STWC. Holdings, Inc. - Quarter Report: 2019 October (Form 10-Q)

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, 2019

☐ 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)

Securities Registered pursuant to section 12(b) of the Act: None

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act 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, 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.

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 34,482,156 shares of common stock as of December 9, 2019.

Table of Contents

PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

STWC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes.

STWC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes.

STWC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

See accompanying notes.

STWC HOLDINGS, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICT)

(Unaudited)

See accompanying notes.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

Note 1 – Organization

STWC HOLDINGS, INC., through its wholly-owned subsidiary, 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 and production industry. The Company was originally incorporated in the State of Utah on April 25, 2007, and redomiciled to Colorado by merging into a Colorado corporation incorporated on June 7, 2016. Strainwise, Inc., a wholly owned subsidiary of the Company, was originally 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. On August 20, 2019 the Company adopted Colorado Bylaws which replace the bylaws formerly used by the Company and previously adopted by 4^th Grade Films, a Utah corporation, prior to its change of domicile to Colorado.

On December 13, 2018, the Company invested in Meridian A, LLC, an Oklahoma limited liability company, which owns a CBD retail store located in Oklahoma. The Company’s Chief Executive Officer is the managing member of the entity and STWC owns 75% of the legal entity. On May 15, 2019, the Company obtained full ownership of the HiLife JV entity. In accordance with Accounting Standards Codification 810 Consolidation, the Company has consolidated these entities.

Note 2 – Summary of significant accounting policies

Basis of presentation - The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company has elected a fiscal year ending on January 31. Certain balance sheet classifications have been made to prior period balances to reflect the current period’s presentation format. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

Unaudited Interim Financial Statements - The accompanying unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial position; (b) the result of operations; and (c) cash flows, have been made in order to make the financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year.

Going Concern and Management’s Plan - Our Consolidated Financial Statements as of and for the period ended October 31, 2019 were prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that could be necessary should we be required to liquidate assets.

Our ability to continue as a going concern and raise capital for specific strategic initiatives could also depend on obtaining adequate capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms.

Use of estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period they are deemed to be necessary. Significant estimates made in the accompanying financial statements include but are not limited to following: those related to revenue recognition, allowance for doubtful accounts and notes receivable and unbilled services, lives and recoverability of equipment and other long-lived assets, realization of deferred tax assets, valuation of equity-based transactions, contingencies and litigation. The Company is subject to uncertainties, such as the impact of future events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company’s financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

Cash and cash equivalents – the company considers all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents. Cash balances may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date. For the periods presented no balances exceeded the federally insured limits.

Accounts Receivable – Accounts receivable are recorded at the net value of face amount less an allowance for doubtful accounts. The Company evaluates its accounts receivable periodically based on specific identification of any accounts receivable for which the Company deems the net realizable value to be less than the gross amount of accounts receivable recorded; in these cases, an allowance for doubtful accounts is established for those balances. In determining its need for an allowance for doubtful accounts, the Company considers historical experience, analysis of past due amounts, client creditworthiness and any other relevant available information. However, the Company’s actual experience may vary from its estimates. If the financial condition of its clients were to deteriorate, resulting in their inability or unwillingness to pay the Company’s fees, it may need to record additional allowances or write-offs in future periods.

The allowance for doubtful accounts, if any, is recorded as an expense within general and administrative expenses. As of October 31, 2019, and January 31, 2019, the Company’s allowance for doubtful accounts was $67,165 and nil, respectively. The Company recorded bad debt expense during the three and nine months ended October 31, 2019 of $67,165.

Prepaid expenses and other assets – Prepaid expenses and other current assets consist of various payments the Company has made in advance for goods or services to be received in the future. As of October 31, 2019, prepaid expenses were comprised of advance payments made to third parties for general expenses. Prepaid general expenses are amortized over the applicable periods which approximate the life of the contract or service period.

Tenant improvements and office equipment – Tenant improvements and office equipment are recorded at cost and are depreciated under straight line methods over each item’s estimated useful life. Management reviews the Company’s tenant improvements and office equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Maintenance and repairs of property and equipment are charged to operations. Major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in operations.

Tenant improvements and office equipment, net of accumulated amortization and depreciation are comprised of the following:

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, 2019 and 2018 was $252 and $252, respectively. Amortization and depreciation expense related to tenant improvements and office equipment for the nine months ended October 31, 2019 and 2018 was $1,191 and $755 respectively.

Investment in Unconsolidated Entity – The Company has a significant and non-controlling investment in several entities. The Company accounts for its investment using the equity method based on the ownership interest and ability to exert significant influence. Accordingly, investments are recorded at cost, and adjustments to the carrying amount of the investment are recognized in the period incurred. The Company’s share of the earnings or losses are reported in the other income and expense section of the income statement.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

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.

Trademarks – Trademarks and other intangible assets are stated at cost and are amortized using the straight-line method over fifteen years. Amortization expense for the three months ended October 31, 2019 and 2018 was $220 and $183, respectively. Amortization expense for the nine months ended October 31, 2019 and 2018 was $773 and $549, respectively.

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 and unrealized gains (losses) on available-for-sale securities. Since the Company’s inception there have been no differences between the Company’s comprehensive loss and net loss.

Net income per share of common stock - We present earnings per share (“EPS”) in accordance with ASC 260 Earnings per Share, which requires 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.

Revenue Recognition

Effective February 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers using the modified retrospective method. There was no adjustment required upon transition. Under ASC 606, the Company recognizes revenue applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

Consulting Services

We generate revenues from professional services consulting agreements. These arrangements are generally entered into: (1) on an hourly basis for an hourly fee; or, (2) on a fixed fee basis; or (3) a monthly fee basis. Generally, we require a complete or partial prepayment or retainer prior to performing services for hourly or fixed fee contracts.

For hourly based service contracts, we recognize revenue over time as services are performed and customers simultaneously consume such services. Any advances or retainers received from clients for hourly services are reflected in the Deferred revenue liability account until we recognize revenues as we incur and charge billable hours.

Our fixed fee basis engagements are recognized at a point in time. Generally, our fixed fee arrangements are for completion of a final deliverable or act which is significant to the arrangement as a whole. Although fees are typically collected in advance and the services provided have no alternative use to the Company, there is not a specific enforceable right to payment for the cost of services provided plus a reasonable profit margin. Accordingly, advances received at contract inception are reflected in the Deferred revenue liability account until the end of the contract when revenue is recognized and the customer takes control of the deliverable. These engagements do not generally exceed a one-year term.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

Revenue recognition is affected by a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing, awaiting notification of license award from local government, and the level of client involvement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. We believe if an engagement terminates prior to completion, we can recover the costs incurred related to the services provided.

Certain of our fixed fee contracts assisting customers with license applications include a success fee which is earned if the customer is awarded a license. We exclude such variable consideration from the transaction price and recognize the revenue when and if the license is awarded as the uncertainty of the application process creates a probability of significant revenue reversal.

Our monthly fee arrangements are billed on a monthly basis in arrears for a variety of services and are recognized over time as the customers simultaneously consume such services.

The revenue by contract type for the periods ending October 31, 2019 and 2018 are listed in the table below:

Deferred revenue as of October 31, 2019 and January 31, 2019 was $166,500 and $192,500, respectively. The Company is unable to determine timing for revenue recognition at this time for its deferred revenue due to state regulation changes.

Product Sales

Revenue from product sales, including delivery fees, is recognized when an order has been obtained from the customer, the price is fixed and determinable when the order is placed, the product is shipped, title has transferred and collectability is reasonably assured. Given the facts that (1) our customers exercise discretion in determining the timing of when they place their product order; and, (2) the price negotiated in our product sales contracts is fixed and determinable at the time the customer places the order, we are not of the opinion that our product sales indicate or involve any significant financing that would materially change the amount of revenue recognized under the contract, or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606. Product sales for the sales for the three and nine months ended October 31, 2019 was $22,095 and $45,506, respectively.

Reclassifications- Certain account reclassifications have been made to prior period balances to reflect the current period’s presentation format; such reclassifications had no impact on the Company’s consolidated statements of operations or consolidated statements of cash flows and had no material impact on the Company’s consolidated balance sheets.

Stock-Based Compensation – The Company records equity instruments at their fair value on the measurement date by utilizing the Black-Scholes option-pricing model. Stock Compensation for all share-based payments, is recognized as an expense over the requisite service period.

Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of the options, risk-free interest rate and forfeiture rate. The term of the options was assumed to be five years. The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant. Finally, management assumed a 0% forfeiture rate in fiscal year 2018.

Non-employee share-based compensation charges generally are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

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. New pronouncements assessed by the Company recently are discussed below:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases (“ASU 2016-02”). The guidance in this new standard requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard effective February 1, 2019 by recording an immaterial transition adjustment and right of use assets and lease liabilities of approximately $500,000.

In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of evaluation the impact of the pronouncement.

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, 2019 of $10.2 million. The Company’s losses to date raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s 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 the Company’s 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.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

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:

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.

Note 5 – Commitments and contingencies

The Company entered into a right-of-use operating lease agreement with an affiliate for the Company’s corporate office needs, consisting of 4,000 square feet of office space. The lease is for a 4-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. The office space lease includes in-substance fixed lease payments, and does not provide an implicit rate, the remaining lease term for the office space is 30 months. The Company also leases commercial retail space for the benefit of its investments in Oklahoma under an agreement ending August 31, 2023.

As of October 31, 2019, maturities of the lease liabilities are as follows:

During the three months ended October 31, 2019 and 2018, rent expense was $19,108 and $13,500, respectively. During the nine months ended October 31, 2019 and 2018, rent expense was $61,064 and $39,516, respectively.

Note 6 – Notes Receivable-Related Parties

The Company has management and licensing agreements with a private entity in Puerto Rico 39% owned by the Company’s CEO, Erin Phillips, to operate four dispensaries and one cultivation operation in Puerto Rico. In conjunction with these agreements, the Company has begun providing funds to operate the Puerto Rico operations, which will be evidenced by a promissory note. The terms have not been finalized on this note and currently there is no specified terms to the agreement. Through October 31, 2019 the Company has advanced $280,607 related to the note.

The Company has management and licensing agreements with two private entities in Oklahoma. STWC has a 25% ownership in 2600 Meridian LLC, and an option to acquire 25% interest in HWH Farms, LLC. In conjunction with these agreements, the Company has begun providing funds for start-up and development costs, which will be evidenced by a promissory note. The terms have not been finalized on these notes and currently there is no specified terms to the agreement. Through October 31, 2019 the Company has advanced $121,655 to 2600 Meridian, LLC and recognized a loss on investment of $31,988. The Company has advanced $197,669 to HWH Farms, LLC related to the notes.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

Note 7 – Related Party

The Company has entered into separate management and licensing contracts with STWC Sorrento Valley, LLC which is partially owned by the Company’s CEO, Erin Phillips. Ms. Phillips owns 27.5% of the STWC Sorrento Valley, LLC. Ms. Phillips allocated $200,000 of the Green Acres note to fund the related project in California as directed by the note agreement which reduced the liability to Ms. Phillips for loan advances received as of October 31, 2019.

The Company manages its cash flow by utilizing related party loans. During the nine months ended October 31, 2019 and 2018 the company had net borrowings of $35,939 and $106,139, respectively, from related parties to fund operations. The loans do not carry any interest. The Company converted an accrued expense with a related party to a note payable in the amount of $60,300 in January 2019. As of October 31, 2019, the Company reflected current loans payable to related parties of $67,960.

The Company received $125,000 for the benefit of the Puerto Rico entities and is disbursing these funds to operate the Puerto Rico operations, the balance as of October 31, 2019 was $32,745. In addition, the Company received $50,000 for the benefit of 2600 Meridian LLC; all the funds have been used to cover start-up and development costs. The funds held for related party entities are included as advances held in trust liabilities on the balance sheet.

Note 8 – Notes Payable

Note purchase and security agreement – On August 29, 2018, the Company entered into a Note Purchase and Security Agreement with Richland Fund, LLC., a Delaware limited liability company. Pursuant to the Agreement, Richland agreed to purchase Convertible Promissory Notes of the Company 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 December 15, 2020. The Notes are secured by all assets of the Company and guarantees from Shawn and Erin Phillips. Principal and interest payments are to commence on August 1, 2019, no payments were made during the three months ended October 31, 2019.

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. The company recognized a beneficial conversion feature on the notes as a discount and additional paid in capital of $225,000. The company has recognized $40,909 in interest expense for the amortization of the debt discount for the three months ending October 31, 2019 and $122,727 during the nine months ending October 31, 2019.

In connection with the funding agreement, the Company agreed to form and organize a subsidiary. The Company and lender are in discussions regarding the assets to be held in the subsidiary; nothing has been finalized as of the issuance date.

Loan Agreement – On April 6, 2018, the Company entered into a loan agreement with Green Acres Partners A, LLC, (the “lender”) whereby the lender agreed to loan to the Company $205,000. The loan proceeds are to be used specifically for the capital needs of two related party projects in San Diego, California. The interest rate on the notes is 12% per annum and monthly interest payments are due the first day beginning no later than August 1, 2019; thereafter the Company shall pay interest and principal on 60% of the Company’s ownership percentage of the available profits from the San Diego projects. The loan is personally guaranteed by Shawn Phillips, the husband of Erin Phillips, CEO. No payments were made during the three months ended October 31, 2019.

Secured Promissory Note – On December 7, 2018, the Company entered into a 15% Secured Promissory Note with Richland Fund, LLC, (the “lender”) whereby the lender agreed to loan to the Company $126,100. The interest rate on the note is 15% per annum and monthly interest payments are due the first day each month beginning January 1, 2019. If any interest payment remains unpaid and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only will be increased to 20% per annum, until the past due interest amount is paid in full. The note originally matured on March 7, 2019 but was extended to a maturity date of August 1, 2019, no payments were made during the three months ended October 31, 2019.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

Securities Purchase Agreements (SPA)

Power Up Lending - On February 13, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $103,000. On February 15, 2019, the Company issued the Note. The Note matures on February 13, 2020, and bears interest at 12% per annum, increasing to 22% after maturity.

On March 18, 2019, the Company entered into the second tranche of the potential $1,000,000 funding with Power Up.  The Company entered into a second Securities Purchase Agreement pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $53,000. On March 18, 2019, the Company issued the Note. The Note matures on March 18, 2020, and bears interest at 12% per annum, increasing to 22% after maturity.

Under the Note, Power Up may convert all or a portion of the outstanding principal of the Note into shares of common stock of the Company beginning on the date which is 180 days from the date of the Note, at a price equal to 61% of the lowest trading price during the 20 trading day period ending on the last complete trading date prior to the date of conversion; provided, however, that Power Up may not convert the Note to the extent that such conversion would result in beneficial ownership by Power Up and its affiliates of more than 4.99% of the Company’s issued and outstanding Common Stock. The company recognized a beneficial conversion feature on the notes as a discount and additional paid in capital of $102,738. The company has recognized $42,761 in interest expense for the amortization of the debt discount for the three and nine months ending October 31, 2019.

If the Company prepays the Note within 30 days of the date of the Note, the Company must pay all of the principal at a cash redemption premium of 110%; if the prepayment is made between the 31^st day and the 60^th day after the date of the Note, then the redemption premium is 115%; if the prepayment is made from the 61^st to the 90^th day after date of the Note, then the redemption premium is 120%; if the prepayment is made from the 91^st to the 120^th day after the date of the Note, then the redemption premium is 125%; if the prepayment is made from the 121^st to the 150^th day after the date of the Note, then the redemption premium is 130%; and if the prepayment is made from the 151^st to the 180^th day after the date of the Note, then the redemption premium is 135%. The Note cannot be prepaid after the 180^th day following the date of the Note.

The Company is required to reserve for issuance upon conversion of the Note, six times the number of shares that would be issuable upon full conversion of the Note, assuming the 4.99% limitation were not in effect.  In connection with the Note, the Company has caused its transfer agent to reserve initially 1,494,276 shares of Common Stock. The Company received a net amount of $150,000, with $6,000 paid for Power Up’s legal and due diligence expenses.

Crown Bridge - On May 1, 2019 the Company received funds from Crown Bridge Partners, LLC under a Securities Purchase Agreement dated April 18, 2019. Under the terms of the SPA, the Company received a total of $95,000, after an original issue discount of $5,000, and issued a convertible promissory note in the principal amount of $100,000.  In addition, the Company reimbursed Crown Bridge $2,000 for its legal fees.  The Company also issued warrants to purchase 60,606 shares of the company’s common stock associated with this transaction.

The maturity date of the Note is 12 months from April 18, 2019. The Note bears interest at 12% per annum at its face amount, with a default rate of 15% per annum (or the maximum amount permitted by law). If the Company prepays the Note through the 180^th day following the date thereof, the Company must pay all of the principal and interest with a prepayment penalty ranging from 135% to 150%. After the 180^th day the Company has no further right of prepayment.

Crown Bridge may, at any time, convert all or any part of the outstanding principal of the Note into shares of our common stock at a price per share equal to 60% (representing a 40% discount rate) of the lowest trading price of the common stock during the 20 trading day period ending on the last complete trading day prior to the date of conversion. If the conversion price is equal to or lower than $0.35 per share, an additional 15% discount will be applied (resulting in a 55% discount rate, assuming no other adjustments); if the Company is unable to deliver converted shares via DWAC, an additional 10% discount will be applied (resulting in a discount rate of 50%, assuming no other adjustments); if the Company fails to comply with our reporting requirements under the Exchange Act, an additional 15% discount will be applied (resulting in a discount rate of 55%, assuming no other adjustments); and if the Company fails to maintain our status as “DTC Eligible” or if at any time the conversion price is lower than $0.10, an additional 10% discount will be applied (resulting in a discount of 65%, assuming no other adjustments except for the 15% discount due to the conversion price below $0.35).  Crown Bridge may not convert the Note to the extent that such conversion would result in beneficial ownership by Crown Bridge and its affiliates of more than 4.99% of our issued and outstanding common stock.  The Company has also granted piggy-back registration rights for the shares issuable upon conversion of the Note. The company recognized a beneficial conversion feature on the notes as a discount and additional paid in capital of $100,000. The company has recognized $25,137 in interest expense for the amortization of the debt discount for the three months ending October 31, 2019 and $50,000 during the nine months ending October 31, 2019.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

The Note contains certain representations, warranties, covenants (both affirmative and negative), and events of default, including if our common stock is suspended or delisted for trading, or if the Company is delinquent in our periodic report filings with the SEC. In the event of a default, at the option of Crown Bridge, it may consider the Note immediately due and payable and the amount of repayment increases to 150% of the outstanding balance of the Note.  The Note also grants Crown Bridge a right of first refusal for any future capital raises or financings by us.  It also contains a most favored nations provision for any more favorable terms in future financing transactions by us.

The Warrant may be exercised at any time through the second anniversary date of the Note. The exercise price per share of common stock under the Warrant is $1.65 per share, subject to adjustment, including cashless exercise.  The Warrant also contains a most favored nations provision. As a result of granting the Warrant to FirstFire, see below, with an exercise price of $1.00, Crown Bridge Partners, LLC, the holder of warrants to purchase 60,606 shares of the Company’s common stock at a stated exercise price of $1.65 per share, has the option to reduce the exercise price to $1.00 per share and to increase the number of shares issuable upon exercise of the warrant to 100,000 shares.

Tangiers - On June 20, 2019 the Company entered into a 10% Fixed Convertible Promissory Note with Tangiers Global, LLC in the aggregate principal amount of up to $550,000. The initial principal amount of the Tangiers Note is $165,000, for which Tangiers paid a purchase price of $150,000 on June 24, 2019, representing approximately a 10% original issue discount, due six months from the effective date of each payment by Tangiers. Upon Company request, subject to certain conditions, Tangiers will pay up to an additional $400,000 consideration, subject to a 10% original issue discount, and in such event, the maturity date for the additional payment would be six months from the effective date of such payment. The sum that the Company must repay to Tangiers would be prorated based on the consideration actually paid by Tangiers, such that the Company is only required to repay the amount funded (plus the original issue discount, interest and other fees, as applicable), and the Company is not required to repay any unfunded portion of the Tangiers Note.

The Tangiers Note is convertible at the option of Tangiers at a conversion price of $0.65 per share, subject to adjustment in the event of a forward split, stock dividend, or the like, but not adjusted in the event of a reverse split, recombination, or the like. If a prepayment is made within 90 days, the Company must pay an amount equal to 110% of the principal amount so paid; from 91 to 120 days, the Company must pay an amount equal to 120% of the principal amount so paid; and from 121 to 180 days, the Company must pay an amount equal to 130% of the principal amount so paid. Upon the occurrence of an event of default, as such term is defined under the Tangiers Note, at the holder’s election, the Note will be immediately due and payable in cash at an amount equal to the principal amount due, plus an additional amount equal to 30% of the principal amount.  In addition, five days following acceleration of the repayment of the Note, interest will accrue at the rate of 20% per annum or the maximum legal rate.  The Company has also caused their transfer agent to reserve not less than 7,500,000 shares of the Company’s common stock for issuance upon conversion. The company recognized a beneficial conversion feature on the notes as a discount and additional paid in capital of $165,000. The company has recognized $82,951 in interest expense for the amortization of the debt discount for the three months ending October 31, 2019 and $119,918 during the nine months ending October 31, 2019.

In the even the Note is not repaid on or before the maturity date, the holder may convert in whole or in part the outstanding principal amount of the Note into shares of our common stock at a conversion price equal to the lower of initial conversion price of $0.65 per share or 60% of the lowest trading price of our common stock during the 15 consecutive trading days prior conversion.

For a period of 45 days following the initial funding under the Note, the Company has agreed not to enter into any convertible debt financing transaction with another party.  Further, the Company has granted a right of first refusal to Tangiers in connection future financings by us so long as the Note is outstanding.

 STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

With respect to the above loan transaction with Tangiers, the Company issued Tangiers a stock purchase warrant allowing for the purchase of 1,100,000 shares of our common stock at $1.25 per share on a cashless basis for a period of five years.

In addition to the loan transaction with Tangiers, the Company has entered into an Investment Agreement with Tangiers whereby Tangiers has agreed to purchase shares of our common stock up to an aggregate of $10,000,000 under certain terms and conditions.  The purchase price for the shares is 80% of the lowest trading price of the stock during the five consecutive trading days prior to receipt by Tangiers of the notice from us requiring purchase by them.  The maximum number of shares the Company can require Tangies to purchase is restricted to 200% of the average daily trading volume during 10 consecutive trading days, provided the amount is at least $5,000 and does not exceed $500,000.

FirstFire - On June 21, 2019 the Company received funds from FirstFire Global Opportunities Fund.  Under the terms of the SPA, the Company received a total of $135,000, after an original issue discount of $15,000, and issued a convertible promissory note, in the principal amount of $150,000.  The Company also issued to FirstFire immediately exercisable five-year warrants to purchase 150,000 shares of our common stock at $1.00, subject to adjustment in the event the Company issues shares at less than the current exercise price.  The Warrant also contains a cashless exercise provision and a most favored nations provision.

The maturity date of the Note is nine months from June 18, 2019. The Note bears interest at 10% per annum at its face amount, with a default rate of 15% per annum (or the maximum amount permitted by law). If the Company prepays the Note through the 90^th day following the date thereof, the Company must pay an amount equal to 125% of the principal amount of the Note and any accrued but unpaid interest thereon, plus any default interest.  If the Company prepays the Note from the 91^st day through the 180^th day following the date thereof, the Company must pay an amount equal to 135% of the principal amount of the Note and any accrued but unpaid interest thereon, plus any default interest. After the 180^th day the Company has no further right of prepayment.

FirstFire may, at any time, convert all or any part of the outstanding principal and interest, including default interest, of the Note into shares of the company’s common stock at the lower of $0.75 per share or a price per share equal to 55% (representing a 45% discount rate) of the lowest trading price of the common stock during the 20 trading day period prior to the date of conversion. FirstFire may not convert the Note to the extent that such conversion would result in beneficial ownership by FirstFire and its affiliates of more than 4.99% of our issued and outstanding common stock, or up to 9.99% at the option of FirstFire.  The Company has agreed to reserve for issuance the greater of 25,000,000 shares or the number of shares equal to 3.5 times the number of shares issuable upon conversion of the Note. The company recognized a beneficial conversion feature on the notes as a discount and additional paid in capital of $150,000. The company has recognized $50,365 in interest expense for the amortization of the debt discount for the three months ending October 31, 2019 and $73,905 during the nine months ending October 31, 2019.

The debt evidenced by the Note ranks senior to any other debt incurred as of or following the date of the Note.  So long as any obligations under the Note remain outstanding, the Company cannot incur or guarantee any indebtedness that is senior to or pari passu with the debt evidenced by the Note, and cannot, without prior consent, pay or declare any dividends or other distributions to shareholders.

For a period of 18 months, FirstFire has a right of first refusal to purchase up to $150,000 of equity, debt, or equity equivalent securities offered by us during the 18-month period.  The Company is required to provide FirstFire 10 business days’ notice of a proposed transaction, which, if accepted, is required to be completed by FirstFire within 10 business days following the notice period.  The terms of the acceptance by FirstFire must not be more favorable to FirstFire or less favorable to the Company than those set forth in the offer notice.

So long as the Note is outstanding, the Company cannot enter into any variable rate transaction whereby the Company issues any securities convertible into shares of its common stock at a price based on trading or quotation prices of the Company’s common stock.

Within 60 calendar days following funding, the Company is required to obtain director and officer insurance for a period of at least 18 months, with two years of tail coverage.  The Company has also agreed to indemnify FirstFire against any actions arising under the SPA.  Under the terms of the SPA, the Company also granted piggyback registration rights to FirstFire to register for resale shares issuable upon conversion of the Note or exercise of the Warrant.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

The Note contains certain representations, warranties, covenants (both affirmative and negative), and events of default. In the event of a default, the Note will be immediately due and payable, and the amount of repayment increases to 150% of the outstanding balance of the Note.  The Company has also authorized FirstFire to appear ex parte without notice to the Company to confess judgment against the Company for the unpaid amount of the Note following an event of default.

The SPA also grants FirstFire a right of first refusal for any future capital raises or financings by the Company.  It also contains a most favored nations provision for any more favorable terms in future financing transactions.

Note 9 – Stockholders Equity

Common Stock

On February 4, 2019, the Company initiated a private equity offering to accredited investors (the “Offering”) in accordance with Regulation D under the Securities Act of 1933 (“Securities Act”). The Offering consisted of 2,000,000 units with each unit consisting of one share of the Company’s Common Stock and a warrant to purchase an additional share of common for $2.00 at any time prior to January 31, 2022. During the period ended October 31, 2019, 80,000 units were sold at a price per unit of $1.00, for offering proceeds of $80,000. The company allocated proceeds at the estimated fair value of the common shares and warrants for value of $41,353 and $38,647, respectively.

The Company entered into an Advisor Agreement with Matthew Willer, pursuant to the terms of the advisor agreement, on February 22, 2019, the Company issued 500,000 shares of its common stock to Mr. Willer for services performed.

The Company engaged Hayden IR, LLC and Tysadco Partners LLC to provide investor relations services under an Investor Relations Consulting Agreement. Pursuant to the IR Agreement, the Company issued a total of 25,000 shares of its common stock on February 22, 2019.

From time to time the Company offers shares in-lieu of cash for consulting, investor relations and legal services. During the three months ended October 31, 2019 the Company issued 506,000 shares of its common stock for services performed.

Warrants

Stock Options

The Company has 250,000 stock options outstanding at October 31, 2019 and recognized $9,887 for the three months ended and October 31, 2019, and $32,953 for the nine months ended October 31, 2019 in stock compensation. The Company has $164,765 in unrecognized stock compensation expense.

STWC HOLDINGS, INC

Notes to the Unaudited Consolidated Financial Statements

The Company accounts for unit-based compensation using the Black-Scholes model to estimate the fair value of unit-based awards at the date of grant. The Black-Scholes model requires the use of highly subjective assumptions, including value of the enterprise, expected life, expected volatility, and expected risk-free rate of return. Other reasonable assumptions could provide differing results.

The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, expected time to a liquidity event, exercise patterns, and post-vesting forfeitures. The Company estimates volatility based on the historical volatility of comparable company’s common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black-Scholes model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent term equal to the expected life of the award. The Company uses historical data to estimate pre-vesting option forfeitures and record unit-based compensation for those awards that are expected to vest. The Company adjusts unit-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed.

The assumptions used in the fair value calculations are as follows for the period ended October 31, 2019:

Note 10 – 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”).

The Company has not paid any interest or principal on the note purchase and security agreement dated August 29, 2018, with Richland Fund, LLC.  Commencing August 2, 2019 the interest rate on the unpaid interest and principal increased to 18% per annum, until the past due interest amount is paid in full.  As of the filing date of this report, we owe approximately $87,143 for the principal and past due interest.

The Company has failed to make the required monthly interest payments on the loan agreement dated April 6, 2018, with Green Acres Partners A, LLC.  As of the filing date of this report, we owe approximately $22,703 for this past due interest.

The Company has not paid any interest or principal on the secured promissory note dated December 7, 2018, with Richland Fund, LLC.  Commencing August 2, 2019 the interest rate on the unpaid interest and principal increased to 20% per annum, until the past due interest amount is paid in full.  As of the filing date of this report, we owe approximately $148,226 for the principal and past due interest.

In November 2019 Power Up Lending converted $8,000 of the principal amounts due in accordance with the conditions of the convertible note into 260,586 shares of our common stock, respectively. The remaining principal balance under the note is $77,000.

In November 2019 Crown Bridge Partners, LLC converted $5,250 of the principal amounts due in accordance with the conditions of the convertible note into 150,000 shares of our common stock, respectively. The remaining principal balance under the note is $95,500.

ITEM 2. 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 and its territories. 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 provisions of such services.

The fulfillment services that we currently are able to provide are summarized, as follows:

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.

Historical Overview

Since the change in our business operations in 2017, we have secured debt and equity funding for operations from various sources, including the following:

Equity Funding

On February 4, 2019, the Company initiated a private equity offering to accredited investors (the “Offering”) in accordance with Regulation D under the Securities Act of 1933 (“Securities Act”). The Offering consisted of 2,000,000 units with each unit consisting of one share of the Company’s Common Stock and a warrant to purchase an additional share of common for $2.00 at any time prior to January 31, 2022. During the nine months ended October 31, 2019 80,000 units were sold at a price per unit of $1.00, for offering proceeds of $80,000. The company allocated proceeds at the estimated fair value of the common shares and warrants for value of $41,353 and $38,647, respectively.

Power Up Convertible Debt Funding

In February 2019 we secured funding through a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up”) pursuant to which Power Up purchased a convertible promissory note (the “First Tranche Note”) in the face amount of $103,000. The First Tranche Note matures on February 13, 2020, and bears interest at 12% per annum, increasing to 22% after maturity. Power Up may convert all or a portion of the outstanding principal of the First Tranche Note into shares of our common stock beginning on the date which is 180 days from the date of the First Tranche Note, at a price equal to 61% of the lowest trading price during the 20 trading day period ending on the last complete trading date prior to the date of conversion; provided, however, that Power Up may not convert the Note to the extent that such conversion would result in beneficial ownership by Power Up and its affiliates of more than 4.99% of our outstanding common stock. During the first months of the First Tranche Note we can prepay the note at premiums ranging from 110% to 135%. The First Tranche Note cannot be prepaid after the 180^th day following the date thereof. We are required to reserve for issuance upon conversion of the First Tranche Note, six times the number of shares that would be issuable upon full conversion thereof, assuming the 4.99% limitation were not in effect.  In connection with the First Tranche Note, we have caused our transfer agent to reserve initially 880,969 shares of Common Stock. We received a net amount of $100,000, with $2,500 paid for Power Up’s legal counsel and $500 for Power Up’s due diligence fee.

On March 18, 2019, we entered into a second funding arrangement with Power Up under terms identical to the first transaction.  The second note (the “Second Tranche Note”) is in the face amount of $53,000 and matures on March 18, 2020. In connection with the Second Tranche Note, we caused our transfer agent to reserve initially 613,307 shares of Common Stock. We received a net amount of $50,000, with $3,000 paid for Power Up’s legal and due diligence expenses.

Crown Bridge Partners Convertible Debt Funding

On May 1, 2019 we received funding from Crown Bridge Partners, LLC (“Crown Bridge”) under a Securities Purchase Agreement dated April 18, 2019 (the “SPA”).  Under the terms of the SPA, we received a total of $95,000, after an original issue discount of $5,000, and issued a convertible promissory note dated April 18, 2019, in the principal amount of $100,000 (the “Note”).  In addition, we reimbursed Crown Bridge $2,000 for its legal fees.  We also issued warrants to purchase 60,606 shares of our common stock (the “Warrant”) associated with this transaction. The Warrant may be exercised at any time through the second anniversary date of the Note. The exercise price per share of common stock under the Warrant is $1.65 per share, subject to adjustment, including cashless exercise.  The Warrant also contains a most favored nations provision.

The maturity date of the Note is 12 months from April 18, 2019. The Note bears interest at 12% per annum at its face amount, with a default rate of 15% per annum (or the maximum amount permitted by law). If we prepay the Note through the 180^th day following the date thereof, we must pay all of the principal and interest with a prepayment penalty ranging from 135% to 150%. After the 180^th day we have no further right of prepayment.

Crown Bridge may, at any time, convert all or any part of the outstanding principal of the Note into shares of our common stock at a price per share equal to 60% (representing a 40% discount rate) of the lowest trading price of the common stock during the 20 trading day period ending on the last complete trading day prior to the date of conversion. If the conversion price is equal to or lower than $0.35 per share, an additional 15% discount will be applied (resulting in a 55% discount rate, assuming no other adjustments); if we are unable to deliver converted shares via DWAC, an additional 10% discount will be applied (resulting in a discount rate of 50%, assuming no other adjustments); if we fail to comply with our reporting requirements under the Exchange Act, an additional 15% discount will be applied (resulting in a discount rate of 55%, assuming no other adjustments); and if we fail to maintain our status as “DTC Eligible” or if at any time the conversion price is lower than $0.10, an additional 10% discount will be applied (resulting in a discount of 65%, assuming no other adjustments except for the 15% discount due to the conversion price below $0.35).  Crown Bridge may not convert the Note to the extent that such conversion would result in beneficial ownership by Crown Bridge and its affiliates of more than 4.99% of our issued and outstanding common stock.  We have also granted piggy-back registration rights for the shares issuable upon conversion of the Note.

Tangiers Global LLC Convertible Debt Funding

On June 20, 2019 we entered into a 10% Fixed Convertible Promissory Note with Tangiers Global, LLC in the aggregate principal amount of up to $550,000. The initial principal amount of the Tangiers Note is $165,000, for which Tangiers paid a purchase price of $150,000 on June 24, 2019, representing approximately a 10% original issue discount, due six months from the effective date of each payment by Tangiers. Upon Company request, subject to certain conditions, Tangiers will pay up to an additional $400,000 consideration, subject to a 10% original issue discount, and in such event, the maturity date for the additional payment would be six months from the effective date of such payment. The sum that we must repay to Tangiers would be prorated based on the consideration actually paid by Tangiers, such that we are only required to repay the amount funded (plus the original issue discount, interest and other fees, as applicable), and we are not required to repay any unfunded portion of the Tangiers Note.

The Tangiers Note is convertible at the option of Tangiers at a conversion price of $0.65 per share, subject to adjustment in the event of a forward split, stock dividend, or the like, but not adjusted in the event of a reverse split, recombination, or the like. If a prepayment is made within 90 days, we must pay an amount equal to 110% of the principal amount so paid; from 91 to 120 days, we must pay an amount equal to 120% of the principal amount so paid; and from 121 to 180 days, we must pay an amount equal to 130% of the principal amount so paid. Upon the occurrence of an event of default, as such term is defined under the Tangiers Note, at the holder’s election, the Note will be immediately due and payable in cash at an amount equal to the principal amount due, plus an additional amount equal to 30% of the principal amount.  In addition, five days following acceleration of the repayment of the Note, interest will accrue at the rate of 20% per annum or the maximum legal rate.  We have also caused their transfer agent to reserve not less than 7,500,000 shares of our common stock for issuance upon conversion.

In the event the Note is not repaid on or before the maturity date, the holder may convert in whole or in part the outstanding principal amount of the Note into shares of our common stock at a conversion price equal to the lower of initial conversion price of $0.65 per share or 60% of the lowest trading price of our common stock during the 15 consecutive trading days prior conversion.

For a period of 45 days following the initial funding under the Note, we have agreed not to enter into any convertible debt financing transaction with another party.  Further, we have granted a right of first refusal to Tangiers in connection future financings by us so long as the Note is outstanding.

With respect to the above loan transaction with Tangiers, we issued Tangiers a stock purchase warrant allowing for the purchase of 1,100,000 shares of our common stock at $1.25 per share on a cashless basis for a period of five years.

In addition to the loan transaction with Tangiers, we have entered into an Investment Agreement with Tangiers whereby Tangiers has agreed to purchase shares of our common stock up to an aggregate of $10,000,000 under certain terms and conditions.  The purchase price for the shares is 80% of the lowest trading price of the stock during the five consecutive trading days prior to receipt by Tangiers of the notice from us requiring purchase by them.  The maximum number of shares we can require Tangies to purchase is restricted to 200% of the average daily trading volume during 10 consecutive trading days, provided the amount is at least $5,000 and does not exceed $500,000.

FirstFire Global Opportunities Fund Convertible Debt Funding

On June 21, 2019 we received funds from FirstFire Global Opportunities Fund.  Under the terms of the SPA we received a total of $135,000, after an original issue discount of $15,000, and issued a convertible promissory note, in the principal amount of $150,000.  We also issued to FirstFire immediately exercisable five-year warrants to purchase 150,000 shares of our common stock at $1.00, subject to adjustment in the event we issue shares at less than the current exercise price.  The Warrant also contains a cashless exercise provision and a most favored nations provision.

The maturity date of the Note is nine months from June 18, 2019. The Note bears interest at 10% per annum at its face amount, with a default rate of 15% per annum (or the maximum amount permitted by law). If we prepay the Note through the 90^th day following the date thereof, we must pay an amount equal to 125% of the principal amount of the Note and any accrued but unpaid interest thereon, plus any default interest.  If we prepay the Note from the 91^st day through the 180^th day following the date thereof, we must pay an amount equal to 135% of the principal amount of the Note and any accrued but unpaid interest thereon, plus any default interest. After the 180^th day we has no further right of prepayment.

FirstFire may, at any time, convert all or any part of the outstanding principal and interest, including default interest, of the Note into shares of our common stock at the lower of $0.75 per share or a price per share equal to 55% (representing a 45% discount rate) of the lowest trading price of the common stock during the 20 trading day period prior to the date of conversion. FirstFire may not convert the Note to the extent that such conversion would result in beneficial ownership by FirstFire and its affiliates of more than 4.99% of our issued and outstanding common stock, or up to 9.99% at the option of FirstFire.  We have agreed to reserve for issuance the greater of 25,000,000 shares or the number of shares equal to 3.5 times the number of shares issuable upon conversion of the Note.

The debt evidenced by the Note ranks senior to any other debt incurred as of or following the date of the Note.  So long as any obligations under the Note remain outstanding, we cannot incur or guarantee any indebtedness that is senior to or pari passu with the debt evidenced by the Note, and cannot, without prior consent, pay or declare any dividends or other distributions to shareholders.

For a period of 18 months, FirstFire has a right of first refusal to purchase up to $150,000 of equity, debt, or equity equivalent securities offered by us during the 18-month period.  We are required to provide FirstFire 10 business days’ notice of a proposed transaction, which, if accepted, is required to be completed by FirstFire within 10 business days following the notice period.  The terms of the acceptance by FirstFire must not be more favorable to FirstFire or less favorable to the Company than those set forth in the offer notice.

So long as the Note is outstanding, we cannot enter into any variable rate transaction whereby we issue any securities convertible into shares of its common stock at a price based on trading or quotation prices of our common stock.

Within 60 calendar days following funding, we are required to obtain director and officer insurance for a period of at least 18 months, with two years of tail coverage.  We have also agreed to indemnify FirstFire against any actions arising under the SPA.  Under the terms of the SPA, we also granted piggyback registration rights to FirstFire to register for resale shares issuable upon conversion of the Note or exercise of the Warrant.

The Note contains certain representations, warranties, covenants (both affirmative and negative), and events of default. In the event of a default, the Note will be immediately due and payable, and the amount of repayment increases to 150% of the outstanding balance of the Note.  We have also authorized FirstFire to appear ex parte without notice to the Company to confess judgment against the Company for the unpaid amount of the Note following an event of default.

The SPA also grants FirstFire a right of first refusal for any future capital raises or financings by the Company.  It also contains a most favored nations provision for any more favorable terms in future financing transactions.

Results of Operations

Comparison of the three months ended October 31, 2019 and 2018

Material changes in line items in our Statement of Operations for the three months ended October 31, 2019 as compared to the same period last year, are discussed below:

Comparison of the nine months ended October 31, 2019 and 2018

Material changes in line items in our Statement of Operations for the nine months ended October 31, 2019 as compared to the same period last year, are discussed below:

Liquidity and Capital Resources

Overview

We have incurred operating losses, accumulated deficit and negative cash flows from operations since inception. As of October 31, 2019, we had an accumulated deficit of $10,204,683 from operating activities. The Company had total cash on hand of approximately $6,000 as of October 31, 2019. The Company utilizes credit from vendors, borrowings from related parties, and secured third party financing to manage its cash flow. Management believes the change in focus along with our substantial industry knowledge, defined growth strategy, and minimal expense structure will allow us to ultimately achieve profitability. We have restructured our operating expenses sufficiently and believe that our planned sources of revenue will be sufficient to cover these expenses for the foreseeable future.

Our Consolidated Financial Statements as of and for the three and nine months ended October 31, 2019 were prepared on the basis of a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that could be necessary should we be required to liquidate assets.

Our ability to continue as a going concern and raise capital for specific strategic initiatives could also depend on obtaining adequate capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on acceptable terms.

Our net cash flows are as follows:

Operating Activities

During the nine months ended October 31, 2019, the Company used $819,701 in cash for operations compared to cash used of $842,361 for operations during the nine months ended October 31, 2018. This decrease in cash used for operating activities was due to less cash loaned to affiliates and an increase in accounts payable.

Investing Activities

During the nine months ended October 31, 2019, the Company invested $8,086 in fixed assets, there were $155,233 invested in the prior period primarily an invetmnst in unconsolidated affiliate.

Financing Activities

Our cash provided by financing for the nine months ended October 31, 2019 was $830,640 compared to cash provided of $999,912 for the same period in 2018.

During the period ended October 31, 2019 the company entered into convertible debt funding totaling $571,000 compared to the prior period of $225,000. As of the date of filing, all debt is convertible into the Company’s common shares.

During the period ended October 31, 2018 the company launched a non-public equity offering and raised $683,200 and $42,150 from the corresponding issuance of warrants.

In February 2019 the Company launched a non-public equity offering at $1.00 per unit. We raised cash proceeds of $80,000 and issued 80,000 shares of common stock and 80,000 warrants to purchase common stock at an exercise price of $2.00 per share.

The Company received $125,000 for the benefit of the Puerto Rico entities and is disbursing these funds to operate the Puerto Rico operations, the balance as of October 31, 2019 was $32,745. In addition, the Company received $50,000 for the benefit of 2600 Meridian LLC, all the funds have been used to cover start-up and development costs. The funds held for related party entities are included as advances held in trust liabilities on the balance sheet.

Off Balance Sheet Arrangements

During the quarter ended October 31, 2019, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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.

ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting Company and are not required to provide the information required under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the direction and with the participation of our management, we carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of October 31, 2019. We maintain 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 our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. our 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 our disclosure controls and procedures were not effective as of October 31, 2019 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, 2019, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In connection with the Settlement Agreement with Headgate II, LLC, William A. Shopneck, and Christopher Shopneck (collectively, the “Plaintiffs”) disclosed under Item 3 of our annual report on Form 10-K for the year ended January 31, 2019, we are current in our settlement payments to the Plaintiffs.

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

In August we issued 506,000 shares to two consultants for services provided. The shares were issued under Rule 701 Promulgated by the SEC for compensatory services.

During the quarter ended October 31, 2109, Power Up Lending converted $10,000 and $8,000 of the principal amounts due in accordance with the conditions of the convertible note into 24,839 and 50,441 shares of our common stock, respectively. The remaining principal balance under the note is $85,000.

In November 2019 Power Up Lending converted $8,000 of the principal amounts due in accordance with the conditions of the convertible note into 260,586 shares of our common stock, respectively. The remaining principal balance under the note is $77,000.

In November 2019 Crown Bridge Partners, LLC converted $5,250 of the principal amounts due in accordance with the conditions of the convertible note into 150,000 shares of our common stock, respectively. The remaining principal balance under the note is $95,500.

The above note conversions were made pursuant to the exemption from registreation provided by Section 3(a)(9) of the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

We have a note purchase and security agreement dated August 29, 2018, with Richland Fund, LLC., in the aggregate principal amount of $225,000. The Notes bear 12% interest per annum, with the last payment under the Notes due December 15, 2020. The Notes are secured by all assets of the Company and guarantees from Shawn and Erin Phillips. Principal and interest payments were to commence on August 1, 2019. The Company has not paid any interest or principal on the loan. Commencing August 2, 2019 the interest rate on the unpaid interest and principal increased to 18% per annum, until the past due interest amount is paid in full. As of the filing date of this report, we owe approximately $87,143 for the principal and past due interest.

We have a loan agreement dated April 6, 2018, with Green Acres Partners A, LLC, in the amount of $205,000 repayable in installments and maturing not later than September 1, 2020. The note evidencing the loan is guaranteed by Shawn and Erin Phillips. Monthly interest payments are due the first day beginning no later than August 1, 2019; thereafter we are required to pay interest and principal on 60% of our ownership percentage of the available profits from the San Diego projects. We failed to make the required monthly interest payments.  As of the filing date of this report, we owe approximately $22,703 for this past due interest.

We have a secured promissory note dated December 7, 2018, with Richland Fund, LLC, in the amount of $126,100 which matured on August 1, 2019. The Note bears 15% interest per annum, and monthly interest payments were due the first day each month beginning January 1, 2019. The note originally matured on March 7, 2019 but was extended to a maturity date of August 1, 2019. The Company has not paid any interest or principal on the loan.  Commencing August 2, 2019 the interest rate on the unpaid interest and principal increased to 20% per annum, until the past due interest amount is paid in full. As of the filing date of this report, we owe approximately $148,226 for the principal and past due interest.

Item 6. Exhibits

SIGNATURE PAGE FOLLOWS

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.

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