Quarterly report pursuant to Section 13 or 15(d)


3 Months Ended
Mar. 31, 2013
Business Combinations [Abstract]  
Acquisition of Assets of PhytoSphere Systems, LLC

On December 15, 2012, we entered into the Agreement with PhytoSPHERE, whereby on January 29, 2013 we acquired certain assets of PhytoSPHERE. Pursuant to the Agreement, we acquired from PhytoSPHERE tangible equipment, inventory including 460 kg of raw hemp oil, all URLs and domain names of PhytoSPHERE, all landline telephone numbers and postal addresses affiliated with PhytoSPHERE, an exclusive license to use the names “PhytoSPHERE” and “PhytoSPHERE Systems” in the development and commercialization of hemp-based products including CBD, existing bank accounts with a total balance of $50,775, vendor lists, permits, licenses and other approvals, and all rights and obligations under existing and pending supply contracts. The Company purchased the assets of PhytoSPHERE as the basis for adoption of the Company’s new business model, which is to manufacture, market and sell products containing hemp oil. As part of the purchase price, the Company acquired intangible assets which could not be specifically identified which has been classified as goodwill on the accompanying condensed financial statements. Goodwill represents the residual value after all identifiable assets were valued and what not valued independently and is primarily attributable to the assembled workforce, operating and process know-how and potential expansion into local and global markets. We expect goodwill to be amortizable for tax purposes.


At closing the Company issued 900,000 shares of common stock to PhytoSPHERE in satisfaction of its first installment payment. On April 4, 2013 the Company made its second installment payment by issuing 1,000,000 shares of common stock to PhytoSPHERE.


The purchase price of the acquisition was determined to be $8,020,000 based on management’s estimate of the fair market value of the business acquired. The fair market value was determined to be the more appropriate basis of valuation as the Company’s common stock had little, if any, trading volume and the market price of the stock at that time did not constitute a reliable indicator of its present or future value. Additionally, the Company’s operations at the time of the of the closing of the Transaction consisted of product development, building infrastructure and pursuing strategic alliances and investments and the acquisition of the PhytoSPHERE assets provided the Company with its initial source of revenue. The Company’s common stock issued was contemporaneously valued with the purchase price of PhytoSPHERE.


The following is the allocation of the purchase price:


Assets acquired        
Tangible assets        
Cash   $ 50,775  
Accounts receivable     396,438  
Inventory     345,477  
Prepaid inventory     1,260,510  
Fixed assets, net     1,288  
     Total tangible assets     2,054,488  
Identifiable intangible assets        
Vendor relationships     1,170,000  
Trade name     230,000  
Noncompete agreement – PhytoSPHERE Team     2,710,000  
   Total identifiable intangible assets     4,110,000  
Unidentifiable intangible assets        
Goodwill residual estimate     1,855,512  
Total assets acquired from PhytoSPHERE   $ 8,020,000  


Due to the complexity and limited information available from the selling company of PhytoSHERE, supplemental proforma information has not been presented. The operations and management of PhytoSHERE was not indicative of the current operations and strategy, accordingly, the proforma information would not be indicative of future operations or be beneficial to the users of these financial statements.


We have amortized the identifiable intangible assets using the straight-line method over a useful life of five years. We determined that the useful life of those assets are based on the term of the noncompete agreement purchased and estimated useful lives of the relationships acquired. Amortization of intangible assets is expected to be $753,500 for the year ending December 31, 2013, $822,000 for the years ending December 31, 2014, 2015 and 2016 and $342,500 for the year ending December 31, 2017.


Intangible assets consist of the following at March 31, 2013,


Description   Original Fair Market Value     Accumulated Amortizaton     Net  
Vendor relationships   $ 1,170,000     $ 39,000     $ 1,131,000  
Trade name     230,000       7,667       222,333  
Noncompete agreement     2,710,000       90,333       2,619,667  
    $ 4,110,000     $ 137,000     $ 3,973,000  


Amortization expense for the three months ended March 31, 2013 totaled $137,000.