersome. Thus, customers may contract with the Company to implement a compliance process, based upon the number and type of licenses and
    permits for their specific business. The Company will provide this service on both an hourly rate and stipulated monthly fee.
 
    Lending: The Company will provide loans to individuals and businesses in the cannabis industry.
 
The Company does NOT grow marijuana plants, produce marijuana infused products, sell marijuana plants and/or sell marijuana infused products of any nature in any state were such activity has not been legalized. Growing marijuana plants, producing marijuana infused products, selling marijuana plants and/or selling marijuana infused products of any nature is federally illegal under the Controlled Substances Act.
 
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements include all adjustments, which consist of normal recurring adjustments and transactions or events discretely impacting the interim periods, considered necessary by management to fairly state our results of operations, financial position and cash flows. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2018 Form 10K.
8


 
Note 2 – Summary of significant accounting policies
 
Use of estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and cash equivalents – For purposes of the statement of cash flows, we consider all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents. Under current banking regulations, not all marijuana centric entities are afforded normal banking privileges. And thus, because of our perceived association with the Regulated Entities, we have not been able to maintain a corporate bank account at any federally or state charted banking institution.
 
 
Tenant improvements and office equipment, net of accumulated amortization and depreciation are comprised of the following:

 

 

October 31, 2018

 

January 31, 2018

 

Leasehold improvements

$

2,200

$

2,200

Office equipment, furniture and fixtures

 

26,276

 

26,276

 

28,476

 

28,476

Accumulated amortization and depreciation

 

  (25,458)

 

(24,703)

$

3,018

$

3,773

 

 

 

 

 

 


Tenant improvements are amortized over the term of the lease, and office equipment is depreciated over its useful lives, which has been deemed by management to be three years. Amortization and depreciation expense related to tenant improvements and office equipment for the three months ended October 31, 2018 was $252. For the three months ended October 31, 2017 there was no amortization or depreciation expense. Amortization and depreciation expense related to tenant improvements and office equipment for the nine months ended October 31, 2018 and 2017 was $755 and $1,325, respectively.

Income taxes – The Company accounts for income taxes pursuant to ASC 740. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Investment in Unconsolidated Entity – The Company entered into an agreement in September 2018, whereby the Company owns a 51% interest in Volume 2, LLC ("V2L"), which the Company has agreed to invest $120,000 in cash, issue 500,000 shares of the Company"s stock, and grant 500,000 warrants for a total capital contribution of $185,000. The Company accounts for its investment V2L using the equity method based on the inability of the Company to control the acquired entity based on the terms of the Letter of Intent. Additionally, the Company has advanced $30,538 to fund operations. Accordingly, the investment was recorded at cost, and adjustments to the carrying amount of the investment to recognize the Company's share of the earnings or losses of V2L are made in each reporting period.

Long-Lived Assets – In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair value.

9

Trademarks – Trademarks and other intangible assets are stated at cost and are amortized using the straight-line method over fifteen years. Accumulated amortization was $3,538 and $2,989 at October 31, 2018 and January 31, 2018, respectively, and consisted of the following at October 31, 2018:

 


Gross Carrying Amount

 


Accumulated Amortization

 

 

   Net

Trademarks

$

13,260

 

$

3,538

 

$

9,722

 

Deferred Revenue – The Company periodically collects advances from customers related to consulting services. These advances are recorded as deferred revenue until the contracted services are completed. The Company has recorded deferred revenue of $176,000 and $150,000 as of October 31, 2018 and January 31, 2018, respectively.

Share-Based Payments and Stock-Based Compensation – Share-based compensation awards, including warrants and restricted stock awards, are recorded at estimated fair value of the awards' grant date, based on estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over te time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the fair value of the share-based payments, whichever is more readily determinable. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.

The fair value of warrants is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by the Company's assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the awards. The Company recognizes stock-based compensation expense over the requisite service period, which is generally consistent with the vesting of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.

Discontinued Operations During November 2017, the Company settled all remaining operations related to its rental activities with regulated entities. As a consequence of the sale, the operating results and the assets and liabilities of the discontinued operations, which formerly comprised the rental operations, are presented separately in the Company's financial statements. There were no components of major assets and liabilities associated with the discontinued operations at October 31, 2018 and at January 31, 2018. Summarized financial information for the discontinued rental business is shown below. Prior period balances have been reclassified to present the operations of the rental business as a discontinued operation.

Three Months Ended

October 31, 2017

 

 

 

Nine months Ended

October 31, 2017

 

 

 

 

Rental income from the Regulated Entities (Affiliates)

$

397,198

 

$

2,254,793

Total revenues

 

397,198

 

 

2,254,793

Operating costs and expenses

 

 

 

 

Reserve for amounts due from Regulated Entities (Affiliates)

 

99,698

 

 

 

984,428

Rents and other occupancy

 

(1,719,769)

 

 

 

(87,212)

Depreciation and amortization

 

38,831

 

 

 

120,756

Total operating costs and expenses

 

(1,581,240)

 

 

1,017,972

Operating (loss)/income from discontinued operations

 

1,978,438

 

 

1,236,821

Other income and (expenses)

 

 

 

 

Interest expense

 

(4,075)

 

 

 

(91,845)

Loss from discontinued operations

$

1,974,363

 

$

1,144,976


10

Comprehensive Income (Loss) - Comprehensive income is defined as all changes in stockholders' equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries. Since our inception there have been no differences between our comprehensive loss and net loss.

Net income per share of common stock - We have adopted applicable FASB Codification regarding Earnings per Share, which require presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In the accompanying financial statements, basic earnings per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. 

 Recently Issued Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and ensure that there are proper controls in place to ascertain that the Company's financial statements properly reflect the change. The Company evaluated all new accounting pronouncements and deemed none resulted in changes to the financial statements

Note 3 – Going concern:

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since inception, we have not achieved profitable operations, and have cumulative losses through October 31, 2018 of $7.1 million. Our losses to date raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our achieving a sustainable level of profitability. The Company intends to continue financing its future development activities and its working capital needs largely from the private sale of our securities, with additional funding from other traditional financing sources, including convertible term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. However, the financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 4 – Fair value of financial instruments

The carrying amounts of cash and current liabilities approximate fair value because of the short maturity of these items. These fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. We do not hold or issue financial instruments for trading purposes, nor do we utilize derivative instruments in the management of our foreign exchange, commodity price or interest rate market risks.

The FASB Codification clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.

 

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

11


 
Note 5 - Operating Leases

The Company entered into a lease agreement with an affiliate for the Company's corporate office needs, consisting of 6,176 square feet of office space. The lease originally provided for a 31-month period, that commenced in January 2014 through October 31, 2016. The lease was extended in November 2016 for a 5-year period ending October 31, 2021. This lease to the Company is on the same terms and conditions as is the direct lease between the affiliate and the independent lessor. Consequently, the Company believes that the lease terms to the Company are comparable to lease terms the Company would receive directly from third party lessors in the Company's market, because the related party terms mirror the terms of the direct lease between the independent, third party lessor and the affiliated entity.

During the three months ended October 31, 2018 and 2017, rent expense was $13,500 and $28,143, respectively. During the nine months ended October 31, 2018 and 2017, rent expense was $39,516 and $56,445, respectively.

As of October 31, 2018, future minimum lease payments are as follows:

For the Fiscal Year Ending January 31,


 

Remainder of 2019

 

$

13,750

 

2020

 

 

55,250

 

2021

 

 

56,250

 

2022

 

 

42,750

 

Thereafter

 



 

Total minimum lease payments

 

$

168,000

 

 

Note 6 – Note Receivable

The Company entered into management and licensing agreements with a private entity in Puerto Rico, COPR Enterprises, LLC, 49% owned by Erin Phillips to operate five dispensaries and two cultivation operations in Puerto Rico. In conjunction with these agreements, the Company has begun providing funds to operate the Puerto Rico operations, which is evidenced by a promissory note. The note provides for a 36-month payment schedule bearing interest at 12%. The principal amount of the loan has not been determined. Through October 31, 2018 the Company has advanced $275,107 related to the note.

The Company entered into management and licensing agreements with a private entity to establish a joint venture in Oklahoma, 2600 Meridian, LLC, that is owned 25% by the Company. In conjunction with this joint venture the Company has agreed to provide funds to operate the operations. The note provides for a 36-month payment schedule bearing interest at 12%. The principal amount of the loan has not been determined. Through October 31, 2018 the Company has advanced $228,227 related to the note.

Note 7 – Due to Related Party

The Company borrowed $49,562 from related parties to fund operations during the nine months ended October 31, 2018. One of the related parties converted $322,006 in loans to common stock during the nine months ended October 31, 2018. The loans do not carry an interest rate and do not have a maturity date. As of October 31, 2018 and January 31, 2018, the Company owed related parties $218,526 and $490,970, respectively.

Note 8 – Notes Payable

Richland Note

On August 29, 2018, the Company entered into a Note Purchase and Security Agreement (the "Purchase Agreement") with Richland Fund, LLC., a Delaware limited liability company ("Richland"). Pursuant to the Agreement, Richland agreed to purchase Convertible Promissory Notes of the Company (collectively, the "Notes"), in the aggregate principal amount of $225,000, funded in three tranches, (i) $100,000.00 (the "First Note"), (ii) $67,000.00 (the "Second Note"), and (iii) the balance of $58,000.00 (the "Third Note"). The Notes bear 12% interest per annum, with the last payment under the Notes due January 15, 2020. The Notes are secured by all assets of the Company and guarantees from Shawn and Erin Phillips. The Notes may be prepaid without penalty with 30 days' advance notice to Richland.

12

The Notes are convertible into common stock of the Company. The conversion price will be equal to the lower of (i) $0.15 cents per share (ii) or the average of the closing bid price of the Company's common stock taken over the three trading days prior to conversion or (iii) upon any issuance by the Company of common stock, or a security that is convertible into

common stock, at a price lower than a net receipt to the Company of $0.15 per share, at such price that shall be at the same discount ratio as on the Funding Date. The conversion price of the Notes will be further subject to proportional adjustment for stock splits, reverse stock splits or combinations of shares, stock dividends, and the like. There are penalties for failure to timely deliver conversion shares.

Green Acres Note

In order to continue to fund ongoing California operations, on or around April 6, 2018, the Company entered into a loan agreement ("Loan Agreement") with Green Acres Partners, LLC, a California limited liability company ("Green Acres") whereby Green Acres agreed to loan the Company $205,000 in exchange for a promissory note ("Note") issued by the company in the principal amount of $205,000. The Note matures no later than September 1, 2020, with payments to begin no later than September 1, 2018; however, payments may begin sooner than such date in the event operations in San Diego begin sooner. The Note carries an interest rate of 12% per year, with an 18% default interest rate. The principal balance of the Note may be accelerated upon default or transfer. This note has not been funded and as of October 31, 2018 there was no balance due under this note.

Note 9 – Stockholders Equity

Common Stock

On August 29, 2018, in conjunction with the Richland Note, the Company issued Richland warrants to purchase 100,000 shares of the Company's common stock for $18,000. Richland exercised the warrants on October 3, 2018.

From approximately September 24, 2018 to October 16, 2018, the Company issued a total of 281,000 shares of its common stock for $42,150 resulting from the exercise of outstanding warrants with an exercise price of $0.15 per share. These shares were issued pursuant to Section 4(a)(2) of the Securities Act.

On October 15, 2018, the Company entered into an Exchange Agreement (the "Exchange Agreement") with Shawn Phillips ("Mr. Phillips"), pursuant to which the Company issued Mr. Phillips 2,012,539 shares of the Company's Common Stock in exchange for $322,006 of debt owed to Mr. Phillips (the "Exchange"). The Exchange agreement otherwise contains standard terms and conditions. During the three and nine months ended October 31, 2018 the Company recognized an expense of $80,502 related to the conversion of these notes as a result of the stock being issued at a discount below the private offering price.

On or around October 18, 2018, the Company completed a private offering to accredited investors (the "Offering") in accordance with Regulation D under the Securities Act of 1933 ("Securities Act"). The Offering consisted of 3,416,000 shares of the Company's Common Stock at a price per share of $0.20, for offering proceeds of $683,200. All securities sold in the Offering were sold in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

Warrants

On October 15, 2018, the Company issued warrants to purchase 1,900,000 shares of its common stock to three individuals in exchange for services, respectively. The warrants all carry two-year terms and an exercise price of $0.16 per share. Forty percent of each warrant may be exercised pursuant to a cashless exercise formula. The warrants otherwise contain standard terms and conditions. During the three and nine months ended October 31, 2018 the Company recognized $76,000 in expense related to the issuance of these warrants. These warrants were issued pursuant to Section 4(a)(2) of the Securities Act.

On October 26, 2018 the Company issued a total of 25,000 shares to Tysadco Partners LLC as compensation for services.

The shares shall vest at a schedule of 10,000 shares at on November 1, 2018, 7,500 shares on the 120th day from November 1, 2018, and 7,500 shares on the 180th day from November 1, 2018, subject to the investor relations agreement being in effect as of each applicable vesting date.

13

Note 11 – Subsequent Events

GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued ("subsequent events") as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, ("recognized subsequent events"). The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date ("non-recognized subsequent events").

Recognized Subsequent Events

None

Unrecognized Subsequent Events

The Company was named as a defendant in one civil suit filed with the District Court of the City and County of Denver, Colorado. This matter has been resolved.

On October 15, 2018, the Company entered into an Executive Employment Agreement (the "Phillips Employment Agreement") with Erin Phillips ("Ms. Phillips"). Pursuant to the Phillips Employment Agreement, Ms. Phillips agreed to continue to serve as the Company's CEO for a term commencing on October 15, 2018 and continuing until terminated by either party. The Company acknowledged that Ms. Phillips had $165,000 deferred compensation as of July 31, 2018 and Ms. Phillips agreed to continue to defer payment until November 1, 2018. The deferred compensation is recorded in accounts payable and accrued expenses on the balance sheet. Ms. Phillips will receive a base salary of $180,000 per year. If the Agreement is terminated by Ms. Phillips with "good reason" or by the Company without "cause," Ms. Phillips will be entitled to severance pay equal to $500,000 plus her base salary for twelve months. The Phillips Employment Agreement otherwise contains standard terms and conditions.

On October 15, 2018, the Company entered into an Employment Agreement (the "Kotzker Employment Agreement") with Jay Kotzker ("Mr. Kotzker"). Pursuant to the Employment Agreement, Mr. Kotzker agreed to continue to serve as the Company's general counsel for a term commencing on October 15, 2018 and continuing until terminated by either party. The Company acknowledged that Mr. Kotzker had $43,750 deferred compensation as of September 15, 2018 and $1,571.27 in unpaid expenses. Mr. Kotzker will receive a base salary of $150,000 per year. If the Agreement is terminated by the Company without "cause," Mr. Kotzker shall be entitled to severance pay equal to four months' salary. The Kotzker Employment Agreement otherwise contains standard terms and conditions.

On October 18, 2018, the Company entered into an Employment Agreement (the "SPhillips Employment Agreement") with Shawn Phillips ("Mr. Phillips"). Pursuant to the Employment Agreement, Mr. Phillips agreed to serve as the Company's Senior Business Development Strategist for a term commencing on October 18, 2018 and continuing until terminated by either party. Mr. Phillips will receive a base salary of $96,000 per year. If the Agreement is terminated by the Company without "cause," Mr. Phillips shall be entitled to severance pay equal to three months' salary. During the term of the Agreement, Mr. Phillips shall receive a vehicle stipend in the amount of $800 per month.  The SPhillips Employment Agreement otherwise contains standard terms and conditions.

14

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We were established to provide sophisticated Fulfillment Services to medical and retail stores and cultivation facilities in the regulated cannabis industry throughout the United States. Such Fulfillment Services are only be provided to stores and facilities located in geographical areas where the governing state and local ordinances allow for the provision of such services.

The Fulfillment Services that we currently are able to provide are summarized, as follows:

  •  Opportunity Assessment: For a standard fee, we will complete an Opportunity Assessment for a client, which would include financial modeling, completed with our proprietary assessment software.

     Application Filing Assistance: Based upon our knowledge of the various rules and regulations of respective state and local jurisdictions, we will provide

      turn-key application preparation and submission services for a client, and/or provide consulting assistance to a client who is self-preparing their application.

 

 ●     Branding, Marketing and Administrative Consulting Services: Customers may contract with us to use the Strainwisname, logo and affinity images in their retail store locations. A monthly fee will permit a branding customer to use the Strainwise® brand at a specific location. In addition, we will assist operators in marketing and managing their businesses, setting up new retail locations and general business planning and execution at an hourly rate. This includes services to establish an efficient, predictable production process, as well as, nutrient recipes for consistent and appealing marijuana strains.

 

 ●     Accounting and Financial Services: For a monthly fee, we will provide customers with a fully implemented general ledger system, with an industry centric chart of accounts, which enables management to readily monitor and manage all facets of a marijuana medical dispensary and cultivation facility. We will provide bookkeeping, accounts payable processing, cash management, general ledger processing, financial statement preparation, state and municipal sales tax filings, and state and federal income tax compilation and filings.

 

 ●     Compliance Services: The rules, regulations and state laws governing the production, distribution and retail sale of marijuana can be complex, and compliance may prove cumbersome. Thus, customers may contract with us to implement a compliance process, based upon the number and type of licenses and permits for their specific business. We will provide this service on both an hourly rate and stipulated monthly fee.

 

 ●     Lending: We will provide loans to individuals and businesses in the cannabis industry.

 We do NOT grow marijuana plants, produce marijuana infused products, sell marijuana plants and/or sell marijuana infused products of any nature in any jurisdiction were such activity has not been legalized.

Prior to December 2017, we provided rental and operational support-related activities to regulated entities, that have been discontinued.

15

Results of Operations  

Comparison of the three months ended October 31, 2018 to the three months ended October 31, 2017


For the Three Months Ended
October 31,

 

Change

     2018

 

        2017

 

 

$

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consulting services

$

12,500

 

$

20,000

 

$

(7,500)

(38)

 

Cost of consulting services

 

(12,500)

 

 

(55,121)

 

 

42,621

(77)

 

Gross profit

 

 

 

(35,121)

 

 

35,121

100

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Rents and other occupancy

 

13,500

 

 

28,143

 

 

(14,643)

(52)

 

Compensation

 

148,856

 

 

137,206

 

 

11,650

8

 

Professional, legal and consulting

 

335,429

 

 

33,150

 

 

302,279

912

 

Depreciation and amortization

 

435

 

 

183

 

 

252

137

 

General and administrative

 

79,895

 

 

97,202

 

 

(17,307)

(18)

 

Total operating costs and expenses

 

578,115

 

 

295,884

 

 

282,231

95

 

Loss from continuing operations

 

(578,115)

 

 

(331,005)

 

 

(247,110)

75

 

Loss on equity investment in unconsolidated subsidiary

 

(10,129)

 

 

 

 

(10,129)

100

 

Other

 

(114,986)

 

 

(115)

 

 

(114,871)

100

 

Loss from continuing operations, before provision for taxes on income

 

(703,230)

 

 

(331,120)

 

 

 

372,110

 

112

 

Provision for taxes on income

 

 

 

 

 

 

Loss from continuing operations, net of tax

 

(703,230)

 

 

(331,120)

 

 

372,110

112

 

Income (loss) from discontinued operations, net of tax

 

 

 

1,974,363

 

 

(1,974,363)

(100)

 

Net income/(loss)

$

(703,230)

 

$

1,643,243

 

$

(2,346,473)

(143)

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of the nine months ended October 31, 2018 to the nine months ended October 31, 2017

For the Nine Months Ended
October 31,

 

Change

       2018

 

         2017

 

 

$

%


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consulting services

$

143,749

 

$

173,500

 

$

(29,751)

(17)

 

Cost of consulting services

 

(24,943)

 

 

(172,473)

 

 

147,530

(86)

 

Gross profit

 

118,806

 

 

1,027

 

 

117,779

11,468

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Rents and other occupancy

 

39,516

 

 

56,445

 

 

(16,929)

(30)

 

Compensation

 

433,341

 

 

389,734

 

 

43,607

11

 

Professional, legal and consulting

 

420,518

 

 

84,283

 

 

336,235

399

 

Depreciation and amortization

 

1,304

 

 

1,874

 

 

(570)

(30)

 

General and administrative

 

221,536

 

 

238,328

 

 

(16,792)

(7)

 

Total operating costs and expenses

 

1,116,215

 

 

770,664

 

 

334,551

45

 

Loss from continuing operations

 

(997,409)

 

 

(769,637)

 

 

(227,772)

30

 

Loss on equity investment in unconsolidated subsidiary

 

(10,129)

 

 

 

 

(10,129)

100

 

Other

 

(116,726)

 

 

(1,016)

 

 

(115,710)

11,389

 

Loss from continuing operations, before provision for taxes on income

 

(1,124,264)

 

 

(770,653)

 

 

 

(353,611)

 

(46)

 

Provision for taxes on income

 

 


 

 

 

Loss from continuing operations, net of tax

 

(1,124,264)

 

 

(770,653)

 

 

(353,611)

(46)

 

Income (loss) from discontinued operations, net of tax

 

 

 

1,144,976

 

 

1,144,976

(100)


Net income/(loss)

$

(1,124,264)

 

$

374,323

 

$

(1,498,587)

(400)


 

 

 

 

 

 

 

 

 

 


 

16

Material changes in line items in our Statement of Operations for the three and nine months ended October 31, 2018 as compared to the same period last year, are discussed below:

            Rent and other occupancy – During 2017 rent included various back charges that resulted in higher rent. As a result of not having similar charges during 2018,          rent decreased for the three and nine months during 2018.

            Compensation – Compensation increased as a result of additional headcount for operations and to expand our consulting services.

          Professional, legal, and consulting – Professional fees increased due to significantly higher fees during the three months due to our efforts to bring our SEC       filings into compliance and the issuance of stock-based compensation related to professional services provided to us.

   ●General and administrative – General and administrative expenses include marketing, travel, and office expenses. These expenses fluctuate from period to               period but have been driven by our shift in focus of our operations to consulting services.

        Other – Other includes costs related to financing, expense related to the conversion of payables, and the amortization of debt discount related to the                  
        beneficial conversion feature.

Liquidity and Capital Resources

Our net cash flows are as follows:

 


For the Nine months
Ended October 31,




2018



2017


Consolidated Statements of Cash Flows Data:









Net cash used in operating activities


$

(433,089

)


$

(73,756)


Net cash used in investing activities



(155,233

)



( 4,024)


Net cash provided by financing activities



590,640

 



 9,863


Net change in cash


$

2,318

 


$

(67,737)


 

Operating Activities

Our cash used in operating activities is driven primarily by consulting revenue and vendor provided credit. Our primary uses of cash from operating activities have been for inventory purchases, compensation expenditures, professional fees, rent expense, and general and administrative expenses. Our cash flows from operating activities will continue to be affected principally by the results of operations and the extent to which we increase spending on personnel expenditures and our working capital requirements.

Investing Activities

During the period we acquired a trademark for $2,250 and made total cash investments of $152,983 into a equity investment in an unconsolidated subsidiary.

Financing Activities

Our cash provided by financing was primarily the result of advances made on the Puerto Rico and Oklahoma notes receivable, proceeds from the Richland convertible promissory notes, borrowings from related parties, proceeds from the issuance of common stock, and conversion of warrants to purchase common stock.

Indebtedness Agreements

On August 29, 2018, we entered into a Note Purchase and Security Agreement (the "Purchase Agreement") with Richland Fund, LLC., a Delaware limited liability company ("Richland"). Pursuant to the Agreement, Richland agreed to purchase our Convertible Promissory Notes (collectively, the "Notes"), in the aggregate principal amount of $225,000, funded in three tranches, (i) $100,000.00 (the "First Note"), (ii) $67,000.00 (the "Second Note"), and (iii) the balance of $58,000.00 (the "Third Note"). The Notes bear 12% interest per annum, with the last payment under the Notes due January 15, 2020. The Notes are secured by all of our assets and guarantees from Shawn and Erin Phillips. The Notes may be prepaid without penalty with 30 days' advance notice to Richland. In conjunction with the Richland Note, we issued Richland warrants to purchase 100,000 shares of the Company's common stock for $18,000. Richland exercised the warrants on October 3, 2018.

17

The Notes are convertible into our common stock. The conversion price will be equal to the lower of (i) $0.15 cents per share (ii) or the average of the closing bid price of our common stock taken over the three trading days prior to conversion or (iii) upon any issuance by the Company of common stock, or a security that is convertible into common stock, at a price lower than a net receipt to the Company of $0.15 per share, at such price that shall be at the same discount ratio as on the Funding Date. The conversion price of the Notes will be further subject to proportional adjustment for stock splits, reverse stock splits or combinations of shares, stock dividends, and the like. There are penalties for failure to timely deliver conversion shares.

For additional information see our Current Report on Form 8-K filed with the SEC on October 19, 2018.

Critical Accounting Policies and New Accounting Pronouncements

See Note 2 to the financial statements included as part of this report for a description of the Company's significant accounting policies.

Disclosure Controls and Procedures

Under the direction and with the participation of the Company's management, the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of October 31, 2018. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic reports with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations, and that such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching its desired disclosure control objectives. Based upon this evaluation, management concluded that the Company's disclosure controls and procedures were not effective as of October 31, 2018, primarily based on these criteria, due to material weaknesses resulting from our failure to 1) provide correct responsibilities to adequately segregate activity in the area of cash receipts and cash disbursements, 2) effectively implement comprehensive entity level internal controls, and 3) adequately segregate duties within the accounting department due to an insufficient number of staff.

Changes in Internal Controls

There were no changes in the Company's internal control over financial reporting during the quarter ended October 31, 2018, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

18

PART II

Item 1. Legal Proceedings

 None.

Item 1A. Risk Factors

 

There have been no material changes to the Risk Factors as disclosed in our 2018 Form 10-K for the year ended January 31, 2018 filed with the Securities and Exchange Commission on October 9, 2018.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Equity Securities

On or around October 18, 2018, 23 completed a private offering to accredited investors (the "Offering") in accordance with Regulation D under the Securities Act of 1933 ("Securities Act"). The Offering consisted of 3,416,000 shares of the Company's Common Stock at a price per share of $0.20, for offering proceeds of $683,200. All securities sold in the Offering were sold in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

From approximately September 24, 2018 to October 16, 2018, we issued a total of 281,000 shares of its common stock for $42,150 resulting from the exercise of outstanding warrants with an exercise price of $0.15 per share. These shares were issued pursuant to Section 4(a)(2) of the Securities Act.

Use of Proceeds

 

We utilized these funds for an equity investment in Volume 2, LLC, loans to fund joint ventures in Oklahoma and Puerto Rico, and to fund day to day operations.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information.

None.

19

 Item 6. Exhibit Index

 

 

 

 

 

Incorporated by Reference

Exhibit
No.

 

Description

 

Form

 

SEC File 
Number

 

Exhibit

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1**

 

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

31.2**

 

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1***

 

Certification of the Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101**

 

The following materials from STWC Holdings, Inc.'s quarterly report on Form 10-Q for the three months ended October 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Statement of Changes in Stockholders' Deficit; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) related notes to these financial statements. 

 

 

 

 

 

 

 

 

 

 

 

 

*

Indicates management contract or compensatory plan or arrangement.

**

Filed herewith

***

Furnished herewith



20

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.

 

 

                                              STWC HOLDINGS, INC.

 

 

December 14, 2018                                                                            By:/s/ Erin Phillips
                                                                                                            Erin Phillips, President, Chief Financial and Accounting Officer

 

21