NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, NATURE OF OPERATIONS
Business
Description
Notis
Global, Inc. (formerly Medbox, Inc.), which is incorporated in the state of Nevada (the “Company”), provides specialized
services to the hemp and marijuana industry, distributes hemp product processed by contractual partners and through September
30, 2017, owned independently and through affiliates, real property and licenses that it leased and assigned or sublicensed to
partner cultivators and operators in return for a percentage of revenues or profits from sales and operations. Prior
to 2016, through its consulting services, the Company worked with clients who sought to enter the medical and cultivation marijuana
markets in those states where approved. In 2015, the Company expanded into hemp cultivation with the acquisition of a 320-acre
farm (the “Farm”) in Colorado by the Company’s wholly-owned subsidiary, EWSD I, LLC (“EWSD”). The
farm was operated by an independent farming partner until the relationship was terminated in May 2016. In addition, through
its wholly-owned subsidiary, Vaporfection International, Inc. (“VII”), the Company sold a line of vaporizer and accessory
products online and through distribution partners. On March 28, 2016, the Company sold the assets of VII and exited the vaporizer
and accessory business. As of December 31, 2016, the Company was headquartered in Los Angeles, California. As of the date of filing
of this Quarterly Report, the Company was headquartered in Middletown, New Jersey.
Effective
January 28, 2016, the Company changed its legal corporate name from Medbox, Inc., to Notis Global, Inc. The name change was effected
through a parent/subsidiary short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes. Notis Global, Inc.,
the Company’s wholly-owned Nevada subsidiary formed solely for the purpose of the name change, was merged with and into
the Company, with Notis Global, Inc. as the surviving entity. The merger had the effect of amending the Company’s Articles
of Incorporation to reflect the new legal name of the Company. There were no other changes to the Company’s Articles of
Incorporation. The Company’s Board of Directors approved the name-change.
Notis
Global, Inc., operates the business directly and through the utilization of three primary operating subsidiaries, as follows:
●
|
EWSD
I, LLC, a Delaware limited liability company that owns property in Colorado.
|
|
|
●
|
Pueblo
Agriculture Supply and Equipment, LLC, a Delaware limited liability company that was established to own extraction equipment.
|
|
|
●
|
Shi
Cooperative, LLC, a Colorado limited liability company that contracts with third-party farmers to cultivate hemp in, among
other areas, Colorado, Nevada, and Oklahoma.
|
|
|
●
|
San
Diego Sunrise, LLC, a California corporation to hold San Diego, California dispensary operations. (As of June 30, 2016, the
Company sold its interest in San Diego Sunrise, LLC.
|
|
|
●
|
Prescription
Vending Machines, Inc., a California corporation, d/b/a Medicine Dispensing Systems in the State of California (“MDS”),
which previously distributed our Medbox product and provided related consulting services.
|
|
|
●
|
Vaporfection
International, Inc., a Florida corporation through which we distributed our medical vaporizing products and accessories. (All
the assets of which were sold during the three months ended March 31, 2016).
|
|
|
●
|
Medbox
Property Investments, Inc., a California corporation specializing in real property acquisitions and leases for dispensaries
and cultivation centers. This corporation currently owns no real property.
|
During
December 2016 the Company’s Board of Directors and management completed a strategic shift and completely exited the vapor
and medical cannabis dispensing line.
On
April 15, 2016, at a special meeting of the stockholders of the Company, the stockholders of the Company holding a majority of
the total shares of outstanding common stock (the “Common Stock”) of the Company voted to amend the Company’s
Articles of Incorporation to increase the number of authorized shares of Common Stock from 400,000,000 to 10,000,000,000 (the
“Certificate of Amendment”). The Certificate of Amendment was filed with the Nevada Secretary of State and was declared
effective on April 18, 2016.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
Concern
The
Condensed Consolidated Financial Statements were prepared on a going concern basis. The going concern basis assumes that the Company
will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in
the normal course of business. During the nine months ended September 30, 2017, the Company had a net loss from operations of
approximately $20.4 million, negative cash flow from operations of $1.4 million and negative working capital of
$61.9 million. During the year ended December 31, 2016, the Company had a net loss of approximately $17.7
million, negative cash flow from operations of $3.5 million and negative working capital of $38 million. The Company will
need to raise capital in order to fund its operations. On September 22, 2016, the Company received notice of an Event of Default
and Acceleration from one of its lenders regarding a Promissory Note issued on March 14, 2016. As of the date of this filing,
the Company is in default on all notes outstanding. The Company is unable to predict the outcome of these matters, however, legal
action taken by the Company’s lenders 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. These factors, among others, raise substantial
doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these
financial statements. The ability to continue as a going concern is dependent on the Company’s ability to raise additional
capital and implement its business plan. The Condensed Consolidated Financial Statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
The
Company expects that the acquisition of EWSD, which owns a 320-acre farm in Pueblo, Colorado, will generate recurring
revenues for the Company through farming hemp, extracting and selling CBD oil, and collecting fees from production related to
extracting CBD oil for other farmers, while controlling the full production cycle to ensure consistent quality. Lastly, management
is actively seeking additional financing over the next few months to fund operations.
The
Company will continue to execute on its business model by attempting to raise additional capital through the sales of debt or
equity securities or other means. However, there is no guarantee that such financing will be available on terms acceptable to
the Company, or at all. It is uncertain whether the Company can obtain financing to fund operating deficits until profitability
is achieved. This need may be adversely impacted by: unavailability of financing, uncertain market conditions, the success of
the crop growing season, the demand for CBD oil, the ability of the Company to obtain financing for the equipment and labor needed
to cultivate hemp and extract the CBD oil, and adverse operating results. The outcome of these matters cannot be predicted at
this time.
On
May 24, 2016, the Company received a notice from the OTC Markets Group, Inc. (“OTC Markets”) that the Company’s
bid price was below $0.01 and that the Company did not meet the Standards for Continued Eligibility for OTCQB pursuant to OTC
Markets’ Standards. If the bid price did not close at or above $0.01 for ten consecutive trading days by November 20, 2016,
the Company would be moved to the OTC Pink marketplace. Additionally, on September 9, 2016, the Company received notice from OTC
Markets that it would move the Company’s listing from the OTCQB market to OTC Pink marketplace, if the Company did not file
its Quarterly Report on Form 10-Q for the period ended June 30, 2016 by September 30, 2016. On or about October 1, 2016, the Company
moved to the OTC Pink marketplace. These actions might also impact the Company’s ability to obtain funding.
Basis of Presentation - Unaudited Interim
Financial Information
The accompanying unaudited interim condensed
consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules
and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited
interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2016.
Principles
of Consolidation
The
Condensed Consolidated Financial Statements include the accounts of Notis Global, Inc. and its wholly-owned subsidiaries, as named
in Note 1 above. All intercompany transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods.
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
(i)
|
Assumption
as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the normal course of business.
|
|
|
(ii)
|
Fair
value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted
cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly
determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets
are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some
examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of
assets relative to expected historical or projected future operating results; (ii) significant changes in the manner
or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes
in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased
competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and
(vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually
and more frequently upon the occurrence of such events.
|
|
|
(iii)
|
Valuation
allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be
offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of
the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company
has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its
daily operations by way of a public or private offering, among other factors.
|
|
|
(iv)
|
Estimates
and assumptions used in valuation of equity instruments: Management estimates expected term of share options and similar
instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual
rate of quarterly dividends, and risk-free rate(s) to value share options and similar instruments.
|
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience, and reasonable assumptions. After such evaluations, if deemed appropriate,
those estimates are adjusted accordingly.
Actual
results could differ from those estimates.
Discontinued
Operations
US
GAAP requires the results of operations of a component of an equity that either has been disposed of or is classified as held
for sale to be reported as discontinued operations in the Condensed Consolidated Financial Statements if the sale or disposition
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.
Concentrations
of Credit Risk
The
Company maintains cash balances at several financial institutions that are insured by the Federal Deposit Insurance Corporation
up to $250,000. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of
the financial institutions and has determined the credit exposure to be negligible.
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments,
the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying value
of cash, accounts receivable, capitalized agriculture costs, inventory, accounts payable and accrued expenses, notes payable,
related party notes payable, provision for customer refunds and short-term loans payable approximate fair value due to the short
period to maturity of these instruments.
Embedded derivative – The Company’s
convertible notes payable include embedded features that require bifurcation due to a reset provision and are accounted for as
a separate embedded derivative.
The Company estimated the fair value of
the conversion feature derivatives embedded in the convertible debentures based on a Monte Carlo Simulation model (“MCS”).
The MCS model was used to simulate the stock price of the Company from the valuation date through to the maturity date of the
related debenture and to better estimate the fair value of the derivative liability due to the complex nature of the convertible
debentures and embedded instruments. Management believes that the use of the MCS model compared to the Black-Scholes-Merton model
as previously used would provide a better estimate of the fair value of these instruments
The Company valued these embedded derivatives
using a “with-and-without method,” where the value of the Convertible Debentures including the embedded derivatives,
is defined as the “with”, and the value of the Convertible Debentures excluding the embedded derivatives, is defined
as the “without.” This method estimates the value of the embedded derivatives by observing the difference between
the value of the Convertible Debentures with the embedded derivatives and the value of the Convertible Debentures without the
embedded derivatives. The Company believes the “with-and-without method” results in a measurement that is more representative
of the fair value of the embedded derivatives.
For each simulation path, the Company used the Geometric Brownian Motion (“GBM”)
model to determine future stock prices at the maturity date. The inputs utilized in the application of the GBM model included
a starting stock price, an expected term of each debenture remaining from the valuation date to maturity, an estimated volatility,
and a risk-free rate.
For
the nine months ended September 30, 2017, the Company estimated the fair value of the conversion feature derivatives embedded
in the convertible debentures based on an internally calculated adjustment to the MCS valuation determined at December 31, 2016.
This adjustment took into consideration the changes in the assumptions, such as market value and expected volatility of the Common
Stock and the discount rate used in the September 30, 2017, valuation as compared to December 31, 2016. The Company believes this
methodology results in a reasonable fair value of the embedded derivatives for the interim period.
Warrants
The
Company reexamined the determination made as of March 31, 2016, that it did not have sufficient authorized shares available for
all of their outstanding warrants to be classified in equity at September 30, 2016 and concluded there still were insufficient
authorized shares (Note 7). Therefore, the Company recognized a warrant liability as of December 31, 2016. The Company
estimated the fair value of the warrant liability based on the Black-Scholes-Merton model. The key assumptions used consist
of the price of the Company’s stock, a risk-free interest rate based on the average yield of a one to three-year Treasury
note (based on remaining term of the related warrants) and expected volatility of the Common Stock over the remaining life of
the warrants.
A
three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level
1
|
Quoted
prices in active markets for identical assets or liabilities.
|
|
|
Level
2
|
Quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, or other inputs that are observable, either directly or indirectly.
|
|
|
Level
3
|
Significant
unobservable inputs that cannot be corroborated by market data.
|
The
assets or liabilities’ fair value measurement within the fair value hierarchy is based upon the lowest level of any input
that is significant to the fair value measurement. The following table provides a summary of the relevant assets and liabilities
that are measured at fair value on a recurring basis:
|
|
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)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
|
1,174,901
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,174,901
|
|
Option liability
|
|
|
49,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,169
|
|
Derivative
liability
|
|
|
23,047,696
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,047,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
24,271,766
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,271,766
|
|
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 nine
months ended
September 30, 2017
|
|
|
|
Total
|
|
January
1, 2017
|
|
|
15,650,377
|
|
Initial
recognition of conversion feature
|
|
|
6,926,260
|
|
Initial
recognition of warrant liability
|
|
|
3,277,052
|
|
Initial
recognition of option liability
|
|
|
147,504
|
|
Change
in fair value of option liability
|
|
|
(98,335
|
)
|
Change
in fair value of conversion feature
|
|
|
489,489
|
|
Change
in fair value of warrant liability
|
|
|
(2,116,581
|
)
|
|
|
|
|
|
Ending
Balance, September 30, 2017
|
|
|
24,271,766
|
|
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 September 30, 2017 and December 31,
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 September 30, 2017 and December 31, 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 nine months ended September 30, 2017 the Company recorded an impairment of $0 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 nine months ended September 30, 2017 presented in these Condensed Consolidated Financial Statements, the weighted-average number of shares of Common Stock outstanding
excludes Common Stock equivalents because their inclusion would be anti-dilutive.
As
of September 30, 2016. the Company had approximately 69,758,000 warrants to purchase common stock outstanding as of September
30, 2016, which were not included in the computation of diluted loss per share, as based on their exercise prices they would all
have an anti-dilutive effect on net loss per share. The Company also had outstanding at September 30, 2016 approximately $7,465,000
in convertible debentures, respectively, that are convertible at the holders’ option at a conversion price of the lower
of $0.75 or 51% to 60% of either the lowest trading price or the VWAP over the last 20 to 30 days prior to conversion (subject
to reset upon a future dilutive financing), whose underlying shares resulted in an additional 10,506,777,999 dilutive shares being
included in the computation of diluted net income per share for the nine months ended September 30, 2016.
The
Company had the following Common Stock equivalents at September 30, 2017:
|
|
September
30, 2017
|
|
Warrants
|
|
|
11,765,757,081
|
|
Option
|
|
|
1,000,000
|
|
Convertible
notes – related party
|
|
|
10,500,000
|
|
Convertible
notes
|
|
|
237,010,196,003
|
|
Totals
|
|
|
248,787,453,084
|
|
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 Condensed 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 Condensed 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 Condensed 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.
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.
Management’s
Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date of September 30, 2017, through the date which the Condensed
Consolidated Financial Statements were issued. Based upon the review, other than described in Note 15 – Subsequent Events,
the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the Condensed Consolidated Financial Statements.
NOTE
3 – 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 cultural costs, consist of cultivation, fertilization, labor costs and soil improvement, pest control
and irrigation.
Biomass
are comprised of labor and equipment expenses incurred to harvest and deliver crops to the packinghouses.
Raw
materials include all purchasing costs.
Inventory
at September 30, 2017 and December 31, 2016 consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
CBD Oil
|
|
$
|
8,232
|
|
|
$
|
-
|
|
Biomass
|
|
|
523,560
|
|
|
|
160,131
|
|
|
|
|
|
|
|
|
|
|
Less Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
inventory, net
|
|
$
|
531,792
|
|
|
$
|
160,131
|
|
NOTE
4 – 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 $300,000.00 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 Clint
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 $1,000,000.00 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
($300,000.00) 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 $10.00 (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 for the period
ended September 30, 2017. The $1,001,520 is the amount the Company invested in the PCH transaction.
NOTE
5 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITY
Convertible
notes payable consists of:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
Investor #1
|
|
$
|
14,922,404
|
|
|
$
|
6,642,745
|
|
Investor #2
|
|
|
2,087,198
|
|
|
|
1,857,146
|
|
Investor #3
|
|
|
293,009
|
|
|
|
231,142
|
|
Investor #4
|
|
|
2,205,084
|
|
|
|
-
|
|
Investor #5
|
|
|
300,000
|
|
|
|
-
|
|
|
|
|
19,807,696
|
|
|
|
8,731,033
|
|
Less discounts
|
|
|
(1,459,640
|
)
|
|
|
(85,591
|
)
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
18,348,056
|
|
|
|
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.
During the nine months ended September 30, 2017 the Company issued 25 convertible notes to third-party lenders
totaling $1,345,297. The Company received cash of $882,400 and paid $413,457 from the PCH-Related Note. These convertible notes
accrue interest at a rate of 10% per annum and mature with interest and principal both due between February 2017 through March
2019. 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 nine months ended September 30, 2017, gave
rise to a derivative liability of $2,608,275, $ 895,301 of 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 nine months ended September 30, 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 $3,606,710
from notes payable to convertible notes payable.
During
the nine months ended September 30, 2017, the Company repaid $363,547 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.
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 nine months ended September
30, 2017, Investor #2 converted $1,935 of principal into 38,700,000 shares of Common Stock.
Investor
#3
During
the nine months 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.
During
the nine months ended September 30, 2017 Investor #3 notes were increased by $61,867
Investor
#4
During the nine months ended September
30, 2017 the Company issued 5 convertible notes to third party lenders totaling $1,470,056. The Company received cash of $1,000,000,
and the lender paid $470,056 on behalf of the company for vendor liabilities. These notes accrue interest at a rate of 10% per
annum and mature with interest and principal both due on September 30, 2018. These notes are convertible upon default at a rate of
$0.0001.
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 the Investor #4 notes during the nine months ended September 30, 2017, gave rise to a derivative liability of $3,330,253. In
addition, the Company issued warrants to purchase 10,000,000,000 shares of Company common stock. The warrant entitles the holder
to purchase the Company’s 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 nine months ended September 30, 2017 the Company went into default on all notes from Investor #4.
The 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 $719,322 was recorded to interest expense.
Investor
#5
During
the nine months ended September 30, 2017 the company issued 2 convertible notes to third party lenders totaling $200,000. The
company received cash of $200,000. These notes accrue interest at a rate of 10% per annum and mature with interest and principal
both due between April 27, 2018 through May 08, 2018. The notes convert at a fixed rate of $0.0002.
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 nine months ended September 30, 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 200,000,000 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 nine months ended September 30, 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.
NOTE
6 – NOTES PAYABLE
Notes
payable consists of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Southwest
Farms
|
|
$
|
3,547,075
|
|
|
$
|
3,590,241
|
|
East West Secured Development
|
|
|
486,531
|
|
|
|
503,031
|
|
Investor #1
|
|
|
103,847
|
|
|
|
3,691,200
|
|
Investor #2
|
|
|
-
|
|
|
|
275,000
|
|
|
|
|
4,137,453
|
|
|
|
8,059,472
|
|
Less
discounts
|
|
|
-
|
|
|
|
(598,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,137,453
|
|
|
|
7,460,751
|
|
Less
current maturities
|
|
|
4,137,453
|
|
|
|
3,367,479
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
4,093,272
|
|
Southwest Farms
During the nine months ended September
30, 2017 the Company repaid $43,166 in principal.
East West Secured Development
During the nine months ended September
30, 2017 the Company repaid $16,500 in principal.
Investor
#1
During the nine months ended September
30, 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 in May
of 2017.
During the nine months ended September
30 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 nine months ended September 30, 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.
NOTE
7 – 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, (b) the number of issued and outstanding shares of the Corporation’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 (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 September 30, 2017 and 2016, there were no shares of Series A Preferred Stock outstanding.
Common
Stock
On
January 20, 2017, the Company issued 2,000,000 shares of 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.
For
shares of Common Stock that were issued upon conversion of the convertible debentures during the nine months ended September 30,
2017, see Note 5.
Share-based
awards, restricted stock and restricted stock units (“RSUs”)
A
summary of the activity related to RSUs for the nine months ended September 30, 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 September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
A
summary of the expense related to restricted stock, RSUs and stock option awards for the nine months ended September
30, 2017 and December 31, 2016 is presented below:
|
|
Nine
months ended
September
30, 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 nine months ended September 30, 2017 are as follows:
|
|
September
30, 2017
|
|
Exercise price
|
|
$
|
0.0001
|
|
Expected
dividends
|
|
|
0
|
%
|
Expected volatility
|
|
|
249.30
– 284.72
|
%
|
Risk free interest
rate
|
|
|
1.44
- 1.54
|
%
|
Expected life of warrant
|
|
|
4
years
|
|
The
following is a summary of the Company’s warrant activity:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Days
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– December 31, 2016
|
|
|
65,757,081
|
|
|
$
|
0.11
|
|
|
$
|
1.97
|
|
Granted
|
|
|
11,800,000,000
|
|
|
|
0.0001
|
|
|
|
4.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(100,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding
– September 30, 2017
|
|
|
11,765,757,081
|
|
|
$
|
0.0007
|
|
|
$
|
3.48
|
|
At
September 30, 2017, the aggregate intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
During
the nine months ended September 30, 2017, 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 September 30, 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 September 30, 2017. The fair value of these warrants was re-measured on September 30, 2017 using the Black
Scholes Merton Model, with key valuation assumptions used that consist of the price of the Company’s stock on September
30, 2017, a risk-free interest rate based on the average yield of a 2 or 3 year Treasury note and expected volatility of the Company’s
common stock, resulting in the fair value for the Warrant liability of $1,174,901. The resulting change in fair value of
approximately $2,116,581 for the nine months ended September 30, 2017, was recognized as a loss in the Consolidated Statement
of Comprehensive Income(loss).
During
the nine months ended September 30, 2017, a total of 11,800,000,000 warrants were issued with convertible notes payable
(See Note 5 above). The warrants have a grant date fair value of $3,009,034 using a Black-Scholes option-pricing
model and the above assumptions.
NOTE
8 – 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 Company’s Condensed Consolidated Financial Statements.
The
following subsidiaries of the Company qualify as a discontinued operation for Notis Global.
●
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 nine months ended September 30, 2017 and
2016, consisted of the following:
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
111,798
|
|
Revenue, related party
|
|
|
-
|
|
|
|
75,028
|
|
Net revenue
|
|
|
-
|
|
|
|
186,826
|
|
Cost of revenues
|
|
|
-
|
|
|
|
74,682
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
112,144
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,064
|
|
|
|
549,853
|
|
Total operating expenses
|
|
|
3,064
|
|
|
|
549,853
|
|
Loss from operations
|
|
|
(3,064
|
)
|
|
|
(437,709
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1,963
|
|
|
|
(8,858
|
)
|
Gain on sale of assets of subsidiary
|
|
|
-
|
|
|
|
5,498
|
|
Loss on sale of rights and assets
|
|
|
-
|
|
|
|
178,032
|
|
Loss on default settlement of a note
|
|
|
-
|
|
|
|
(168,092
|
)
|
Other income (expense)
|
|
|
-
|
|
|
|
86,000
|
|
Total other income (expense)
|
|
|
(1,963
|
)
|
|
|
92,580
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,027
|
)
|
|
$
|
(345,129
|
)
|
NOTE
9 – 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 2017 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 September
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 Prescription
Vending Machines, Inc. (“PVM”). A trial date has been set for May 2017 (Note 14). On July 18, 2017, plaintiff filed
a Request for Dismissal with Prejudice of the litigation in respect of PVM.
Rent
expense for the nine months ended September 30, 2017 and 2016 was approximately $20,074 and $376,000, 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%.
Litigation
On
May 22, 2013, the Company, then known as Medbox , Inc., initiated litigation in the United States District Court in the District
of Arizona against three stockholders of MedVend Holdings LLC (“MedVend”) in connection with a contemplated transaction
that Medbox entered into for the purchase of an approximate 50% ownership stake in MedVend for $4.1 million. The lawsuit alleges
fraud and related claims arising out of the contemplated transaction during the quarter ended June 30, 2013. The litigation is
pending and Medbox has sought cancellation due to a fraudulent sale of the stock because the selling stockholders lacked the power
or authority to sell their ownership stake in MedVend, and their actions were a breach of representations made by them in the
agreement. On November 19, 2013, the litigation was transferred to United States District Court for the Eastern District of Michigan.
MedVend recently joined the suit pursuant to a consolidation order executed by a new judge assigned to the matter. In the litigation,
the selling stockholder defendants and MedVend seek to have the transaction performed, or alternatively be awarded damages for
the alleged breach of the agreement by the Company. MedVend and the stockholder defendants seek $4.55 million in damages, plus
costs and attorneys’ fees. The Company denied liability with respect to all such claims. On June 5, 2014, the Company entered
into a purchase and sale agreement (the “MedVend PSA”) with PVM International, Inc. (“PVMI”) concerning
this matter. Pursuant to the MedVend PSA, the Company sold to PVMI the Company’s rights and claims attributable to or controlled
by the Company against those three certain stockholders of MedVend, known as Kaplan, Tartaglia and Kovan (the “MedVend Rights
and Claims”), in exchange for the return by PVMI to the Company of 30,000 shares of Common Stock. PVMI is owned by Pejman
Vincent Mehdizadeh, formerly the Company’s largest stockholder. On December 17, 2015, the Company entered into a revocation
of the MedVend PSA, which provided that from that date forward, the Company would take over the litigation and be responsible
for the costs and attorneys’ fees associated with the MedVend Litigation from December 17, 2015 forward. All costs and attorneys’
fees through December 16, 2015 will be borne by PVMI. After the filing of a motion for substitution of the Company for PVMI, Defendants
agreed, via a stipulated order, to permit the substitution. The Court entered the order substituting Notis Global, Inc. for PVMI
on February 17, 2016. A new litigation schedule was recently issued which resulted in an adjournment of the trial. A new trial
date will be set by the court following its ruling on a motion for summary judgment filed by Defendants and MedVend, which is
set for hearing on November 16, 2016. At this time, the Company cannot determine whether the likelihood of an unfavorable outcome
of the dispute is probable or remote, nor can they reasonably estimate a range of potential loss, should the outcome be unfavorable.
In January 2017, the Company entered into a Settlement Agreement with the three stockholders, pursuant to which we agreed to pay
to them $375,000 in six payments commencing August 2017 and concluding on or before February 2020. In connection with the settlement,
the Company executed a Consent Judgment in the amount of $937,000 in their favor. The Company did not make the first payment and
the Consent Judgment was recorded against it on August 25, 2017. Plaintiffs have attempted to collect on the judgment and, in
November 2017, garnished approximately $10,000 from the Company’s bank account.
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:
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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;
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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;
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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
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releases
of claims and dismissal of the action.
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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.
As
of September 30, 2017, all obligations have been settled in connection with this class settlement.
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 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, the Company will make a payment of $135,000 in cash to be used to
pay Merritts’ counsel for any attorneys’ fees and expenses, or as service awards to Merritts, that are approved and
awarded by the Court. The Settlements have been approved by the court.
As of September 30, 2017, all obligations
have been settled in connection with this class settlement.
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 Condensed 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 Condensed 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 of 1933 (Securities Act) and Sections 10(b), 13(a),
13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (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 is 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 Prescription Vending Machines, Inc. (“PVM”). 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.
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.
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 judgement for the plaintiff for $89,000
and pre judgement interest at a rate of 6.25%.
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).
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 MA 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.
NOTE
10 – SUBSEQUENT EVENTS
The Company evaluates events that have
occurred after the balance sheet date of September 30, 2017, through the date which the Consolidated Financial Statements were
issued. Based upon the review, other than described in Note 10 – 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 September 30, 2017, the Company
issued 24 convertible notes to third party lenders totaling $2,610,463. These notes accrue interest at a rate of 10% per annum
and mature with interest and principal both due between December 2018 through June 2020.
Subsequent to September 30, 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 September 30, 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. 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 (a total of 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.
As
of July 31, 2019, in connection with the March 2018 Aeon Agreement, Shi Farms had received an investment of $1,000,000.00 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.
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.