NOTES TO THE FINANCIAL STATEMENTS
Organization and Nature of Operations
Business Description –
Business Activity
We were incorporated in Nevada on March
20, 2014. On May 1, 2014, we entered into an exclusive Technology License Agreement with Medicine Man Denver whereby Medicine Man
Denver granted us a license to use all of their proprietary processes they have developed, implemented and practiced at their cannabis
facilities relating to the commercial growth, cultivation, marketing and distribution of medical marijuana and recreational marijuana
pursuant to relevant state laws and the right to use and to license such information, including trade secrets, skills and experience
(present and future).
In 2017, the Company acquired
additional cultivation intellectual property through the acquisition of Success Nutrients™ and Pono Publications,
including the rights to the book titled “Three A Light” and its associated cultivation techniques, which have
been part of the Company’s products and services offerings since the acquisition. The Company acquired Two J’s
LLC d/b/a The Big Tomato (“Big T or The Big Tomato”) in 2018, which operates a retail location in Aurora,
Colorado. It has been a leading supplier of hydroponics and indoor gardening supplies in the metro Denver area since May
2001. The Company was focused on cannabis dispensary and cultivation consulting and providing equipment and nutrients to
cannabis cultivators until its first plant touching acquisition in April of 2020. In 2019, due to the changes in Colorado law
permitting non-Colorado resident and publicly traded investment into “plant-touching” cannabis companies, the
Company made a strategic decision to move toward direct plant-touching operations. The Company developed a plan to roll up a
number of direct plant-touching dispensaries, manufacturing facilities, and cannabis cultivations with a target to be one of
the largest seed to sale cannabis businesses in Colorado. In April 2020 the Company acquired its first plant-touching
business, Mesa Organics, which consists of four dispensaries and one MIP, d/b/a Purplebee’s.
On April 20, 2020, the Company rebranded
and conducts its business under the trade name, Schwazze. The corporate name of the Company continues to be Medicine Man Technologies,
Inc. Effective April 21, 2020, the Company commenced trading under the OTC ticker symbol SHWZ.
On December 17, 2020, the Company closed
on the acquisition of (i) Starbuds Pueblo LLC; and (ii) Starbuds Alameda LLC. On December 18, 2020, the Company closed on the acquisition
of (i) Starbuds Commerce City LLC; (ii) Lucky Ticket LLC; (iii) Starbuds Niwot LLC; and (iv) LM MJC LLC under the applicable APAs.
On February 4, 2021, the Company acquired
the assets of Colorado Health Consultants LLC and Mountain View 44th LLC under the applicable APAs.
On March 2, 2021, the Company acquired
the assets of (i) Starbuds Aurora LLC, (ii) SB Arapahoe LLC, (iii) Citi-Med LLC, (iv) Starbuds Louisville LLC and (v) KEW LLC under
the applicable APAs.
From December 2020 through March 2021 the
Company completed a private placement of Series A Cumulative Convertible Preferred Stock (“Preferred Stock”) for aggregate
gross proceeds of $57.7 million dollars. In the private placement, the Company
issued and sold an aggregate of 57,700 shares of Preferred Stock at a price of $1,000 per share under securities purchase agreement
with Dye Capital and CRW managed funds as well as subscription agreements with unaffiliated investors. Among other terms, each
share of Preferred Stock (i) earns an annual dividend of 8% on the “preference amount,” which initially is equal to
the $1,000 per-share purchase price and subject to increase, by having such dividends automatically accrete to, and increase, the
outstanding preference amount; (ii) is entitled to a liquidation preference under certain circumstances, (iii) is convertible into
shares of the Company’s Common Stock by dividing the preference amount by $1.20 per share under certain circumstances, and
(iv) is subject to a redemption right or obligation under certain circumstances.
In
addition, on December 16, 2020, the Company issued and sold a Convertible Promissory Note and Security Agreement in the original
principal amount of $5,000,000 to Dye Capital & Company, LLC. On February 26, 2021, Dye Capital & Company, LLC converted
all outstanding amounts under the note into 5,060 shares of Preferred Stock.
The Company is focused on growing through
internal growth, acquisition, and new licenses in the Colorado cannabis market. The Company is focused on building the premier
vertically integrated cannabis company in Colorado. The company's leadership team has deep expertise in mainstream consumer packaged
goods, retail, and product development at Fortune 500 companies as well as in the cannabis sector. The Company has a high-performance
culture and a focus on analytical decision making, supported by data. Customer-centric thinking inspires the Company’s strategy
and provides the foundation for the Company’s operational playbooks.
1.
|
Liquidity and Capital Resources
|
During the fiscal year ended December 31,
2020 and 2019, the Company primarily used revenues from its operations supplemented by cash to fund its operations.
Cash and cash equivalents are carried at
cost or amortized cost and represent cash on hand, deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase date. The Company had $1,231,235 and $11,853,627
classified as cash and cash equivalents as of December 31, 2020, and December 31, 2019, respectively.
The
Company maintains its cash balances with high-credit-quality financial institutions. At times, such cash may be more than the
insured limit of $250,000. The Company has not experienced any losses in such accounts, and management believes the Company is
not exposed to any significant credit risk on its cash and cash equivalents.
The following table depicts the composition
of the Company’s cash and cash equivalents as of December 31, 2020 and 2019:
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Deposits placed with banks
|
|
$
|
1,231,235
|
|
|
$
|
736,101
|
|
United States Treasury Bill
|
|
|
–
|
|
|
|
11,117,526
|
|
Total cash and cash equivalents
|
|
$
|
1,231,235
|
|
|
$
|
11,853,627
|
|
2.
|
Critical Accounting Policies and Estimates
|
Basis of Presentation
These accompanying financial statements
have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) for annual financial statements.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due
to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that
differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation. These reclassifications had no impact on the Company’s net (loss) earnings and
financial position.
Fair Value Measurements
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value
hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted
prices in active markets for identical assets or liabilities.
Level 2 – Inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 – Unobservable
inputs that are supported by little or no market activity and that are significant to the measurement of the fair value of the
assets or liabilities.
The Company’s financial instruments
include cash, accounts receivable, note receivable, accounts payables and tenant deposits. The carrying values of these financial
instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates
fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to
us. The Company’s derivative liability was adjusted to fair market value at the end of the year, using Level 3 inputs.
The following is the Company’s assets
and liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 2020 and 2019, using quoted prices
in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs
(Level 3):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Level 1 – Marketable Securities Available-for-Sale – Recurring
|
|
$
|
276,782
|
|
|
$
|
406,774
|
|
Marketable Securities at Fair Value
on a Recurring Basis
Certain assets are measured at fair value
on a recurring basis. The Level 1 position consists of an investment in equity securities held in Canada House Wellness Group,
Inc., a publicly-traded company whose securities are actively quoted on the Toronto Stock Exchange.
Fair Value of Financial Instruments
The carrying amounts of cash and current
assets and liabilities approximate fair value because of the short-term maturity of these items. These fair value estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. Available-for-sale securities are recorded at current market
value as of the date of this report.
Accounts Receivable
The Company extends unsecured credit to
its customers in the ordinary course of business. Accounts receivable related to consulting revenues are recorded when a milestone
is reached at a point in time resulting in funds being due for delivered services, and where payment is reasonably assured. Accounts
receivable related to consulting revenues are recorded based on cultivation yields over time on harvested cannabis. Consulting
revenues are generally collected from 30 to 60 days after the invoice is sent.
The following table depicts the composition
of our accounts receivable as of December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts receivable – trade
|
|
$
|
1,315,188
|
|
|
$
|
384,202
|
|
Accounts receivable – related party
|
|
|
80,494
|
|
|
|
72,658
|
|
Accounts receivable – litigation, non-current
|
|
|
3,063,968
|
|
|
|
3,063,968
|
|
Allowance for doubtful accounts
|
|
|
(44,808
|
)
|
|
|
(70,885
|
)
|
Total accounts receivable
|
|
$
|
4,414,842
|
|
|
$
|
3,449,943
|
|
The Company establishes an allowance for
doubtful accounts based on management’s assessment of the collectability of trade receivables. A considerable amount of judgment
is required in assessing the amount of the allowance. The Company makes judgments about the creditworthiness of each customer based
on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future.
If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a specific allowance
will be required. At December 31, 2020 and 2019, the Company recorded an allowance for doubtful accounts of $44,808 and $70,885,
respectively.
Recovery of bad debt amounts previously
written off is recorded as a reduction of bad debt expense in the period the payment is collected. If the Company’s actual
collection experience changes, revisions to its allowance may be required. After all attempts to collect a receivable have failed,
the receivable is written off against the allowance. The Company wrote-off $16,798 of its accounts receivable during the year ended
December 31, 2020. The Company wrote-off $80,284 of its accounts receivable during the year ended December 31, 2019.
In July 2018, the Company commenced legal
action against a customer in Clark County, Nevada for breach of contract, adding a significant value to its receivables for fees
that had been booked, due to forbearance grants by the Company that were subsequently violated, causing the Company to increase
its receivables accordingly. The Company provided services to this customer for a period of thirteen months, agreeing conditionally
to three modifications in December 2017, March 2018 and May 2018 to forego certain revenue sharing payments in accordance with
the agreement with the customer, which were subsequently breached by the customer. As a result, the Company engaged legal counsel
and filed a complaint in Clark County, Nevada, which alleged breach of contract and sought general, special and punitive damages
in the amount of $3,876,850.
On August 2, 2019, a jury in the District
Court of Clark County, Nevada found in favor of the Company and awarded the Company damages totaling $2,773,321 (See Part II, Item
1, Legal Proceedings for more information). The Company has classified the awarded amount receivable as a non-current asset since
the customer has subsequently filed an appeal. Considering this customer’s appeal, the Company sought to compel the customer
to obtain and produce a bond securing the award. On December 13, 2019, proof of the bond was posted through United States Fire
Insurance Company, naming the Company as the obligee.
At December 31, 2020 and 2019, the accounts
receivable for this matter totaled $2,773,321, and the related revenue recorded totaled $0 and $1,782,457 for the years ended December
31, 2020 and 2019, respectively.
The Company analyzed the contract, associated
revenue and litigation process under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers. As detailed above, the Company had a contract with the customer that identified distinct performance obligations
to be satisfied over time. Additionally, it determined that the litigation process and subsequent award represented a contract
modification.
Paragraph 606-10-25 states that an entity
transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over
time if one of the following criteria is met:
·
|
The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
|
·
|
The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
|
·
|
The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
|
Paragraph 606-10-25 further states that
the process for determining the proper treatment for a contract modification includes three steps:
·
|
Determine whether a change to a contract qualifies as a contract modification.
|
·
|
Determine whether the modification should be treated as a separate, standalone contract or as a modification of the original contract. If the contract is a separate contract, the entity follows the five-step model to determine how to recognize revenue. If the modification is not treated as a separate contract, the entity continues to Step 3.
|
·
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Determine appropriate accounting treatment for contract modification not accounted for as a separate contract.
|
ASC
606 defines a contract modification as a change in scope and/or price to an original contract or any change to the enforceable
rights and obligations of the parties to the original contract. Enforceable rights and obligations are those that are approved
by both parties and legally required. A contract modification does not need to be written; enforceable changes can be the result
of oral agreements or implied through customary business practices.
The effect that the modification has on
the transaction price and on the entity’s measure of progress towards satisfaction of the performance obligation is recognized
as an adjustment to revenue either as an increase in or a reduction of revenue at the date of the modification. The adjustment
to revenue is made on a cumulative catch-up basis.
As management determined that the litigation
process constituted a contract modification, and that the contract was upheld judicially, the Company recognized and recorded $1,782,457
on a cumulative catch-up basis as of August 2, 2019.
On June 7, 2019, the Company filed a complaint
against a second customer in Clark County, Nevada, for, amongst other causes of action, breach of contract. On July 17, 2019, the
parties stipulated to stay the case in favor of arbitration. On February 25, 2020 ACC Industries Inc. filed a counterclaim alleging
breach of contract, which the Company believes is without merit. The Company discovered new facts that lead it to believe that
a related entity not previously named as a party to the arbitration should be brought in as a party to the arbitration. Based upon
the new facts, the Company filed a motion to amend the complaint to add new claims and the related entity as a party. On September
1, 2020, the court ruled in favor of the Company and permitted the Company to amend the complaint to add the related entity. On
September 1, 2020, the Company filed an amended complaint naming the related entity a party and added intentional misrepresentation,
fraudulent inducement, civil conspiracy, aiding and abetting, successor liability and fraudulent concealment claims. The Company
began arbitration proceedings on November 2, 2020. The Company completed arbitration in February 2021 and expects a decision in
early April 2021. As of December 31, 2020 and 2019, the accounts receivable for this matter totaled $290,648.
Notes Receivable
On July 17, 2018, the Company entered into
an intellectual property license agreement with Abba Medix Corp. (AMC), a wholly-owned subsidiary of publicly-traded Canada House
Wellness Group, Inc. (CHV). The Company agreed to provide a lending facility to AMC in CAD$125,000 increments of up to CAD$500,000.
The lending facility is for a term of 36 months and bears interest at a rate of 2%. As of December 31, 2020 and 2019, the Company
had loaned to AMC a total of $246,765 and $241,711, respectively. The Company classified these loans as long-term notes receivable
on its consolidated balance sheets as of December 31, 2019. As of December 31, 2020, the Company has recorded a full allowance
on the note receivable balance.
Other Assets (Current and Non-Current)
Other assets at December 31, 2020 and 2019
were $666,079 and $529,416, respectively.
At December 31, 2020, other assets included
$345,777 in prepaid expenses, $268,423 in tax receivable, and $51,879 in security deposits. Prepaid expenses were primarily comprised
of insurance premiums, vendor prepayments, and prepaid software costs.
At December 31, 2019, other assets included
$480,881 in prepaid expenses, $21,085 in interest receivable and $27,450 in security deposits.
Goodwill and Intangible Assets
Goodwill represents the future economic
benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising
from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of licensing agreements, product licenses and registrations, and intellectual property or trade secrets. Their estimated
useful lives range from 10 to 15 years.
Goodwill and indefinite-lived assets are
not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company
performs an annual impairment assessment for goodwill at the end of each calendar year and more frequently whenever events or changes
in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is
a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying
amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair
values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting
unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit,
which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount
rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate,
the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size
and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value,
growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples
from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater
than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the
second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill
by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting
unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s
assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If
the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal
to the excess.
Determining the fair value of a reporting
unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic
plans and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions
made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions
and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value
assessment at December 31, 2020 on its reporting units and subsidiary with material goodwill and intangible asset amounts on their
respective balance sheets and determined that no impairment exists.
Long-Lived Assets
The Company evaluates the recoverability
of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. Long-lived
assets are grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash
flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying
value of the assets, the assets are written down to the estimated fair value.
The Company evaluated the recoverability
of its long-lived assets at December 31, 2020 on its reporting units and subsidiary with material amounts on their respective balance
sheets and determined that no impairment exists.
Accounts Payable
Accounts payable at December 31, 2020 and
2019 were $3,557,461 and $699,961, respectively, and were comprised of trade payables for various purchases and services rendered
during the ordinary course of business.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities
at December 31, 2020 and 2019 were $2,705,445 and $1,091,204, respectively.
At December 31, 2020, accrued expenses
and other liabilities was comprised of customer deposits of $26,826, accrued payroll of $1,154,887, and operating expenses of $1,523,732.
At December 31, 2019, accrued expenses
and other liabilities was comprised of customer deposits of $148,109, accrued payroll of $714,220, and operating expenses of $228,875.
Revenue Recognition and Related Allowances
The Company’s revenue recognition
policy is significant because the amount and timing of revenue is a key component of its results of operations. Certain criteria
are required to be met in order to recognize revenue. If these criteria are not met, then the associated revenue is deferred until
the criteria are met. When consideration is received in advance of the delivery of goods or services, a contract liability is recorded.
Revenue contracts are identified when accepted from customers and represent a single performance obligation to sell the Company’s
products to a customer.
The Company has three main revenue streams:
(i) product sales; (ii) licensing and consulting fees; and (iii) other operating revenues from seminars, reimbursements and other
miscellaneous sources.
Product sales are recorded at the time
that control of the products is transferred to customers. In evaluating the timing of the transfer of control of products to customers,
the Company considers several indicators, including significant risks and rewards of products, its right to payment, and the legal
title of the products. Based on the assessment of control indicators, sales are generally recognized when products are delivered
to customers.
Revenue from licensing and consulting fees
are recognized when the obligations to the client are fulfilled which is determined when milestones in the contract are achieved
and target harvest yields are exceeded.
Revenue from seminar fees is related to
one-day seminars and is recognized as earned upon the completion of the seminar. The Company also recognizes expense reimbursement
from clients as revenue for expenses incurred during certain jobs.
Costs of Goods and Services Sold
Costs of goods and services sold are comprised
of related expenses incurred while supporting the implementation and sales of Company’s products and services.
General and Administrative Expenses
General and administrative expense are
comprised of all expenses not linked to the production or advertising of the Company’s products or services.
Advertising and Marketing Costs
Advertising and marketing costs are expensed
as incurred and totaled $1,040,671 and $455,047 for years ended December 31, 2020 and 2019, respectively.
Stock-Based Compensation
The Company accounts for share-based payments
pursuant to ASC 718, Stock Compensation and, accordingly, the Company records compensation expense for share-based awards
based upon an assessment of the grant date fair value for stock and restricted stock awards using the Black-Scholes option pricing
model.
Stock compensation expense for stock options
is recognized over the vesting period of the award or expensed immediately under ASC 718 and Emerging Issues Task Force (“EITF”)
96-18 when stock or options are awarded for previous or current service without further recourse.
Share-based expense paid to through direct
stock grants is expensed as occurred. Since the Company’s stock is publicly traded, the value is determined based on the
number of shares issued and the over-the-counter quoted value of the stock on the date of the transaction.
On June 20, 2018, the FASB issued ASU 2018-07
which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of
the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.
Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee share-based payments
issued for goods and services were accounted for under ASC 505-50. Before the ASU, the major difference for the Company (but not
limited to) was the determination of measurement date, which generally is the date on which the measurement of equity classified
share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified
nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by
the counterparty is reached or the date at which the counterparty’s performance is complete. They are now measured at the
grant date of the award, which is the same as share-based payments for employees. The Company adopted the requirements of the new
rule as of January 1, 2019, the effective date of the new guidance.
The Company recognized $8,230,513 and $7,279,363
in expense for stock-based compensation to directors, employees and consultants during the years ended December 31, 2020 and 2019,
respectively.
Income Taxes
ASC 740, Income Taxes requires the use
of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC 740, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets are regularly assessed
to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe
it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our
ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative
evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred
tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable
future, and the impact of any feasible and prudent tax planning strategies.
The Company assesses all material positions
taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment
or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s
sustainability, and the tax benefit to be recognized is measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. We recognize the impact of a tax position in our financial statements only if
that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits
of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess
the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result
in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest
and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
As the Company operates in the cannabis
industry, it is subject to the limits of the Internal Revenue Code (IRC) Section 280E under which the Company is only allowed to
deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business
expenses deemed non-allowable under IRC Section 280E.
Right of Use Assets and Lease Liabilities
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The standard requires lessees to recognize almost all leases on the balance sheet as a Right-of-Use
(“ROU”) asset and a lease liability and requires leases to be classified as either an operating or a finance type lease.
The standard excludes leases of intangible assets or inventory. The standard became effective for the Company beginning January
1, 2019. The Company adopted ASC 842 using the modified retrospective approach, by applying the new standard to all leases existing
at the date of initial application. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are
presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical
accounting under ASC 840. The Company elected the package of practical expedients permitted under the standard, which also allowed
the Company to carry forward historical lease classifications. The Company also elected the practical expedient related to treating
lease and non-lease components as a single lease component for all equipment leases as well as electing a policy exclusion permitting
leases with an original lease term of less than one year to be excluded from the ROU assets and lease liabilities.
Under ASC 842, the Company determines if
an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value
of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable
at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company estimated the incremental
borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to
commencement and is recorded net of any lease incentives received. The Company’ lease terms may include options to extend
or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are included in operating
lease Right-of-Use assets and operating lease liabilities, current and non-current, on the Company's consolidated balance sheets.
3.
|
Recent Accounting Pronouncements
|
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations except
as noted below:
FASB ASU 2017-01, Clarifying the Definition
of a Business (Topic 805) – In January 2017, the FASB issued 2017-01. The new guidance that changes the definition of
a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires
an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable
asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance
also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning
it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017,
and for interim periods within those years. Adoption of this ASU did not have a significant impact on the Company’s consolidated
results of operations, cash flows and financial position.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740), which enhances and simplifies various aspects of the income tax accounting guidance, including
requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes
in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies
with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact of this
amendment on its consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases
(Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13
and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15,
2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate
a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its
consolidated financial statements.
4.
|
Property and Equipment
|
Property and equipment are recorded at
cost, net of accumulated depreciation and are comprised of the following:
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Furniture and fixtures
|
|
$
|
228,451
|
|
|
$
|
98,903
|
|
Leasehold improvements
|
|
|
90,314
|
|
|
|
40,953
|
|
Machinery and tools
|
|
|
1,456,752
|
|
|
|
34,000
|
|
Office equipment
|
|
|
104,059
|
|
|
|
33,833
|
|
Software
|
|
|
1,308,387
|
|
|
|
–
|
|
Work in process
|
|
|
269,414
|
|
|
|
190,743
|
|
|
|
|
3,457,377
|
|
|
|
398,432
|
|
Less: accumulated depreciation
|
|
|
(872,579
|
)
|
|
|
(159,354
|
)
|
Total property and equipment, net of depreciation
|
|
$
|
2,584,798
|
|
|
$
|
239,078
|
|
Depreciation on equipment is recorded on
a straight-line basis over the following expected useful:
Furniture and fixtures
|
3 years
|
Leasehold improvements
|
Lesser of the lease term or estimated useful life
|
Marketing display
|
3 years
|
Vehicles
|
3 years
|
Office equipment
|
3 years
|
Software
|
3-5 years
|
Depreciation expense for the years ended
December 31, 2020 and 2019 was $295,947 and $55,800, respectively.
Intangible assets
at December 31, 2020 and 2019 were comprised of the following:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
License agreement
|
|
$
|
1,667,000
|
|
|
$
|
5,300
|
|
Tradename
|
|
|
350,000
|
|
|
|
–
|
|
Customer relationships
|
|
|
1,055,000
|
|
|
|
–
|
|
Non-compete
|
|
|
120,000
|
|
|
|
–
|
|
Product license and registration
|
|
|
57,300
|
|
|
|
57,300
|
|
Trade secret – intellectual property
|
|
|
32,500
|
|
|
|
32,500
|
|
|
|
|
3,282,500
|
|
|
|
95,100
|
|
Less: accumulated amortization
|
|
|
(200,456
|
)
|
|
|
(19,811
|
)
|
Total intangible assets, net of amortization
|
|
$
|
3,082,044
|
|
|
$
|
75,289
|
|
Amortization expense for years ended December
31, 2020 and 2019 was $180,644 and $5,908, respectively.
6.
|
Derivative Liabilities
|
During the year ended December 31, 2019,
the Company entered into employment agreements with certain key officers that contained contingent consideration provisions based
upon the achievement of certain market condition milestones. The Company determined that each of these vesting conditions represented
derivative instruments.
On January 8, 2019, the Company granted
the right to receive 500,000 shares of restricted Common Stock to an officer, which will vest at such time that that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
On April 23, 2019, the Company granted
the right to receive 1,000,000 shares of restricted Common Stock to an officer, which will vest at such time that that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds. On February 25, 2020,
the officer resigned from his remaining positions with the Company and forfeited his right to the contingent consideration. As
a result, the Company recorded a gain of $1,462,636 as a component of other income (expense), net on its financial statements.
On June 11, 2019, the Company granted the
right to receive 1,000,000 shares of restricted Common Stock to an officer, which will vest at such time that the Company’s
stock price appreciates to $8.00 per share with defined minimum average daily trading volume thresholds.
The Company accounts for derivative instruments
in accordance with the U.S. GAAP accounting guidance under ASC 815 Derivatives and Hedging Activities. The Company estimated
the fair value of these derivatives at the respective balance sheet dates using the Black-Scholes option pricing model based upon
the following inputs: (i) stock price on the date of grant ranging between $1.32 - $3.75, (ii) the contractual term of the derivative
instrument ranging between 2.25 - 3 years, (iii) a risk-free interest rate ranging between 1.87% - 2.57% and (iv) an expected volatility
of the price of the underlying Common Stock ranging between 145% - 158%.
As of December 31, 2020, the fair value
of these derivative liabilities is $1,047,481. The change in the fair value of derivative liabilities for the year ended December
31, 2020 was $1,263,264, resulting in an aggregate unrealized gain on derivative liabilities.
7.
|
Related Party Transactions
|
For the year ended December 31, 2020
During the year ended December 31, 2019,
the Company’s Chief Cultivation Officer, Joshua Haupt, who currently owns 20% of both Super Farm and De Best, customers of
the Company, was an Officer of the Company and therefore a related party. Effective December 4, 2019, he was no longer an Officer
and therefore no longer a related party. As such, he is not included as a related party with respect to sales and accounts receivable
to Super Farm or De Best during the period ended December 31, 2020.
During the year ended December 31, 2020,
the Company had sales from Medicine Man Denver, a customer of the Company, totaling $997,262. As of December 31, 2020, the Company
had an accounts receivable balance with Medicine Man Denver totaling $72,109. The Company’s former Chief Executive Officer,
Andy Williams, maintains an ownership interest in Medicine Man Denver.
During the year ended December 31, 2020,
the Company had sales from MedPharm Holdings LLC (“MedPharm”), a customer of the Company, totaling $73,557. As of December
31, 2020, the Company had a net accounts receivable balance with MedPharm totaling $5,885. On August 1, 2020, the Company entered
into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) with MedPharm. Pursuant to the terms of
the Settlement Agreement, the Company and MedPharm agreed that the amount of the settlement to be furnished to the Company by MedPharm
shall be $767,695 in principal and $47,161 in accrued interest. The Company received a $100,000 cash payment from MedPharm on August
1, 2020. On September 4, 2020, Andrew Williams, a member of the MedPharm Board of Directors and the Company’s former Chief
Executive Officer, returned 175,000 shares of the Company’s Common Stock to the Company, as equity consideration at a price
of $1.90 per share, a mutually agreed upon price per share. These shares are held in treasury. The remaining outstanding principal
and interest of $181,911 due and payable by MedPharm under the Settlement Agreement will be paid out in bi-weekly installments
of product by scheduled deliveries through March 31, 2021.
During the year ended December 31, 2020,
the Company recorded sales from Baseball 18, LLC totaling $14,605, Farm Boy, LLC totaling $16,125, Emerald Fields LLC totaling
$16,605, and Los Sueños Farms totaling $52,244. During the year ended December 31, 2020, the Company had a net accounts
payable balance of $31,250 with Baseball and $93,944 with Farm Boy. One of the Company’s former directors, Robert DeGabrielle,
owns the Colorado retail marijuana cultivation licenses for Farm Boy, LLC, Emerald Fields LLC, Baseball 18, LLC, and Los Sueños
Farms.
Justin Dye, the Company’s Chief Executive
Officer, one of our directors and the largest beneficial owner of the Common Stock, controls Dye Capital & Company, LLC (“Dye
Capital”). Dye Capital controls Dye Capital Cann Holdings, LLC (“Dye Cann I”) and Dye Capital Cann Holdings II,
LLC (“Dye Cann II”). Dye Cann I is a significant holder of the Company’s common stock. Dye Cann II is one of
the Company’s holders of Preferred Stock. Mr. Dye has sole voting and dispositive power over the securities held by Dye Capital,
Dye Cann I, and Dye Cann II.
On May 20, 2020, the Company entered into
a second amendment (the “Amendment”) to that certain securities purchase agreement (the “Agreement”) dated
as of June 5, 2019 by and between the Company and Dye Capital Cann Holdings, LLC, a Delaware limited liability company (the “Investor”
and together with the Company the “Parties”) as described in a Current Report on Form 8-K filed with the Securities
and Exchange Commission (the “SEC”) on June 6, 2019, as amended by the first amendment to the Agreement dated as of
July 15, 2019 (the “First Amendment”) and as described in a Current Report on Form 8-K filed with the SEC on July 17,
2019. The Agreement, as amended by the First Amendment, contemplated, among other things, the sale by the Company to the Investor
in three separate tranches of shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”),
together with warrants to purchase the number of shares of Common Stock purchased in each tranche closing (the “Warrants”).
At the time of the closing of the initial transactions contemplated in the Agreement, Justin Dye, principal of the Purchaser, became
a Director and Chief Executive Officer of the Company; the Purchaser is currently the Company’s largest shareholder and Mr.
Dye has voting and dispositive power over the securities held by the Purchaser. The Amendment provides, pursuant to the terms and
subject to the conditions set forth therein, that in addition to the shares of Common Stock and Warrants previously purchased by
the Investor in connection with the Agreement as amended by the First Amendment, the Investor shall purchase in a private placement
187,500 shares of Common Stock at a price of $2.00 per share together with 187,500 Warrants at an exercise price of $3.50 per share
(the “Transaction”). The Transaction closed on May 21, 2020.
On December 16, 2020, the Company entered into an Amendment
to Securities Purchase Agreement with Dye Capital Cann Holdings II, LLC (the “Investor”) to change the number of shares
of the Company’s Series A Preferred Stock, par value $0.001 per share (the “Preferred Stock”) the Investor would
purchase under the Securities Purchase Agreement, dated November 16, 2020 (as amended, the “SPA”), between the Company
and the Investor from 12,400 to up to 13,000 in one or more closings, among other changes. The Company issued and sold to the Investor
7,700 shares of Preferred Stock on the same date, 1,450 shares of Preferred Stock on December 18, 2020, and 1.300 shares of Preferred
Stock on December 22, 2020. The purchase price was $1,000 per share of Preferred Stock, for aggregate gross proceeds of $10,450,000
and aggregate net proceeds of approximately $8,205,500 after deducting placement agent fees and estimated offering expenses.
In addition, on December 16, 2020, the Company entered into
a Secured Convertible Note Purchase Agreement with Dye Capital & Company, LLC and issued and sold to Dye Capital a Convertible
Note and Security Agreement in the principal amount of $5,000,000.
Mr. Brian Ruden, a member of the Company’s
Board of Directors, has an ownership interest in each Star Buds Company that sold assets to us on December 17, 2020 and December
18, 2020. Brain is also the owner of Star Buds outside the state of Colorado. He is also the landlord of 5844 Ventures LLC, CO
Real Estate Holdings LLC, and 428 McCulloch St LLC, two of the Star Buds retail locations in which we lease.
For the year ended December 31, 2019
During the year ended December 31, 2019,
the Company had sales from Super Farm totaling $578,655 and sales from De Best totaling $191,915. The Company gives a larger discount
on nutrient sales to related parties than non-related parties. During the year ended December 31, 2019, the Company had sales discounts
associated with Super Farm totaling $291,823 and sales discounts associated with De Best totaling $95,957. As of December 31, 2019,
the Company had an accounts receivable balance from Super Farm totaling $33,127 and an accounts receivable balance from De Best
totaling $2,180. The Company’s former Chief Cultivation Officer, Joshua Haupt, currently owns 20% of both Super Farm and
De Best.
During the year ended December 31, 2019,
the Company recorded sales from Medicine Man Denver totaling $402,839 and sales discounts totaling $143,473. As of December 31,
2019, the Company had an accounts receivable balance with Medicine Man Denver totaling $34,748. Also, during the year ended December
31, 2019, the Company incurred expenses from Medicine Man Denver totaling $125,897 for contract labor and other related administrative
costs. The Company’s former Chief Executive Officer, Andy Williams, currently owns 38% of Medicine Man Denver.
During the year ended December 31, 2019,
the Company recorded sales from MedPharm Holdings totaling $64,378 and sales discounts totaling $7,498. As of December 31, 2019,
the Company had an accounts receivable balance with MedPharm Holdings totaling $2,604. Also, during the year ended December 31,
2019, the Company issued various notes receivable to MedPharm Holdings totaling $767,695 with original maturity dates ranging from
September 21, 2019 through January 19, 2020 and all bearing interest at 8% per annum. Certain notes extended to 2020 by mutual
agreement between the Company and noteholder. The Company’s former Chief Executive Officer, Andy Williams, currently owns
29% of MedPharm Holdings.
During the year ended December 31, 2019,
the Company recorded sales from Baseball 18, LLC totaling $165,617. The revenue is included under product sales - related party,
net, in the Company’s consolidated financial statements. As of December 31, 2019, the Company had an accounts receivable
balance with Baseball 18, LLC totaling $169,960. During the year ended December 31, 2019, the Company recorded sales from Farm
Boy, LLC totaling $321,307. The revenue is included under product sales - related party, net, in the Company’s consolidated
financial statements. As of December 31, 2019, the Company had an accounts receivable balance with Farm Boy, LLC totaling $330,911.
8.
|
Goodwill and Acquisition Accounting
|
On June 3, 2017, the Company issued an
aggregate of 7,000,000 shares of its Common Stock for 100% ownership of both Success Nutrients and Pono Publications. The Company
utilized purchase price accounting stating that net book value approximates fair market value of the assets acquired. The purchase
price accounting resulted in $6,301,080 of goodwill.
On July 21, 2017, the Company issued 2,258,065
shares of its Common Stock for 100% ownership of Denver Consulting Group (“DCG”). The Company utilized purchase price
accounting stating that net book value approximates fair market value of the assets acquired. The purchase price accounting resulted
in $3,003,226 of goodwill.
On September 17, 2018, we closed the acquisition
of Two JS LLC, dba The Big Tomato, a Colorado limited liability company. (“Big T” or “Big Tomato”). The
Company issued an aggregate of 1,933,329 shares of its Common Stock for 100% ownership of Big Tomato. The Company utilized purchase
price accounting stating that net book value approximates fair market value of the assets acquired. The purchase price accounting
resulted in the Company valuing the investment as $3,000,000 of goodwill.
On April 20, 2020, the Company closed the
acquisition of Mesa Organics. The aggregate purchase price after working capital adjustments was $2,609,500 of cash and 2,554,750
shares of the Company’s Common Stock. The Company accounted for the transaction utilizing purchase price accounting
stating that the book value approximates the fair market value of the assets acquired. The purchase price accounting resulted in
the Company valuing the investment as $2,147,613 of goodwill. The purchase price allocation is preliminary. The purchase price
allocation will continue to be preliminary until a third-party valuation is finalized and the fair value and useful life of the
assets acquired is determined. The amounts from the final valuation may significantly differ from the preliminary allocation.
On December 17, 2020 and December 18, 2020,
the Company closed the acquisition of six SBUD LLC dispensaries. The aggregate purchase price was $39,082,180. The Company
accounted for the transaction utilizing purchase price accounting stating that the book value approximates the fair market value
of the assets acquired. The purchase price accounting resulted in the Company valuing the investment as $38,594,810 of goodwill.
The purchase price allocation is preliminary. The purchase price allocation will continue to be preliminary until a third-party
valuation is finalized and the fair value and useful life of the assets acquired is determined. The amounts from the final valuation
may significantly differ from the preliminary allocation.
As of December 31, 2020, the Company had
$53,046,729 of goodwill which consisted of $6,301,080 from Success Nutrients and Pono Publications, $3,003,226 from DCG, $3,000,000
from Big Tomato, $2,147,613 from Mesa Organics, and $38,594,810 from SBUD.
As of December 31, 2020 and December 31,
2019, the Company had $2,090,887 and $684,940 of finished goods inventory, respectively. As of December 31, 2020, the Company had
$500,917 of work in process and $27,342 of raw materials. The Company did not have any work in process or raw materials at December
31, 2019. The inventory valuation method that the Company uses is the FIFO method. During the years ended December 31, 2020 and
2019, the Company did not recognize any impairment for obsolescence within its inventory.
Leases with an initial term of one year
or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease
term. Leases with a term greater than one year are recognized on the balance sheet at the time of lease commencement or modification
by recording an ROU operating lease asset and a lease liability, initially measured at the present value of the lease payments.
Lease costs are recognized in the income statement over the lease term on a straight-line basis. ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease.
The Company's leases consist of real estate
leases for office, retail and warehouse spaces. The Company elected to combine the lease and related non-lease components for its
operating leases.
The Company’s operating leases may
include options to extend or terminate the leases, which are not included in the determination of the ROU asset or lease liability
unless it is reasonably certain to be exercised. The Company's operating leases have remaining lease terms of less than one year.
The Company’s lease agreements do not contain any material residual value guarantees or materially restrictive covenants.
As the Company's leases do not provide
an implicit rate, the Company used an incremental borrowing rate based on the information available at the lease commencement date
in determining the present value of lease payments. The discount rate used in the computations was 6-12%.
Balance Sheet Classification of Operating Lease Assets
and Liabilities
|
|
Balance Sheet Line
|
|
December 31, 2020
|
|
Asset
|
|
|
|
|
|
|
Operating lease asset
|
|
Non-Current Assets
|
|
$
|
2,579,036
|
|
Liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Non-Current Liabilities
|
|
$
|
2,645,597
|
|
Lease Costs
The table below summarizes the components of lease costs for
the year ended December 31, 2019.
|
|
Year Ended
December 31, 2020
|
|
|
|
|
|
|
Operating lease costs
|
|
$
|
359,564
|
|
Maturities of Lease Liabilities
Maturities of lease liabilities as of December
31, 2020 are as follows:
2020 fiscal year
|
|
$
|
2,730,205
|
|
Total lease payments
|
|
|
2,730,205
|
|
Less: Interest
|
|
|
(84,608
|
)
|
Present value of lease liabilities
|
|
$
|
2,645,597
|
|
The following table presents the Company’s future minimum
lease obligation under ASC 840 as of December 31, 2020:
2021 fiscal year
|
|
|
854,870
|
|
2022 fiscal year
|
|
|
849,792
|
|
2023 fiscal year
|
|
|
717,539
|
|
2024 fiscal year
|
|
|
495,175
|
|
2025 fiscal year
|
|
|
162,182
|
|
Total
|
|
$
|
3,079,559
|
|
11.
|
Commitments and Contingencies
|
Over the past three years, the Company
has supported legislation in Colorado to allow licensed cannabis companies in Colorado to trade their securities, provided they
are reporting companies under the Exchange Act. HB19-1090 titled, “Publicly Licensed Marijuana Companies” was signed
into Colorado legislature on May 29, 2019 and went into effect on November 1, 2019. The bill repeals the provision that prohibits
publicly traded corporations from holding a marijuana license in Colorado.
Definitive Agreement to Acquire the
Colorado-Based Star Buds Branded Dispensaries
On June 5, 2020, the Company and SBUD,
LLC, a wholly owned subsidiary of the Company, on the one hand, entered into 13 separate purchase agreements with, on the other
hand, each of Colorado Health Consultants, LLC, CitiMed, LLC, Lucky Ticket LLC, Kew LLC, SB Aurora LLC, SB Arapahoe LLC, SB Alameda
LLC, SB 44th LLC, Starbuds Pueblo LLC, Starbuds Louisville LLC, Starbuds Niwot LLC, Starbuds Longmont LLC, and Starbuds Commerce
City LLC (each, a “Star Buds Company” and collectively “Star Buds”) whereby SBUD, LLC agreed to purchase
substantially all of the assets of Star Buds from each individual Star Buds Company pursuant to the agreements. In addition, SBUD,
LLC entered into a Trademark License Agreement with Star Brands LLC under which Star Brands LLC will license certain trademarks
to SBUD, LLC effective as of the closing of the Star Buds acquisitions in exchange for license payments on use of such trademarks
outside of Colorado. The parties entered into an Omnibus Amendment No. 1 to Asset Purchase Agreements on September 15, 2020. The
description below describes the terms of the transactions as amended.
On December 17, 2020, the Company and SBUD,
LLC entered into an Omnibus Amendment No. 2 with each Star Buds Company. Omnibus Amendment No. 2 revised certain material terms
originally set forth in the Agreements, as amended by Omnibus Amendment No. 1.
The aggregate purchase price for Star Buds’
assets is approximately $118,000,000, subject to adjustment upon the closing of each of the purchases based on, among other things,
the target inventory as opposed to actual inventory and target working capital as opposed to net working capital of each Star Buds
Company, and will be payable to Star Buds 75% in cash and 25% in shares of Preferred Stock, valued at $1,000 per share, estimated
to be an aggregate of approximately 29,500 shares (which would be convertible into approximately 24,583,333 shares of Common Stock
(based on the initial Preference Amount and an initial Conversion Price equal to $1.20 per share)). Two-thirds of the cash payment
is payable at the applicable closing and one-third is deferred and payable 30 months after the applicable closing. 15% of the shares
of Preferred Stock will be held in escrow and released post-closing to either the seller or the buyer depending on post-closing
adjustments to the purchase price. The Company will make quarterly interest payments on the deferred cash amount at a rate of 4%
per annum during the first year after each closing, 6% per annum during the second year after each closing, and 8% per annum during
the last 6 months of the 30-month period after each closing. The Company may prepay the deferred cash amount at any time. Payment
of the deferred cash amount and the interest will be secured by a security interest in the purchased Star Buds assets, subject
to subordination to any security interest in favor of the Company’s future lenders. SBUD, LLC will not assume any of Star
Buds’ liabilities other than accounts payable by Star Buds, liabilities in respect of any contractual arrangements assigned
to SBUD, LLC by Star Buds, and liabilities in connection with administrative fees associated with obtaining necessary governmental
approvals or waivers of such approvals. SBUD, LLC has also agreed to pay certain transfer taxes in connection with the purchases.
The closing of each purchase is subject to customary closing conditions, such as the parties obtaining all necessary governmental
approvals and licenses for the transactions.
On December 17, 2020, pursuant to the applicable
APA, the Company and SBUD, LLC closed on the acquisition of (i) Starbuds Pueblo LLC; and (ii) Starbuds Alameda LLC. On December
18, 2020, pursuant to the applicable APA, the Company and SBUD LLC closed on the acquisition of (i) Starbuds Commerce City LLC;
(ii) Lucky Ticket LLC; (iii) Starbuds Niwot LLC; and (iv) LM MJC LLC. The aggregate purchase price for the assets of the Star Buds
Companies acquired on December 17, 2020 and December 18, 2020 was approximately $37.1 million and was paid to each applicable Star
Buds Company and its members as a combination of cash and deferred cash, an aggregate of 7,877 shares of Preferred Stock together
with an aggregate of 1,389 shares of Preferred Stock to be held in escrow pursuant to the terms and subject to the conditions set
forth in Omnibus Amendment No. 2 (the “Transaction Shares”) and warrants to purchase an aggregate of 1,737,719 shares
of the Company’s Common Stock at exercise price equal to $1.20 per share (the “Transaction Warrants”). The Company
funded the aggregate cash portion of the purchase price for the assets acquired on December 17, 2020 and December 18, 2020 from
proceeds received as disclosed in its December 22, 2020 8-K filing.
Departure and Appointment of Officers
On February 25, 2020, Andy Williams resigned
from the positions of President and member of the Board of Directors of the Company. Mr. Williams’s resignation was not the
result of any disagreement with the Company on any matter relating to the company’s operations, policies or practices. Simultaneously,
the Company entered into a Severance Agreement and Release (the “Severance Agreement”) with Mr. Williams.
The Severance Agreement provides that as
severance and in consideration of a customary release against the Company and other customary covenants, Mr. Williams will receive
(i) continued salary in the amount of $300,000, half of which to be paid within ten days of the execution of the Severance Agreement,
and the remaining half is to be paid in 26 equal disbursements in accordance with the Company’s regular payroll periods,
(ii) a bonus payment in the amount of $25,000, (iii) one year family health care coverage, (iv) stock options to purchase 350,000
shares of the Company’s Common Stock, which may be exercised on a cashless basis and vested immediately on the date of termination
at a price of $1.80 per share and valued at $582,228, and (v) stock options to purchase 15,000 shares of the Company’s Common
Stock, which may be exercised on a cashless basis at a price of $1.80 per share, valued at $27,000, at the one year anniversary
of the termination date if Mr. Williams is compliant with the terms of the Severance Agreement.
On June 19, 2020, the Company received
the resignation of Robert DeGabrielle from the positions of Chief Operating Officer and member of the Board of Directors of the
Company. Mr. DeGabrielle’s resignation was not the result of any disagreement with the Company on any matters relating to
the Company’s operations, policies, or practices.
On September 9, 2020 the Company appointed
Nirup Krishnamurthy as Chief Operating Officer and appointed Jeff Garwood as a member of the Company’s Board of Directors
(the “Board”). Mr. Krishnamurthy and the Company entered an Employment Agreement effective March 1, 2020 (the “CIO
Agreement”). The CIO Agreement provides that Mr. Krishnamurthy shall be paid a base salary of $264,000 per annum, in accordance
with the Company’s usual payroll practices (the “Salary”). In addition to the Salary, on the effective date of
the CIO Agreement, the Company issued an aggregate of 600,000 options to purchase shares of Common Stock, at a purchase price equal
to $1.71 per share (the “CIO Option”). The CIO Option shall vet one-fourth on an annual basis beginning on the first
anniversary of the date of grant, such that the CIO Option shall vest and shall be exercisable in full on the fourth anniversary
of the date of grant. Notwithstanding the foregoing, the CIO Option shall vest in full and become exercisable upon the occurrence
of a “Change in Control” as defined in the CIO Agreement. All shares of Common Stock issuable upon exercise of the
CIO Option are subject to a limitation whereby Mr. Krishnamurthy may sell no more than 5% of the preceding day average volume of
the Common Stock on any given trading day. In connection with Mr. Garwood’s appointment, Mr. Garwood is expected to be granted
an inaugural award of $50,000 value in shares of Common Stock within 90 days of board service.
On December 10, 2019, the shareholders
approved an amendment to the Company’s articles of incorporation increasing the number of authorized shares of Common Stock
from 90,000,000 shares to 250,000,000 shares.
The Company is authorized to issue two
classes of shares, designated preferred stock and Common Stock.
Preferred Stock
The number of shares of preferred stock
authorized is 10,000,000, par value $0.001 per share. The preferred stock may be divided into such number of series as the Board
may determine. The Board is authorized to determine and alter the rights, preferences, privileges and restrictions granted and
imposed upon any wholly unissued series of preferred stock, and to fix the number and designation of shares of any series of preferred
stock. The Board, within limits and restrictions stated in any resolution of the Board, originally fixing the number of shares
constituting any series may increase or decrease, but not below the number of such series then outstanding, the shares of any subsequent
series.
At December 31, 2020 and 2019, the Company
had 19,716 and 0 shares of Preferred Stock, respectively, issued and outstanding.
Common Stock
The Company is authorized to issue 250,000,000
shares of Common Stock at a par value of $0.001 and had 42,601,773 shares of Common Stock issued and 42,169,041 shares of Common
Stock outstanding as of December 31, 2020, and 39,952,628 shares of Common Stock issued and 39,694,896 shares of Common Stock outstanding
as of December 31, 2019.
Common Stock Issued in Private Placements
During the year ended December 31, 2019,
the Company issued and sold 9,800,000 shares of Common Stock and warrants to purchase 9,800,000 shares of Common Stock, for gross
proceeds of $19,600,000.
During the year ended December 31, 2020,
the Company issued 187,500 shares of Common Stock and warrants to purchase 187,500 shares of Common Stock, for gross proceeds of
$375,000.
Common Stock Issued in Connection
with the Exercise of Warrants
During the year ended December 31, 2019,
the Company issued 485,543 shares of Common Stock for proceeds of $602,560 under a series of stock warrant exercises with an exercise
price of $1.33 per share.
Common Stock Issued as Compensation
to Employees, Officers and Directors
During the year ended December 31, 2019,
the Company issued 1,740,000 shares of Common Stock valued at $2,916,880 to employees, officers and directors as compensation.
During the year ended December 31, 2019, the Company issued an additional 173,775 shares of Common Stock valued at $305,521 to
contractors and professionals in exchange for services provided.
On April 3, 2020, the Company cancelled
500,000 shares of Common Stock, with vesting conditions represented as derivative instruments. These shares were incorrectly issued
as restricted shares instead of restricted stock units to an officer of the Company, Paul Dickman, on January 8, 2019.
During the year ended December 31, 2020,
the Company issued an additional 406,895 shares of Common Stock valued at $497,301 to employees, officers, and directors as compensation.
Common and Preferred Stock Issued
as Payment for Acquisition
On April 20, 2020, the Company issued 2,554,750
shares of Common Stock valued at $4,167,253 for the acquisition of Mesa Organics, Ltd.
On December 17, 2020, the Company issued 2,862 shares of Preferred
Stock valued at $2,861,994 and on December 18, 2020, the Company issued 6,404 shares of Preferred Stock valued at 6,403,987 for
the acquisition of the Star Buds assets.
Warrants
The Company accounts for Common Stock purchase
warrants in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company’s Own Stock, Distinguishing Liabilities from Equity. The Company estimates the fair value of warrants at date of
grant using the Black-Scholes option pricing model. There is a moderate degree of subjectivity involved when using option pricing
models to estimate the warrants, and the assumptions used in the Black Scholes option-pricing model are moderately judgmental.
During the year ended December 31, 2020,
the Company issued 187,500 Common Stock purchase warrants to an accredited investor with an exercise price of $3.50 per share with
an expiration date of three years from the date of issuance. The Company also issued 1,737,719 Common Stock purchase warrants as
purchase consideration for the acquisition of SBUD LLC. These warrants have an exercise price of $1.20 per share and expiration
date of five years from the date of issuance. The Company estimated the fair value of these warrants at date of grant using the
Black-Scholes option pricing model using the following inputs: (i) stock price on the date of grant of $3.50 or $1.20, respectively,
(ii) the contractual term of the warrant of 3 or 5 years, respectively, (iii) a risk-free interest rate ranging between 0.21% -
0.38% and (iv) an expected volatility of the price of the underlying Common Stock ranging between 173.07% - 187.52%.
|
|
Number of shares
|
|
|
|
|
|
Balance as of January 1, 2020
|
|
|
9,800,000
|
|
Warrants exercised
|
|
|
–
|
|
Warrants forfeited
|
|
|
–
|
|
Warrants issued
|
|
|
1,925,220
|
|
Balance as of December 31, 2020
|
|
|
11,725,220
|
|
Option Repricing
On December 15, 2020, the Board repriced
certain outstanding stock options issued to the Company’s employees. The repriced stock options had original exercise prices
ranging from $1.52 per share to $3.83 per share. All of these stock options were repriced to have an exercise price of $1.26 per
share, which was the closing price of the Company’s Common Stock on December 15, 2020.
In April 2020, the Company acquired its
first cannabis plant-touching business, Mesa Organics, which consists of four dispensaries and one MIP, d/b/a Purplebee’s.
The Company also acquired six additional cannabis dispensaries in December 2020. The activity of these acquired operations is subject
to the limitations of IRC Section 280E. Under Section 280E, no deduction or credit is allowed for any amount paid or incurred during
the taxable year in carrying on business if the business (or the activities which comprise the trade or business) consists of trafficking
in controlled substances (within the meaning of Schedules I and II of the CSA) except the expenses directly related to sales of
product. The IRS has applied this provision to cannabis operations, prohibiting them from deducting expenses associated with cannabis
businesses.
The following table sets forth the components
of income tax (benefit) expense for the years ended December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
Total current tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(796,353
|
)
|
|
$
|
(477,625
|
)
|
State and local
|
|
|
(102,756
|
)
|
|
|
(105,305
|
)
|
Total deferred tax expense (benefit)
|
|
$
|
(899,109
|
)
|
|
$
|
(582,930
|
)
|
The following table sets forth a reconciliation
of income tax expense (benefit) at the federal statutory rate to recorded income tax expense (benefit) for the years ended December
31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Federal taxes at U.S. statutory rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
State income taxes
|
|
|
2.3%
|
|
|
|
4.6%
|
|
Permanent and temporary differences
|
|
|
(3.4%
|
)
|
|
|
(15.5%
|
)
|
Change in valuation allowance
|
|
|
(14%
|
)
|
|
|
(6.8%
|
)
|
Change in state rate
|
|
|
(1.7%
|
)
|
|
|
0.0%
|
|
Return to provision adjustment/other
|
|
|
0.4%
|
|
|
|
0.0%
|
|
Effective tax rate
|
|
|
4.6%
|
|
|
|
3.3%
|
|
The following tables set forth the components
of deferred income taxes as of December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
69,132
|
|
|
|
18,168
|
|
Accrued expenses
|
|
|
197,958
|
|
|
|
38,413
|
|
Share based compensation accruals
|
|
|
3,505,290
|
|
|
|
3,528,726
|
|
Net operating loss carryforwards
|
|
|
4,357,600
|
|
|
|
1,703,425
|
|
Capitalized transaction costs
|
|
|
222,360
|
|
|
|
–
|
|
Unrealized losses
|
|
|
245,862
|
|
|
|
161,155
|
|
Other carryforwards
|
|
|
13,357
|
|
|
|
–
|
|
Operating leases
|
|
|
240,278
|
|
|
|
–
|
|
Total deferred tax assets
|
|
|
8,851,837
|
|
|
|
5,449,887
|
|
Less: valuation allowance
|
|
|
(7,233,123
|
)
|
|
|
(4,411,110
|
)
|
Net deferred tax assets
|
|
$
|
1,618,714
|
|
|
|
1,038,777
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
–
|
|
|
|
121,777
|
|
Fixed assets
|
|
|
269,443
|
|
|
|
12,388
|
|
Goodwill and intangible assets
|
|
|
1,116,546
|
|
|
|
636,188
|
|
Unrealized gains
|
|
|
232,725
|
|
|
|
–
|
|
Net deferred tax liabilities
|
|
$
|
1,618,714
|
|
|
|
770,354
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
–
|
|
|
|
268,423
|
|
The
Company has gross Federal net operating loss carryforwards of approximately $19.7 million, which can be carried forward indefinitely.
State net operating losses of approximately $12.2 million, which begin to expire in 2039. The Company plans to carryback approximately
$1.3M of gross Federal net operating losses to the 2018 tax year, as a result of the CARES Act, which was enacted in response to
the COVID-19 pandemic on March 27, 2020. The resulting tax benefit from this carryback is approximately $270k.
Federal and State tax laws impose significant
restrictions on the utilization of net operating loss carryforwards in the event of a change in ownership of the Company, as defined
by Internal Revenue Code Section 382 (Section 382). The Company has not completed a formal Section 382 analysis but plans to do
so prior to utilizing any net operating losses in future tax years or releasing the full valuation allowance against its net operating
loss carryforwards.
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The Company's valuation allowance represents the amount of tax benefits that are likely to not be realized. The Company
has recorded a valuation allowance of $7,233,123 on its deferred tax asset balances as of 12/31/2020. The net change in the valuation
allowance for 12/31/2020 was $2,822,013.
As of December 31, 2020 and 2019, the Company
had no unrecognized tax benefits. The Company does not anticipate the total amount of unrecognized tax benefits to significantly
change within the next twelve months. The Company recognized no interest expense or penalties on income tax assessments during
2019 or 2018 and there was no interest related to income tax assessments accrued as of December 31, 2020 or 2019.
14.
|
Major Customers and Accounts Receivable
|
The Company had certain customers whose
revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually
represented 10% or more of the Company’s total accounts receivable.
As of December 31, 2019, two customers
accounted for 68% of accounts receivable, one with 57% and another with 11%. As of December 31, 2020, two customers accounted for
22% of accounts receivable, both with 11%.
For the year ended December 31, 2019, one
customer accounted for 14% of revenue. For the year ended December 31, 2020, there were no customers that accounted for 10% or
more of revenue.
The Company has three identifiable segments
as of December 31, 2020; (i) products, (ii) licensing and consulting and (iii) corporate, infrastructure and other. The products
segment sells merchandise directly to customers via e-commerce portals, through the Company’s proprietary websites and retail
location. The licensing and consulting segment sales derives its revenue from licensing and consulting agreements with cannabis
related entities. The corporate, infrastructure and other segment represents new resources added in anticipation of various acquisition
transactions and other corporate related costs.
The following information represents segment
activity for the years ended December 31, 2020 and 2019:
|
|
For the
Years Ended December 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Products
|
|
|
Licensing
and Consulting
|
|
|
Corporate,
Infrastructure and Other
|
|
|
Total
|
|
|
Products
|
|
|
Licensing
and Consulting
|
|
|
Corporate,
Infrastructure and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
22,506,393
|
|
|
$
|
1,494,459
|
|
|
$
|
–
|
|
|
$
|
24,000,852
|
|
|
$
|
7,820,518
|
|
|
$
|
4,580,437
|
|
|
$
|
–
|
|
|
$
|
12,400,955
|
|
COGS
|
|
$
|
(16,359,011
|
)
|
|
$
|
(867,476
|
)
|
|
$
|
–
|
|
|
$
|
(17,226,486
|
)
|
|
$
|
(6,354,100
|
)
|
|
$
|
(1,262,121
|
)
|
|
$
|
–
|
|
|
$
|
(7,616,221
|
)
|
Gross profit
|
|
$
|
6,147,382
|
|
|
$
|
626,983
|
|
|
$
|
–
|
|
|
$
|
6,774,365
|
|
|
$
|
1,466,418
|
|
|
$
|
3,318,316
|
|
|
$
|
–
|
|
|
$
|
4,784,734
|
|
Intangible assets amortization
|
|
$
|
180,106
|
|
|
$
|
539
|
|
|
$
|
–
|
|
|
$
|
180,644
|
|
|
$
|
5,465
|
|
|
$
|
443
|
|
|
$
|
–
|
|
|
$
|
5,908
|
|
Depreciation
|
|
$
|
76,310
|
|
|
$
|
219,637
|
|
|
$
|
–
|
|
|
$
|
295,947
|
|
|
$
|
7,186
|
|
|
$
|
48,614
|
|
|
$
|
–
|
|
|
$
|
55,800
|
|
Net income (loss)
|
|
$
|
3,201,757
|
|
|
$
|
345,312
|
|
|
$
|
(22,963,830
|
)
|
|
$
|
(19,416,761
|
)
|
|
$
|
794,747
|
|
|
$
|
1,688,147
|
|
|
$
|
(19,458,636
|
)
|
|
$
|
(16,975,742
|
)
|
Segment assets
|
|
$
|
61,591,952
|
|
|
$
|
187,601
|
|
|
$
|
8,803,419
|
|
|
$
|
70,682,601
|
|
|
$
|
12,406,230
|
|
|
$
|
6,081,485
|
|
|
$
|
13,740,892
|
|
|
$
|
32,228,607
|
|
16.
|
Earnings per share (Basic and Dilutive)
|
The Company computes net (loss) income
per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted Earnings
Per Share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available
to Common Stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible
preferred stock using the if-converted method. These potential dilutive shares include 6,627,000 vested stock options, 11,725,220
stock purchase warrants, and 19,716 of preferred shares. In computing diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes
all dilutive potential shares if their effect is anti-dilutive.
The following is a reconciliation of the
numerator and denominator used in the basic and diluted EPS calculations for the years ended December 31, 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,416,761
|
)
|
|
$
|
(16,975,742
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock
|
|
|
41,217,026
|
|
|
|
33,740,557
|
|
Dilutive effect of warrants
|
|
|
–
|
|
|
|
–
|
|
Diluted weighted-average shares of common stock
|
|
|
41,217,026
|
|
|
|
33,740,557
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.47
|
)
|
|
$
|
(0.50
|
)
|
Diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(0.50
|
)
|
Dilutive-potential common share equivalents
are excluded from the computation of net loss per share in loss periods, as their effect would be antidilutive. As the Company
has incurred a loss from operations in 2020 and 2019, shares issuable pursuant to equity awards were excluded from the computation
of diluted net loss per share in the accompanying consolidated statements of operations, as their effect is anti-dilutive.
In accordance with FASB ASC 855-10, Subsequent
Events, the Company has analyzed its operations subsequent to December 31, 2020 to the date these consolidated financial statements
were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial
statements, except as follows:
On January 27, 2021, the Company appointed
Pratap Mukharji to the Board of the Company. Mr. Mukharji will serve as Chairman of the Board’s Audit Committee.
On January 27, 2021, the Company received
the resignation of Leonard Riera as a member of the Board. Mr. Riera was Chairman of the Board’s Audit Committee. Mr. Riera’s
resignation is not the result of any disagreement with the Company on any matters relating to the Company’s operations, policies,
or practices.
On February 3, 2021, the Company issued
and sold 6,100 shares of Preferred Stock.
On February 4, 2021, pursuant to the applicable
APA, the Company and SBUD, LLC closed on the acquisition of (i) Colorado Health Consultants LLC; and (ii) Mountain View 44th LLC.
The aggregate purchase price for the assets of the Star Buds Companies acquired on February 4, 2021 was approximately $9.3 million
and was paid to each applicable Star Buds Company and its members as a combination of cash, an aggregate of 1,969 shares of Preferred
Stock together with an aggregate of 347 shares of Preferred Stock to be held in escrow pursuant to the terms and subject to the
conditions set forth in Omnibus Amendment No. 2 and warrants to purchase an aggregate of 434,315 shares of the Company’s
Common Stock at exercise price equal to $1.20 per share.
On February 9, 2021, the Company issued
and sold 100 shares of Preferred Stock, on February 10, 2021, 250 shares of Preferred Stock, on February 23, 2021, 500 shares of
Preferred Stock, on February 25, 2021, 1,300 shares of Preferred Stock, on February 26, 2021, 23,900 shares of Preferred Stock
on March 1, 2021, 1,500 shares of Preferred Stock, and on March 3, 2021, 2,100 shares of Preferred Stock.
On February 26, 2021, the Company received
a Conversion Notice and Agreement (the “Conversion Agreement”) from Dye Capital pursuant to which Dye Capital elected
to convert all outstanding amounts owed by the Company to Dye Capital under the Convertible Promissory Note and Security Agreement
in the original principal amount of $5,000,000 issued by the Company to Dye Capital on December 16, 2020 pursuant to the terms
thereof. On the same date, the Company executed the Conversion Agreement and issued 5,060 shares of Preferred Stock to Dye Capital
and also paid Dye Capital an immaterial amount in cash in lieu of issuing any fractional shares of Preferred Stock to Dye Capital
upon conversion.
On February 26, 2021, the Company’s
wholly owned subsidiaries Mesa Organics Ltd., Mesa Organics II Ltd., Mesa Organics III Ltd., Mesa Organics IV Ltd, SCG Holding,
LLC and PBS Holdco LLC, as borrowers (collectively, the “Borrowers”), entered into a Loan Agreement (the “Loan
Agreement”) with SHWZ Altmore, LLC, as lender (the “Lender”), and GGG Partners LLC, as collateral agent (the
“Collateral Agent”). Upon execution of the Loan Agreement and the associated loan documents described below, the Lender
made an initial advance of $10,000,000 to the Borrowers. Under the Loan Agreement, the Lender has agreed to make one additional
advance of $5,000,000 to the Borrowers on or before June 26, 2021 upon the satisfaction of certain closing conditions customary
for this type of transaction as well as a requirement that the Company has completed the acquisition of substantially all of the
assets of an identified company.
On March 2, 2021, pursuant to the applicable
APA, the Company and SBUD, LLC closed on the acquisition of (i) Starbuds Aurora LLC, (ii) SB Arapahoe LLC, (iii) Citi-Med LLC,
(iv) Starbuds Louisville LLC and (v) KEW LLC. The aggregate purchase price for the assets of the Star Buds Companies acquired on
March 2, 2021 was approximately $71.8 million and was paid to each applicable Star Buds Company and its members as a combination
of cash, an aggregate of 15,228.45 shares of Preferred Stock, together with an aggregate of 2,687.37 shares of Preferred Stock
to be held in escrow pursuant to the terms, and subject to the conditions, set forth in Omnibus Amendment No. 2 and warrants to
purchase an aggregate of 3,359,215.32 shares of the Company’s Common Stock at exercise price equal to $1.20 per share. The
Company funded the aggregate cash portion of the purchase price for the assets acquired on March 2, 2021 from the net proceeds
of the transactions disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2021.
Mr. Brian Ruden, a member of the Company’s
Board of Directors, has an ownership interest in each Starbuds Company that was acquired on February 4, 2021 and March 2, 2021
On March 14, 2021, the Company increased
the size of the Board from five to seven directors, designated the two new directorships as Class A, and appointed Jeffrey A. Cozad
and Salim Wahdan as Class A directors. Mr. Cozad will serve as a member of the Board’s Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee. Mr. Wahdan will serve as a member of the Board’s Audit Committee.
On March 30, 2021, the Company entered into a Third Amendment
to Securities Purchase Agreement (the “Third Amendment”) with Dye Capital Cann II to amend the terms of the Securities
Purchase Agreement, dated November 16, 2020, as previously amended by the Amendment to Securities Purchase Agreement, dated December
16, 2020, and the Second Amendment to Securities Purchase Agreement, dated February 3, 2021 (as amended, the “Cann II SPA”).
The Third Amendment increased the number of shares of Preferred Stock the Company may sell and Dye Capital Cann II may purchase
under the Cann II SPA from 17,000 to 21,350, and also extended the time during which the parties may agree to do so from February
23, 2021 to March 30, 2021. On the same date, the Company issued and sold 4,000 shares of Preferred Stock to Dye Capital Cann II
at a purchase price of $1,000 per share for aggregate gross proceeds of $4,000,000 and aggregate net proceeds of approximately
$3,900,000, after deducting placement agent fees and estimated offering expenses.