NOTE 3  ACQUISITION OF CMP WELLNESS On May 1, 2017 (Merger Date), the Company and KBCMP, Inc., a Delaware corporation and newly formed wholly-owned subsidiary of the Company (Merger Sub), entered into an Agreement of Merger (the Merger Agreement) with Lancer West Enterprises, Inc., a California corporation and Walnut Ventures, a California corporation, pursuant to which each of Lancer West Enterprises, Inc. and Walnut Ventures were merged with and into Merger Sub, with Merger Sub as the surviving corporation, resulting in the Companys indirect acquisition of CMP Wellness, LLC, a California limited liability company, which prior to the merger, was owned 100% by Lancer West Enterprises, Inc. and Walnut Ventures. Membership interest in CMP was the sole and only asset of Lancer West Enterprises, Inc. and Walnut Ventures (CMP Wellness or CMP). As a result, CMP Wellness became a wholly-owned subsidiary of the Company. CMP Wellness is a distributor of vaporizers, cartridges and accessories. The Companys Directors believed the acquisition of CMP Wellness and the product offerings of CMP Wellness leveraged the Companys existing product development program and provided the Company with the possibility of generating near term revenue and operating cash flow, as well as establishing a commercial platform whereby other cannabis industry-support products may be accessed in the future. Going forward, the existing product offering and other product licensing opportunities, will be the basis of the Company's long-term product portfolio. CMPs assets acquired and liabilities assumed are recorded at their acquisition-date fair values. As part of the purchase price allocation, all intangible assets that were a part of the acquisition were identified and valued. It was determined that only non-competition agreements and trade name had separately identifiable intangible values. Trade name represents the CMP product names that the Company intends to continue to use. The deferred income tax liability relates to the tax effect of acquired identifiable intangible assets as such amounts are not deductible for tax purposes. For the acquisition discussed above, goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company determined that the acquisition of CMP resulted in the recognition of goodwill primarily because of synergies unique to the Company and the strength of its acquired workforce. The results of operations of CMP were consolidated beginning on the date of the merger. Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the costs are incurred. Any excess of the acquisition consideration over the fair value of tangible and intangible assets acquired and liabilities assumed is allocated to goodwill. The amount of contingent consideration was recorded at its estimated fair value as of the acquisition date. The subsequent accounting for contingent consideration depends on whether the contingent consideration is classified as a liability or equity. The portion of contingent consideration classified as equity is not remeasured in subsequent accounting periods. However, contingent consideration classified as a liability is remeasured to its fair value at the end of each reporting period and the change in fair value is reflected in income or expense during that period. Any changes within the measurement period resulting from facts and circumstances that existed as of the acquisition date may result in retrospective adjustments to the provisional amounts recorded at the acquisition date. The acquisition consideration consisted of a fixed cash payment of $1,500,000, unsecured promissory notes in the aggregate principal amount of approximately $770,820, having a one-year maturity, and an aggregate of 7,800,000 restricted shares of the Companys common stock. During the one-year period following the closing, the two sellers of CMP may become entitled to receive up to an additional $1,905,000 in cash, in the aggregate, and 4,740,960 shares of common stock of the Company, in the aggregate, based on the gross profit generated by the CMP product line for the period from May 1, 2017 to April 30, 2018. Per the terms of the Merger Agreement, post-closing adjustments to CMPs working capital is directly offset to the unsecured promissory notes payable. Management has estimated that the post-closing working capital adjustments amounted to $104,032, which management estimates will result in a decrease of the unsecured promissory notes payable from $770,820 to $666,788. In accordance with ASC 805, management has evaluated the estimated fair value of the contingent consideration based a probability-weighted assessment of the occurrence of CMP reaching certain gross profit earnout targets. The Company initially recorded a contingent liability for the contingent cash consideration of $1,735,375 and the fair value of the contingent equity consideration of $10,763,760. Based on information obtained during the fourth fiscal quarter, the Company revised its estimate of the contingent cash consideration from $1,735,375 to $1,905,000, and its estimate of the contingent equity consideration from $10,763,760 to $11,682,775. As discussed in Note 2, in connection with the Companys initial acquisition accounting, the Company inadvertently classified the contingent equity consideration as equity. Given that the earnout arrangements allow for a variable number of shares to be issued depending on how the CMP product line performs against the gross profit target, the Company should have classified the contingent equity consideration as a liability until the contingency is resolved. Accordingly, the Company has recorded the changes in the fair value of its contingent consideration within its statements of operations. The fixed equity consideration received by CMP members was calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price on the acquisition date. The contingent equity consideration (number of common shares) was also calculated based on the negotiated price per share of common stock of the Company of $2.50, which approximated the quoted market price. The total preliminary acquisition consideration is as follows: May 1, 2017 (As initially reported) Measurement Period Adjustments (1) August 31, 2017 (As adjusted) Cash $ 1,500,000 $ - $ 1,500,000 Fair value of common shares issued to CMP members 19,500,000 - 19,500,000 Promissory notes 660,216 6,572 666,788 Estimated fair value contingent cash consideration 1,735,375 1,735,375 Estimated fair value contingent equity consideration 10,763,760 10,763,760 Total estimated acquisition consideration $ 34,159,351 $ 6,572 $ 34,165,923 (1) As of August 31, 2017, a measurement period adjustment of $6,572 was recorded, which resulted in an increase of the promissory notes from $660,216 to $666,788. May 1, 2017 Measurement Period August 31, 2017 (As initially reported) Adjustments (1) (As adjusted) Accounts receivable $ 735,513 $ - $ 735,513 Inventory 655,970 - 655,970 Prepaid expenses 206,874 - 206,874 Fixed assets 1,737 - 1,737 Deposits 6,261 - 6,261 Deferred tax liability - (1,354,370 ) (1,354,370 ) Accounts payable and accrued liabilities (105,124 ) 6,572 (98,552 ) Total identifiable net assets 1,501,231 (1,347,798 ) 153,433 Trade name - 2,600,000 2,600,000 Non-compete - 800,000 800,000 Goodwill 32,658,120 (2,045,630 ) 30,612,490 Total fair value of consideration $ 34,159,351 $ 6,572 $ 34,165,923 (1) As of August 31, 2017, the Company allocated $2,600,000 and $800,000 to the trade name and non-compete, respectively. The Company also recorded a deferred tax liability of $1,354,370 associated with the CMP acquisition. An additional post-closing adjustment of $6,572 was recorded, which resulted in an increase of the promissory notes from $660,216 to $666,788. The following unaudited summary pro forma financial information for the years ended August 31, 2017 and 2016 has been presented for illustrative purposes only and does not purport to represent what the Companys results of operations would have been if the acquisition had occurred as presented, or to project the Companys results of operations for any future periods. The pro forma financial information was prepared assuming the CMP Wellness transaction occurred as of September 1, 2015. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable, including those pertaining to revenue, operating expenses, income taxes, and depreciation expense. For the Years Ended August 31, 2017 2016 Net Revenue $ 25,672,583 $ 11,375,944 Income from operations 3,241,245 488,886 Net income 2,407,679 431,033 Net income per common share: Basic $ 0.06 $ 0.01 Diluted $ 0.05 $ 0.01 On July 16, 2018, the Company issued an aggregate of 3,740,960 shares of common stock associated with the contingent equity consideration in accordance with the terms of the Merger Agreement.