December 31, 2017
|
|
Total
|
|
|
Quoted
Prices
in Active
Markets for Identical
Assets or Liabilities
(Level 1)
|
|
|
Quoted
Prices
for
Similar Assets or Liabilities in Active
Markets
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Warrant liability
|
|
|
3,528,602
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,528,602
|
|
Option liability
|
|
|
299,965
|
|
|
|
-
|
|
|
|
-
|
|
|
|
299,965
|
|
Derivative liability
|
|
|
113,636,474
|
|
|
|
-
|
|
|
|
-
|
|
|
|
113,636,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
117,465,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
117,465,041
|
|
December
31, 2016
|
|
Total
|
|
|
Quoted
Prices
in Active
Markets for Identical
Assets or Liabilities
(Level 1)
|
|
|
Quoted
Prices
for Similar Assets or Liabilities in Active
Markets
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Warrant liability
|
|
|
14,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,430
|
|
Derivative liability
|
|
|
15,635,947
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,635,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
15,650,377
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,650,377
|
|
The
following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that
are measured at fair value on a recurring basis:
|
|
For
the year ended December 31, 2017
|
|
|
|
Total
|
|
January 1, 2017
|
|
|
15,650,377
|
|
Initial recognition of conversion
feature
|
|
|
7,781,259
|
|
Initial recognition of warrant liability
|
|
|
3,277,052
|
|
Initial recognition of option liability
|
|
|
299,925
|
|
Change in fair value of conversion
feature
|
|
|
90,219,268
|
|
Change in fair value of warrant liability
|
|
|
237,120
|
|
Change in
fair value of option liability
|
|
|
40
|
|
|
|
|
|
|
Ending Balance, December 31,
2017
|
|
$
|
117,465,041
|
|
|
|
For
the year ended December 31, 2016
|
|
|
|
Total
|
|
January 1, 2016
|
|
$
|
20,186,594
|
|
Initial recognition of conversion feature
|
|
|
581,817
|
|
Change in fair value of conversion feature
|
|
|
33,271,611
|
|
Gain on extinguishment of debt
|
|
|
(37,464,075
|
)
|
Change in fair value of liability
|
|
|
(918,969
|
)
|
Unrealized loss
on marketable securities
|
|
|
(6,601
|
)
|
December 31, 2016
|
|
|
15,650,377
|
|
Revenue
Recognition
Revenues
from Cannabidiol oil product
The
Company recognizes revenue from the sale of Cannabidiol oil products (“CBD oil”) upon shipment, when title passes,
and when collectability is reasonably assured.
Cost
of Revenue
Cost
of revenue consists primarily of expenses associated with the delivery and distribution of the Company’s products and services.
Under the Company’s prior business model, the Company only began capitalizing costs when it obtained a license and a site
for operation of a customer dispensary or cultivation center. The previously capitalized costs are charged to cost of revenue
in the same period that the associated revenue is earned. In the case where it is determined that previously inventoried costs
are in excess of the projected net realizable value of the sale of the licenses, then the excess cost above net realizable value
is written off to cost of revenues. Cost of revenues also includes the rent expense on master leases held in the Company’s
name, which are subleased to the Company’s operators. In addition, cost of revenue related to the Company’s vaporizer
line of products consists of direct procurement cost of the products along with costs associated with order fulfillment, shipping,
inventory storage and inventory management costs.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of
December 31, 2017 and 2016, the Company held no cash equivalents.
The
Company’s policy is to place its cash with high credit quality financial instruments and institutions and limit the amounts
invested with any one financial institution or in any type of instrument. Deposits held with banks may exceed the amount of insurance
provided on such deposits. The Company has not experienced any losses on its deposits of cash.
Accounts
Receivable and Allowances
Accounts
receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts
for estimated losses resulting from the inability of its customers to make required payments. The Company makes ongoing assumptions
relating to the collectability of its accounts receivable in its calculation of the allowance for doubtful accounts. In determining
the amount of the allowance, the Company makes judgments about the creditworthiness of customers based on ongoing credit evaluations
and assesses current economic trends affecting its customers that might impact the level of credit losses in the future and result
in different rates of bad debts than previously seen. The Company also considers its historical level of credit losses. As of
December 31, 2017 and 2016, there was an allowance for doubtful accounts of $0.
Inventory
The
Company utilizes lower of standard cost or net realizable value
method. During the years ended December 31, 2017 and 2016, the Company recorded an impairment of $0 and $32,300
respectively, that was recorded to cost of revenues.
Capitalized
agricultural costs
Capitalized
agricultural costs consists of pre-harvest agricultural costs,
including irrigation, fertilization, seeding, laboring, other ongoing crop and land maintenance activities and work-in-progress
activities. All capitalized agricultural costs are accumulated and capitalized as incurred. The Company has reflected
the capitalized agriculture costs as a current asset as the growing cycle of the crops are estimated to be six months to a
year.
Basic
and Diluted Net Income/Loss Per Share
Basic
net loss per share of Common Stock is computed by dividing net loss attributable to common stockholders by the weighted-average
number of shares of Common Stock outstanding during the period. Diluted net loss per share of Common Stock is determined using
the weighted-average number of shares of Common Stock outstanding during the period, adjusted for the dilutive effect of Common
Stock equivalents. In periods when losses are reported, which is the case for the years ended December 31, 2017 and 2016 presented
in these Consolidated Financial Statements, the weighted-average number of shares of Common Stock outstanding excludes
Common Stock equivalents because their inclusion would be anti-dilutive.
The
Company had the following Common Stock equivalents at December 31, 2017 and 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Warrants
|
|
|
11,765,757,748
|
|
|
|
69,757,748
|
|
Options
|
|
|
1,000,000,000
|
|
|
|
-
|
|
Convertible notes – related party
|
|
|
10,500,000
|
|
|
|
10,500,000
|
|
Convertible notes
|
|
|
465,782,195,939
|
|
|
|
114,808,810,010
|
|
Totals
|
|
|
478,558,453,687
|
|
|
|
114,889,067,758
|
|
Property
and Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results
of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using
the straight-line method for financial statement purposes. The Company uses accelerated depreciation methods for tax purposes
where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Vehicles
|
|
|
5
years
|
|
Furniture and Fixtures
|
|
|
3
- 5 years
|
|
Office equipment
|
|
|
3
years
|
|
Machinery
|
|
|
2
years
|
|
Buildings
|
|
|
10
- 39 years
|
|
Income
Taxes
The
Company accounts for income taxes under the asset and liability method. The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or
tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based
on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that
the Company will not realize tax assets through future operations.
In
addition, the Company’s management performs an evaluation of all uncertain income tax positions taken or expected to be
taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more
likely than not” standard of being sustained under examination by the applicable taxing authorities. This evaluation is
required to be performed for all open tax years, as defined by the various statutes of limitations, for federal and state purposes.
Commitments
and Contingencies
Certain
conditions may exist as of the date the Consolidated Financial Statements are issued, which may result in a loss to the
Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management
and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result
in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Consolidated Financial Statements. If the assessment
indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee
would be disclosed.
The
Company accrues all legal costs expected to be incurred per event. For legal matters covered by insurance, the Company accrues
all legal costs expected to be incurred per event up to the amount of the deductible.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting
periods for public business entities beginning after December 15, 2017, including interim periods within that reporting period.
The new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently
evaluating the effect that ASU 2014-09 will have on its financial statements and related disclosures. The Company has not yet
selected a transition method nor determined the effect of the standard on its ongoing financial reporting.
On
July 22, 2015, the FASB issued a new standard that requires entities to measure most inventory “at the lower of cost and
net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower
of cost or market. The new standard will not apply to inventories that are measured by using either the last-in, first-out (LIFO)
method or the retail inventory method. The new standard will be effective for fiscal years beginning after December 15, 2016,
and interim periods in fiscal years beginning after December 15, 2016. The adoption did not have a material effect on its financial
position or results of operations or cash flows.
In
April 2015, the FASB issued a new standard that requires an entity to determine whether a cloud computing arrangement contains
a software license. If the arrangement contains a software license, the entity would account for the fees related to the software
license element in a manner consistent with how the acquisition of other software licenses is accounted for. If the arrangement
does not contain a software license, the customer would account for the arrangement as a service contract. The new standard will
be effective for fiscal years beginning after December 15, 2015, and interim periods in fiscal years beginning after December
15, 2016. The adoption did not have a material effect on its financial position or results of operations or cash flows.
In
February 2016, the FASB issued “Leases (Topic 842)” (ASU 2016-02). This update amends leasing accounting requirements.
The most significant change will result in the recognition of lease assets and lease liabilities by lessees for those leases classified
as operating leases under current guidance. The new guidance will also require significant additional disclosures about the amount,
timing, and uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning
after December 15, 2018, which for the Company is December 31, 2018, the first day of its 2019 fiscal year. Upon adoption, entities
are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. Early adoption is permitted, and a number of optional practical expedients may be elected to simplify the impact of
adoption. The Company is currently evaluating the impact of adopting this guidance. The overall impact is that assets and liabilities
arising from leases are expected to increase based on the present value of remaining estimated lease payments at the time of adoption.
In
March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting
Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. ASU 2016-09 simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal
years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The adoption
did not have a material effect on its financial position or results of operations or cash flows.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02,
lessees will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly
change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor
accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02
will be effective for us on January 1, 2019 and initially required transition using a modified retrospective approach for leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In
July 2018, the FASB issued ASU 2018-11 , “Leases (Topic 842) - Targeted Improvements,” which, among other things,
provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative
periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope
Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar
taxes and certain lessor costs. As of January 1, 2019, the Company adopted ASU 2016-02 and has recorded a right-of-use asset and
lease liability on the balance sheet for its operating leases. We elected to apply certain practical expedients provided under
ASU 2016-02 whereby we will not reassess(i) whether any expired or existing contracts are or contain leases, (ii) the lease classification
for any expired or existing leases and (iii) initial direct costs for any existing leases. We also do not expect to apply the
recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We expect to account
for lease and non-lease components separately because such amounts are readily determinable under our lease contracts and because
we expect this election will result in a lower impact on our balance sheet.
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers
of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual
periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is
permitted. The Company is currently evaluating the impact of the new standard.
In
April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing” (topic 606). In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (topic 606). These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”.
The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides
a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual
property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal
versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10
and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which we adopted for interim and annual reporting
periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance.
In
May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration,
presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating
the impact of adopting this guidance.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after
December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which
case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
evaluating the impact of adopting this guidance.
In
October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers
of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual
periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is
permitted. The Company is currently evaluating the impact of the new standard.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of
cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently evaluating the impact of adopting this
guidance.
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently
evaluating the impact of adopting this guidance.
In
May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. The Company is currently evaluating the impact of adopting this guidance.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements.
NOTE
3 – ASSET ACQUISITION
Farming
Agreement
On
December 18, 2015, the Company and EWSD entered into a Farming Agreement (the “Farming Agreement”) with Whole Hemp
Company LLC (“Whole Hemp” now known as “Folium Biosciences, LLC”), pursuant to which Folium Biosciences
would manufacture products from hemp and cannabis crops it would grow on EWSD farmland, and the Company would build greenhouses
for such activities up to an aggregate size of 200,000 square feet. Folium Biosciences would pay all preapproved costs of such
construction on or before September 30, 2017 as partial consideration for a revocable license to use the greenhouses and a separate
10 acre plot of EWSD farmland (the “10 Acres”). EWSD would retain ownership of the greenhouses. For the first growing
season commencing October 1, 2016, the Company would receive a percentage of gross sales of all Folium Bioscience’s products
on a monthly basis, and the Company’s share would increase incrementally based on the extent of crops planted on EWSD farmland
according to a mutually agreed schedule. In addition, the Company would receive 50% of Folium Biosciences’ gross profits
from the farming activities on the 10 Acres. The Company planned to recognize all revenue from the Farming Agreement at the net
amount received when it has been earned and determined collectable.
Pursuant
to the Farming Agreement, the Company also granted Folium Biosciences a warrant to purchase 4,000,000 shares of Common Stock at
an exercise price of $0.50 per share, exercisable at any time within five years. The warrants were valued at $76,000, using the
Black-Scholes-Merton model, with key valuation assumptions used that consist of the price of shares of Common Stock at settlement
date, a risk-free interest rate based on the average yield of a five-year Treasury note and expected volatility of shares of Common
Stock, all as of the measurement date. The fair value of the warrants is included in deferred costs and will be recognized over
the life of the Farming Agreement. Due to the termination of the Farming and Growers Distribution Agreements, as discussed below,
as of September 30, 2016, this amount has been fully amortized.
On
March 11, 2016, the Company and EWSD entered into a First Amended and Restated Farming Agreement with Whole Hemp, amending,
and restating in certain respects the Farming Agreement. The First Amended and Restated Farming Agreement clarifies that EWSD,
rather than the Company, would be responsible for the building of greenhouses to be utilized by Whole Hemp for growing hemp and
cannabis crops pursuant to the agreement, and that EWSD would be the recipient of all payments by Whole Hemp (including all revenue
sharing arrangements) under the agreement.
On
or about May 7, 2016, the Company determined that Folium Biosciences was in default of the Farming Agreement, principally because
it had abandoned its obligation to provide farming activities under the First Amended and Restated Farming Agreement. On May 13,
2016, EWSD notified Folium Biosciences of its defaults under the First Amended and Restated Farming Agreement and EWSD’s
election to terminate the First Amended and Restated Farming Agreement.
By
its terms, the First Amended and Restated Farming Agreement may be terminated at any time by either party, if the other party
was in material breach of any obligation under the First Amended and Restated Farming Agreement, which breach continued uncured
for 30 days following written notice thereof.
On
June 1, 2016, a complaint was filed by Whole Hemp on this matter, naming the Company and EWSD, as defendants. See Whole Hemp Complaint,
below.
Growers’
Distributor Agreement
On
December 18, 2015, the Company also entered into a Growers’ Agent Agreement with Folium Biosciences, which was amended on
March 11, 2016, to change the name of the agreement to Growers’ Distributor Agreement, (“Distributor Agreement”)
and to clarify some terms. Pursuant to the Distributor Agreement, the Company would provide marketing, sales, and related services
on behalf of Folium Biosciences in connection with the sale of its Cannabidiol oil product (“CBD oil”), from which
the Company would receive a percentage of gross revenues (other than the sale of such product generated from the EWSD 10 Acres
and the Folium Biosciences 40 acre plot subject to the Farming Agreement). The Growers’ Agent Agreement was effective until
September 30, 2025. The Company would sell the product on behalf of Folium Biosciences on a commission basis. The Company may
not act as agent of any other grower, distributor, or manufacturer of the same product unless such other party agrees.
On
March 11, 2016, the Company and EWSD entered into a First Amended and Restated Grower’s Distributor Agreement with Whole
Hemp, amending and restating in certain respects the Grower’s Agent Agreement, including by substituting EWSD as a party
in place of the Company.
Because
the Company believes Folium Biosciences is in default, principally because it had abandoned its obligation to provide farming
activities under the First Amended and Restated Farming Agreement since May 7, 2016, EWSD notified Whole Hemp on May 13, 2016
of its election to terminate the Restated Grower’s Distributor Agreement.
By
its terms, the Restated Grower’s Distributor Agreement could be terminated at any time by either party, if the other party
was in material breach of any obligation under the Restated Grower’s Distributor Agreement, which breach continued uncured
for 30 days following written notice thereof.
Whole
Hemp Complaint
A
complaint was filed by Whole Hemp Company, LLC (“Whole Hemp”) on June 1, 2016, naming the Company and EWSD (collectively,
the “Company Defendants”), as defendants in Pueblo County, CO district court. The complaint alleges five causes of
action against the Company Defendants: misappropriation of trade secrets, civil theft, intentional interference with prospective
business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and the Company
Defendants for the Farming Agreement and the Distributor Agreement.
The
court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July
14, 2016, enjoining the Company Defendants from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s
trade secrets, including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration,
except for the disposition of the temporary restraining order.
On
August 12, 2016, the court ordered that all of Whole Hemp’s plants in the Company Defendants’ possession be destroyed,
which occurred by August 24, 2016, at which time the temporary restraining order was dissolved and the parties were expected to
file a motion to dismiss the district court action.
In
light of the Whole Hemp plants all being destroyed pursuant to the court order, the Company has immediately expensed all
Capitalized agricultural costs as of June 30, 2016, as all costs as of that date related to Whole Hemp plants.
The
Company Defendants commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the
contracts between the parties. Whole Hemp filed an Answer and counterclaims on September 6, 2016, asserting similar allegations
that were asserted to the court.
On
September 30, 2016, the arbitrator held an initial status conference and agreed to allow the Company Defendants to file a motion
to dismiss some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial
disclosures of relevant documents and persons with knowledge of relevant information by October 21, 2016.
On
or about July 19, 2016, EWSD initiated arbitration before JAMS (Case ID: 18657). Effective June 20, 2017, as a result of a mediation
held in Colorado, the parties entered into a Confidential Settlement and Mutual Release Agreement (the “Release Agreement”),
pursuant to which the parties dismissed with prejudice all of their respective claims or counterclaims against each other, as
asserted in the Arbitration, and mutually released each other from all claims. The Release Agreement specifically provides that
neither its execution nor implementation is, or will be deemed to be or construed as, an admission by any party of any liability,
act, or matter.
NOTE
4 – INVENTORY AND CAPITALIZED AGRICULTURAL COSTS
Inventories
and capitalized agricultural costs are generally kept for a short period of time.
Finished
goods are comprised of CBD Isolate and CBD Distillate.
Growing
costs, also referred to as agricultural costs, consist of cultivation, fertilization, labor costs and soil improvement, pest
control and irrigation.
Biomass
is comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.
Raw materials include
all purchasing costs.
Inventory
at December 31, 2017 and 2016 consisted of the following:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Finished goods
|
|
$
|
84,210
|
|
|
$
|
—
|
|
Growing crops
and biomass
|
|
|
394,903
|
|
|
|
160,131
|
|
|
|
|
|
|
|
|
|
|
Total
inventory, net
|
|
$
|
479,113
|
|
|
$
|
160,131
|
|
The
Company recorded a markdown of $0 and $32,300 during the years ended December 31, 2017 and 2016, respectively.
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2017 and 2016 consists of:
Property
and Equipment
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Advances
|
|
|
-
|
|
|
|
472,126
|
|
Land
|
|
|
4,945,000
|
|
|
|
4,945,000
|
|
Construction in progress
|
|
|
-
|
|
|
|
1,241,380
|
|
Buildings and structures
|
|
|
1,300,630
|
|
|
|
59,250
|
|
Machinery
|
|
|
497,011
|
|
|
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,742,641
|
|
|
|
6,739,356
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(397,658
|
)
|
|
|
(26,988
|
)
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
6,344,983
|
|
|
$
|
6,712,368
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016, was $367,385 and $17,363,
respectively.
NOTE
6 – PCH INVESTMENT
Effective
as of March 21, 2017, through a series of related transactions, Notis intended to acquire, indirectly, an aggregate of 459,999
of the then-issued and outstanding shares of capital stock (the “PCH To-Be-Purchased Shares”) of PCH Investment Group,
Inc., a California corporation (“PCH”) for a proposed purchase price of $300,000 in cash and the proposed issuance
of shares of Common Stock. The PCH To-Be-Purchased Shares represented 51% of the outstanding capital stock of PCH. In connection
with the Company’s then-intended acquisition of the PCH To-Be-Purchased Shares, the Company (or its affiliates) was also
to be granted an indirect option to acquire the remaining 49% (the “PCH Optioned Shares”) of the capital stock of
PCH. The option was to expire on February 10, 2019 (the “PCH Optioned Shares Expiry Date”).
Located
in San Diego, California, PCH was a management services business that focused on the management of cannabis production and manufacturing
businesses. On November 1, 2016, PCH entered into a Management Services Agreement (the “PCH Management Agreement”)
with California Cannabis Group (“CalCan”) and Devilish Delights, Inc. (“DDI”), both of which then were
California nonprofit corporations in the cannabis production and manufacturing business (“their business”). CalCan
and Mr. Pyatt represented that CalCan was then licensed by the City of San Diego, California, to cultivate cannabis and manufacture
cannabis products, as well as to sell, at wholesale, the cultivated and manufactured products at wholesale to legally operated
medical marijuana dispensaries. The PCH Management Agreement provided that PCH was responsible for the day-to-day operations and
business activities of their business. In that context, PCH was to be responsible for the payment of all operating expenses of
their business (including the rent and related expenditures for CalCan and DDI) from the revenue generated by their business,
or on an out-of- pocket basis if the revenue should be insufficient. In exchange for PCH’s services and payment obligations,
PCH was to be entitled to 75% of the gross profits of their business. The PCH Management Agreement did not provide for any gross
profit milestone during its first 12 months; thereafter, it provided for an annual $8 million gross profit milestone, with any
amount in excess thereof to be carried forward to the next annual period. In the event that, during any annual period, the gross
profit thereunder was less than $8 million (including any carry-forward amounts), then, on a one- time basis, PCH would have been
permitted to carry-forward such deficit to the following annual period. If, in that following annual period, the gross profit
was to have exceeded $6 million, then PCH would have been entitled to an additional “one-time basis” carry-forward
of a subsequent deficit. The term of the PCH Management Agreement was for five years, subject to two extensions, each for an additional
five-year period, in all cases subject to earlier termination for an uncured material breach by PCH of its obligations thereunder.
Mr. Pyatt, the Company’s then- current Chief Operating Officer and Senior Vice President, Government Affairs, was also then
a member of the Board of Directors of CalCan and DDI.
Pursuant
to a Securities Purchase Agreement, that was made and entered into as of March 16, 2017 (five days before the presumed closing
of the transaction; the “SPA”), “PASE” was to have acquired the PCH To-Be-Purchased Shares from the three
PCH shareholders: (i) Mystic, LLC, a California limited liability company that Mr. Goh, the Company’s then-Chief Executive
Officer, formed and controlled for his investments in cannabis projects, (ii) Mr. Pyatt, and (iii) Mr. Kaller, then the general
manager of PCH (collectively, the “PCH Shareholders”).
As
a condition to the Lender entering into the Note Purchase Agreement and the PCH-Related Note (both as noted below) and providing
any additional funding to the Company in connection with its intended acquisition of the PCH To-Be-Purchased Shares, the Board
ratified the forms of employment agreements for Mr. Goh, as the Company’s then-Chief Executive Officer, and for Mr. Pyatt,
as the Company’s then-prospective President. If the agreements became effective, and following the second anniversary thereof,
the terms were to have become “at- will.” In addition to payment of a base salary, the agreements provided for certain
cash, option, and equity bonuses, in each case to become subject both to each individual and to the Company meeting certain performance
goals to be acknowledged by them and to be approved by a disinterested majority of the Board.
Due
to the nature of the above-described intended transaction, and the related parties involved with PCH, the Company formed a special
committee of its Board to consider all of the aspects thereof, as well as the related financing proposed to be provided by the
Lender. The special committee consisted of three of the four directors: Ambassador Ned L. Siegel, Mitch Lowe, and Manual Flores.
In the context of the special committee’s charge, it engaged an otherwise independent investment banking firm (the “Banker”)
to analyze the potential acquisition of the PCH To-Be-Purchased Shares through the SPA (noted above) and the Stock Purchase Option
Agreement (the “PCH Option Agreement”; the parties to which are PASE, PCH, the PCH Shareholders, as noted below),
the related financing agreements (all as noted below), other related business and financial arrangements, and the above-referenced
employment agreements. After the Banker completed its full review of those agreements and its own competitive analysis, it provided
its opinion that the consideration to be paid in connection with the acquisition of the PCH To- Be-Purchased Shares and the terms
of the PCH-Related Note were fair to the Company from a financial point of view. Following the Banker’s presentation of
its analysis and opinion, and the special committee’s own analysis, the special committee unanimously recommended to the
full Board that all of such transactions should be approved and that the Company could consummate the acquisition of the PCH To-Be-Purchased
Shares, accept the option to acquire the PCH Optioned Shares, enter into the PCH-Related Note, the documents ancillary thereto,
and the Employment Agreements.
In
connection with the Company’s intended acquisition of the PCH To-Be-Purchased Shares and the Company’s intended option
to acquire the PCH Optioned Shares, PASE, EWSD, PCH, and the Company entered into a Convertible Note Purchase Agreement (the “Note
Purchase Agreement”) with a third-party lender (the “PCH Lender”). Concurrently, PASE and the Company (with
EWSD and PCH as co-obligors) entered into a related 10% Senior Secured Convertible Promissory Note (the “PCH-Related Note”)
in favor of the PCH Lender. The initial principal sum under the PCH-Related Note was $1,000,000 and it bears interest at the rate
of 10% per annum. Principal and interest are subject to certain conversion rights in favor of the PCH Lender. So long as any principal
is outstanding or any interest remains accrued, but unpaid, at any time and from time to time, at the option of the PCH Lender,
any or all of such amounts may be converted into shares of Common Stock. Notwithstanding such conversion right, and except in
the circumstance described in the next sentence, the PCH Lender may not exercise its conversion rights if, in so doing, it would
then own more than 4.99% of the Company’s issued and outstanding shares of Common Stock. However, upon not less than 61
days’ notice, the PCH Lender may increase its limitation percentage to a maximum of 9.99%. The PCH Lender’s conversion
price is fixed at $0.0001 per share. Principal and accrued interest may be pre-paid from time to time or at any time, subject
to 10 days’ written notice to the PCH Lender. Any prepayment of principal or interest shall be increased to be at the rate
of 130% of the amount so to be prepaid and, during the 10-day notice period, the PCH Lender may exercise its conversion rights
in respect of any or all of the amounts otherwise to be prepaid.
In
a series of other loan transactions prior to the intended closing of the acquisition of the PCH To-Be-Purchased Shares, a different
third party lender (the “Ongoing Lender”) had lent to the Company, in five separate tranches, an aggregate amount
of approximately $414,000 (the “Pre-acquisition Loans”), that, in turn, the Company lent to PCH to use for its working
capital obligations. Upon the purported closing of the acquisition of the PCH To-Be-Purchased Shares and, pursuant to the terms
of the PCH-Related Note, the PCH Lender lent to the Company (i) approximately $86,000, that, in turn, the Company lent to PCH
to use for its additional working capital obligations, (ii) $300,000 for the purported acquisition of the PCH To-Be-Purchased
Shares, and (iii) $90,000 for various transaction-related fees and expenses. Immediately subsequent to the closing of the purported
acquisition of the PCH To-Be-Purchased Shares, the PCH Lender lent to the Company (x) approximately $170,000 for the Company’s
operational obligations and (y) approximately $114,000 for the Company partially to repay an equivalent amount of the Pre-acquisition
Loans.
In
connection with the Pre-acquisition Loans and the PCH-Related Note, the makers and co-obligors thereof entered into an Amended
and Restated Security and Pledge Agreement in favor of the Lender, pursuant to which such parties, jointly and severally, granted
to the Lender a security interest in all, or substantially all, of their respective property. Further, PCH entered into a Guarantee
in favor of the PCH Lender in respect of the other parties’ obligations under the PCH-Related Note. PCH’s obligation
to the PCH Lender under these agreements is limited to a maximum of $500,000.
As
of the intended closing of the acquisition of the PCH To-Be-Purchased Shares, the Company paid $300,000 to the PCH Shareholders.
If that transaction had closed, the Company would also have become obligated to issue to the PCH Shareholders 1,500,000,000 shares
(the “Purchase Price Shares”) of Common Stock. That number of issuable shares was to be subject to certain provisions
detailed in the PCH-Related Note, which are summarized herein.
Notwithstanding
the number of issuable shares referenced above, the number of issued Purchase Price Shares was to have been equal to 15% of the
then-issued and outstanding shares of Common Stock at the time that the Company exercised its option to acquire the PCH Optioned
Shares under the PCH Option Agreement. Further, in the event that the Company were to have issued additional equity securities
prior to the date on which it in fact had issued the Purchase Price Shares at a price per share that was less than the value referenced
above, the PCH Shareholders would have been entitled to “full ratchet” anti-dilution protection in the calculation
of the number of Purchase Price Shares to be issued (with the exception of a recapitalization by the Lender to reduce the Company’s
overall dilution).
If
the Company did not exercise the intended option to acquire the PCH Optioned Shares prior to PCH Optioned Shares Expiry Date,
the PCH Shareholders would have had the right to reacquire the PCH To-Be-Purchased Shares from the Company for the same cash consideration
($300,000) that was to have been paid to them for those shares. Further, if the Company were to be in default of its material
obligations under the SPA, or if PASE were the subject of any bankruptcy proceedings, then the PCH Shareholders have the same
reacquisition rights noted in the preceding sentence.
Pursuant
the PCH Option Agreement, PASE was granted the option to purchase all 49%, but not less than all 49%, of the PCH Optioned Shares.
The exercise price for the PCH Optioned Shares is an amount equivalent to five times PCH’s “EBITDA” for the
12-calendar month period, on a look-back basis, that concludes on the date of exercise of the Option, less $10 (which was the
purchase price of the option). The calculation of the 12-month EBITDA was to be determined by PASE’s (or its) then-currently
engaged independent auditors. If the Company were to exercise the option prior to the first anniversary of the closing of the
acquisition of the PCH To-Be-Purchased Shares, then the exercise price for the PCH Optioned Shares was to be based on the EBITDA
for the entire 12-calendar month period that commenced with the effective date of the PCH Option Agreement.
PCH
Investment Group, Inc. – San Diego Project Termination
On
March 27, 2017, the Company filed a Current Report on Form 8-K to announce the above-described series of events. Subsequently,
it became clear to the Company that the PCH Parties failed to make key closing deliveries, including, without limitation, actual
transfer of the PCH To-Be-Purchased Shares, the PCH Lease (as defined below) and related marijuana licenses. Thereafter, the parties
entered into litigation and eventual settlement as described below.
The
Settlement Agreement and Mutual General Release
The
Company, PACE, and EWSD (collectively, the “Notis Parties”) and PCH, Messrs. Pyatt, Kaller, and Goh (solely in connection
with his status as an equity holder of PCH, collectively, the “PCH Individuals”; and, with PCH, collectively, the
“PCH Parties”) entered into a Settlement Agreement and Mutual General Release, with an effective date of August 16,
2017 (the “Settlement Agreement”), inter alia, to “unwind” the SPA’s intended transactions,
to confirm that the transactions never officially closed, and to enter into a series of mutual releases with such parties. Some
of the salient recitals from the Settlement Agreement are:
|
1.
|
One
or both of the PCH Lender and the Ongoing Lender (collectively, the “Notis Lenders”) and PCH have certain disagreements
in respect of their respective rights and obligations in and related to certain of the SPA and related documents;
|
|
|
|
|
2.
|
Some
or all of the Notis Parties and the Notis Lenders, on the one hand, and PCH and the PCH Individuals, on the other hand, have
certain disagreements in respect of the conduct of PCH’s business;
|
|
|
|
|
3.
|
Some
or all of the Notis Parties and PCH have certain disagreements in respect of the ownership and possessory right of certain
of the furniture and equipment utilized by PCH on its own behalf or on behalf of others in respect of the conduct of PCH’s
business located at 9212 Mira Este Court, San Diego, California (the location for the “PCH Lease”);
|
|
|
|
|
4.
|
The
Notis Parties and the PCH Parties have certain disagreements in respect of their respective rights and obligations in and
related to the SPA;
|
|
|
|
|
5.
|
PCH
and Trava LLC, a Florida limited liability company and a material lender to PCH, have certain disagreements in respect of
their respective rights and obligations in and related to the PCH / Trava Master Service Agreement (as defined in the Settlement
Agreement);
|
|
|
|
|
6.
|
Notis
and Mr. Pyatt have certain disagreements in respect of their respective rights and obligations in and related to the Pyatt
Employment Agreement (as defined in the Settlement Agreement), as manifested in part by Mr. Pyatt’s filing of the Pyatt
Labor Complaint (as defined in the Settlement Agreement);
|
|
|
|
|
7.
|
The
Notis Parties and the PCH Parties have certain disagreements in respect of the Notis Parties and the PCH Parties’ respective
conduct in connection with PCH’s rights and obligations in and related to the PCH / SDO Master Service Agreement (as
defined in the Settlement Agreement);
|
|
|
|
|
8.
|
The
Notis Lenders and PCH have certain disagreements in respect of the PCH’s conduct in connection with PCH’s rights
and obligation in and related to certain of the Notis Financing Documents (as defined in the Settlement Agreement);
|
|
|
|
|
9.
|
The
Notis Lenders and PCH have certain disagreements in respect of the ownership and possessory rights of certain of the Equipment
(as defined in the Settlement Agreement); and
|
|
|
|
|
10.
|
Some
or all of the Notis Parties and the PCH Individuals, among others, have certain disagreements in respect of the operation
of the PCH Shareholder/Buy-Sell Agreement (as defined in the Settlement Agreement).
|
See,
also, Change of Officers and Directors in connection with the severance by each of Messrs. Pyatt and Goh of their respective
employment and directorship relationships with us.
In
connection with the PCH investment, the Company recorded $1,001,520 as a loss in connection with
the failed and unconsummated business combination. The $1,001,520 is the amount the Company invested in the PCH transaction.
NOTE
7 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
Convertible
notes payable consists of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Investor
#1
|
|
$
|
15,198,404
|
|
|
$
|
6,642,745
|
|
Investor
#2
|
|
|
2,087,198
|
|
|
|
1,857,146
|
|
Investor
#3
|
|
|
293,009
|
|
|
|
231,142
|
|
Investor
#4
|
|
|
2,462,284
|
|
|
|
-
|
|
Investor
#5
|
|
|
300,000
|
|
|
|
-
|
|
|
|
|
20,340,895
|
|
|
|
8,731,033
|
|
Less
discounts
|
|
|
(869,441
|
)
|
|
|
(85,591
|
)
|
Plus
premium
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less
current maturities
|
|
|
19,471,454
|
|
|
|
8,645,442
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
Investor
#1
During
the year ended December 31, 2016 the Company issued 30 convertible notes to third-party lenders totaling $9,700,170. The Company
received cash of $2,695,000 and original issue discounts of $119,737. The lender also paid $161,401 on advancements on fixed assets
and consolidated principal and interest of $6,818,744. These convertible notes accrue interest at a rate of 10% per annum and
mature with interest and principal both due between July 13, 2016 through September 9, 2017. This note is secured by the Company’s
assets. The convertible notes convert at a fixed rate of $0.75 or a 49% to 40% discount with a lookback of 30 trading days.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #1’s notes during the year ended December 31, 2016, gave rise to a derivative liability of $12,259,532,
of which $1,952,380 were recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance
cost ratably over the term of the convertible notes. $10,307,152 was recorded due to the consolidation of the principal and interest
and was expense to loss on extinguishment.
During
the year ended December 31, 2016 Investor #1 converted $802,926 of principal into 4,374,651,437 shares of Common Stock.
During
the year ended December 31, 2016 Investor #1 converted $5,188,643 of principal and $686,827 of interest into the consolidation
loan disclosed in respect of Investor #1 and Investor #3 elsewhere in these notes. The Company has recorded $36,071,697 gain on
extinguishment.
During
the year ended December 31, 2017 the Company issued 29 convertible notes to third-party lenders totaling $1,529,297.
The Company received cash of $1,066,400 and paid $413,457 from the PCH-Related Note. (See Note 6). These convertible
notes accrue interest at a rate of 10% per annum and mature with interest and principal both due between February 3, 2017
through December 4, 2018. The notes convert at a fixed rate of $0.0001 or a 50% discount with a lookback of 30 trading
days.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #1’s convertible notes during the year ended December 31, 2017, gave rise to a derivative liability
of $2,950,900. $1,036,301 which was recorded as a debt discount. The debt discount is charged to accretion of debt
discount and issuance cost ratably over the term of the convertible note.
During
the year ended December 31, 2017 the Company went into default on all of Investor #1’s convertible notes. These notes now
accrue interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal
increases by 50%-30%. The increase of principal of $3,698,710 was recorded to interest expense.
Upon
default, 18 promissory notes held by Investor #1 became convertible. The Company reclassed $3,691,199 from notes payable to convertible
notes payable.
During
the year ended December 31, 2017, the Company repaid $250,000 in principal and $37,148 in interest.
Investor
#2
During
the year ended December 31, 2016, the Company issued two convertible notes to third-party lenders totaling $278,000. The Company
received cash of $235,000 and the lender paid $43,000 on behalf of the Company for vendor liabilities. These convertible notes
accrue interest at a rate of 5% per annum and mature with interest and principal both due between July 13, 2016 through April
30, 2017. This note is secured by the Company’s assets. The convertible notes convert at a fixed rate of $0.75 or
a 49% discount with a lookback of 20 trading days.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #2’s convertible notes during the year ended December 31, 2016, gave rise to a derivative liability
of $282,312, of which $265,917 was recorded as a debt discount. The debt discount is charged to accretion of debt discount and
issuance cost ratably over the term of the convertible notes. $16,395 was above the face value of the convertibles notes and was
recorded as interest expense.
During
the year ended December 31, 2017, the Company went into default on all of Investor #2’s convertible notes. These notes now
accrue interest at a rate of 24% per annum and a late fee of 18% on interest outstanding compounding quarterly. The default caused
a derivative expense of $549,535.
Upon
default, the promissory note held by Investor #2 became convertible. The Company reclassed $275,000 from notes payable to convertible
notes payable.
During
the year ended December 31, 2016, Investor #2 converted $1,450,661 of principal and $38,002 of interest into 4,949,130,904 shares
of Common Stock.
During
the year ended December 31, 2017, Investor #2 converted $1,935 of principal into 38,700,000 shares of Common Stock.
At
December 31, 2017, the Company was in default on all the convertible debentures with Investor #2.
Investor
#3
During
the year ended December 31, 2016, the Company issued two convertible notes to third-party lenders totaling $282,500. The Company
received cash of $236,500, original issue discounts of $34,750 and the lender paid $11,250 on behalf of the Company for vendor
liabilities. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal both due
between September 14, 2016 through August 20, 2017. This note is secured by the Company’s assets. These notes are
convertible upon default at a rate of $0.75 or a 49% discount with a lookback of 30 trading days.
Due
to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #3’s convertible notes during the year ended December 31, 2016, gave rise to a derivative liability
of $672,335, of which $332,592 was recorded as a debt discount. The debt discount is charged to accretion of debt discount and
issuance cost ratably over the term of the convertible notes. $339,743 was above the face value of the convertible notes and was
recorded as interest expense.
During
the year ended December 31, 2016 Investor #3 converted $51,358 of principal into 205,431,250 shares of Common Stock.
Investor
#4
During
the year ended December 31, 2017, the Company issued seven convertible notes to third-party lenders totaling $1,641,522. The Company
received cash of $1,000,000 and paid $641,522 towards farm expenses. These convertible notes accrue interest at a rate of 10%
per annum and mature with interest and principal both due between March 15, 2018 through November 09, 2018. This note is secured
by the Company’s assets. The notes convert at a fixed rate of $0.0001 or a 50% discount with a lookback of 30 trading
days.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #4’s notes during the year ended December 31, 2017, gave rise to a derivative liability of $3,842,628.
In addition, the Company issued warrants to purchase 10,000,000,000 shares of common stock. The warrant entitles the holder to
purchase shares of Common Stock at a purchase price of $0.0001 per share for a period of four years from the issue date. The Company
recorded a $2,979,231 debt discount relating to the warrants issued to the investor. The debt discounts are charged to
accretion of debt discount and issuance cost ratably over the term of the convertible note.
During
the year ended December 31, 2017, the Company went into default on all of Investor #4 convertible notes. These notes now accrue
interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal increases
by 50%. The increase of principal of $820,761 was recorded to interest expense.
Investor
#5
During
the year ended December 31, 2017, the Company issued two convertible notes to third-party lenders totaling $200,000. The Company
received cash of $200,000. These convertible notes accrue interest at a rate of 10% per annum and mature with interest and principal
both due between April 27, 2018 through May 8, 2018. This note is secured by the Company’s assets. These notes are convertible
upon default at a rate of $0.0001 or a 49% discount with a lookback of 30 trading days.
Due
to the fact that these convertible notes have an option to convert at a variable amount, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #5’s convertible notes during the year ended December 31, 2017, gave rise to a derivative liability
of $438,196, of which $170,198 was recorded as a debt discount. In addition, the Company issued warrants to purchase 200,000
shares of Common Stock. The warrant entitles the holder to purchase shares of Common Stock at a purchase price of $0.0001 per
share for a period of four years from the issue date. The Company recorded a $29,802 debt discount relating to the warrants issued
to the investor. The debt discounts are charged to accretion of debt discount and issuance cost ratably over the term of the convertible
notes.
During
the year ended December 31, 2017, the Company went into default on all of Investor #4’s convertible notes. These notes now
accrue interest at a rate of 24% per annum, a late fee of 18% on interest outstanding compounding quarterly and the principal
increases by 50%. The increase of principal of $100,000 was recorded to interest expense.
Related
Party Financing
One
of the members of the Board entered into three separate subordinated convertible promissory notes convertible at $0.01 with the
Company on March 4, 2016, March 10, 2016, and March 15, 2016, respectively, each in the principal amount of $25,000, for
a total of $75,000. Also on March 15, 2016, another of the Company’s directors entered into a subordinated convertible promissory
note convertible at $0.01 with the Company in the principal amount of $25,000, and two other of the Company’s directors
each entered into a subordinated convertible promissory note convertible at $0.01 with the Company in the principal amount of
$2,500. All of the foregoing convertible promissory notes have three year terms and an interest rate of 8% per annum. The debentures
were evaluated to determine if the conversion feature fell within the guidance for derivative accounting, and as the debentures
are convertible at a fixed conversion price, and do not include a reset provision to occur upon subsequent sales of securities
at a price lower than the fixed conversion price, the Company concluded the conversion feature did not qualify as a derivative.
In
connection with their funding of the Notes (collectively, the “Board Notes”), the directors each received a warrant,
exercisable for a period of three (3) years from the date of Board Notes, to purchase an amount of Common Stock equal to 50% of
the principal sum under each of the Board Notes, at an exercise price equal to 200% of the applicable Conversion Price. The exercise
price of the warrants is $0.02. The warrants were determined to have a fair value of $42,000, calculated with the Black-Scholes-Merton
model, with the following key valuation assumptions: estimated term of three years, annual risk-free rate of 0.93%, and annualized
expected volatility of 172%.
NOTE
8 – NOTES PAYABLE
Notes
payable consists of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Southwest Farms
|
|
$
|
3,536,279
|
|
|
$
|
3,590,241
|
|
East West Secured Development
|
|
|
486,531
|
|
|
|
503,031
|
|
Investor #1
|
|
|
103,847
|
|
|
|
3,691,200
|
|
Investor #2
|
|
|
-
|
|
|
|
275,000
|
|
Investor #6
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
4,191,657
|
|
|
|
8,059,472
|
|
Less discounts
|
|
|
-
|
|
|
|
(598,721
|
)
|
Plus
premium
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Subtotal notes payable
|
|
|
4,191,657
|
|
|
|
7,460,751
|
|
Less
current maturities
|
|
|
4,191,657
|
|
|
|
3,367,479
|
|
|
|
|
|
|
|
|
|
|
Notes payable,
net of current maturities
|
|
$
|
-
|
|
|
$
|
4,093,272
|
|
Investor
#1
During
the year ended December 31, 2016, the Company issued 18 convertible notes to third-party lenders totaling $3,691,199. The Company
received cash of $1,095,741, original issue discounts of $996,199 and the lender paid $145,000 on behalf of the Company for vendor
liabilities. These convertible notes accrue interest at a rate between 5% to 10% per annum and mature with interest and principal
both due between December 12, 2016 through November 18, 2017. This note is secured by the Company’s assets. These
notes are convertible upon default at a rate of $0.75 or a 40% discount with a lookback of 20 trading days.
Due
to the fact that these notes have an option to convert at a variable amount upon default, they are subject to derivative liability
treatment. The Company has applied ASC 815, due to the potential for settlement in a variable quantity of shares. The conversion
feature of Investor #4’s notes during the year ended December 31, 2017, gave rise to a derivative liability of $390,967,
of which $230,901 was recorded as a debt discount. The debt discount is charged to accretion of debt discount and issuance cost
ratably over the term of the convertible note. $328,116 was above the face value of the note and was recorded as interest expense.
During
the year ended December 31, 2017, the Company issued 4 notes to third-party lenders totaling $103,847. The Company
received cash of $95,527, original issue discounts of $819 and the lender paid $7,500 on behalf of the Company
for vendor liabilities. These notes mature from May 2017 through August of 2017.
During
the year ended December 31, 2017, the Company went into default on all of Investor #1’s notes. The notes now accrue interest
at a rate of 24% per annum.
Upon
default, 18 promissory notes held by Investor #1 became convertible. The Company reclassed $3,691,199 from notes payable to convertible
notes payable.
Investor
#2
During
the year ended December 31, 2017, the Company went into default on all of Investor #2’s notes. The notes now accrue interest
at a rate of 24% per annum. Upon default, the promissory note held by Investor #2 became convertible. The Company reclassed $275,000
from notes payable to convertible notes payable.
Investor
#6
During
the year ended December 31, 2017, the Company issued a promissory note to a vendor totaling $65,000 to settle an outstanding vendor
liability. The Company recorded a gain of settlement of vendor liability of 82,776 that is included in other income.
Investor
#7
On
April 6, 2016, the Company entered into a promissory note for $87,500, which was issued with a $2,500 premium, and bears interest
at 0.0%. The proceeds were to be used by the Farm, to pay for water usage. Additionally, the Company issued 600,000 shares of
its restricted common stock to the holder. The shares were valued at the market value of the common shares of the Company on the
date of the issuance of the note. The payment terms called for $40,000 to be paid on or before April 21, 2016, $20,000 to be paid
on or before May 6, 2016, and the final $27,500 to also be paid on or before May 6, 2016. The Note also allowed for the extension
of the maturity date by 30 days, at the Company’s request, in exchange for an additional $2,500 payment. The note and the
$2,500 extension payment were paid during July 2016.
Related
Party Financing
Notes
payable, related parties, consists of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Notes payable - related parties
|
|
$
|
289,866
|
|
|
$
|
289,866
|
|
|
|
|
|
|
|
|
|
|
Less
discounts
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
289,866
|
|
|
$
|
289,866
|
|
On
March 14, 2016, the Company issued Promissory Notes (the “March 2016 Directors Notes”), in the amount of $41,667,
to a director in exchange for various amounts outstanding for fees and reimbursements incurred during the year ended December
31, 2015. The March 2016 Directors Notes are due on demand and bear interest at 8% until the March 2016 Directors’ Notes
are paid in full.
On
June 14, 2016, the Company issued Promissory Notes (the “June 2016 Director’s Notes”), in the amount of $250,700,
to all the directors in exchange for various amounts outstanding for fees and reimbursements incurred during December 2015 and
April 2016. The June 2016 Director’s Notes have a term of six months and bear interest at 8% until the June 2016 Director’s
Notes are paid in full. The June 2016 Director’s Notes were each issued with a warrant for 50% of the face amount of each
June 2016 Director’s Note, with an exercise price of $0.01 and exercisable for three years. The warrants were determined
to have a fair value of $12,000, calculated with the Black-Scholes-Merton model, with the following key valuation assumptions:
estimated term of three years, annual risk-free rate of .93%, and annualized expected volatility of 172%. The $12,000 fair value
was recognized as a debt discount and is being amortized over the six-month term of the June 2016 Directors Notes.
NOTE
9 – Stockholders’ Deficit
Preferred
Stock
The
Series A Preferred Stock has special voting rights when voting as a class with the Common Stock as follows: (i) the holders of
Series A Preferred Stock shall have such number of votes as is determined by multiplying (a) the number of shares of Series A
Preferred Stock held by such holder, by (b) the number of issued and outstanding shares of the Company’s Series
A Preferred Stock and Common Stock (collectively, the “Common Stock”)
on a Fully-Diluted Basis (as hereinafter defined),
as of the record date for the vote, or, if no such record date is established, as of the date such vote is taken or any written
consent of stockholders is solicited, and by (c) 0.00000025; and (ii) the holders of Common Stock shall have one vote per
share of Common Stock held as of such date. “Fully-Diluted Basis” mean that the total number of issued and outstanding
shares of Common Stock shall be calculated to include (a) the shares of Common Stock issuable upon exercise and/or conversion
of all of the following securities (collectively, “Common Stock Equivalents”): all outstanding (a) securities convertible
into or exchangeable for Common Stock, whether or not then convertible or exchangeable (collectively, “Convertible Securities”),
(b) subscriptions, rights, options and warrants to purchase shares of Common Stock, whether or not then exercisable (collectively,
“Options”), and (c) securities convertible into or exchangeable or exercisable for Options or Convertible Securities
and any such underlying Options and/or Convertible Securities.
As
of December 31, 2017 and 2016, there were no shares of Series A Preferred Stock outstanding.
Common
Stock
Our Articles of Incorporation
authorize 10,000,000,000 shares of common stock. As of November 26, 2019, our Board has authorized the issuance
of all of the shares of Common Stock, of which shares 9,982,923,868 are held of record or in street name by our stockholders.
On
January 20, 2017, the Company issued 2,000,000 shares of its restricted Common Stock to in connection with the settlement of the
Crystal v. Medbox, Inc. litigation. The Company did not receive any proceeds from such issuance. The Company issued such
shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
During the year ended December
31, 2017 the Company issued 17,076,132 shares of Common Stock as compensation to a director. The Company recorded $50,098 as stock-based
compensation expense.
During
the year ended December 31, 2016 the Company received $16,000 for the sale of 851,063 shares of Common Stock.
During
the year ended December 31, 2016 the Company issued 144,042,308 shares of Common Stock to consultants for services rendered. These
shares had a fair value of 96,790.
During
the year ended December 31, 2016, $324,754 was contributed by a related party.
During
the year ended December 31, 2016 the Company issued 28,778,831 shares of Common Stock to employees for services rendered. These
shares had a fair value of $809,424.
During
the year ended December 31, 2016 an investor cancelled 1,633,652 as part of the Derivative Settlements discussion below.
For
shares of Common Stock that were issued upon conversion of the convertible debentures during the years ended December 31, 2017
and 2016, see Note 7.
Share-based
awards, restricted stock and restricted stock units (“RSUs”)
The
Board resolved that, beginning with the fourth calendar quarter of 2015, the Company shall pay each member of the Board, who is
not also then an employee of the Company, for each calendar quarter during which such member continues to serve on the Board,
compensation in the amount of $15,000 in cash and 325,000 shares of Common Stock. The 975,000 shares issued to all the directors
for the three months ended March 31, 2016 were valued at the market price of shares of Common Stock on March 31, 2016, for total
compensation expense of $9,750. On March 31, 2016, the Board awarded the Chairman a cash bonus of approximately $89,000 and, 2,230,000
shares of Common Stock for his service in the three months ended March 31, 2016.
The
Board authorized grants of approximately 2,761,000 shares of Common Stock during the second quarter of 2016, which were valued
at the market price of shares of Common Stock on date of grant, for total compensation expense of approximately $13,000. On June
8, 2016, the Board also awarded the Chairman a cash bonus of approximately $89,200 and 6,027,000 shares of Common Stock, valued
at approximately $8,000.
The
Board also voted on June 8, 2016, to increase the shares available for grant under the 2014 Equity Incentive Plan to 125,000,000.
A
summary of the activity related to RSUs for the years ended December 31, 2017 and 2016 is presented below:
Restricted
stock units (RSUs)
|
|
Total
shares
|
|
|
Grant
date fair
value
|
|
RSUs non-vested at January 1, 2017
|
|
|
7,142,856
|
|
|
$
|
0.51
- $1.88
|
|
RSUs granted
|
|
|
250,975,000
|
|
|
$
|
0.0002
- $0.0003
|
|
RSUs vested
|
|
|
(258,117,856
|
)
|
|
$
|
0.0002
- $1.88
|
|
RSUs forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
RSUs non-vested December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Restricted
stock units (RSUs)
|
|
Total
shares
|
|
|
Grant
date fair
value
|
|
RSUs non-vested at January 1, 2016
|
|
|
152,823
|
|
|
$
|
0.51
- $1.88
|
|
RSUs granted
|
|
|
14,285,714
|
|
|
$
|
0.007
|
|
RSUs vested
|
|
|
(7,295,681
|
)
|
|
$
|
0.51-
$1.88
|
|
RSUs forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
RSUs non-vested December 31, 2016
|
|
|
7,142,856
|
|
|
$
|
0.51
- $1.88
|
|
A
summary of the expense related to restricted stock, RSUs and stock option awards for the year ended December 31, 2017 and 2016
is presented below:
|
|
Year
ended
December 31, 2017
|
|
RSUs
|
|
$
|
50,293
|
|
Stock options
|
|
|
299,925
|
|
|
|
|
|
|
Total
|
|
$
|
350,218
|
|
|
|
Year
ended
December 31, 2016
|
|
RSUs
|
|
$
|
261,196
|
|
Common stock
|
|
|
539,246
|
|
|
|
|
|
|
Total
|
|
$
|
800,442
|
|
Warrant
Activities
The
Company applied fair value accounting for all share-based payments awards. The fair value of each warrant granted is estimated
on the date of grant using the Black-Scholes-Merton model.
The
assumptions used for warrants granted during the year ended December 31, 2017 and 2016 are as follows:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Exercise price
|
|
$
|
5.54
- 0.0001
|
|
|
$
|
0.02
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
284.72%
- 249.30
|
%
|
|
|
289.97
|
%
|
Risk free interest rate
|
|
|
1.54%
- 1.44
|
%
|
|
|
1.6
|
%
|
Expected life of warrant
|
|
|
4
years
|
|
|
|
3
years
|
|
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Days Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding –
December 31, 2015
|
|
|
43,161,222
|
|
|
$
|
0.16
|
|
|
$
|
2.77
|
|
Granted
|
|
|
22,595,859
|
|
|
|
0.04
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31,
2016
|
|
|
65,757,081
|
|
|
|
0.11
|
|
|
|
1.97
|
|
Granted
|
|
|
11,800,000,000
|
|
|
|
0.0001
|
|
|
|
4
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(100,000,000
|
)
|
|
|
0.001
|
|
|
|
-
|
|
Outstanding and Exercisable –
December 31, 2017
|
|
|
11,765,757,081
|
|
|
$
|
0.0007
|
|
|
$
|
3.23
|
|
At
December 31, 2017, the aggregate intrinsic value of warrants outstanding and exercisable was $2,340,000 and $1,340,000, respectively.
During
the year ended December 31, 2017 and 2016, there were no warrants exercised.
The
Company adopted a sequencing policy that reclassifies contracts, with the exception of stock options, from equity to assets or
liabilities for those with the earliest inception date first. Any future issuance of securities, as well as period-end reevaluations,
will be evaluated as to reclassification as a liability under the sequencing policy of earliest inception date first until all
of the convertible debentures are either converted or settled.
For
warrants issued in 2015, the Company determined that the warrants were properly classified in equity as there is no cash settlement
provision and the warrants have a fixed exercise price and, therefore, result in an obligation to deliver a known number of shares.
The
Company reevaluated the warrants as of December 31, 2017 and determined that they did not have a sufficient number of authorized
and unissued shares to settle all existing commitments, and the fair value of the warrants for which there was insufficient authorized
shares, were reclassified out of equity to a liability. Under the sequencing policy, of the approximately 11,765,757,081 warrants
outstanding at December 31, 2017. The fair value of these warrants was re-measured on December 31, 2017 using the Black-Scholes-Merton
model, with key valuation assumptions used that consist of the price of the Company’s stock on December 31, 2017, a
risk-free interest rate based on the average yield of a 1 or 4 year Treasury note and expected volatility of shares of
Common Stock, resulting in the fair value for the Warrant liability of approximately $3,528,602. The resulting change in fair
value of approximately $237,120 for the year ended December 31, 2017, was recognized as a loss in the Consolidated Statement
of Comprehensive Income (loss).
During
the year ended December 31, 2017, a total of 10,200,000,000 warrants were issued with convertible notes payable (See Note 7
above). The warrants have a grant date fair value of $3,009,034, using the Black-Scholes-Merton model and the
above assumptions. 5,000,000,000 shares vest upon the Company reaching $12 million in revenue.
During
the year ended December 31, 2017, a total of 1,600,000,000 warrants were issued for services. The warrants have a grant date fair
value of $268,018 using the Black-Scholes-Merton model and the above assumptions.
The
following is a summary of the Company’s option activity:
|
|
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Days Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – December
31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,000,000,000
|
|
|
$
|
0.0001
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and Exercisable
– December 31, 2017
|
|
|
1,000,000,000
|
|
|
$
|
0.0001
|
|
|
$
|
4.59
|
|
At
December 31, 2017 and 2016, the aggregate intrinsic value of options outstanding and exercisable was $200,000 and $0, respectively.
Stock-based
compensation for stock options has been recorded in the consolidated statements of operations and totaled $ 299,925 and $0, for
the year ended December 31, 2017 and 2016, respectively.
The
following is a summary of the Company’s stock options granted during the year ended December 31, 2017:
Options
|
|
|
Value
|
|
|
Purpose for Grant
|
|
1,000,000,000
|
|
|
$
|
299,925
|
|
|
Service
Rendered
|
NOTE
10 – RELATED PARTY TRANSACTIONS
During
the first quarter of 2016, the Company issued three convertible notes to one of its directors in the aggregate principal amount
of $75,000 and one convertible note to another of its directors in the aggregate principal amount of $25,000, plus a convertible
note to each of its other to directors, in the amount of $2,500 each.
In
the second quarter of 2016, the Company issued promissory notes to all of the directors, in exchange for past unpaid cash bonuses,
board compensation and expenses. See Note 8 for a description of these notes.
NOTE
11 – DISCONTINUED OPERATIONS
Management
deemed the vapor and medical cannabis dispensing line of operations discontinued in the 4th quarter of 2016. This determination
was due to poor performance and decreasing gross profit of the Company businesses and resulted in an overall halt of operations
of the Company in the 4th quarter of 2016. Upon analysis of the individual business lines, the Company’s newly formed special
committee decided not to continue in the vapor and medical cannabis dispensing industries.
On
March 28, 2016, the Company sold the assets of the vapor subsidiary for $70,000. At the time of the asset disposal, it was disclosed
as not a strategic shift in operations; however, with the inclusion of the medical cannabis dispensing operations, the definition
of a strategic shift was met. One definition of a strategic shift is a disposal of “80 percent interest in one of two product
lines that account for 40 percent of total revenue”. The disposal of both operations meets the definition of a strategic
shift and should therefore be shown as discontinued operations in the Consolidated Financial Statements.
The
following subsidiaries of the Company qualify as discontinued operations:
●
Prescription Vending Machines, Inc.
●
Medbox Management Services, Inc.
●
Medbox Rx, Inc.
●
Vaporfection International, Inc.
●
MJ Property Investments, Inc.
The
income (loss) from discontinued operations presented in the income statement for the year ended December 31, 2017 and 2016, consisted
of the following:
|
|
For
the year ended
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
243,965
|
|
Revenue, related
party
|
|
|
-
|
|
|
|
99,946
|
|
Net revenue
|
|
|
-
|
|
|
|
343,911
|
|
Cost of revenues
|
|
|
-
|
|
|
|
99,411
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
244,500
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
5,171
|
|
|
|
65,647
|
|
Total operating
expenses
|
|
|
5,171
|
|
|
|
65,647
|
|
Loss
from operations
|
|
|
5,171
|
|
|
|
178,853
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(3,221
|
)
|
|
|
(8,858
|
)
|
Gain on sale of
assets of subsidiary
|
|
|
-
|
|
|
|
5,498
|
|
Loss on sale of
rights and assets
|
|
|
-
|
|
|
|
(178,833
|
)
|
Loss on default
settlement of a note
|
|
|
-
|
|
|
|
(168,092
|
)
|
Other-than-temporary
impairment of Marketable securities
|
|
|
-
|
|
|
|
(16,010
|
)
|
Other
income
|
|
|
-
|
|
|
|
141,058
|
|
Total other income
(expense)
|
|
|
(3,221
|
)
|
|
|
(225,237
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,392
|
)
|
|
$
|
(46,384
|
)
|
NOTE
12 – INCOME TAXES
The
Company accounts for income taxes under FASB ASC 740-10, which requires use of the liability method. FASB ASC 740-10-25 provides
that deferred tax assets and liabilities are recorded based on the differences between the tax basis of assets and liabilities
and their carrying amounts for financial reporting purposes, referred to as temporary differences.
Deferred
income taxes are provided for temporary differences arising from using the straight-line depreciation method for financial statement
purposes and accelerated methods of depreciation for income taxes, including differences between book and tax for amortizing organization
expenses. In addition, deferred income taxes are recognized for certain expense accruals, allowances and net operating loss carry
forwards available to offset future taxable income, net of valuation allowances for potential expiration and other contingencies
that could impact the Company’s ability to recognize the benefit.
The
Company is required to file federal and state income tax returns. Various taxing authorities may periodically audit the Company’s
income tax returns. These audits would include questions regarding the Company’s tax filing positions, including the timing
and amount of deductions and the allocation of income to various tax jurisdictions.
Management
has performed its evaluation of all other income tax positions taken on all open income tax returns and has determined that there
were no positions taken that do not meet the “more likely than not” standard. Accordingly, there are no provisions
for income taxes, penalties or interest receivable or payable relating to uncertain income tax provisions in the accompanying
Consolidated Financial Statements. The Company is currently delinquent on filing its tax returns.
From
time to time, the Company may be subject to interest and penalties assessed by various taxing authorities. These amounts have
historically been insignificant and are classified as other expenses when they occur.
Deferred
tax assets and liabilities result from temporary differences in the recognition of income and expense for tax and financial reporting
purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
$
|
-
|
|
|
$
|
-
|
|
Customer deposits
|
|
|
-
|
|
|
|
-
|
|
Deferred revenue
|
|
|
-
|
|
|
|
-
|
|
Share based compensation
|
|
|
631,779
|
|
|
|
906,214
|
|
NOL carryforward
|
|
|
3,375,214
|
|
|
|
2,469,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
4,006,993
|
|
|
|
3,375,214
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible asset
amortization
|
|
|
|
|
|
|
—
|
|
|
|
|
4,006,993
|
|
|
|
3,375,214
|
|
Less: Valuation
allowance
|
|
|
(4,006,993
|
)
|
|
|
(3,375,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
A
valuation allowance has been recorded against the realizability of the net deferred tax asset such that no value is recorded for
the asset in the accompanying Consolidated Financial Statements. The valuation allowance decreased $4,006,993 between
the year ended December 31, 2017 and 2016.
For
the years ended December 31, 2017 and 2016, a reconciliation of the statutory rate and effective rate for the provisions for income
taxes consists of the following:
|
|
2017
|
|
|
2016
|
|
Federal tax statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax statutory rate
|
|
|
8.84
|
%
|
|
|
8.84
|
%
|
Permanent differences
|
|
|
3.46
|
%
|
|
|
3.46
|
%
|
Valuation allowance
|
|
|
(46.30
|
)%
|
|
|
(46.30
|
)%
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
NOTE
13 – COMMITMENTS AND CONTINGENCIES
The
Company previously leased property for its day-to-day operations and facilities for possible retail dispensary locations and cultivation
locations as part of the process of applying for retail dispensary and cultivation licenses.
Entry
into Agreement to Acquire Real Property
On
June 17, 2016, EWSD entered into a Contract to Buy and Sell Real Estate (the “Acquisition Agreement”) with Tammy J.
Sciumbato and Donnie J. Sciumbato (collectively, the “Sellers”) to purchase certain real property comprised of 116
acres of agricultural land, a barn and a farmhouse in Pueblo, Colorado (the “Property”). The closing of the Acquisition
Agreement was scheduled to occur on or about September 22, 2016 (the “Closing”), with possession of the land and barn
occurring 12 days after the Closing and possession of the farm house occurring on or before January 1, 2017. The Sellers were
to rent back the farm house from the Company until January 1, 2017. The purchase price to acquire the Property is $650,000, including
$10,000 paid by the Company as a deposit into the escrow for the Property. During the third quarter of 2016, the Acquisition
Agreement was cancelled and the deposit was forfeited.
Office
Leases
On
August 1, 2011, the Company entered into a lease agreement for office space located in West Hollywood, California through June
30, 2017 at a current monthly rate of $14,828 per month. The Company moved to different offices in Los Angeles, CA in April
2015. The sublease on the office has a term of 18 months with monthly rent of $7,486.
The
landlord for the West Hollywood space has filed a suit against the Company and independent guarantors on the West Hollywood lease.
The Company has expensed all lease payments due under the West Hollywood lease. The Company’s liability for the West Hollywood
lease will be adjusted, if required, upon settlement of the suit with the landlord. On September 8, 2016, the court approved the
landlord’s application for writ of attachment in the State of California in the amount of $374,402 against PVM. A trial
date had been set for May 2017 (Note 11). On July 18, 2017, plaintiff filed a Request for Dismissal with Prejudice
of the litigation in respect of PVM.
Total
rent expense under operating leases for the year ended December 31, 2017 and 2016 was $20,474 and $89,000, respectively.
Consulting
Agreements
On
December 7, 2015, the Company entered into a consulting agreement for marketing and PR services, for a term of six months, which
was subsequently extended through August 30, 2016. Compensation under this agreement through May 30, 2016 was $25,000 per month,
with twenty percent, or $5,000, of this amount to be paid in shares of Common Stock. Pursuant to the terms of the agreement,
the number of shares issued is determined at the end of each quarter. Upon extension, the terms were adjusted to $15,000 per month
for services, with $5,000 to be paid in shares of Common Stock. On November 30, 2017, the Court granted plaintiff’s request
for a Default Judgment in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses,
attorney’s fees, and interest at a rate of 6.25%.
On
March 1, 2016, the Company entered into a consulting agreement for corporate financial advisory services, for a term of 12 months,
which is cancellable anytime with 30 days written notice after the first 90 days. Compensation under this agreement consists of
a retainer of $3,500 per month, plus 1,500,000 shares of Common Stock issuable in 375,000 share tranches on a quarterly basis.
On September 9, 2016, this agreement was terminated and no more shares of Common Stock were issued.
Litigation
On
May 22, 2013, we initiated litigation in the United States District Court in the District of Arizona against three shareholders
of MedVend Holdings LLC (“MedVend”) in connection with a contemplated transaction that we entered into for the purchase
of an approximate 50% ownership stake in MedVend for $4.1 million. The lawsuit alleged fraud and related claims arising out of
the contemplated transaction during the quarter ended June 30, 2013. In January 2017, we settled the litigation and agreed to
pay the original shareholders of MedVend an aggregate of $375,000 in 6 installments over three years. We defaulted on the original
settlement agreement. MedVend unsuccessfully attempted to obtain a partial payment from us through certain court proceedings that
it initiated regarding Dr. Bedrick’s component of the above-disclosed SEC Investigation and Wells Notice.
On
February 20, 2015, Michael A. Glinter, derivatively and on behalf of the Company, as a nominal defendant, and the Board and certain
executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe,
Ned Siegel, Jennifer Love, and C. Douglas Mitchell), filed a suit in the Superior Court of the State of California for the County
of Los Angeles. The suit alleges breach of fiduciary duties and abuse of control by the defendants. Relief is sought awarding
damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to
reform and improve its corporate governance and internal procedures to comply with applicable law. The Company has entered into
a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On
January 21, 2015, Josh Crystal on behalf of himself and of all others similarly situated filed a class action lawsuit in the U.S.
District Court for Central District of California against the Company and certain past and present members of the Board (Pejman
Vincent Mehdizadeh, Bruce Bedrick, Thomas Iwanski, Guy Marsala, and C. Douglas Mitchell). The suit alleges that the Company issued
materially false and misleading statements regarding its financial results for the fiscal year ended December 31, 2013 and each
of the interim financial periods that year. The plaintiff seeks relief of compensatory damages and reasonable costs and expenses
or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related
cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and
appointing a lead plaintiff. On July 27, 2015, Plaintiffs filed a Consolidated Amended Complaint. The Company has entered into
a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion below under Class Settlement.
On
January 18, 2015, Ervin Gutierrez filed a class action lawsuit in the U.S. District Court for the Central District of California.
The suit alleges violations of federal securities laws through public announcements and filings that were materially false and
misleading when made because they misrepresented and failed to disclose that the Company was recognizing revenue in a manner that
violated US GAAP. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses or all damages sustained
as a result of the wrongdoing. On April 23, 2015, the Court issued an Order consolidating the three related cases in this matter:
Crystal v. Medbox, Inc., Gutierrez v. Medbox, Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff.
On July 27, 2015, Plaintiffs filed a Consolidated Amended Complaint. The Company has entered into a Stipulation and Agreement
of Settlement on October 16, 2015. See more detailed discussion below under Class Settlement.
On
January 29, 2015, Matthew Donnino filed a class action lawsuit in the U.S. District Court for Central District of California.
The suit alleges that the Company issued materially false and misleading statements regarding its financial results for the fiscal
year ended December 31, 2013 and each of the interim financial periods that year. The plaintiff seeks relief for compensatory
damages and reasonable costs and expenses or all damages sustained as a result of the wrongdoing. On April 23, 2015, the Court
issued an Order consolidating the three related cases in this matter: Crystal v. Medbox, Inc., Gutierrez v. Medbox,
Inc., and Donnino v. Medbox, Inc., and appointing a lead plaintiff. On July 27, 2015 Plaintiffs filed a Consolidated
Amended Complaint. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed
discussion below under Class Settlement.
On
February 12, 2015, Jennifer Scheffer, derivatively on behalf of the Company, Guy Marsala, Ned Siegel, Mitchell Lowe and C. Douglas
Mitchell filed a lawsuit in the Eighth Judicial District Court of Nevada seeking damages for breaches of fiduciary duty regarding
the issuance and dissemination of false and misleading statements and regarding allegedly improper and unfair related party transactions,
unjust enrichment and waste of corporate assets. On April 17, 2015, Ned Siegel and Mitchell Lowe filed a Motion to Dismiss. On
April 20, 2015, the Company filed a Joinder in the Motion to Dismiss. On July 27, 2015, the Court held a hearing on and granted
the Motion to Dismiss without prejudice. The Company has entered into a Stipulation and Agreement of Settlement on October 16,
2015. See more detailed discussion below under Derivative Settlements.
On
March 10, 2015, Robert J. Calabrese, derivatively and on behalf of the Company, as a nominal defendant, filed a suit in the United
States District Court for the District of Nevada against certain Company officers and/or directors (Ned L. Siegel, Guy Marsala,
J. Mitchell Lowe, Pejman Vincent Mehdizadeh, Bruce Bedrick, and Jennifer S. Love). The suit alleges breach of fiduciary duties
and gross mismanagement by issuing materially false and misleading statements regarding the Company’s financial results
for the fiscal year ended December 31, 2013 and each of the interim financial periods. Specifically, the suit alleges that defendants
caused the Company to overstate the Company’s revenues by recognizing revenue on customer contracts before it had been earned.
The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as a result of
the alleged wrongdoing. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed
discussion below under Derivative Settlements.
On
March 27, 2015, Tyler Gray, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the United States District
Court for the District of Nevada against the Board and certain executive officers (Pejman Vincent Mehdizadeh, Matthew Feinstein,
Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, and C. Douglas Mitchell). The suit
alleges breach of fiduciary duties and abuse of control. The plaintiff seeks relief for compensatory damages and reasonable costs
and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally, the plaintiff seeks declaratory judgments
that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate representative of the Company,
and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly the
plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its corporate governance and
internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement of Settlement on October
16, 2015. See more detailed discussion below under Derivative Settlements.
On
May 20, 2015, Patricia des Groseilliers, derivatively and on behalf of the Company, as a nominal defendant, filed a suit in the
United States District Court for the District of Nevada against the Board and certain executive officers (Pejman Vincent Mehdizadeh,
Ned Siegel, Guy Marsala, J. Mitchell Lowe, Bruce Bedrick, Jennifer S. Love, Matthew Feinstein, C. Douglas Mitchell, and Thomas
Iwanski). The suit alleges breach of fiduciary duties and unjust enrichment. The plaintiff seeks relief for compensatory damages
and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally, the plaintiff
seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff is an adequate
representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their fiduciary duties
to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform and improve its
corporate governance and internal procedures to comply with applicable law. The Company has entered into a Stipulation and Agreement
of Settlement on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On
June 3, 2015, Mike Jones, derivatively and on behalf of the Company, as a nominal defendant., filed a suit in the U.S. District
Court for Central District of California against the Board and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned
Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, and Thomas Iwanski).
The suit alleges breach of fiduciary duties, abuse of control, and breach of duty of honest services. The plaintiff seeks relief
for compensatory damages and reasonable costs and expenses for all damages sustained as a result of the alleged wrongdoing. Additionally
the plaintiff seeks declaratory judgments that plaintiff may maintain the action on behalf of the Company, that the plaintiff
is an adequate representative of the Company, and that the defendants have breached and/or aided and abetted the breach of their
fiduciary duties to the Company. Lastly the plaintiff seeks that the Company be directed to take all necessary actions to reform
and improve its corporate governance and internal procedures to comply with applicable law. On July 20, 2015, the Court issued
an Order consolidating this litigation with those previously consolidated in the Central District (Crystal, Gutierrez, and Donnino).
On October 7, 2015, the Court issued an Order modifying the July 20, 2015 Order consolidating the litigation so that the matters
remain consolidated for the purposes of pretrial only. The Company has entered into a Stipulation and Agreement of Settlement
on October 16, 2015. See more detailed discussion below under Derivative Settlements.
On
July 20, 2015, Kimberly Freeman, derivatively and on behalf of nominal defendant Medbox, Inc., filed a suit in the Eighth Judicial
District Court of Nevada against the Board and certain executive officers (Pejman Vincent Mehdizadeh, Guy Marsala, Ned Siegel,
J. Mitchell Lowe, Jennifer S. Love, C. Douglas Mitchell, and Bruce Bedrick). The suit alleges breach of fiduciary duties and unjust
enrichment. The plaintiff seeks relief for compensatory damages and reasonable costs and expenses for all damages sustained as
a result of the alleged wrongdoing. Additionally, the plaintiff seeks declaratory judgments that plaintiff may maintain the action
on behalf of the Company, that the plaintiff is an adequate representative of the Company, and that the defendants have breached
and/or aided and abetted the breach of their fiduciary duties to the Company. Lastly, the plaintiff seeks that the Company be
directed to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable
law. The Company has entered into a Stipulation and Agreement of Settlement on October 16, 2015. See more detailed discussion
below under Derivative Settlements.
On
October 16, 2015, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties to the class actions
and derivative lawsuits named above entered into settlements that collectively effect a global settlement of all claims asserted
in the class actions and the derivative actions. The global settlement provides, among other things, for the release and dismissal
of all asserted claims. The global settlement is contingent on final court approval, respectively, of the settlements of the class
actions and derivative actions. If the global settlement does not receive final court approval, it could have a material adverse
effect on the financial condition, results of operations and/or cash flows of the Company and its ability to raise funds in the
future.
On
October 27, 2015, separate from the above lawsuits and settlement, Richard Merritts, derivatively and on behalf the Company, as
a nominal defendant, filed a suit in the Superior Court of the State of California for the County of Los Angeles against the Board
and certain executive officers (Guy Marsala, J. Mitchell Lowe, Ned Siegel, Jennifer S. Love, C. Douglas Mitchell, Pejman Vincent
Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Jeff Goh, and Thomas Iwanski). The suit titled Merritts v. Marsala, et al.,
Case No. BC599159 (the “Merritts Action”) alleges breach of fiduciary duties by the defendants. Relief is sought awarding
damages resulting from breach of fiduciary duty and to direct the Company and the defendants to take all necessary actions to
reform and improve its corporate governance and internal procedures to comply with applicable law. On February 16, 2016, the court
issued an order staying the litigation pending final court approval of the settlement of the other pending derivative actions
involving the Company, as nominal defendant, and former and current officers and directors. The settlement of the other derivative
actions has been preliminarily approved by the court in Jones v. Marsala, et al., Case No. 15-cv-4170 BRO (JEMx), in the
U.S. District Court for the Central District of California. On March 25, 2016, Merritts filed a Motion to Intervene in the case
filed by Mike Jones in the U.S. District Court for the Central District of California. By his Motion, Merritts seeks limited intervention
in the Jones stockholder derivative action in order to seek confirmatory information and discovery regarding the Stipulation and
Agreement of Settlement preliminarily approved by the Court on February 3, 2016. On April 4, 2016, Plaintiff Jones and the Company
separately filed oppositions to the Motion to Intervene. On April 22, 2016, the Court issued an Order granting, without a hearing,
stockholder Richard Merritts’ Motion to Intervene in the lawsuit titled Mike Jones v. Guy Marsala, et al., in order
to conduct limited discovery. On September 16, 2016, solely to avoid the costs, risks, and uncertainties inherent in litigation,
the parties entered into a settlement regarding Merritts’ claims. See more detailed discussion below under Derivative
Settlements.
Class
Settlement
On
December 1, 2015, Medbox and the class plaintiffs in Josh Crystal v. Medbox, Inc., et al., Case No. 2:15-CV-00426-BRO (JEMx),
pending before the United States District Court for the Central District of California (the “Court”) notified the
Court of the settlement. The Court stayed the action pending the Court’s review of the settlement and directed the parties
to file a stipulation of settlement. On December 18, 2015, plaintiffs filed the Motion for Preliminary Approval of Class Action
Settlement that included the stipulation of settlement. On February 3, 2016, the Court issued an Order granting preliminary approval
of the settlement. The settlement provides for notice to be given to the class, a period for opt outs and a final approval hearing.
The Court originally scheduled the Final Settlement Approval Hearing to be held on May 16, 2016 at 1:30 p.m., but continued it
to August 15, 2016 at 1:30 p.m. to be heard at the same time as the Final Settlement Approval Hearing for the derivative actions,
discussed below. The principal terms of the settlement are:
|
●
|
a
cash payment to a settlement escrow account in the amount of $1,850,000, of which $150,000 will be paid by the Company and
$1,700,000 will be paid by the Company’s insurers;
|
|
|
|
|
●
|
a
transfer of 2,300,000 shares of Common Stock to the settlement escrow account, of which 2,000,000 shares would be contributed
by the Company and 300,000 shares of Common Stock by Bruce Bedrick;
|
|
|
|
|
●
|
the
net proceeds of the settlement escrow, after deduction of Court-approved administrative costs and any Court-approved attorneys’
fees and costs would be distributed to the Class; and
|
|
|
|
|
●
|
releases
of claims and dismissal of the action.
|
By
entering into the settlement, the settling parties have resolved the class claims to their mutual satisfaction. However, the final
determination is subject to approval by the Federal Courts. Defendants have not admitted the validity of any claims or allegations
and the settling plaintiffs have not admitted that any claims or allegations lack merit or foundation. If the global settlement
does not receive final court approval, it could have a material adverse effect on the financial condition, results of operations
and/or cash flows of the Company and its ability to raise funds in the future.
Derivative
Settlements
As
previously announced on October 22, 2015, on October 16, 2015, the Company, in its capacity as a nominal defendant, entered into
a memorandum of understanding of settlement (the “Settlements”) in the following stockholder derivative actions: (1)
Mike Jones v. Guy Marsala, et al., in the U.S. District Court for Central District of California; (2) Jennifer Scheffer
v. P. Vincent Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (3) Kimberly Y. Freeman v. Pejman Vincent
Mehdizadeh, et al., in the Eighth Judicial District Court of Nevada; (4) Tyler Gray v. Pejman Vincent Mehdizadeh, et al.,
in the U.S. District Court for the District of Nevada; (5) Robert J. Calabrese v. Ned L. Siegel, et al., in the U.S. District
Court for the District of Nevada; (6) Patricia des Groseilliers v. Pejman Vincent Mehdizadeh, et al., in the U.S. District
Court for the District of Nevada; (7) Michael A. Glinter v. Pejman Vincent Mehdizadeh, et al., in the Superior Court of
the State of California for the County of Los Angeles (the “Stockholder Derivative Lawsuits”). In addition to the
Company, Pejman Vincent Mehdizadeh, Matthew Feinstein, Bruce Bedrick, Thomas Iwanski, Guy Marsala, J. Mitchell Lowe, Ned Siegel,
and C. Douglas Mitchell were named as defendants in all of the lawsuits, and Jennifer S. Love was named in all of the lawsuits
but the Scheffer action (collectively, the “Individual Defendants”).
On
December 3, 2015, the parties in the Jones v. Marsala action advised the Court of the Settlements in the Stockholder Derivative
Lawsuits and that the parties would be submitting the Settlements to the Court in the Jones action for approval. The Court thereafter
issued an order vacating all pending dates in the action and ordered Plaintiff to file the Stipulation and Agreement of Settlement
for the Court’s approval. On December 18, 2015, plaintiffs filed the Motion for Preliminary Approval of Derivative Settlement
that included the Stipulation and Agreement of Settlement. On February 3, 2016, the Court issued an Order granting preliminary
approval of the Settlements.
By
entering into the Settlements, the settling parties have resolved the derivative claims to their mutual satisfaction. The Individual
Defendants have not admitted the validity of any claims or allegations and the settling plaintiffs have not admitted that any
claims or allegations lack merit or foundation.
Under
the terms of the Settlements, the Company agrees to adopt and adhere to certain corporate governance processes in the future.
In addition to these corporate governance measures, the Company’s insurers, on behalf of the Individual Defendants, will
make a payment of $300,000 into the settlement escrow account and Messrs. Mehdizadeh and Bedrick will deliver 2,000,000 and 300,000
shares, respectively, of their shares of Common Stock into the Settlement escrow account. The funds and Common Stock in the Settlement
escrow account will be paid as attorneys’ fees and expenses, or as service awards to plaintiffs.
On
September 16, 2016, solely to avoid the costs, risks, and uncertainties inherent in litigation, the parties entered into a Court-approved
settlement regarding the Merritts Action. The settlement provides, among other things, for the release and dismissal of all
asserted claims. Under the terms of the settlement, the Company agrees to adopt and to adhere to certain corporate governance
processes in the future. In addition to these corporate governance measures, on or about October 3, 2016, the Company paid
$135,000 to pay Merritts’ counsel for attorneys’ fees and expenses, or as service awards to Merritts that are
approved and awarded by the Court.
SEC
Investigation
In
October 2014, the Board appointed a special committee (the “Special Committee”) to investigate issues arising from
a federal grand jury subpoena pertaining to the Company’s financial reporting which was served upon the Company’s
predecessor independent registered public accounting firm as well as certain alleged wrongdoing raised by a former employee of
the Company. The Company was subsequently served with two SEC subpoenas in early November 2014. The Company is fully cooperating
with the grand jury and SEC investigations. In connection with its investigation of these matters, the Special Committee in conjunction
with the Audit Committee initiated an internal review by management and by an outside professional advisor of certain prior period
financial reporting of the Company. The outside professional advisor reviewed the Company’s revenue recognition methodology
for certain contracts for the third and fourth quarters of 2013. As a result of certain errors discovered in connection with the
review by management and its professional advisor, the Audit Committee, upon management’s recommendation, concluded on December
24, 2014 that the Consolidated Financial Statements for the year ended December 31, 2013 and for the third and fourth quarters
therein, as well as for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, should no longer be relied upon
and would be restated to correct the errors. On March 6, 2015 the audit committee determined that the Consolidated Financial
Statements for the year ended December 31, 2012, together with all three-, six-, and nine-month financial information
contained therein, and the quarterly information for the first two quarters of the 2013 fiscal year should also be restated. On
March 11, 2015, the Company filed its restated Form 10 Registration Statement with the SEC with restated financial information
for the years ended December 31, 2012 and December 31, 2013, and on March 16, 2015, the Company filed amended and restated quarterly
reports on Form 10-Q, with restated financial information for the periods ended March 31, June 30 and September 30, 2014, respectively.
In
March 2016, the staff of the Los Angeles Regional Office of the U.S. Securities and Exchange Commission advised counsel for the
Company in a telephone conversation, followed by a written “Wells” notice, that it is has made a preliminary determination
to recommend that the Commission file an enforcement action against the Company in connection with misstatements by prior management
in the Company’s financial statements for 2012, 2013 and the first three quarters of 2014. A Wells Notice is neither a formal
allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the Company with an opportunity
to respond to issues raised by the Staff and offer its perspective prior to any SEC decision to institute proceedings.
In
March 2017, the SEC and the Company settled this matter. The Company consented to the entry of a final judgment permanently enjoining
it from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B)
of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and 13a-13 thereunder. In connection with the settlement, the Company did
not have any monetary sanctions or penalties assessed against it.
Other
litigation
Whole
Hemp complaint
A
complaint was filed by Whole Hemp Company, LLC d/b/a Folium Biosciences (“Whole Hemp”) on June 1, 2016, naming Notis
Global, Inc. and EWSD (collectively, “Notis”), as defendants in Pueblo County, CO district court. The complaint alleges
five causes of action against Notis: misappropriation of trade secrets, civil theft, intentional interference with prospective
business advantage, civil conspiracy, and breach of contract. All claims concern contracts between Whole Hemp and Notis for the
Farming Agreement and the Distributor Agreement.
The
court entered an ex parte temporary restraining order on June 2, 2016, and a modified temporary restraining order on July
14, 2016, enjoining Notis from disclosing, using, copying, conveying, transferring, or transmitting Whole Hemp’s trade secrets,
including Whole Hemp’s plants. On June 13, 2016, the court ordered that all claims be submitted to arbitration, except for
the disposition of the temporary restraining order.
On
August 12, 2016, the court ordered that all of Whole Hemp’s plants in Notis’ possession be destroyed, which occurred
by August 24, 2016, at which time the temporary restraining order was dissolved and the parties will soon file a motion to dismiss
the district court action. On June 29, 2017, the parties jointly stipulated to the dismissal of all claims and counterclaims with
prejudice.
Notis
commenced arbitration in Denver, CO on August 2, 2016, seeking injunctive relief and alleging breaches of the contracts between
the parties. Whole Hemp filed its Answer and counterclaims on September 6, 2016, asserting similar allegations that were
asserted to the court.
On
September 30, 2016, the arbitrator held an initial status conference and agreed to allow EWSD and Notis to file a motion to dismiss
some or all of Whole Hemp’s claims by no later than October 28, 2016. The parties were also ordered to make initial disclosures
of relevant documents and persons with knowledge of relevant information by October 21, 2016.
In
light of the court order to destroy all Whole Hemp plants, the Company has immediately expensed all Capitalized agricultural costs
of $73,345 related to Whole Hemp plants. As of December 31, 2016, the Company capitalized $160,131 that related to Whole Hemp
plants.
As
noted above, the Company’s long-term strategy is to maintain tight control of its supply chain. The continuing default by
Whole Hemp was conductive to the Company’s efforts to eliminate outside vendors in the supply chain and control production
from “Seed to Sale.” The Company’s decision to terminate the Whole Hemp Agreements comports with its long-term
strategy to maintain tight control of its supply chain.
West
Hollywood Lease
The
lease for the former office at 8439 West Sunset Blvd. in West Hollywood, CA has been partially subleased. The Company plans to
sublease the remainder of the office in West Hollywood, CA and continues to incur rent expense while the space is being marketed.
The landlord for the prior lease filed a suit in Los Angeles Superior Court in April 2015 against the Company for damages they
allege have been incurred from unpaid rent and otherwise. In January 2016, the landlord filed a first amended complaint adding
the independent guarantors under the lease as co-defendants and specifying damages claim of approximately $300,000. On September
8, 2016, the court approved Mani Brothers’ application for writ of attachment in the State of California in the amount of
$374,402 against PVM. A trial date was set in May 2017. On March 16, 2017, the Company and Mani Brothers agree to settle
the amount owed if the Company paid $40,000 before July 2017. The Company paid the $40,000 in four monthly payments
commencing in April 2017. On July 24, 2017, the case was dismissed against the Company.
Los
Angeles Lease
The
Company’s former landlord, Bank Leumi, filed an action against the Company in Los Angeles Superior Court for breach of lease
on August 31, 2016, seeking $29,977 plus fees and interest, in addition to rent payment for September 2016. The Company filed
a response to the complaint on September 21, 2016, and a case management conference is scheduled for December 9, 2016. In November
2016, the parties entered into a Settlement Agreement and General Release, pursuant to which the Company agreed to an eight-payment
plan in favor of the Bank, commencing December 2016 and terminating July 2017. All of the payments, which aggregated $46,522 for
rent, fees, and costs, have been made.
Creaxion
On
August 23, 2017, Creaxion Corporation filed a Complaint in the Superior Court of Fulton County, Georgia, styled Creaxion Corporation,
Plaintiff, v. Notis Global, Inc., Defendant, Civil Action No. 2017CV294453. Plaintiff plead counts for (1) Breach of Contract
in the amount of $89,000, (2) Prejudgment interest, and (3) Attorney’s fees. The Company was served on September 26, 2017,
and did not respond to the Complaint. On November 30, 2017, the Court granted plaintiff’s request for a Default Judgment
in the amount of $89,000. Further, the Court scheduled a hearing for December 14, 2017, in respect of expenses, attorney’s
fees, and interest at a rate of 6.25%. On December 14, 2017, the court entered into default judgment for the plaintiff for $89,000
and pre judgment interest at a rate of 6.25%.
Sheppard,
Mullin
On
October 27, 2017, Sheppard Mullin filed a Complaint in the Superior Court of the State of California for the County of Los Angeles,
styled Sheppard, Mullin, Richter & Hampton LLP, a California limited liability partnership, plaintiff v. Notis Global,
Inc., a Nevada corporation, formerly known as Medbox, Inc.; and Does 1-10, inclusive, Defendants, Case No. BC681382. Plaintiff
plead causes of action for (1) Breach of Contract; (2) Account Stated; and (3) and Unjust Enrichment, seeking approximately $240,000.
The Company accepted service on November 10, 2017, and, as of the date of this Report, has not responded to the complaint. On
May 17, 2018, the court entered judgment in favor of Sheppard Mullin in the amount of $277,998.77. On June 25, 2018, the Company
entered into a settlement agreement with Sheppard Mullin pursuant to which the Company agreed to pay $50,000 due by June 29, 2018
and $25,000 due by June 28, 2019. The Company tendered both
of the payments on the agreed-upon schedule.
Pueblo
Farm – Management Services Agreement
On
May 31, 2017, the Company, and two of its subsidiaries, EWSD and Pueblo Agriculture Supply and Equipment LLC, and Trava LLC, a
Florida limited liability company that has lent various sums to the Company (“Trava”; referenced above as the “PCH
Lender”), entered into a Management Services Agreement (the “MS Agreement”) in respect of the Company’s
hemp grow-and-extraction operations located in Pueblo, Colorado (the “Pueblo Farm”). The MS Agreement has a 36-month
term with two consecutive 12-month unilateral options exercisable in the sole discretion of Trava. Pursuant to the provisions
of the MS Agreement, Trava shall collect all revenue generated by the Pueblo Farm operations. Further, Trava is to satisfy all
of the Pueblo Farm-related past due expenses and, subject to certain limitations, to pay all current and future operational expenses
of the Pueblo Farm operations. Finally, commencing October 2017, Trava is obligated to make the monthly mortgage payments on the
Pueblo Farm, although the Company remains responsible for any and all “balloon payments” due under the mortgage. On
a cumulative calendar monthly cash-on-cash basis, Trava is obligated to tender to the Company or, at the Company’s option,
to either or both of those subsidiaries, an amount equivalent to 51% of the net cash for each such calendar month. Such monthly
payments are on the 10th calendar day following the end of a calendar month for which such tender is required. At the
end of the five-year term (assuming the exercise by Trava of each of the two above-referenced options), Trava has the unilateral
right to purchase the Pueblo Farm operation at a four times multiple of its EBITDA (calculated at the mean average thereof for
each of the two option years).
On
January 29, 2018, the parties to the MS Agreement entered into a subsequent agreement (the “Termination Agreement”),
pursuant to which they agreed to terminate the MS Agreement in full. By its terms, the Termination Agreement did not modify any
of the then-extant agreements among the parties. In connection with the termination of the MS Agreement and in lieu of any compensation
and reimbursement that otherwise was to have been tendered by Trava, the parties agreed that, on or before March 31, 2019, the
Company would tender to Trava the sum of not less than $250,000.00, subject to increase depending upon the results of the Farm’s
2018 harvest season. Pursuant to the terms of the Termination Agreement, on March 31, 2019, the Company tendered the sum of approximately
$265,000 to Trava.
Commencing
in September 2017 in connection with Trava’s monthly lending to the Company funds sufficient for the Pueblo Farm’s
monthly operational expenses of the Pueblo Farm operations, the Company amended the MS Agreement to provide that, from
time to time, Trava may exercise its rights to convert some or all of the notes that evidence its lending of funds into shares
of Common Stock at a fixed conversion price of $.0001 pre-share. If Trava converts, in whole or in part, any one or more of such
notes, then (unless (i) thereafter, the Company is unable to accommodate any future such conversions because of a lack of authorized,
but unissued or unreserved, shares or (ii) the public market price for a share of Common Stock becomes “no bid”),
Trava shall continue to exercise its conversion rights in respect of all of such notes (to the 4.9% limitations set forth therein)
and shall diligently sell the shares of Common Stock into which any or all of such notes may be converted (collectively, the “Underlying
Shares”) in open market or other transactions (subject to any limitations imposed by the Federal securities laws and set
forth in any “leak-out” type of arrangements in respect of the “underlying shares” to which Trava is a
party).
Trava
acknowledged that any proceeds derived by it from such sales of the underlying shares shall, on a dollar-for-dollar basis, reduce
the Company’s financial obligations under the notes. Once Trava has received sufficient proceeds from such sales to reduce
the aggregate obligations thereunder to nil (which reductions shall include any and all funds that Trava may have otherwise received
in connection with the respective rights and obligations of the parties to the MSA), then the MSA shall be deemed to have been
cancelled without any further economic obligations between Trava and the Company and Trava’s purchase right shall, accordingly,
be extinguished.
Jeffery
Goh
We are a party to certain
litigation that was filed by Jeff Goh, one of our former directors and executive officers in Superior Court for the state of California,
County of Orange, styled JEFF GOH, an individual, Plaintiff, vs. MEDBOX HOLDINGS, INC., a Nevada corporation; NOTIS GLOBAL,
INC., a Nevada corporation; and DOES 1 through 100, inclusive, Defendants, Case No. 30-2018-01014038-CU-BC-CJC. We intend
to file such motions as may currently be required in this matter and, thereafter, litigate vigorously against Mr. Goh.
NOTE
14 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date of December 31, 2017, through the date which the Consolidated
Financial Statements were issued. Based upon the review, other than described in Note 14 – Subsequent Events, the Company
did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the Consolidated
Financial Statements.
Subsequent
to December 31, 2017, the Company issued 20 convertible notes to third party lenders totaling $2,143,499. These notes accrue interest
at a rate of 10% per annum and mature with interest and principal both due between December 2018 through September 2020.
Subsequent
to December 31, 2017, the Company issued 2 notes to third party lenders totaling $200,000. These notes accrue interest at a rate
of 10% per annum and mature with interest and principal both due between April 2019 through May 2019.
Subsequent
to December 31, 2017, the Company settled Investor #2 notes with a principal balance of $2,595,895 for $2,350,000. The Company
is currently in default on the settlement agreement.
Southwest
Farms Note Modification
On
June 20, 2018, Shi Farms entered into a loan modification agreement (the “Agreement”) to extend the term of the EWSD
Secured Note. Pursuant to the Agreement, the maturity date of the EWSD Secured Note is extended to August 1, 2020, and Shi Farms
will continue to make payments in the same manner as previously required through and including July 1, 2020, with the final balloon
payment due and payable on August 1, 2020. Additionally, on May 31, 2019, Shi Farms paid Southwest Farms an additional required
principal payment of $250,000, which does not reduce any regularly scheduled payments, but will reduce the final balloon payment.
Office
Lease
On
January 25, 2019, the Company entered into a seven-year operating lease for approximately 1,840 square feet of office space for
employees in Red Bank, New Jersey. The commencement date of this agreement was May 1, 2019; currently, the Company is operating
out of a temporary space while the full space is prepared. The monthly rent is $1,200 for the temporary space which ends August
30, 2019. The minimum monthly lease payments, once the space is complete, will be $3,000.
Canbiola
Joint Venture
On
July 11, 2019, NY – SHI, LLC, a New York limited liability company (“NY – SHI”), and Shi Farms (collectively,
the “Company Subs”) entered into a joint venture agreement (the “Joint Venture Agreement”) with Canbiola
Inc., a Florida corporation (“Canbiola”), and NY Hemp Depot, LLC, a Nevada limited liability company (“Canbiola
Sub”). The purpose of the joint venture is to develop and implement a business model referred to as the “Depot Model”
to aggregate and purchase fully-grown, harvested industrial hemp from third-party farmers in the State of New York to be processed
in any processing facility chosen by NY – SHI (the “Joint Venture”).
Pursuant
to the Joint Venture Agreement, the Company Subs will jointly seek farmers to grow and cultivate industrial hemp in the State
of New York for the Joint Venture. In addition, the Joint Venture may sell to the farmers feminized hemp seeds, clone plants,
and additional materials required to grow and cultivate industrial hemp and provide to the farmers the initial training reasonably
required for them to grow industrial hemp.
Canbiola
Sub is responsible for securing the building on behalf of the Joint Venture in the State of New York to house certain of the operations
of the business of the Joint Venture (the “NY Hemp Depot Facility”). Canbiola Sub will manage and direct the day-to-day
operations of the Joint Venture and provide farmer recruitment services. NY – SHI is responsible for providing to the Joint
Venture technical expertise regarding the growth and cultivation of industrial hemp, a license from the New York State Department
of Agriculture and Markets that permits the growth of industrial hemp (the “Cultivating License”), and the farmer
recruitment services.
Upon
the execution of the Joint Venture Agreement, Canbiola Sub delivered to NY – SHI a cash payment of $500,000 and, on July
22, 2019, Canbiola issued and delivered $500,000 in value of Canbiola’s common stock (12,074,089 shares) to NY–
SHI, upon NY – SHI’s amendment of the Cultivating License to add the NY Hemp Depot Facility. Additionally, SHI Farms
has agreed to sell certain isolate to Canbiola or its designated affiliate at the cost of processing the isolate from biomass
and granted Canbiola Sub an interest in the one and one-half percent payments due to SHI Farms in connection with its agreements
with Mile High Labs.
The
“gross profits” from the Joint Venture, which are defined as gross revenues less certain direct operational costs,
will be distributed quarterly in arrears with the first distribution scheduled to be made on March 31, 2020, of which 70% is to
be distributed to Canbiola Sub and 30% is to be distributed to NY – SHI.
Aeon
Investment and Royalty Agreement
On
March 12, 2018, Shi Farms entered into an investment and royalty agreement (the “March 2018 Aeon Agreement”) with
Aeon Funds, LLC (“Aeon”), whereby Aeon committed to use its best efforts to invest $1 million in Shi Farms. These
funds will be used for growing and harvesting 100 acres of industrial hemp at the Farm from March 1, 2018 through November 30,
2019 (the “2018-2019 Crop”), and thereafter, for processing and marketing Shi Farms’ products.
Pursuant
to the terms of the March 2018 Aeon Agreement, Shi Farms will pay royalties to Aeon in an amount equal to 50% of gross sales of
product from the 2018-2019 Crop until the principal investment is fully repaid. Shi Farms will then pay 20% of gross sales of
the 2018-2019 Crop to Aeon until gross sales equal $10 million. Once gross sales exceed $10 million, Shi Farms will pay Aeon 10%
of gross sales. Payments will be made monthly until all products from the 2018-2019 harvest are sold. The March 2018 Aeon Agreement
provides that the Company will also issue to Aeon shares of Common Stock valued at $100,000 and grants Aeon a five-year right
of first negotiation, in the event Shi Farms seeks additional financing. In July of 2019, at the request of Aeon, the share issuance
was amended to become an issuance of warrants for the purchase of $100,000 of shares of our common stock.
As
of July 31, 2019, in connection with the March 2018 Aeon Agreement, Shi Farms had received an investment of $1,000,000 from Aeon
and has repaid $1,374,892.91 of that investment.
AAG
Harvest 2019 Revenue Sharing Agreement
On
May 1, 2019, Shi Farms entered into a revenue sharing agreement (the “RS Agreement”) with AAG Harvest 2019, LLC, a
Delaware limited liability company (“AAG Harvest”), whereby AAG Harvest agreed to invest a portion of the proceeds
from its offering of limited liability company interests in Shi Farms. The RS Agreement provides that AAG Harvest will use its
best efforts to provide up to $3,910,000 of funding (the “Funding”) to Shi Farms, and allows funding to increase to
$7,100,000 by mutual agreement of Shi Farms and AAG Harvest. Shi Farms will use the funding to grow and harvest approximately
1,200 acres of industrial hemp at the Farm in Pueblo, Colorado, its co-op location in Oklahoma, and its co-op location in Southern
Colorado from approximately May 2019 through November 2019 (the “2019 Crop”).
In
exchange for the investment, AAG Harvest will receive payments equal to 25% of Shi Farms’ gross sales of the 2019 Crop until
AAG Harvest has received an amount equivalent to the amount of capital raised by AAG Harvest to fund the Funding (approximately
118% of the Funding). After AAG Harvest has received this amount, Shi Farms will pay 12.5% of gross sales of the 2019 Crop to
AAG Harvest. Payments to AAG Harvest are due within 45 days of each calendar quarter until the 2019 Crop is entirely sold.
As
of August 22, 2019, in connection with the RS Agreement, Shi Farms has received funding of $2,854,775 from AAG Harvest.
Preferred
Units Placement Agreement
On
November 19, 2018, Shi Farms entered into an agreement with AEON Capital, Inc. (“Aeon Capital”), whereby Aeon Capital
provided placement agent services with respect to certain preferred membership units of the Company. In consideration for the
services provided, Shi Farms has agreed to pay Aeon Capital a cash fee of up to 10% of the gross proceeds from the sale of units
to investors introduced by Aeon Capital, and 2.5% of the gross proceeds from the sale of units to investors introduced by the
Company. In connection with this agreement, Aeon Capital has placed $3,915,000 in preferred membership units, for which Shi Farms
has paid fees of 193,490.
January
2018 Notis Global / Shi Farms Amendment to Joint Venture Agreement
On
January 29, 2018, the Company (with Shi Farms as an interested party) entered into an agreement that amended the Company’s
prior joint venture agreement with an individual consultant (the “Individual Consultant”), whereby the Individual
Consultant was to provide certain consulting services necessary to farm, prepare, and plant 98 acres at the Pueblo, Colorado farm
for the 2018 harvest. In connection with the 2017 harvest, the Company agreed to pay the Individual Consultant $75,000 in cash
and $25,000 in “clone credits.” Total base compensation under the amended agreement was from $100,000 (1 to 50 acres)
to $200,000 (151- 200 acres), depending on the number of acres actually planted, with additional compensation for additional planted
acres, and, in each case, with the opportunity of a bonus in an amount equivalent to the relevant base compensation. The parties
agreed that the compensation would be paid on a monthly basis, which will vary based upon the season. The term of the agreement
commenced, when executed on January 29, 2018, and is to continue through November 4, 2020 (the expiration date of the original,
pre-amended joint venture agreement). This is a summary of the amendment to the joint venture agreement and does not include every
material term. Please review the entire amendment, a complete copy of which is filed as an exhibit to this Annual Report.
March
2019 Shi Farms Biomass Joint Venture Agreement
On March 29, 2019, Shi Farms
entered into a joint venture agreement with two individuals (one of whom was the subject of the January 2018 joint venture agreement
disclosed above) and their limited liability company (the “Consultants”), whereby the Consultants were (i) to provide
their advice and assistance to Shi Farms in the cultivation of hemp and (ii) to plant 450 acres on property leased from the Consultants’
company. Shi Farms agreed to provide them with the required seeds (approximately 3,500 per acre) and to pay for their cultivation
costs at the rate of $4,200 per acre for a total of $1,890,000 (or up to $150,000 per month – some months are expected to
be less based on the growing season). The parties agreed that the Consultants would deliver the cultivated biomass to Shi Farms,
which agreed to use its best efforts to monetize the delivered biomass to an intended and final product (i.e., isolate
or other equivalent). Shi Farms would retain 87.5% of the net profits from the monetization of the biomass and the Consultants
would receive the remaining 12.5% of the net profits, on a monthly basis. The term of the payments would conclude one month following
the final sale of the products by Shi Farms from the relevant growing year or 24 consecutive months from the first day of the
next month after the Consultants delivered the biomass to Shi Farms. The joint venture agreement will terminate on the sooner
of (i) the date on which all of the parties’ obligations under the agreement have been fulfilled, (ii) on the mutual consent
of the parties, or (iii) upon the action of the non-breaching party ten days following a notice of material breach of the agreement,
which breach is not cured by the breaching party. This is a summary of the joint venture agreement and does not include every
material term. Please review the entire agreement, a complete copy of which is filed as an exhibit to this Annual Report.
Mile
High Labs – Partner Farm and Supply Agreements
Partner
Farm Agreement
On
May 10, 2019, Shi Farms entered into a partner farm agreement (the “Partner Farm Agreement”) with Mile High Labs,
Inc., a Colorado corporation (“Mile High”), whereby Shi Farms has agreed to produce, sell and/or deliver certain dried
hemp products (the “Product”) to Mile High, and Mile High has agreed to purchase such Product from Shi Farms and/or
provide certain processing services (the “Processing Services”). Among other obligations, Shi Farms has agreed to
provide a physical location to perform such Processing Services on the Farm, the infrastructure necessary to access the Farm and
the construction of certain structures for the purpose of conducting the Processing Services on the Farm. Among other obligations,
Mile High is required to provide, transport and install all necessary equipment to operate the processing facilities located on
the Farm, subject to the terms and provisions therein. Mile High has also agreed to provide Shi Farms with priority processing
services for the Product specified in the Partner Farm Agreement, of up to 25% of the production capacity of the processing facilities
operated by Mile High on the Farm. The Partner Farm Agreement will have an initial term of five years and shall renew automatically
thereafter for one-year increments and is terminable by either Mile High or Shi Farms upon 60 days’ written notice. Shi
Farms will receive 20% of all sales of the Product and Mile High will receive 80% of the sales price, subject to the payment schedule
and terms attached thereto.
Supply
Agreement
In
connection with, and pursuant to, the Partner Farm Agreement, Shi Farms also entered into a supply agreement (the “Supply
Agreement”), on May 10, 2019, with Mile High, whereby Shi Farms will produce and sell to Mile High, and Mile High will purchase
and accept from Shi Farms, the Products enumerated in the Partner Farm Agreement and the Supply Agreement in quantities specified
in the two agreements and by Mile High. Pursuant to the Supply Agreement, Mile High and Shi Farms have agreed, among other things,
to sell the Product as partners and to co-brand the finished Product. Should Mile High establish a cooperative advertising and
promotional program, Shi Farms will be required to pay additional fees. The initial term of the Supply Agreement is five years
and shall renew automatically thereafter for one-year increments and is terminable by either Mile High or Shi Farms upon 60 days’
written notice.