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KUSH BOTT : ES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

11/30/2015 | 01:52pm US/Eastern

Cautionary Statement Concerning Forward-Looking Statements

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

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


value="OTC-PINK:KSHB" idsrc="xmltag.org">Kush Bottles, Inc. ("Kush" or the "Company") provides customizable packaging products, materials and supplies for the cannabis industry. Representative examples of our products include pop-top bottles, exit/barrier bags, tubes, and other small-sized containers. We sell our solutions predominantly to businesses operating in jurisdictions that have some form of cannabis decriminalization. These businesses include medical and recreational dispensaries, large and small scale processors, and packaging re-distributors. We also sell direct to consumers primarily via our online store.

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

On April 10, 2015, the Company paid cash consideration of $373,725 and issued 3,500,000 shares of common stock to the sellers of Dank Bottles, LLC ("Dank"), in exchange for all of 100% of the membership interests in Dank. Kush is identified as the acquiring company for US GAAP accounting purposes. Under the acquisition method of accounting, as of the effective time of the business combination, the assets acquired, including the identifiable intangible assets, and liabilities assumed from Dank were recorded at their respective fair values. Any excess of the purchase price for the business combination over the net fair value of Dank identified assets and intangible assets acquired and liabilities assumed were recorded as goodwill. The operational results discussed below include the activity for Dank from April 10, 2015 to August 31, 2015.

Discussion of Results of Operations for Fiscal 2015 Compared to Fiscal 2014

Total revenues increased from $1,710,286 in fiscal 2014 to $4,013,571 in fiscal 2015, an increase of $2,303,285 or 135%. This increase is primarily attributed to the acquisition of Dank on April 10, 2015, which effectively enabled the Company to capture a large portion of the market share in the state of value="LS/us.co" idsrc="xmltag.org">Colorado. Dank revenues for the period from April 10, 2015 to August 31, 2015 accounted for $1,196,862. Sales to Dank prior to the acquisition for the period from September 1, 2014 to April 9, 2015 accounted for $578,918. In addition, growth in volume of customer orders throughout the fiscal year in the states of value="LS/us.or" idsrc="xmltag.org">Oregon and value="LS/us.wa" idsrc="xmltag.org">Washington contributed to the increase in revenues. Sales growth was not significantly impacted by inflation or changes in pricing. Cost of goods sold increased from $987,094 in fiscal 2014 to $2,585,397 in fiscal 2015, an increase of $1,598,303 or 162%. The two primary components of cost of goods sold include direct purchases and freight. Gross profits in fiscal 2015 amounted to $1,428,174 for a 36% gross margin. Gross profits in fiscal 2014 amounted to $723,192 for a 42% gross margin. Gross Profits increased by $704,982 in fiscal 2015 or 97%. The driving factor behind the increase in sales, cost of goods sold, and gross profits in fiscal 2015 is due to the acquisition of Dank and increased activity in the states of value="LS/us.wa" idsrc="xmltag.org">Washington and value="LS/us.or" idsrc="xmltag.org">Oregon.

Cost of goods sold fiscal 2015 was $2,585,397, which compares to cost of goods sold of $987,094 for fiscal 2014. Our revenue increased during the fiscal year ended August 31, 2015, and as our revenue increased, our cost of goods sold correspondingly increased.

Operating expenses in fiscal 2015 amounted to $1,773,895 compared to $1,113,577 in fiscal 2014, an increase of $660,318 or 59%. The increase stems from the additional operating expenses assumed in the acquisition of Dank in addition to increases in payroll, professional fees, insurance, and rent. Payroll and payroll related expenses increased by $544,836 or 132% in fiscal 2015 due to the increase in head-count, notably an increase of 15. Professional fees increased by $64,213 or 648%. Rent expense increased $44,210 or 48% in fiscal 2015 due to increased rents and the new facility in value="LS/us.co" idsrc="xmltag.org">Colorado. Insurance increased by $32,002 or 644%.

The net result for the fiscal year ended August 31, 2015 was a loss of $339,303 or $0.008 loss per share, compared to a loss of $395,517 or $0.010 loss per share for the prior fiscal year.

Page 9


Liquidity and Capital Resources

At August 31, 2015, we had cash of $201,259 and a working capital surplus of $207,481.

Cash Flows from Operating Activities

Net cash used in operating activities decreased from $228,664 in fiscal 2014 to $202,228 in fiscal 2015. The change is primarily attributed to the decrease in the Company's net loss ($395,517 in fiscal 2014 compared to $339,303 in fiscal 2015). The other significant factors include changes in prepaids and inventory. The Company prepaid for $125,000 of inventory which remained in process and in-transit as of August 31, 2014. The Company focused heavily on expanding its inventory levels in fiscal 2015.

Cash Flows from Investing Activities

Net cash used in investing activities increased from $14,281 in fiscal 2014 to $410,945 in fiscal 2015. The significant increase is due to the $273,725 cash outflow required to acquire Dank. The Company also invested in acquiring new vehicles and machinery.

Cash Flows from Financing Activities

Net cash provided by financing activities increased from $242,285 in fiscal 2014 to $791,428 in fiscal 2015. The change is primarily due to the sale of shares of the Company's common stock to accredited investors in a private placement offering.

Historically, the Company has had operating losses and negative cash flows from operations. The Company has a net loss of $339,303 for the fiscal year ended August 31, 2015, and has an accumulated deficit of $748,447 as of August 31, 2015. Whether, and when, the Company can attain profitability and positive cash flows from operations is uncertain. These uncertainties cast significant doubt upon the Company's ability to continue as a going concern. The Company will need to raise capital in order to fund its operations. This need may be adversely impacted by uncertain market conditions and changes in the regulatory environment. To address its financing requirements, the Company intends to seek financing through debt and equity issuances and rights offerings to existing stockholders.

Specifically, management has identified that a minimum of $350,000 of capital is needed over the next 12 months in order sustain operations. These capital needs take into account, among other things, management's plans to alleviate cash constraints over the next 12 months by increasing sales volume and gross margin through focused sales and marketing efforts in developing states. Management expects to utilize the $350,000 for working capital. Moreover, on April 6, 2015, the Company entered into a $240,000 revolving line of credit facility with a financial institution, which the Company can utilize to fund working capital requirements. Furthermore, management has outlined a plan to raise $1,000,000 in capital over the next 12 months through the issuance of shares of the Company's common stock to accredited investors. Management believes that the capital raised through these methods will be sufficient to sustain operations for the next 12 months. However, the outcome of these matters cannot be predicted with certainty at this time.

Off-Balance Sheet Transactions

We have no off-balance sheet transactions.

Critical Accounting Policies and Estimates

We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in the first note to our consolidated financial statements included elsewhere herein. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in value="LC/us" idsrc="xmltag.org">the United States. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect our financial position or results of operations. We believe that the following accounting policies are the most critical because they have the greatest impact on the presentation of our financial condition and results of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in value="LC/us" idsrc="xmltag.org">the United States 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. Actual results could differ from those estimates.

Accounts Receivable and Allowance for Bad Debts

Trade accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis, thus trade receivables do not bear interest. Trade accounts receivables are periodically evaluated for collectability based on past credit history and their current financial condition.


Inventories are stated at the lower of cost or net realizable value using the first-in first out (FIFO) method.

Earnings (Loss) Per Share

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

Revenue Recognition

It is the Company's policy that revenues from product sales is recognized in accordance with ASC 605 "Revenue Recognition". Four basic criteria must be met before revenue can be recognized; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding fixed nature in selling prices of the products delivered and the collectability of those amounts. The Company has not implemented any specific rebate programs. Provisions for discounts to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company has not established a formal customer incentive program, but considers and accomodates discounts to certain customers on a case by case basis, including by way of example, for volume shipping or for certain new customers with orders over a specific discretionary dollar threshold. Consistent with ASC 605-15-25-1, the Company considers factors such as historical return of products, estimated remaining shelf life, price changes from competitors, and introductions of competing products in establishing a refund allowance. The Company recognizes revenues as risk and title to products transfers to the customer (which generally occurs at the time shipment is made), the sales price is fixed or determinable, and collectability is reasonably assured. The Company defers any revenue for which the product was not delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

Share-based Compensation

The Company account for its stock based award in accordance with Accounting Standards Codification subtopic 718-10, "Compensation", which requires fair value measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including restricted stock awards. The Company estimates the fair value of stock using the stock price on the date of the approval of the award. The fair value is then expensed over the requisite service periods of the awards, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.

Income Taxes

The Company accounts for income taxes in accordance with accounting guidance now codified as FASB ASC 740, "Income Taxes," which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

The Company applies the provisions of ASC 740, "Accounting for Uncertainty in Income Taxes". The ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. The ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company did not identify any material uncertain tax positions on returns that have been filed or that will be filed.

Foreign Currency Transactions


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© Edgar Online, source Glimpses

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